Despite miserable markets and falling sukuk issuance, the Monetary Authority of Singapore (MAS) pushed ahead with its inaugural sukuk bond in February. Many took this as a sign of the seriousness of Singapore's ambitions to develop itself as a regional Islamic finance hub to rival Malaysia. Heng Swee Keat, managing director MAS, says the move is to ensure that Singapore remains a dynamic financial centre.
"We are an international financial centre with a very global investor base so we needed to respond to the development of Islamic finance," says Mr Heng. "We see increasing flows of trade, investment and capital between the Middle East and Asia, and the ability for banks operating in Singapore to offer a full suite of financial services, including those that are sharia-compliant, will allow us to facilitate this flow."
Led by bank appetite
The key reason for issuing the S$200m ($130m) sukuk was the need for banks that want to offer Islamic financial services and products to hold sharia-compliant assets. The sukuk, arranged and led by Standard Chartered Bank and the Islamic Bank of Asia (part-owned by Singapore-based DBS Bank), was issued by reverse enquiry. This enabled MAS to let bank appetite, not a central bank prescription, guide the final size and timing of the offering.
"The sukuk was not issued to raise funding for MAS – we were responding to demand and providing liquidity," says Mr Heng. "As we have no fixed plan for the size of Singapore's Islamic finance market, we will not set any artificial targets. We will let the market evolve."
The bonds are the Islamic equivalent of Singapore Government Securities (SGSs) so will get the same regulatory treatment, such as qualifying as an asset in the calculation of capital and liquidity requirements, and as eligible collateral for MAS's repo facility. In the absence of a sukuk benchmark, the issue was priced against SGSs to improve price discovery.
Getting this deal done was an accomplishment. The backdrop was dire – sukuk issuance plummeted 56% last year against 2007 highs. But Singapore also put in place the necessary legal, regulatory and tax framework in less than a year. The UK, which tabled its interest in issuing a sukuk in April 2007, has so far failed to resolve the tax obstacles associated with property-backed bonds. MAS was helped in this regard by the fact that about two years ago, Singapore removed the double stamp duty that is proving a barrier to the UK's sovereign sukuk, says Mr Heng.
In laying the groundwork for what he believes will be a vibrant financial sector, Mr Heng says MAS has paid particular attention to Islamic finance's specific risk characteristics. He acknowledges that Islamic finance has proven more resistant to many of the excesses currently troubling western finance, but says that it has its own vulnerabilities.
For one thing, Islamic banks are generally exposed to greater liquidity risk than conventional counterparts because the range of liquid instruments and hedging tools is more limited. Moreover, the asset-based nature of Islamic finance means it is inherently more exposed to real estate and infrastructure. "These are 'lumpy' types of transactions and because asset bubbles tend to build up quickly, it is important that regulators make sure they are taking such risks into consideration," says Mr Heng.
On the topic of the financial crisis, he says the global response needs to be forceful to prevent the "feedback loop" between the deterioration of financial sector and the real economy being "deeper, faster and more destructive" than it already is.
"We need concerted monetary, fiscal, trade and regulatory policies. And they should be implemented sooner rather than later; more rather than less," he says.
Governments must keep an eye on looming medium-term consequences, such as high levels of debt and too much monetary easing. "There must be proper exit strategies that are communicated early to prevent structural deficits," says Mr Heng.
Intra-Asia trade
The world's governments must also work to address some of the structural issues in the global economy that have played a role in the crisis, such as the US savings deficit and weak domestic consumption in Asia. Mr Heng says the Asian region is already taking steps. "There is a lot more focus being placed on further developing intra-Asia trade, investment and consumption. The framework is there in the shape of the Association of South-east Asian Nations (Asean) free-trade area, and the trade agreements Asean has with Japan, China, India, South Korea, Australia and New Zealand."
But he warns against over-reaction: "In putting in place more effective regulation, we must be very careful not to swing the regulatory pendulum. Some expedient measures could have unintended consequences."
