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Sunday 5 October 2014

Singapore struggles to establish broader Islamic finance market

The Southeast Asian financial hub of Singapore, which is competing with Hong Kong in establishing an Islamic finance market in the region, has suffered a setback this year as only one institution issued an Islamic bond (sukuk) and was just able to raise $150mn. The Sabana Shariah-Compliant Industrial Real Estate Investment Trust issued two tranches in March and September and remained the only sukuk issuer in 2014 in a nation which strives to join a growing number of non-Muslim countries jumping on the bandwagon of the Islamic finance business which is increasingly going mainstream.

Hong Kong, on the other hand, in September successfully raised $1bn in its debut sovereign sukuk – and not only this, the Islamic bond was almost 5 times oversubscribed and will subsequently be listed on Nasdaq Dubai. It was the world’s first US dollar-denominated sukuk issued by a government with an AAA credit rating.

Europe’s financial hub of Luxembourg raised $252mn in its first-ever sukuk issue on October 1, while the UK sold the first sovereign issue from a non-Muslim country when it issued a $324mn sukuk in June. By the end of September, South Africa raised $500mn in its first sukuk issue which was 4 times oversubscribed.

So what went wrong in Singapore? Analysts say it is mainly the absence of large-scale sukuks offered by the government or government-related institutions. Like Hong Kong, Singapore has an AAA sovereign credit rating and could easily attract more Islamic investors if it would introduce some incentives and tax exemptions for sukuk investors. This is exactly what its neighbour Malaysia does, a country that dominates the global sukuk market with a current total of $72bn of sukuk outstanding despite the country’s credit rating on the Standard & Poor’s scale is six levels below Singapore’s.

Unlike Malaysia, Singapore also doesn’t have Islamic pension funds or many businesses in need for Shariah-compliant finance vehicles, even though the country’s Muslim population accounts for 15% of the total.

Finance experts say that Singapore should learn from Malaysia how to attract more Islamic investors. Apart from its strong standing in the global sukuk market, Malaysia is now also starting to develop the widely untapped Islamic private banking market in Asia. High-net-worth individuals in Asia are estimated at 2.6mn who control a total fortune of some $8.4tn and of which a significant part is seen to be Muslims who have limited choice to invest and manage their fortune in Shariah-compliant financial instruments.

“We are an established international hub for sukuk and Islamic banking, (…) thus it is possible for us to steer ahead new and innovative initiatives in this area,” said Dr Rozali Mohamed Ali, chairman of the Kuala Lumpur-based International Center for Education in Islamic Finance, at a private banking conference in the Malaysian capital held on October 1.
That way, Malaysia’s foray into the Islamic private banking market with innovative financial solutions could grab a share of rich Muslim Asian clients including the Middle East’s – people who use the services of Singapore’s huge wealth management industry which attracts foreign millionaires in droves but whose Shariah-compliant banking solutions remain somehow limited and overshadowed be the well-established traditional banking industry in the city state.

(Gulf Times / 04 October 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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