Professor Michael Furmston, Dean of School of Law, Singapore Management University
Ladies and Gentlemen
Good morning
Introduction
1. It is my pleasure to join all of you at the Islamic Finance News Roadshow, held at the Singapore Management University (SMU). The SMU has been a strong proponent of people development for the Islamic finance industry. Allow me to congratulate the university on the upcoming launch of its Master of Laws programme, which comprises specialisation in Islamic Law and Finance. As Islamic finance grows in Singapore, your role will become increasingly critical and relevant.
Global economic recovery under threat
2. Once again, we are facing intensifying threats to the global economic recovery. The Euro zone has yet to emerge from its sovereign debt crisis and is expected to enter a mild recession this year . While the US economy has offered some good news recently as jobless claims fell and consumer confidence soared, global optimism has since been dampened somewhat by an oil price surge due to growing tension at the Strait of Hormuz.
3. Increased strains and fragilities have prompted the International Monetary Fund (IMF) to revise downwards its 2012 forecast on global output to 3¼%, a reduction of ¾ percentage point from its projection last September. Emerging and developing economies, while still relative bright spots in the global economic landscape; have not remained unscathed, with growth prospects for 2012 revised downwards to 5.4% from 6.1%.
4. Despite Arab Spring, economic outlook for the Middle East and North Africa (MENA) region remains intact. The region registered resilient growth of 3.1% in 2011 and is expected to do slightly better at 3.2% this year . Much of this expansion is led by oil and gas exports, which continues to benefit from the elevated energy prices. The Gulf Cooperation Council (GCC), in particular, grew 7% last year , supported by higher public spending introduced in the wake of Arab Spring and the governments’ long-term initiatives to move towards more diversified economies away from hydrocarbons.
Islamic finance: increased resilience, reach and sophistication
5. A similar resilience can be observed in the global Islamic finance industry. The sukuk market saw a resurgence in global issuance to US$85 billion in 2011. The positive momentum has carried forward into 2012, where US$20 billion of sukuk has already been issued so far in January . Governments in the Middle East and Asia have increasingly turned to local investors to back their infrastructure projects as European banks reduced their overseas exposure. Banks in these regions that comply with Shariah law have also demonstrated a strong appetite for assets that meet their requirements.
6. More importantly, the reach of Islamic finance has widened and deepened considerably in recent years. New sources of interest have sprouted in countries like Oman, Egypt and Turkey. Closer to home, the pace of development has picked up strongly in Indonesia and Brunei. The commitment of more countries to Islamic finance can only serve to raise the profile of the industry and expand its cross border reach.
7. The industry has also grown in sophistication and offers a wider range of products. Investors seeking Shariah-compliant instruments can now choose from a whole host of products, including Exchange Traded Funds, Real Estate Investment Trusts, money market and commodities-based investment funds. I encourage industry players to continue to innovate and differentiate themselves by creating new product offerings able to meet the needs of its growing and more diverse group of customers.
Overcome challenges for sustainable growth
8. While the industry has progressed substantively in the last few decades, more can be done. To ensure sustainable growth going forward, the industry must (i) create a broader asset and customer base; (ii) enhance liquidity and transparency; and (iii) increase awareness and acceptance.
Broad-based growth across banking, capital markets and takaful
9. While growth of the industry over the last decade has been exceptional, most of it has taken place in the banking sector. The Islamic capital markets and takaful sectors have not kept pace. According to industry estimates, commercial banks alone account for nearly ¾ of the global assets of Islamic finance while takaful contributed only 1% .
10. For a healthy financial eco-system to exist, we require all three sectors to be strong as each reinforces one another. For example, quite a few Islamic banks had significant exposure to the real estate sector because they did not have enough alternative assets such as capital market instruments to invest in. This risk concentration in real estate has proved costly and underscores the importance of a well-functioning financial ecosystem where risks can be more efficiently priced, hedged and distributed.
Enhance liquidity and transparency
11. This brings me to my second point – the long-standing need to enhance liquidity and price transparency of Islamic market instruments. Many sukuk investors still adopt a buy-and-hold approach. The absence of transactional liquidity and resulting lack of price transparency prevents Islamic investments from wider participation by international investors and asset managers, and from becoming a mainstream asset class.
12. Hopefully, the recent record sukuk issuance will help address these two shortfalls.
Greater acceptance needed
13. Lastly, more needs to be done to increase the understanding and acceptance of Islamic finance. Industry players must do their part in raising investor awareness and understanding through education and outreach programmes. They can achieve this by partnering multilateral agencies like the Islamic Financial Services Board and the Islamic Development Bank or educational institutions like the SMU. To win new investors, Islamic finance must also offer products and services at competitive prices vis-à-vis its well-established and larger conventional counterpart.
Singapore Islamic finance industry
Positioning for growth
14. This is where Singapore can come in. As an international financial centre with more than 700 financial institutions, we intend to, through our participation, bring Islamic finance to a more diverse audience and promote greater acceptance internationally.
15. I am pleased that, in recent years, the diversity of players offering Islamic financial services in Singapore has increased. Regional banks have contributed significantly to the Islamic finance landscape here, bringing with them years’ of experience and expertise from their home countries. International banks have supported the investments of Singapore players such as AEP Investment Management and Keppel Data Centre Investment Management, who jointly manage the world’s first Shariah-compliant data centre fund. In addition, a growing cluster of Middle Eastern banks operating in Singapore has begun to offer Islamic financial services. Together with the local banks who have been serving the market, such diversity will bring about a more vibrant and competitive industry.
16. To ensure that Islamic finance competes on an equal footing with the broader financial sector, MAS has worked closely with the industry and various government agencies to remove regulatory and tax impediments. As the industry evolves, MAS will continue to refine our regulations to cater to the needs of the market. Events like today’s Roadshow and the World Islamic Banking Conference Asia Summit in June this year are vital platforms in profiling the industry and for bringing key stakeholders together to discuss the next moves that will carry the industry forward.
Trade finance as a source of growth
17. We are encouraged by the renewed growth of the industry and continue to be optimistic of its longer-term prospects. The successful completion of several milestone transactions in Singapore demonstrates that with the right offering and pricing, there is good demand for Shariah-compliant products.
18. Islamic finance players should however explore new growth areas which adhere to Shariah principles. One such possibility is trade finance. Globally, trade finance is facing funding pressures as European banks, who have been traditionally strong in this sector, continue to deleverage and adjust to the requirements of Basel III. Given Islamic finance’s emphasis on supporting tangible, real economic activities, trade finance is a business segment which fits well with Shariah principles and business model. Banks with Islamic operations here are therefore well-placed to take advantage of the sizeable trade flows between Singapore and the Middle East. Last year, bilateral trade flows between Singapore and the GCC grew by over 40% and reached S$62 billion. The GCC is now Singapore’s 6th largest trading partner.
Conclusion
19. Let me conclude. Despite global uncertainties and continued tension in the Middle East, the Islamic finance industry has demonstrated strong resilience and appears poised for a new phase of growth.
20. To create the conditions for sustainable growth, the industry must build a broader customer and asset base by raising investor awareness and acceptance as well as to enhance trading liquidity and price transparency of Islamic instruments.
21. Financial institutions in Singapore should tap on the core strengths of our financial centre: that is, in banking, capital markets and asset management, to create new, innovative products and to explore new growth areas such as trade finance. In this way, Singapore can play its part by promoting the usage of Islamic finance to a wider and more diverse group of investors.
22. With this, I wish you a rewarding discussion ahead. Thank you.
