It has almost become a ritual that there has to be some sort of announcement either by the government, regulator or a financial institution at international conferences on Islamic finance.
Singapore is no exception. Not surprisingly, Lim Hng Kiang, Minister for Trade and Industry, who is also the Deputy Chairman, Monetary Authority of Singapore (MAS) (the financial regulator), announced a few days ago at one such conference in the island state that Singapore will in due course issue new income tax regulations for Islamic finance to provide greater tax clarity and certainty to the industry. (source)
He also said the FInance Ministry will provide additional clarification and detailed explanation of the income tax treatment on more prescribed Islamic financing arrangements including financing through a partnership arrangement, project finance as well as interbank placement of funds.
“This is in keeping with our long-standing principle that Shariah-compliant products should not be disadvantaged in terms of regulatory and tax treatment where the economic substance and risks are similar to conventional products.”
It is no secret that Singapore aspires to be a global hub for Islamic wholesale banking services, asset management and capital markets.
MAS has over the last few years facilitated the development of Islamic finance in Singapore’s financial markets, which in recent times has seen several sizeable cross-border transactions, including the world’s first Shariah-compliant data center fund (Securus Data Property Fund), the listing of the world’s largest Islamic Real Estate Investment Trust (Sabana Shariah-Compliant REIT) on the Singapore Exchange, as well as Khazanah Nasional’s controversial S$1.5 billion Sukuk — the largest Singapore Dollar Sukuk to date.
Minister Lim Hng Kiang predictably raised the usual issues of challenges relating to taking the Islamic finance industry forward — the need for further standardization and harmonization of both regulatory and Shariah standards and documentation across the Middle East and Asia to increase efficiency and certainty; easier cross-border offering of financial products that would reach a wider investor base and reduce transaction costs; and would foster better risk management by ensuring that risks are clearly identified and appropriately mitigated between financial institutions and other relevant partners.
Similarly, regulators need to ensure that the legal and regulatory regimes remain robust in ensuring the safety and soundness of markets and institutions, and yet conducive for Islamic finance to grow at a sustainable rate.
At the same time, the industry needs to meet the human capital challenge especially given the rapid growth of the industry in which the demand for financial, accounting and legal professionals who are conversant with Islamic finance will rise.
But if Minister Lim Hng Kiang had been present at the seminar on ‘Strategies for Development of Islamic Capital Markets’ which was organized by the Islamic Financial Services Board (IFSB), the prudential and Supervisory standard setting body for the global Islamic finance industry, in Singapore just a week earlier, he would have heard a different take on the reality of the Islamic finance challenge in Singapore and other East Asian markets.
Similarly, for new IFSB Secretary-General Jaseem Ahmed, it should also be a wake-up call as to the sustainability and expansion of the Islamic finance proposition even in major international financial centers such as Singapore, Hong Kong, Luxembourg and London.
Indeed, Tai Boon Leong, Executive Director, MAS, at the IFSB seminar, rightly reiterated that the progress on Islamic finance in Singapore achieved so far has been encouraging, especially for a small but internationally-orientated market, where a wide range of Islamic financial instruments and products had already been launched.
He, however, acknowledged that “the frequency and size of these instruments and transactions are low and smaller than their conventional equivalents,” however, “these deals underscore that there are no regulatory or market impediments to their origination in Singapore.”
The level of activity (or inactivity), he stressed “can be partly attributed to the low understanding and awareness of Islamic financing structures” (amongst investors, corporates and financial institutions) in Singapore.
“The Middle East and Asia,” he advised, “continue to present attractive opportunities. Both regions need to work closer together to achieve greater synergy and accelerate the global growth of Islamic finance. Singapore will play its part in this international effort together with our regional and industry partners.”
Tax neutrality whether for income, stamp duty or any other financial products — be they Islamic or conventional — is always welcome.
But in terms of building market confidence, especially in the targeted Islamic Capital Market (ICM), both the Minister and the executive director were conspicuous in not mentioning the dreaded ‘double S’ words ‘Sovereign Sukuk’. Imagine the impact it would have made on both events had the Singapore government announced that it may go the wholesale financial market to raise funds for a sovereign Sukuk during 2011 or early 2012.
Alas, there was no such announcement.
MAS launched the country’s first sukuk facility in 2009 to enable Islamic financial players in Singapore to meet their capital and liquidity requirements. The MAS sukuk is the Shariah-compliant equivalent of Singapore government securities, which meant it qualified as eligible assets under MAS liquidity framework for banks in Singapore. That sukuk, however, was issued under the reverse enquiry mechanism, and specifically designed for Islamic banks and the like to subscribe to it.
There are those who stress that the best way the Singapore government could stress the sustainability of the growth of Islamic finance in the country and region (and at the same time its meaningful commitment to expand Singapore as an ICM hub) is to issue a benchmark sovereign Sukuk (not reverse enquiry) under its normal government notes issuance program and debt management criteria.
The proceeds could be used to finance infrastructure projects or any other relevant government program.
There is also the option of issuing local currency domestic Sukuk like in neighboring Malaysia or as in Bahrain.
Tai Boon Leong of MAS could not have put it more aptly at the IFSB seminar, when he stressed that Islamic financial institutions face a general shortage of high quality Shariah-compliant assets to invest their growing deposit base. He also called for the expansion of the breadth and depth of Islamic capital markets in terms of products and capacity to absorb larger flows from a growing industry.
“Sukuk and other short-term market instruments,” he advised, “are sorely needed to enhance the liquidity available to Islamic finance players. This handicap has plagued the industry since its modern re-birth four decades ago. Liquid instruments such as sukuk allow isolated pools of Islamic funds in certain centers to flow cross-border to seek better returns; thereby unlocking the full international potential of Islamic finance.”
Nobody is suggesting that MAS issue Islamic papers on a regular basis, even though the business case may suggest that this could be an option in any diversified government fund-raising strategy especially since sukuk are now very competitive in the aftermath of the global financial crisis which has also affected the conventional bond market in general.
But one foray into the sovereign Sukuk market is not going to inspire that much confidence in international investors, especially when sukuk arrangers seem to be crying out for more AAA-rated sukuk issuances and the recently-established International Islamic Liquidity Management Corporation (IILM) has the unenviable mandate of issuing a pool of AAA-rated sukuk backed by asset pools owned by sovereign or quasi-sovereign entities to stimulate short-term liquidity management for the global Islamic finance industry.
This is the message not only to non-Muslim jurisdictions such as Singapore, UK and Luxembourg, but also for Muslim countries per se. In fact, Malaysia is the only country that has issued two global sovereign sukuk (not including the sukuk issued by its sovereign wealth fund, Khazanah Nasional or domestic issuances), and reports suggest that Kuala Lumpur has already mandated a group of banks to arrange its third international Sukuk.
No wonder there is desperate talk amongst market players and investors about the dearth of a critical mass of highly-rated sukuk, which in turn is partly responsible for the lack of secondary trading, albeit such a culture is only starting to reach the Middle East amongst sukuk certificate holders, and the reluctance of global majors to assume the mantle of market maker, a task which has now fallen on the IILM.
It was noticeable that Singapore, one of the first countries outside the OIC to join the IFSB for instance, did not see fit to become a founder member of the IILM especially when countries such as Luxembourg and Mauritius, who both also aspire to be international Islamic capital markets hubs, indeed were. The founding equity subscription is a modest maximum of $10 million.
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