Post by Habibullah Khan Omar Bashar on May 25, 2009 8:40:05 GMT 4
Page 1
U21Global Working Paper Series, No. 001/2008
Page 0
No. 001/2008
Islamic Finance:
Growth and Prospects in Singapore
Habibullah Khan & Omar K. M. R. Bashar
June 2008
Page 2
U21Global Working Paper Series, No. 001/2008
Page 1
Islamic Finance:
Growth and Prospects in Singapore
Habibullah Khan, U21Global, Singapore
1
hkhan@u21global.edu.sg
Omar K. M. R. Bashar, Swinburne University of Technology
Lilydale, Australia
2
obashar@swin.edu.au
ABSTRACT
Islamic finance has been growing rapidly since its launch in the 1970s. The
major market for this industry is typically the Middle East and it is gaining
popularity in the UK, USA and Southeast Asia. Malaysia is the leading Islamic
finance industry in Southeast Asia while its neighbor Singapore is relatively a
new market player. Singapore revised its regulatory framework and tax
structure and gradually introduced various Shariah-compliant financial products
in the last couple of years. This paper argues that despite having small domestic
market and competition from Malaysia, Singapore can still position itself in a
niche market in the region. Through its strategy of integrated financial and
economic development, Singapore can create new opportunities for Islamic
finance and related financial products in the region.
Keywords: Islamic finance, growth, Singapore
1. Introduction
Islamic finance, which dates back to 1975 with the establishment of Bank Faisal
in Egypt, is developing at a remarkable pace. The growth of Islamic finance industry
has been very strong over the past few years. Currently, there are over 300 Islamic
financial institutions in more than 75 countries though they are mainly concentrated in
the Middle East and Southeast Asia, but are also gaining popularity in Europe and the
United States. It is estimated that the industry will grow at a rate of 15 to 20 percent
annually, from current assets of US$300 billion (Al-Salem, 2008).
The importance and potential of Islamic banking prompted the International
Monetary Fund (IMF) to facilitate the establishment of the Islamic Financial Services
Board (IFSB) (the Islamic equivalent of IMF) in 2002, the idea being addressing the
need for a suitable regulatory framework, new financial instruments and institutional
arrangements for Islamic finance operations. Recently, the Singapore government has
1 Habibullah Khan is Associate Dean, Assessment & Content Author Liaison and Associate Professor at
U21Global, Singapore.
2
Omar K. M. R. Bashar is Lecturer at the Faculty of Higher Education at the Swinburne University of
Technology, Lilydale, Australia.
Page 3
U21Global Working Paper Series, No. 001/2008
Page 2
also recognized the need for establishing Islamic banking in order to be complete as an
international financial centre.
This paper contains four sections. After introductory remarks in section 1, the
principles of Islamic finance and types of products and services offered in the industry
have been discussed in section 2. Section 3 enumerates the status and prospects of
Islamic finance in Singapore. Finally, section 4 concludes the paper.
2. Islamic Finance: Principles and Products
2.1 Principles of Islamic Finance and Advantages
Islamic finance operates under religious beliefs and cultural characteristics of
Muslim societies. According to Shariah (Islamic law), the Islamic mode of finance
should emphasize profit and loss sharing and prohibit fixed-returns. In other words, any
predetermined payment over and above the actual amount of the principal (i.e. interest)
is prohibited. The Shariah also prohibits activities related to uncertainty, risk and
speculation. A modern interpretation is that interest may be paid only for taking
investment risk but not for time value risk-free investment. As such, asset-based
lending is allowed under Shariah while paper- or financial-based lending is not. The
law also prohibits investment in “un-Islamic” activities, such as lending for
constructing a casino or trading of alcohol.
In sum, the guiding principles regarding Islamic finance include the following:
(1) any predetermined payment over and above the actual amount of principal is
prohibited. (2) The lender must share in the profits or losses arising out of the enterprise
for which money was lent. (3) Making money from money is not acceptable by Islamic
law. Money is only a medium of exchange, and therefore should not be allowed to give
rise to more money, via fixed interest payments, simply by being put in a bank or lent
to someone else. (4) Gharar (uncertainty, risk or speculation) is also prohibited. (5)
Investments should only support practices or products that are not forbidden (or
discouraged) by Islam.
There are several advantages of Islamic system which is based on the principle
of profit-sharing. First of all, Profit-sharing channels investible funds to the projects
with the highest expected profitability as opposed to the interest-based system where
funds go to the most creditworthy borrowers whose projects may not necessarily be the
most profitable ones. In fact, the ‘quest for profit’ is the main driving force behind the
development of modern businesses and it was clearly reflected in the powerful writings
of Adam Smith in The Wealth of Nations (1776). Adam Smith argued that even though
self-interest is the prime mover of economic activity, the end result is the allocation of
goods and services that serves society’s collective interests in the best possible manner.
If produces offer ‘too much’ of one product and ‘too little’ of another, profit
opportunities immediately would alert entrepreneurs to the fact and provide incentives
for them to change the line of production. In other words, the system based on
profitability will ensure ‘economic efficiency’ leading to optimality in production,
consumption, and exchange. Secondly, profit-sharing is more conducive to economic
growth, as this would increase the supply of risk capital for investment and greater
incentives for undertaking such risks due to expected profitability. Finally, the Islamic
Page 4
U21Global Working Paper Series, No. 001/2008
Page 3
system promotes an ‘integrated’ economic development as it encourages the use of
money for facilitating trade in goods and investment in productive capacity rather than
creating money for the sake of money. Such a system is likely to be more stable and is
less vulnerable to financial crisis that can be caused by speculative activities.
2.2 Islamic Financial Products
The following is a brief description of Islamic financial products:
3
i) Profit sharing financial products
• Musharakah- all partners participation in terms of equity, investment,
management and profit (based on pre-agreed ratio) and loss (based on equity
contributions).
• Mudarabah- one contributes capital, others provide entrepreneurship. Profit is
shared on a pre-agreed ratio.
• Qard Hasan- charitable loans free of interest and profit-sharing margins;
repayment by installments. Modest service charge is permissible.
• Wakalah- a bank is authorized to conduct business on customers’ behalf.
• Hawalah- an agreement by the bank to undertake some of the liabilities of the
customer in return for a service fee. The customer pays back the bank when the
liabilities mature.
ii) Advance purchase financial products
• Murabahah- a contract between the bank and its client for the sale of goods at a
price that includes a profit margin agreed by both parties.
• Istithna’- a contract for acquisition of goods by specification or order, where the
price is paid progressively in accordance with the progress of job completion.
• Mu’ajjal- a sales contract that allows purchase with deferred delivery.
• Ijarah- a leasing contract under which a bank buys and leases out for a rental
fee equipment required by its clients.
iii) Deposit products
• Wadi’ah- deposits, including current accounts (giro wadi’ah).
• Mudarabah- deposit products based on revenue-sharing between depositor and
bank, including savings products that can be withdrawn any time and time
deposit products.
• Qard al-Hasanah- unremunerated deposit products, usually for charitable
purposes.
iv) Insurance products
• Takaful- Islamic insurance with joint risk-sharing.
3
Adopted from Imady and Seibel (2006).
Page 5
U21Global Working Paper Series, No. 001/2008
Page 4
3. Islamic Finance in Singapore
3.1 Status of Islamic Finance in Singapore
Islamic finance received attention of the Singapore government in recent years.
The following is a brief description of Singapore’s recent development in Islamic
finance:
i) Regulatory treatment
In June 2006, the Monetary Authority of Singapore (MAS) gave its approval to
banks to engage in non-financial activities, such as commodity trading, to facilitate
Murabahah transactions for clients’ investments. Prior to this, banks had been
forbidden to engage in non-financial activities such as trading, which is not normally
associated with banking and finance. This move shows that MAS recognizes the
fundamental characteristics of Murabaha - a key form of Islamic financing in the
Middle East (Asmani, 2006).
ii) Tax treatment
The Singapore government recognizes that given the nature and structure of
Islamic financial products, they tend to attract more tax then their counterparts. The
overall policy approach has been to align tax treatment of Islamic contracts with the
treatment of conventional financing contracts they are economically equivalent to. In
line with this policy, the Finance Ministry announced several changes in the 2005 and
2006 budgets.
In 2005, Singapore waived the imposition of double stamp duties in Islamic
transactions involving real estate and accorded the same concessionary tax treatment on
income from Islamic bonds that are applicable to conventional bonds.
In 2006, income tax and GST (goods and services tax) applications on some
Islamic products were further clarified. The government identified three Shariah-
compliant products and ensured that they do not suffer more taxes due to the nature of
their structuring. In addition, to level the tax playing field for Sukuk (Islamic
equivalent of a bond), remission will be granted on stamp duty on immovable property,
incurred under a Sukuk structure, that is in excess of that chargeable in the case of an
equivalent conventional bond issue.
4
iii) Growth and development of financial products
In July 2001, Maybank, Malaysia’s largest bank started Islamic banking in
Singapore with the introduction of Singapore Unit Trusts Ethical Growth Fund that
complies with the principles of the Shariah.
5
In November 2005, the bank introduced
Shariah-complaint online savings account and Shariah-compliant savings cum checking
account (Siow, 2005).
4
Ng, Nam Sim, Executive Director, MAS, Opening Remarks at the IQPC Islamic Finance, Singapore
2006.
5
Source: Singapore Unit Trusts website www.sut.com.sg/main/fund_sutegf.asp (accessed on 28 May
2008).
Page 6
U21Global Working Paper Series, No. 001/2008
Page 5
In February 2006, the first Shariah-compliant term deposit in Singapore was
launched by OCBC Bank. The bank targets wholesale to Muslim companies, financial
institutions, mosques and non-profit organizations (Yee, 2006).
Islamic insurance or Takaful has also been successful in Singapore with over
S$500 million Takaful funds under management. For instance, HSBC (Singapore)
launched Takaful Global Fund in September 1995 while Takaful Sinaran Fund was
launched in May 2005. Returns from these funds are not subjected to income tax. There
are about S$2 billion Shariah-compliant real estate funds managed out of Singapore.
6
iv) Islamic equity index
In recognition of increasing interest of Middle East investors in diversifying and
tapping the growth opportunities in Asia, the first Shariah-compliant pan-Asian equity
index was launched in Singapore in February 2006. This index serves as a benchmark
for Shariah-compliant funds investing in Asian equities, and paves the way for the
growth of Shariah-compliant funds seeking Asian exposures.
v) IFSB membership
MAS is a member of IFSB. MAS joined the IFSB in December 2003 as an
observer member and became a full member in April 2005. MAS currently participates
in the Islamic Money Market Taskforce, the Supervisory Review Process Working
Group and the Special Issues in Capital Adequacy Working Group.
7
vi) Education
Another significant move in the development of Islamic finance in Singapore
has been the announcement by the Singapore Islamic Scholars and Religious Teachers
Association (PERGAS) that some Islamic religious scholars would be trained in
banking and finance to assist Singapore’s aim of becoming a hub for Islamic finance.
PERGAS also mentioned in September 2006 that in order to develop Asatizah
(religious teachers), it would introduce a Shariah Advisers Training Programme
organized jointly with the Kuala Lumpur-based International Institute of Islamic
Finance (Venardos, 2006, pp 208-209).
vii) Exchange traded fund
Singapore moved a step forward in the development of its Islamic finance
industry with the first listing of a Shariah-compliant exchange traded fund (ETF) on 27
May 2008. Daiwa Asset Management Co. Ltd.’s first ETF offers an investment channel
into Japanese companies that fully complies with Shariah investment principles.
8
6
MAS, Annual Report 2005/2006.
7
MAS, Annual Report 2006/2007.
8
“Singapore’s de facto Central Bank sees ‘promising growth’ in Islamic Finance”. Source: Forbes
website www.forbes.com/afxnewslimited/feeds/afx/2008/05/27/afx5048208.html (accessed on 28 May
2008).
Page 7
U21Global Working Paper Series, No. 001/2008
Page 6
3.2 Prospects of Islamic Finance in Singapore
Singapore is a relatively new market player in Islamic finance. The domestic
market is quite small and there is not sufficient public awareness about Islamic finance.
Regionally, Malaysia is leading Islamic finance industry. Yet Singapore has good
prospect for positioning itself in a niche market. For instance, as of 2006 there are
nearly 227 million Muslims in Southeast Asia, which is about 40 percent of total
population in the region.
9
Being a regional financial hub, Singapore could target a big
pie of this Muslim community since Islamic finance in Southeast Asia is not as far
advanced as in the Middle East despite strong growth potential. For example, Islamic
finance in Indonesia is not nearly as well developed as it is in Malaysia with Islamic
banks holding only a 0.12 per cent share of the assets in the banking system. The lack
of comprehensive and appropriate framework and instruments for regulation and
supervision has impeded the development of Islamic finance to its full potential.
Indonesia is the world’s most populous Muslim nation and Singapore could eye on this
potentially huge market.
The Middle East and South Asia could also offer a unique opportunity for
Singapore’s development in Islamic finance industry. Singapore could attract rich
Arabs in the Middle East and Muslims in Pakistan, Bangladesh and India. Besides, non-
Muslims could also be educated on Islamic finance products and targeted in the long-
run. Singapore’s reputation as a stable and open financial hub is expected to play an
important role in luring investors in this industry.
In order to strengthen its presence in Islamic finance industry, Singapore has
refined its regulatory framework and tax structures over the years. The initiatives
include granting of a 5 percent concessionary tax rate for income derived from Shariah-
compliant fund management, lending and insurance and re-insurance. The MAS will
also be developing a facility for the issuance of Singapore dollar denominated
sovereign-rated Sukuks in response to the needs of financial institutions conducting
Shariah-compliant activities in Singapore.
10
4. Conclusion
Islamic finance is a relatively new concept in Singapore. Small domestic market
and lack of public awareness do not offer strong growth potential for Islamic finance
industry within the Republic. Over the years, Singapore revised its regulatory
framework and tax structure and introduced various Shariah-compliant financial
products. The city-state Republic also faces strong competition from Malaysia in
providing Islamic products regionally. However, the country can still find a niche
market in Southeast Asia (particularly Indonesia), the Middle East and South Asia
given the reputation of being regional financial hub and its overall attractiveness as a
business location. Singapore’s neutral stance to all religious beliefs and practices and
its harmonious development of various race relations within the community at large has
further added to its strength. Another important point is worth mentioning. Singapore is
9
Source: Muslim Population Worldwide website www.islamicpopulation.com (accessed on 31 May
2008).
10
“Singapore’s de facto Central Bank sees ‘promising growth’ in Islamic Finance”. Source: Forbes
website www.forbes.com/afxnewslimited/feeds/afx/2008/05/27/afx5048208.html (accessed on 28 May
2008).
Page 8
U21Global Working Paper Series, No. 001/2008
Page 7
pursuing a strategy of integrated development of financial and real sectors as it believes
that the two can reinforce each other. Singapore has just completed a free trade
agreement (FTA) negotiation with Gulf Cooperation Council (GCC) and this is likely
to facilitate trade and investment between two sides. With deeper trade and investment
links, there will be greater opportunity for financial integration that could open new
promises for Islamic finance and the related products.
Page 9
U21Global Working Paper Series, No. 001/2008
Page 8
REFERENCES
Al-Salem, Faoud (2008), “The Size and Scope of the Islamic Finance Industry: An Analysis,”
International Journal of Management, May 2008 (online version).
Asmani, A. (2006), “Banks Get Light to Offer Another Islamic Product”, The Straits Times
(Singapore), 13 June 2006.
Imady, O. and H. D. Seibel (2006), Principles and Products of Islamic Finance, Working Paper
No. 2006-1, Development Research Center, University of Cologne, Germany.
Monetary Authority of Singapore, Annual Report (various issues).
Siow, L. S. (2005), “Maybank Launches Islamic Banking”, The Business Times (Singapore), 26
November 2005.
Venardos, A. M. (2006), Islamic Banking and Finance in South-east Asia: Its Developments
and Future, Asia-Pacific Business Series Vol. 3 (2
nd
ed.).
Yee, L. (2006), “OCBC Scores on 5-year Risk-adjusted Returns”, The Business Times
(Singapore), 9 February 2006.
Page 10
U21Global Working Paper Series, No. 001/2008
Page 9
More details about U21Global can be found at www.u21global.edu.sg
U21Global is the world's pre-eminent online graduate
school, designed to meet the needs of individuals and
corporations in the 21st century. The graduate school is
backed by an international network of leading research-
intensive universities in 11 countries. U21Global
combines the traditional quality of its founders with
innovative modes of delivery on the Internet, providing
students with substantial learning advantages, while
balancing work, travel and family life.
U21Global Working Paper Series, No. 001/2008
Page 0
No. 001/2008
Islamic Finance:
Growth and Prospects in Singapore
Habibullah Khan & Omar K. M. R. Bashar
June 2008
Page 2
U21Global Working Paper Series, No. 001/2008
Page 1
Islamic Finance:
Growth and Prospects in Singapore
Habibullah Khan, U21Global, Singapore
1
hkhan@u21global.edu.sg
Omar K. M. R. Bashar, Swinburne University of Technology
Lilydale, Australia
2
obashar@swin.edu.au
ABSTRACT
Islamic finance has been growing rapidly since its launch in the 1970s. The
major market for this industry is typically the Middle East and it is gaining
popularity in the UK, USA and Southeast Asia. Malaysia is the leading Islamic
finance industry in Southeast Asia while its neighbor Singapore is relatively a
new market player. Singapore revised its regulatory framework and tax
structure and gradually introduced various Shariah-compliant financial products
in the last couple of years. This paper argues that despite having small domestic
market and competition from Malaysia, Singapore can still position itself in a
niche market in the region. Through its strategy of integrated financial and
economic development, Singapore can create new opportunities for Islamic
finance and related financial products in the region.
Keywords: Islamic finance, growth, Singapore
1. Introduction
Islamic finance, which dates back to 1975 with the establishment of Bank Faisal
in Egypt, is developing at a remarkable pace. The growth of Islamic finance industry
has been very strong over the past few years. Currently, there are over 300 Islamic
financial institutions in more than 75 countries though they are mainly concentrated in
the Middle East and Southeast Asia, but are also gaining popularity in Europe and the
United States. It is estimated that the industry will grow at a rate of 15 to 20 percent
annually, from current assets of US$300 billion (Al-Salem, 2008).
The importance and potential of Islamic banking prompted the International
Monetary Fund (IMF) to facilitate the establishment of the Islamic Financial Services
Board (IFSB) (the Islamic equivalent of IMF) in 2002, the idea being addressing the
need for a suitable regulatory framework, new financial instruments and institutional
arrangements for Islamic finance operations. Recently, the Singapore government has
1 Habibullah Khan is Associate Dean, Assessment & Content Author Liaison and Associate Professor at
U21Global, Singapore.
2
Omar K. M. R. Bashar is Lecturer at the Faculty of Higher Education at the Swinburne University of
Technology, Lilydale, Australia.
Page 3
U21Global Working Paper Series, No. 001/2008
Page 2
also recognized the need for establishing Islamic banking in order to be complete as an
international financial centre.
This paper contains four sections. After introductory remarks in section 1, the
principles of Islamic finance and types of products and services offered in the industry
have been discussed in section 2. Section 3 enumerates the status and prospects of
Islamic finance in Singapore. Finally, section 4 concludes the paper.
2. Islamic Finance: Principles and Products
2.1 Principles of Islamic Finance and Advantages
Islamic finance operates under religious beliefs and cultural characteristics of
Muslim societies. According to Shariah (Islamic law), the Islamic mode of finance
should emphasize profit and loss sharing and prohibit fixed-returns. In other words, any
predetermined payment over and above the actual amount of the principal (i.e. interest)
is prohibited. The Shariah also prohibits activities related to uncertainty, risk and
speculation. A modern interpretation is that interest may be paid only for taking
investment risk but not for time value risk-free investment. As such, asset-based
lending is allowed under Shariah while paper- or financial-based lending is not. The
law also prohibits investment in “un-Islamic” activities, such as lending for
constructing a casino or trading of alcohol.
In sum, the guiding principles regarding Islamic finance include the following:
(1) any predetermined payment over and above the actual amount of principal is
prohibited. (2) The lender must share in the profits or losses arising out of the enterprise
for which money was lent. (3) Making money from money is not acceptable by Islamic
law. Money is only a medium of exchange, and therefore should not be allowed to give
rise to more money, via fixed interest payments, simply by being put in a bank or lent
to someone else. (4) Gharar (uncertainty, risk or speculation) is also prohibited. (5)
Investments should only support practices or products that are not forbidden (or
discouraged) by Islam.
There are several advantages of Islamic system which is based on the principle
of profit-sharing. First of all, Profit-sharing channels investible funds to the projects
with the highest expected profitability as opposed to the interest-based system where
funds go to the most creditworthy borrowers whose projects may not necessarily be the
most profitable ones. In fact, the ‘quest for profit’ is the main driving force behind the
development of modern businesses and it was clearly reflected in the powerful writings
of Adam Smith in The Wealth of Nations (1776). Adam Smith argued that even though
self-interest is the prime mover of economic activity, the end result is the allocation of
goods and services that serves society’s collective interests in the best possible manner.
If produces offer ‘too much’ of one product and ‘too little’ of another, profit
opportunities immediately would alert entrepreneurs to the fact and provide incentives
for them to change the line of production. In other words, the system based on
profitability will ensure ‘economic efficiency’ leading to optimality in production,
consumption, and exchange. Secondly, profit-sharing is more conducive to economic
growth, as this would increase the supply of risk capital for investment and greater
incentives for undertaking such risks due to expected profitability. Finally, the Islamic
Page 4
U21Global Working Paper Series, No. 001/2008
Page 3
system promotes an ‘integrated’ economic development as it encourages the use of
money for facilitating trade in goods and investment in productive capacity rather than
creating money for the sake of money. Such a system is likely to be more stable and is
less vulnerable to financial crisis that can be caused by speculative activities.
2.2 Islamic Financial Products
The following is a brief description of Islamic financial products:
3
i) Profit sharing financial products
• Musharakah- all partners participation in terms of equity, investment,
management and profit (based on pre-agreed ratio) and loss (based on equity
contributions).
• Mudarabah- one contributes capital, others provide entrepreneurship. Profit is
shared on a pre-agreed ratio.
• Qard Hasan- charitable loans free of interest and profit-sharing margins;
repayment by installments. Modest service charge is permissible.
• Wakalah- a bank is authorized to conduct business on customers’ behalf.
• Hawalah- an agreement by the bank to undertake some of the liabilities of the
customer in return for a service fee. The customer pays back the bank when the
liabilities mature.
ii) Advance purchase financial products
• Murabahah- a contract between the bank and its client for the sale of goods at a
price that includes a profit margin agreed by both parties.
• Istithna’- a contract for acquisition of goods by specification or order, where the
price is paid progressively in accordance with the progress of job completion.
• Mu’ajjal- a sales contract that allows purchase with deferred delivery.
• Ijarah- a leasing contract under which a bank buys and leases out for a rental
fee equipment required by its clients.
iii) Deposit products
• Wadi’ah- deposits, including current accounts (giro wadi’ah).
• Mudarabah- deposit products based on revenue-sharing between depositor and
bank, including savings products that can be withdrawn any time and time
deposit products.
• Qard al-Hasanah- unremunerated deposit products, usually for charitable
purposes.
iv) Insurance products
• Takaful- Islamic insurance with joint risk-sharing.
3
Adopted from Imady and Seibel (2006).
Page 5
U21Global Working Paper Series, No. 001/2008
Page 4
3. Islamic Finance in Singapore
3.1 Status of Islamic Finance in Singapore
Islamic finance received attention of the Singapore government in recent years.
The following is a brief description of Singapore’s recent development in Islamic
finance:
i) Regulatory treatment
In June 2006, the Monetary Authority of Singapore (MAS) gave its approval to
banks to engage in non-financial activities, such as commodity trading, to facilitate
Murabahah transactions for clients’ investments. Prior to this, banks had been
forbidden to engage in non-financial activities such as trading, which is not normally
associated with banking and finance. This move shows that MAS recognizes the
fundamental characteristics of Murabaha - a key form of Islamic financing in the
Middle East (Asmani, 2006).
ii) Tax treatment
The Singapore government recognizes that given the nature and structure of
Islamic financial products, they tend to attract more tax then their counterparts. The
overall policy approach has been to align tax treatment of Islamic contracts with the
treatment of conventional financing contracts they are economically equivalent to. In
line with this policy, the Finance Ministry announced several changes in the 2005 and
2006 budgets.
In 2005, Singapore waived the imposition of double stamp duties in Islamic
transactions involving real estate and accorded the same concessionary tax treatment on
income from Islamic bonds that are applicable to conventional bonds.
In 2006, income tax and GST (goods and services tax) applications on some
Islamic products were further clarified. The government identified three Shariah-
compliant products and ensured that they do not suffer more taxes due to the nature of
their structuring. In addition, to level the tax playing field for Sukuk (Islamic
equivalent of a bond), remission will be granted on stamp duty on immovable property,
incurred under a Sukuk structure, that is in excess of that chargeable in the case of an
equivalent conventional bond issue.
4
iii) Growth and development of financial products
In July 2001, Maybank, Malaysia’s largest bank started Islamic banking in
Singapore with the introduction of Singapore Unit Trusts Ethical Growth Fund that
complies with the principles of the Shariah.
5
In November 2005, the bank introduced
Shariah-complaint online savings account and Shariah-compliant savings cum checking
account (Siow, 2005).
4
Ng, Nam Sim, Executive Director, MAS, Opening Remarks at the IQPC Islamic Finance, Singapore
2006.
5
Source: Singapore Unit Trusts website www.sut.com.sg/main/fund_sutegf.asp (accessed on 28 May
2008).
Page 6
U21Global Working Paper Series, No. 001/2008
Page 5
In February 2006, the first Shariah-compliant term deposit in Singapore was
launched by OCBC Bank. The bank targets wholesale to Muslim companies, financial
institutions, mosques and non-profit organizations (Yee, 2006).
Islamic insurance or Takaful has also been successful in Singapore with over
S$500 million Takaful funds under management. For instance, HSBC (Singapore)
launched Takaful Global Fund in September 1995 while Takaful Sinaran Fund was
launched in May 2005. Returns from these funds are not subjected to income tax. There
are about S$2 billion Shariah-compliant real estate funds managed out of Singapore.
6
iv) Islamic equity index
In recognition of increasing interest of Middle East investors in diversifying and
tapping the growth opportunities in Asia, the first Shariah-compliant pan-Asian equity
index was launched in Singapore in February 2006. This index serves as a benchmark
for Shariah-compliant funds investing in Asian equities, and paves the way for the
growth of Shariah-compliant funds seeking Asian exposures.
v) IFSB membership
MAS is a member of IFSB. MAS joined the IFSB in December 2003 as an
observer member and became a full member in April 2005. MAS currently participates
in the Islamic Money Market Taskforce, the Supervisory Review Process Working
Group and the Special Issues in Capital Adequacy Working Group.
7
vi) Education
Another significant move in the development of Islamic finance in Singapore
has been the announcement by the Singapore Islamic Scholars and Religious Teachers
Association (PERGAS) that some Islamic religious scholars would be trained in
banking and finance to assist Singapore’s aim of becoming a hub for Islamic finance.
PERGAS also mentioned in September 2006 that in order to develop Asatizah
(religious teachers), it would introduce a Shariah Advisers Training Programme
organized jointly with the Kuala Lumpur-based International Institute of Islamic
Finance (Venardos, 2006, pp 208-209).
vii) Exchange traded fund
Singapore moved a step forward in the development of its Islamic finance
industry with the first listing of a Shariah-compliant exchange traded fund (ETF) on 27
May 2008. Daiwa Asset Management Co. Ltd.’s first ETF offers an investment channel
into Japanese companies that fully complies with Shariah investment principles.
8
6
MAS, Annual Report 2005/2006.
7
MAS, Annual Report 2006/2007.
8
“Singapore’s de facto Central Bank sees ‘promising growth’ in Islamic Finance”. Source: Forbes
website www.forbes.com/afxnewslimited/feeds/afx/2008/05/27/afx5048208.html (accessed on 28 May
2008).
Page 7
U21Global Working Paper Series, No. 001/2008
Page 6
3.2 Prospects of Islamic Finance in Singapore
Singapore is a relatively new market player in Islamic finance. The domestic
market is quite small and there is not sufficient public awareness about Islamic finance.
Regionally, Malaysia is leading Islamic finance industry. Yet Singapore has good
prospect for positioning itself in a niche market. For instance, as of 2006 there are
nearly 227 million Muslims in Southeast Asia, which is about 40 percent of total
population in the region.
9
Being a regional financial hub, Singapore could target a big
pie of this Muslim community since Islamic finance in Southeast Asia is not as far
advanced as in the Middle East despite strong growth potential. For example, Islamic
finance in Indonesia is not nearly as well developed as it is in Malaysia with Islamic
banks holding only a 0.12 per cent share of the assets in the banking system. The lack
of comprehensive and appropriate framework and instruments for regulation and
supervision has impeded the development of Islamic finance to its full potential.
Indonesia is the world’s most populous Muslim nation and Singapore could eye on this
potentially huge market.
The Middle East and South Asia could also offer a unique opportunity for
Singapore’s development in Islamic finance industry. Singapore could attract rich
Arabs in the Middle East and Muslims in Pakistan, Bangladesh and India. Besides, non-
Muslims could also be educated on Islamic finance products and targeted in the long-
run. Singapore’s reputation as a stable and open financial hub is expected to play an
important role in luring investors in this industry.
In order to strengthen its presence in Islamic finance industry, Singapore has
refined its regulatory framework and tax structures over the years. The initiatives
include granting of a 5 percent concessionary tax rate for income derived from Shariah-
compliant fund management, lending and insurance and re-insurance. The MAS will
also be developing a facility for the issuance of Singapore dollar denominated
sovereign-rated Sukuks in response to the needs of financial institutions conducting
Shariah-compliant activities in Singapore.
10
4. Conclusion
Islamic finance is a relatively new concept in Singapore. Small domestic market
and lack of public awareness do not offer strong growth potential for Islamic finance
industry within the Republic. Over the years, Singapore revised its regulatory
framework and tax structure and introduced various Shariah-compliant financial
products. The city-state Republic also faces strong competition from Malaysia in
providing Islamic products regionally. However, the country can still find a niche
market in Southeast Asia (particularly Indonesia), the Middle East and South Asia
given the reputation of being regional financial hub and its overall attractiveness as a
business location. Singapore’s neutral stance to all religious beliefs and practices and
its harmonious development of various race relations within the community at large has
further added to its strength. Another important point is worth mentioning. Singapore is
9
Source: Muslim Population Worldwide website www.islamicpopulation.com (accessed on 31 May
2008).
10
“Singapore’s de facto Central Bank sees ‘promising growth’ in Islamic Finance”. Source: Forbes
website www.forbes.com/afxnewslimited/feeds/afx/2008/05/27/afx5048208.html (accessed on 28 May
2008).
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pursuing a strategy of integrated development of financial and real sectors as it believes
that the two can reinforce each other. Singapore has just completed a free trade
agreement (FTA) negotiation with Gulf Cooperation Council (GCC) and this is likely
to facilitate trade and investment between two sides. With deeper trade and investment
links, there will be greater opportunity for financial integration that could open new
promises for Islamic finance and the related products.
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REFERENCES
Al-Salem, Faoud (2008), “The Size and Scope of the Islamic Finance Industry: An Analysis,”
International Journal of Management, May 2008 (online version).
Asmani, A. (2006), “Banks Get Light to Offer Another Islamic Product”, The Straits Times
(Singapore), 13 June 2006.
Imady, O. and H. D. Seibel (2006), Principles and Products of Islamic Finance, Working Paper
No. 2006-1, Development Research Center, University of Cologne, Germany.
Monetary Authority of Singapore, Annual Report (various issues).
Siow, L. S. (2005), “Maybank Launches Islamic Banking”, The Business Times (Singapore), 26
November 2005.
Venardos, A. M. (2006), Islamic Banking and Finance in South-east Asia: Its Developments
and Future, Asia-Pacific Business Series Vol. 3 (2
nd
ed.).
Yee, L. (2006), “OCBC Scores on 5-year Risk-adjusted Returns”, The Business Times
(Singapore), 9 February 2006.
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