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Islamic Finance in a Non-Muslim Jurisdiction: Singapore as a Case Study

Yeo Wico and Suhaimi Zainul-Abidin discuss Singapore as a case study offering the potential for Islamic finance to flourish in a predominantly non-Muslim country.

The Islamic finance industry has grown rapidly since its inception in the 1970s and is currently estimated as being a US$1 trillion industry. However, it is still a common but erroneous impression that Islamic financing is only for countries with a large or majority Muslim population. In this respect, Singapore is an interesting case study, holding out the promise of having Islamic finance take root and flourish in a predominantly non-Muslim country.

Capitalising on core strengths

Singapore’s fund management sector, wealth management sector and its established and active stock exchange and deep capital markets are some of the core strengths of its banking and finance industry, and it is in these areas and through leveraging on these core strengths that Singapore stands the best chance of developing its own viable Islamic finance industry. In the opening address at the 2nd World Islamic Banking Conference: Asia Summit 2011 on 8th June 2011, Lim Hng Kiang, the Minister for Trade and Industry and the Deputy Chairman of the Monetary Authority of Singapore (MAS), identified three areas where Singapore could offer its services as an established financial sector to support the growth of Islamic finance: namely in wholesale banking services, asset management and capital markets; and there have been encouraging signs in this respect.

Islamic funds and listings in Singapore

There have been a number of Islamic funds established in Singapore in recent years, including Maybank’s Singapore Unit Trusts Ethical Growth Fund investing in Shariah compliant growth equities; the Daiwa Asset Management (Singapore)’s exchange traded fund offering investors access to the top 100 Shariah compliant Japanese companies by market capitalisation; and more recently the Securus Data Property Fund, established and managed in Singapore with big-name international cornerstone investors, which invests in the unique asset class of data centres. The continuing financial crisis has led investors to seek safe haven countries such as Singapore for investment purposes, and whenever there is interest in funds investing in specific sectors or assets in the region Singapore comes to mind as the ideal jurisdiction for the establishment and management of the fund.

The Singapore government has adopted a consistent proactive approach of developing Singapore as a key fund management centre in Asia, chiefly through fine-tuning its tax incentives in the fund management industry, to keep Singapore a step ahead of its competitors. These measures, including tax exemptions for off shore funds, a 10% tax rate for fund managers and tax exemption for Singapore resident funds, have resulted in a strong expansion of the industry in Singapore over the last few years, and are expected to entice more fund managers to establish Islamic funds in Singapore. The listing of the Sabana Shariah Compliant Real Estate Investment Trust (Sabana REIT) in 2010 has also set the benchmark for Islamic REITs globally.

Sabana REIT is the largest Shariah compliant REIT by total assets globally and has garnered a multitude of international awards and accolades through its listing and other Islamic financings. These Islamic funds and listings demonstrate that the fund management and stock market infrastructure in Singapore is conducive for Islamic funds and the listing of Shariah compliant companies and trusts.

The Islamic capital market looks set for robust growth in the coming years, due to increasing wealth in the hands of Muslims and Shariah compliant corporations worldwide, and the corresponding increasing demand for Shariah compliant investments.

The rise of Islamic wealth management

Singapore has in recent years buttressed its reputation as a safe haven, especially in the eyes of those seeking an oasis of stability and security. With the growing accumulation of wealth, both local and international banks in Singapore have correspondingly focused on expanding their private banking operations. One spot that is yet to be tapped in Singapore is Islamic wealth management. Globally, Islamic wealth management is a relative green field as compared to Shariah compliant retail banking and corporate finance.

The unique needs of Shariah compliant investors who seek wealth management are primarily due to the requirements to pay zakat and the special rules for inheritance and, ultimately, the need to truly comprehend the meaning and purpose of wealth in Islam. These under-served needs offer opportunities for Islamic wealth management in Singapore. If a holistic approach to Islamic wealth management is taken in Singapore to address these needs, Singapore could grow into an Islamic wealth management centre as well.

Lacking a critical mass for Islamic consumer banking

One area where Singapore has a relative dearth of Shariah compliant products is in its consumer banking space. While in many other Islamic finance-friendly jurisdictions it is common for Shariah compliant products to be available to mass market consumers for home mortgages or automobile financing, the same cannot be said for Singapore.

Hitherto, the main reason cited for this is the lack of critical mass in Singapore, given its relatively small population, of which Muslims form less than a 15% minority, which has caused financial institutions in Singapore to shy away from developing Islamic consumer banking. Recent reports on the growth of Islamic finance globally allude to retail banking being one of the key growth drivers worldwide, not only in the Middle East and Malaysia, but also in countries like China, Russia and Africa. Will this trend develop in Singapore notwithstanding its small market? While Muslims in Singapore would be the most obvious beneficiaries of the introduction of Islamic consumer banking products in Singapore, non-Muslims could also be consumers.

Many industry watchers are also keen to see further developments in the Islamic consumer banking space in Singapore, so that Singapore can offer a more complete Islamic banking and finance ecosystem.

Challenges and prospects

Singapore remains a relatively new market participant in Islamic finance and there are challenges ahead in its bid to develop the industry. Most importantly, Singapore’s domestic catchment for Islamic
financing is relatively small as compared to conventional banking and finance.

The Singapore government has and will continue to harmonise the tax and regulatory treatment of Islamic financial products to ensure a level playing field and to remove obstacles that may hamper Islamic financial transactions.

While government support is critical, it is but one piece of an ecosystem. Singapore’s other advantages are its standing as an international financial centre, its high regulatory standards, robust governance and strong legal and regulatory framework, its highly trained industry professionals, the strong partnership between the government and the industry, and its geographical proximity to Malaysia and Indonesia. In the relatively untapped areas of Islamic fund and wealth management, Singapore has a golden opportunity to develop these niches by harnessing these strengths.

This article first appeared in the Islamic Finance News (11 January 2012, Volume 9, Issue 7, Page 24 – 25).  For more information, please visit