Singapore’s ‘secret sauce’ is balancing trust, stability and unorthodox innovation: Piyush Gupta
How this ‘unlikely financial centre’ succeeded where others have failed
SINGAPORE is, in many ways, an unlikely financial centre. When I think about financial centres, like New York, London and Tokyo, they are architected on a common theme: a strong domestic economy. They require a financial system to support and grease the wheels of industry and commerce for a large population.
Singapore had none of these. Not unlike other sectors in the economy, we created a financial sector that was “outside in”. Several others also tried creating an offshore financial centre, all over the Caribbean. But by and large, they either failed to scale or acquired a poor reputation. If one were to look back for a successful example of a financial centre that pulled it off, it would be Singapore.
This success hinges on the central theme of balancing stability, trust and innovation. Is there an inherent natural conflict between the three? One could argue maybe not; it is possible to have stability, innovation and trust together.
Indeed, Singapore’s secret sauce has been its ability to manage all three relatively well: build the trust of people, depositors and investors; create stability in the system; and yet remain nimble about innovation.
In truth, however, there is an inherent tension between these three objectives. It comes from the fact that innovation requires risk-taking and reimagining the status quo.
Having been a banker for over 40 years, I have seen regulators, banks and central banks constantly run afoul one way or the other. This is not an easy game to play. Looking back, it is worth highlighting how Singapore took appropriate risks – some of them quite unorthodox – but at the same time, how we tried to cultivate balance in them.
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This balancing act has been core to Singapore’s DNA from the very beginning.
Our roots in the financial hub can be traced to the creation of the Asian Dollar Market (ADM) in 1968. Financial services represented a promising growth area, given Singapore’s limited land and scarce natural resources. But along with the ADM, we did something truly novel: the formation of a two-tier banking system in the form of an Asian Currency Unit (ACU) and a Domestic Banking Unit (DBU).
The segregation of international and domestic banking activities by the ACU and DBU aimed to safeguard financial stability, by mitigating the risks of fund flows from the ADM impacting domestic monetary policy. It also shielded domestic banks from larger foreign financial institutions, while allowing these institutions to participate in Singapore’s financial services sector.
The formation of the ADM and ACU was highly unorthodox. At that time, while Hong Kong was largely recognised as the main regional financial centre, its authorities opted not to grow an offshore market due to concerns that it would drain liquidity from the domestic market. In contrast, Singapore’s development of an offshore market was a conscious decision to serve as a platform to orchestrate flows of regional savings into regional investments.
This model of unorthodox innovation, paired with careful controls, served Singapore well for decades. Through the late 1980s and 1990s, the Monetary Authority of Singapore (MAS) took a relatively conservative regulatory approach to safeguard the stability of the financial sector by facilitating its controlled development.
While this approach, along with Singapore’s strong economic and financial fundamentals, allowed Singapore to weather the 1997 Asian financial crisis relatively better than other Asian economies, there was recognition that the world around us was changing.
As then deputy prime minister and MAS chairman Lee Hsien Loong noted: “We cannot simply extrapolate this success or the policies which have produced it into the future.” Key drivers of change included technological developments, growing cross-border competition, and a structured trend towards greater industry consolidation.
This was a bold move. While MAS had been conservative in its regulatory approach, changing external conditions necessitated a shift. It involved balancing the promotion of liberalisation and innovation while continuing to safeguard stability. Singapore had to figure out how to become less cautious, but in a careful way, as Lee observed.
The unique mechanism that enabled Singapore to attempt this shift was another unorthodoxy: the dual role of MAS itself.
With the amendment of the MAS Act in 1998 to include financial-sector promotion as a principal objective, MAS has played this unique dual role in both regulating the financial sector and promoting Singapore as an international financial hub.
To use a sporting analogy, MAS acts as the “centre back”: it is the monetary policy institution, the supervisor of the entire banking system, and it develops the industry. This notion of an omnibus regulator, supervisor and central bank is unusual enough by itself. But add to that the idea of being the financial sector development agency, and the approach is truly unorthodox.
It is also something that, arguably, only Singapore could pull off. Global counterparts have often raised an eyebrow because there is an inherent conflict: the person who is supposed to guard the hen house is also tasked with developing the hen house. How can one do both?
In fulfilling its dual roles, MAS pursued two seemingly conflicting objectives. First, growing and sustaining a critical mass of financial institutions to facilitate the development of a financial centre; and second, implementing robust regulations that ensure strict prudential standards without stifling growth.
MAS needed to maintain this balance between providing a conducive environment for markets to grow while protecting depositors and investors. Over the years, it has liberalised the financial sector at a measured, step-by-step pace, applying a “judicious blend of orthodoxy and unconventionality”, as MAS’ then managing director Ravi Menon put it.
Nowhere is this dual tension between “guard” and “developer” more visible today than in the wealth management sector.
The wealth management sector is a great example of how Singapore continues to balance the need for trust and the need for growth. At the same time, the sector is very high-risk. It is seen to be a magnet for money laundering and other illicit activities.
Getting the balance right is like walking a tightrope. Too much regulation and micromanaging lead to bureaucracy and risk, driving away clients. Too little risks tarnishing our reputation as a financial centre, coming under scrutiny from global bodies, and a swift loss of public trust.
In the wealth management sector, this tension plays out in real time. Crucially, this does not happen chronologically. The efforts to innovate and regulate have been concurrent. Along the way, mistakes were made, but that did not stop the drive to continue building the sector and industry. That is how we are the second-largest wealth management industry in the world today.
Ultimately, Singapore’s financial sector has developed on the back of this intricate balance between stability, trust and innovation.
While the relative priorities of these elements have shifted over the years, according to the exigencies of the time, what has remained constant is a bold and pioneering spirit; a close partnership between industry and regulators; a foresight in anticipating structural shifts; and a nimbleness in adapting to new circumstances.
And transformation is afoot. In this world of change, the value and nature of money will change; the nature of settlements will change; what drives people and how people participate will change – even the nature of players will change. So the big question remains: Are we in a position to handle this change in the sector as we move forward?
This is an edited excerpt of the first of a series of IPS-Nathan Lectures by the writer on Singapore’s financial sector. The writer is the 17th S R Nathan Fellow at the Institute of Policy Studies (IPS). He is the former chief executive officer and director of DBS Group.
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