On June 3rd the Monetary Authority of Singapore (MAS) announced that it will further develop its Islamic finance capabilities, making a strong statement to markets and industry players. Deputy Manager, Jacqueline Loh, stated, “strength in conventional financing and capital markets can be adapted to meet the need of Islamic banking.” This comes off the heels of the announcement that the Islamic Development Bank (IDB) will consult with the newly formed Asian Infrastructure Investment Bank (AIIB) to explore the use of Islamic finance for large-scale infrastructure projects.
Loh also stated that “Sukuk are ideal for funding infrastructure projects and would complement work by Singapore as they are asset-backed and can involve more capital-market players”. South East Asia will need US$60-80 billion in infrastructure investment a year until 2022 to close the infrastructure gap. A recent report by PWC also stated that the Asian market, driven by China’s growth, is slated to represent nearly 60% of global infrastructure spending by 2025.
The statement by the MAS should not surprise many within the industry since Singapore is ranked the fourth most competitive global financial center, and has been involved in the Islamic finance industry since the early 1990s. The Government of Singapore has provided incremental steps towards facilitating Islamic finance into the country; in 2005 it fine-tuned the pre-existing framework on banking regulations and focused on levelling the playing field between Islamic and conventional financial services.
According to the IMF Singapore country report, the MAS is considered the most prudent and stable central bank in the world and ‘[the] current institutional reliability and its commitment to a prudent and sound domestic financial system have contributed to the strong economic development of Singapore and its role as one of the leading financial centers in the world.’ Furthermore, Singapore’s leading financial center is considered by many as a gateway to the growth economies in the rest of Asia and this statement has domestic, regional and international ramifications for Singapore’s economy.
Singapore has a competitive advantage over Hong Kong when it comes to establishing an Islamic finance industry as the former has a significant Muslim minority community (15% of the total population), whereas Hong Kong does not. The ability for Singaporean financial institutions to hire domestic talent that have both the conventional banking and Islamic knowledge to practice Islamic finance provides a human capital advantage over Hong Kong and other global financial centers. The historical interaction of the Muslim community in Singapore with the state has developed local institutions that are adequately equipped to further develop a local and international Islamic finance market. An example of this was in 2001 when the Islamic religious authority of Singapore, Majlis Ugama Islam Singapura (MUIS), launched a $25,000,000 musharaka based Islamic bond (sukuk) to partially finance the acquisition of a six-story commercial building. Beyond the local Muslim community in Singapore, the top university institutions including the Singapore Management University, offer courses in Islamic finance to Muslims and non-Muslims alike. Even though Singapore may not be able to compete with Malaysia as a regional leader in Islamic finance, it may be able to utilize its local human capital to edge ahead of Hong Kong at least.
There had been criticism from domestic players that Singapore was losing its competitive edge over Hong Kong in terms of its Islamic finance capabilities and more generally its role as the leading financial center in Asia. Last September the Government of Hong Kong successfully offered its inaugural sukuk under the Government Bond Programme. The sukuk raised $1 billion with a tenure of 5 years and it was five times oversubscribed. It was also the world’s first US dollar denominated sukuk issued by a government with an AAA credit rating. The Government of Hong Kong followed up by issuing a second sukuk this May, also raising $1 billion but this time two times oversubscribed.
The leading daily paper in Singapore, The Straits Times, published an article last July stating that if Singapore does not gain strong government support to make Islamic finance investment hospitable then Singapore would be left behind in the region. Nonetheless, the statement by the Deputy Manager of the MAS, Jacqueline Loh, should reflect the institutions ambitions for further development of Islamic finance within Singapore that could see it become more influential in the region and continue to position itself as a leading global financial center.