Opening Remarks by Mr Ng Nam Sin, Executive Director, Monetary Authority of Singapore at the 4th Asian Takaful Conference,
30 March 2009,
Singapore
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Introduction

1. A very good morning to all of you. To our guests from overseas, a very warm welcome to Singapore.

2. I would like to thank the organisers for inviting me to speak at this event.  Having spoken at the Inaugural launch of this Conference in 2006, I am pleased that this event is now into its fourth year.

Growth & Potential of Takaful

3. A recent study by Swiss Re indicated that the takaful market has grown strongly in the past few years, with a yearly growth of about 25% between 2004 and 2007, compared to 10% in the conventional market[1]. Moody’s has estimated that total premiums for the takaful industry were in excess of US$2.5 billion in 2007.  This is still small compared to the nearly US$4 trillion level of global premiums for conventional insurance, underlining the scope for further expansion of takaful in future.  While this can be seen as an opportunity, are there areas that need to be addressed in order for growth to accelerate.

Challenges Confronting the Industry
4. Indeed there are challenges that need to be addressed. I will focus my comments on just two – the challenge of investing the growing pool of takaful funds in a Shariah-compliant manner, especially in the current uncertain financial market; and the lack of regulatory standards for the takaful industry.

5. On the first challenge, takaful funds are largely invested in Shariah-compliant equities, real estate and sukuks. Before the onset of the global financial crisis, there were already insufficient Shariah-compliant assets to meet the investment needs. The situation has worsened with the crisis. The issuance of sukuks has sharply declined in the past year. The crisis has also severely reduced the value of investments by both conventional insurance and takaful companies. These developments underlined the need for takaful operators to monitor more carefully the impact on their operations and manage the underlying risks of their investment activities.

6. On the regulatory front, the recent turmoil in financial markets has underscored the importance for appropriate standards and regulations.  The takaful industry has the unique opportunity to address these issues early while it is still in the formative stage. To help address this challenge, the Islamic Financial Services Board (IFSB), the standard setting body for the Islamic financial services industry, has recently issued the first draft standard for the takaful industry for public comments [2]. This is a collaborative effort with the International Association of Insurance Supervisors (IAIS) and many insurance regulators, including the Monetary Authority of Singapore (MAS). MAS is contributing in this area through our Chairmanship of the IFSB Working Group on Solvency Requirements for Takaful Operators.

7. However, industry players too have a vital role to play here.  In fact, a window of opportunity will present itself. The IFSB is organising a public hearing session on 5 May 2009 in Singapore, on the eve of the 6th IFSB Summit that the MAS is hosting. The session aims to gather feedback on the draft takaful standard. We encourage industry players in Singapore to actively participate in this dialogue.

Takaful & Islamic Finance in Singapore

8. Singapore hopes to play a major role in facilitating the growth of Islamic financial services. We can contribute in various ways. Firstly, for takaful, we can leverage on Singapore’s position as a leading insurance centre in Asia.  A number of Singapore-based reinsurance companies are already providing retakaful services.

9. Second is the area of regulatory and tax frame-work. We have incorporated takaful into our insurance regulatory framework since 1995 when takaful products were first introduced here. This is in line with our approach of regulating Islamic financial services, including takaful, under the same framework as conventional financial services given that prudential issues are common to both. We have also clarified the treatment of various Shariah-compliant financing arrangements which Singapore-based financial institutions can enter into.  The latest two structures announced earlier in January this year are the Ijara wa Igtina and the Murabaha Interbank placements.

10. We also worked on levelling the playing field between Islamic and conventional financial services. This ensures that Shariah-compliant products are treated similarly in terms of regulatory or tax applications where the economic substance and risks are similar. These changes create the necessary pre-conditions for growth of Islamic financial services and products in Singapore.   In this respect, the MAS has launched our S$ sukuk issuance facility in January 2009. This is to provide Shariah-compliant regulatory assets needed by financial institutions that are carrying out Shariah –compliant activities in Singapore.

11. Thirdly is the area of training and education. In the past year, established training providers such as Chartered Institute of Management Accountants (CIMA) and the Securities and Investment Institute (SII) have brought their Islamic finance courses to Singapore. We welcome more reputable universities and course providers to offer Islamic Finance training in Singapore. This will raise the overall competency of our professionals in this industry.

12. Fourthly, MAS takes an active role in contributing to the formulation of Islamic finance standards and best practices. MAS is a Council member of the IFSB since 2005, with a representative on the IFSB’s Technical Committee which oversees the standard setting work of the body.  MAS contributes to the work of the IFSB though our participation in the IFSB Working Groups on Supervisory Review Process, Special Issues in Capital Adequacy, Solvency Requirements for Takaful Operators and the Taskforce on Islamic Money-Markets.

13. The MAS is also collaborating on the international efforts at promoting greater awareness and understanding of the Islamic finance industry. In this respect, the MAS is honoured to host the 6th IFSB Summit in Singapore from 5th – 8th May 2009.  The annual Summit brings together central bank governors, regulators, academics and major private sector participants, especially from Asia and the Middle East, to discuss key issues and developments on the regulation and supervision of Islamic financial services. This is the first occasion that the flagship event is being held in East Asia. The theme of this year’s Summit is on the Future of the Islamic Financial services. This event is open to non-IFSB members and we welcome and encourage all industry players to attend and engage with these key players of the Islamic finance world.

Conclusion
14.  The near term financial and economic landscape remains an uncertain one. I notice that key topics to be discussed at this conference include corporate governance, regulatory framework and risk management. These are very pertinent issues, given the current environment. The development and growth of Islamic financial services over the past few years has been most impressive. The current financial turmoil should not be allowed to derail its growth. By focussing on key fundamentals, including sound risk management, high prudential & regulatory standards and strong corporate governance, like for other financial sectors, we believe it will be able to ride this crisis and continue on its growth trajectory.

15.  On this note, I wish you all a fruitful conference over this next two days, and look forward to seeing you at the IFSB Summit in May. Thank you.

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[1] Swiss Re’s Sigma publication “Insurance in the Emerging Markets: Overview and Prospects for Islamic Insurance”,  Dec 2008.

[2] IFSB Exposure Draft – Guiding Principles on Governance for Islamic Insurance (Takaful) Operations, Dec 2008.  A copy can be downloaded from the IFSB website  www.ifsb.org

Welcome Address by Mr Heng Swee Keat, Managing Director, Monetary Authority of Singapore at the 6th Islamic Financial Services Board Summit on 7 May 2009
at 1000hrs, Singapore
Summit Theme: “The Future of Islamic Financial Services”
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President of the Islamic Development Bank, H.E. Dr. Ahmad Mohamed Ali Al-Madani
IFSB Council Chairman and Governor of the Saudi Arabian Monetary Agency, H.E. Dr. Muhammad Al-Jasser,
IFSB Governors,
Secretary-General Prof. Rifaat Ahmed Abdel Karim,
Ambassadors,
Honoured guests

Welcome

1. I extend a very warm welcome to all our guests, especially those from overseas.  As an Islamic Financial Services Board (IFSB) member, MAS is honoured to host this 6th IFSB Summit.   This is IFSB’s first Summit in East Asia, and the strong interest shown by participants here is a testament to the growing opportunities for Islamic Finance and economic cooperation in our region.  I very much appreciate the support of fellow Governors and IFSB Board members.  A special thanks to all our panel chairmen and speakers, and to Professor Rifaat and the IFSB secretariat for organising this so well.

2. We meet at a most challenging time. The IMF and the World Bank have forecast the global economy to contract for the first time since World War Two.  The economies of Asia, like the rest of the world, have slowed significantly.  So have all forms of financial services, including Islamic Finance. While actions taken by governments and financial authorities have helped to stem the sharp deterioration, the road to full economic recovery is likely to be bumpy.

3. While the crisis is painful, there are several silver linings. This Summit, with its theme of “The Future of Islamic Financial Services” provides a timely opportunity for us to reflect on the shortcomings in economic and financial models, and in our supervisory approaches.   By drawing the right lessons, we can build the foundation for a better future. Allow me to share some reflections on the future shape of economic linkages and financial services, as well as the supervisory approach.

Economic Linkages

4. First, the crisis shows that while the idea of the ‘de-coupling’ of Asian economies from the rest of the world was premature, the structural trend of a dynamic Asia remains.  I should clarify that in this speech, my reference to Asia includes the Middle East.  Even for 2009, while the World Bank has trimmed its growth forecasts for Asia [1], this remains the faster growing region in the world [2]. 

5. When global growth resumes, developed economies will remain important markets. But the significant deleveraging and the repair of balance sheets are likely to dampen growth prospects for some time.  Asia has entered this crisis with less baggage. But this crisis will force an acceleration of structural economic change in Asia.  The drive towards greater domestic consumption, as well as greater Asia intra-regional trade, investment and consumption, will take on greater urgency.

6. The growth of intra-Asia trade and investments will be driven by both bottom-up initiatives as businesses expand their ties, as well as top-down policy measures as governments enter into agreements on free trade and economic cooperation.  A recent survey by the ADB Institute found that a higher than expected 22% of responding firms use preferences accorded by free trade agreement (FTA) and more are planning to do so [3].  China, Japan and Korea have implemented their FTAs with ASEAN.  The ASEAN-Australia-New Zealand FTA was signed in February 2009.  Singapore has signed FTAs with the GCC and Jordan, and we can expect more of such pacts within Asia in the future.  Cross-border capital flows between the GCC and East Asia will grow significantly in the coming years.

7. With this forced pace of global re-balancing, the relative economic weight of Asia will rise.  This would be a positive development for the global economy, as more engines of growth provide greater resilience.

Financial Services and Islamic Finance

8. However, it is crucial that our optimism does not turn into hubris.  Economies in our region face many important challenges. In particular, getting the financial system to play its proper role is critical. So let me turn to my second reflection on the role of financial services.

9.  Many causes have been cited for the current financial crisis – excessive leverage, complexity and risk-taking incentivised by inappropriate compensation systems; pro-cyclical regulatory requirements and inappropriate cost of capital;  the flawed originate-to-distribute model in credit origination that worsened the principal-agent problem; the role of rating agencies; and the use of instruments such as CDS and CDOs that were supposed to distribute risks more broadly but ended up concealing and concentrating risks instead.  The list goes on.  Each of these plays a role but if we are to identify a common factor across these various causes it is this: that finance has become detached from economic realities. 

10. As we look to develop our financial system, we have to bear in mind that the basic role of finance is to allocate scarce capital to its most productive use.  We earn a return only if the capital is deployed to eventually produce goods and services that are valued by the market.  When the nexus between the mobilization of capital and the productive use of capital is broken, the returns cannot be sustained – the bubble must eventually burst, with painful consequences.

11. In this crisis, both conventional and Islamic financial markets have been affected, but the restrictions on the use of leverage and speculation has put Islamic Finance in a better stead.  In the coming years, as the Shariah principles of using capital to build productive capacity gain wider recognition, Islamic Finance will assume a more prominent role.  Estimates of global Islamic Finance assets today range from US$700 billion to US$ 1 trillion and one consultancy firm estimates this could potentially grow to US$1.6 trillion by 2012 [4]. 

12. Countries in Asia are using Islamic Finance to fund urban development and public infrastructure projects to meet the growing demands of their populations.  The ADB estimates that Asian countries would need more than US$8 trillion of infrastructure investment between 2010 and 2020 [5]. International financial institutions such as the Islamic Development Bank are active in funding worthwhile investment projects.

13. The global sukuk market remains a relatively new asset class with much room to grow out.  In 2007, Asian currency-denominated sukuk outstanding grew by almost 50% but the market contracted by only 1.5% to US$64.3 billion at end-2008 [6]. Around US$1.3 billion in sovereign sukuk issuance will come from Malaysia, Indonesia and Singapore in the first half of 2009, and more private sector issuers are expected to tap the sukuk market and to attract new investors and clients.

14. In asset management, an industry report [7] estimates the number of high net worth individuals and their financial wealth in Asia combined to be about the same as those of Europe and America, but growing faster.  The number of Asian middle class has also surged with economic growth.  While growth momentum may moderate in the next few years as the global economy recovers, the underlying trend remains.  The growing interest in Islamic funds will provide opportunities for asset managers who can provide the right products.

15. In short, my second reflection is that nature of financial services in the coming years will change, with a focus on deepening the symbiotic relationship between financial services and economic growth. This will be favourable for various segments of Islamic finance.

Nature of Financial Regulation

16. Let me move on to my third reflection, on the nature of financial regulation.  This crisis shows that proper regulation of financial activities is difficult – it’s unpopular to take away the punch bowl when the party is going.  But it is necessary.  Equally important is the need to focus on the economic substance and underlying risks of the activities, regardless of its form.

17. Prof. Rifaat provided a very timely reminder when he said recently, “Every financial institution requires close supervision, regardless of whether it is conventional or Islamic.”  While Islamic Finance has features that make it robust, there are also risks such as liquidity and concentration risks that demand special attention.

18. MAS applies a single regulatory framework to both conventional and Islamic banking because our regulations address prudential issues of liquidity, credit, market, operational and concentration risks.  These are relevant to both conventional and Islamic banks.  While Islamic funding and financing structures are different, we consider the economic substance the underlying risk of these structures, and apply the regulatory treatment that is consistent with the risk.  Our regulatory framework therefore provides a level playing field for Islamic and conventional banking.  MAS has for some time now issued regulations to clarify the regulatory treatment of various Islamic finance structures under our rules.

19. Today, we have issued another two regulations [8]  , as well as a consolidated set of Guidelines which provide clarity on how our banking regulations apply to Islamic banking, and offers specific information of the regulatory treatment of various Islamic banking structures.  This set of Guidelines will provide greater clarity and certainty for financial institutions offering Islamic banking products in Singapore. Taken together, these various changes will allow banks to conduct a wide range of Islamic financing activities, and to have greater flexibility to structure instruments to meet their risk management needs.

20. The facility for a reverse-enquiry Singapore dollar sukuk was completed in January.  We have issued the first tranche to the Islamic Bank of Asia, and are reviewing applications from other banks.  We have also ensured equal tax, regulatory and liquidity treatment of the sukuk with Singapore Government Securities, effective immediately.

21. Members of the IFSB Board and the industry have been very active in developing talent.  Several credible Islamic finance training providers are offering courses here. The Singapore Management University offers an undergraduate module on Islamic Law, Banking and Commerce and the Wealth Management Institute has incorporated an Islamic Finance module in its Masters of Science in Wealth Management programme.  The National University of Singapore recently organized an Islamic Finance conference. These initiatives help to raise understanding of Islamic Finance among students and industry practitioners.  To support professionals who wish to deepen their expertise, I am pleased to announce that beginning from this year we will sponsor students for the eligible Islamic Finance Masters programmes.

22. MAS will continue to work towards a regulatory approach that is clear, relevant and consistent, across the range of Islamic financial activities. We are committed to working with fellow regulators, and to developing the infrastructure and talent to support the growth of Islamic Finance in Singapore.

Conclusion

23. In conclusion, we face challenging times.  But the dynamism of Asia, including the Middle East, will return and the structural economic changes are likely to accelerate.  The focus on the role of finance to develop productive sectors will raise the profile of Islamic Finance, and create new opportunities.

24. On that note, I wish you a fruitful discussion during this Summit and a very pleasant stay in Singapore.  Thank you.
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[1] World Bank East Asia and Pacific Update, “Battling the Forces of Global Recession”, April 2009.

[2] The World Bank projected Developing East Asia (including China) to grow by 5.3% in 2009; South Asia by 3.7% and Middle East and North Africa by 3.0%.

[3] Kawai and Wignaraja, “The Asian “Noodle Bowl”: Is It Serious for Business?” Asian Development Bank Institute Working Paper Series No. 136, April 2009.

[4] Oliver Wyman, “The Next Chapter in Islamic Finance – Higher Rewards but Higher Risks”, April 2009.

[5] ADB, “Infrastructure for a Seamless Asia”, April 2009.

[6] Moody’s Global Corporate Finance, “Islamic Finance: Asian Sukuk Market Faces New but also Familiar Challenges”, April 2009.

[7] Capgemini & Merrill Lynch, “World Wealth Report” 2008.

[8] MAS Regulations 23C and 23D on Diminishing Musharaka financing and Spot Murabaha transactions respectively.

Glossary of Islamic Finance terms.

amanah: Trust, with associated meanings of trustworthiness, faithfulness and honesty. As an important secondary meaning, the term also identifies a transaction where one party keeps another’s funds or property in trust. This is in fact the most widely understood and used application of the term, and has a long history of use in Islamic commercial law. By extension, the term can also be used to describe different financial or commercial activities such as deposit taking, custody or goods on consignment.

arbun: Earnest money/Down payment; a non-refundable deposit paid by the client (buyer) to the seller upon concluding a contract of sale, with the provision that the contract will be completed during the prescribed period.

gharar: Uncertainty. One of three fundamental prohibitions in Islamic finance (the other two being riba and maysir). Gharar is a sophisticated concept that covers certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.

Islamic banking: Financial services that meet the requirements of the Shariah, or Islamic law. While designed to meet the specific religious requirements of Muslim customers, Islamic banking is not restricted to Muslims: both the financial services provider and the customer can be non-Muslim as well as Muslim. Also called Islamic finance or Islamic financial services.

ijara: An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows the bank to earn profits by charging rentals on the asset leased to the customer. Ijarah wa iqtinah extends the concept of ijarah to a hire and purchase agreement.

maysir: Gambling. One of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition on maysir is often used as the grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.

mudaraba: A Mudarabah is an Investment partnership, whereby the investor (the Rab ul Mal) provides capital to another party/entrepreneur (the Mudarib) in order to undertake a business/investment activity. While profits are shared on a pre-agreed ratio, loss of investment is born by the investor only. The mudarib loses its share of the expected income.

mudarib: The mudarib is the entrepreneur or investment manager in a mudarabah who invests the investor’s funds in a project or portfolio in exchange for a share of the profits. For example, a mudarabah is essentially similar to a diversified pool of assets held in a Discretionary Asset Management Portfolio.

murabaha: Purchase and resale. Instead of lending out money, the capital provider purchases the desired commodity (for which the loan would have been taken out) from a third party and resells it at a predetermined higher price to the capital user. By paying this higher price over instalments, the capital user has effectively obtained credit without paying interest.

musharaka: Profit and loss sharing. It is a partnership where profits are shared as per an agreed ratio whereas the losses are shared in proportion to the capital/investment of each partner. In a Musharakah, all partners to a business undertaking contribute funds and have the right, but not the obligation, to exercise executive powers in that project, which is similar to a conventional partnership structure and the holding of voting stock in a limited company. This equity financing arrangement is widely regarded as the purest form of Islamic financing.

riba: Interest. The legal notion extends beyond just interest, but in simple terms riba covers any return of money on money – whether the interest is fixed or floating, simple or compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition.

Shariah: Islamic law as revealed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah compliant product meets the requirements of Islamic law. A Shariah board is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shariah compliant products.

Shariah advisor: An independent professional, usually a classically trained Islamic legal scholar, that advises an Islamic bank on the compliance of its products and services with the Shariah, or Islamic law. While some Islamic banks consult individual Shariah advisors, most establish a committee of Shariah advisors (often know as a Shariah board or Shariah committee).

Shariah compliant: An act or activity that complies with the requirements of the Shariah, or Islamic law. The term is often used in the Islamic banking industry as a synonym for “Islamic”—for example, Shariah compliant financing or Shariah compliant investment.

sukuk: Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed income, interest bearing bonds are not permissible in Islam, hence Sukuk are securities that comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Sukuk is a certificate of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or investment activity.

takaful: Islamic insurance. Structured as charitable collective pool of funds based on the idea of mutual assistance, takaful schemes are designed to avoid the elements of conventional insurance (i.e., interest and gambling) that are problematic for Muslims.

tawarruq: Reverse murabahah. As used in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the customer can obtain cash without taking an interest-based loan.

Produced by HSBC Amanah
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Monday, 11 May 2009 23:52 UK
By Robin Brant
Malaysia correspondent, BBC News, Kuala Lumpur

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8025410.stm

Published: 2009/05/11 22:52:02 GMT

2009 Asia Sukuk Summit
18 February 2009

Keynote Address by
Eddie Yue, Deputy Chief Executive
Hong Kong Monetary Authority

on “Hong Kong: The Natural Gateway to Islamic Finance in Asia – Current Developments“

Ladies and gentlemen,

1.   It is a great honour to be invited to speak at today’s inaugural Asia Sukuk Summit in Hong Kong, and a pleasure to welcome you all, especially those of you who are visiting Hong Kong.

2.   This is the first Sukuk Summit to be held in Asia and it takes place at the beginning of the Year of the Ox in the Chinese calendar.  The ox symbolises strength, resilience, and – of course – bullishness.  For, while it may be true that we are still in the middle of unprecedented financial turbulence, every crisis brings with it new opportunities for renewal and change.  The remarkable turnout today clearly reflects a desire to explore new ways of restoring financial market stability and, most important of all, promoting growth.  This Summit has assembled an impressive gathering of colleagues from both the public and private sectors from many parts of Asia, Europe and the Middle East.  The theme of the Summit – “Towards A New Silk Route for Islamic Finance” – is an apt one: it is a call for partnership in creating new regional bonds and links of the kind that once allowed this ancient trade route to flourish in a diverse yet co-operative world.  In the globalised world, such co-operation is more important than ever if our economies are to be able to meet future challenges successfully.

3. I have been asked to give a brief overview of Hong Kong, with particular emphasis on how this city is developing its Islamic finance capabilities.  Hong Kong’s strength as a free and open international financial centre has helped nourish its deep and liquid financial markets.  Yet maintaining a free and open market in such a turbulent world is not an easy task.  It is therefore reassuring that Hong Kong’s monetary and financial systems have continued to be sound and robust, reinforced by a number of recent contingency measures to strengthen financial stability.  There are many factors that underline the resilience of Hong Kong’s financial markets: I would like to highlight two.

4. First, even when extreme volatility prevailed in the global foreign exchange markets following the collapse of Lehman Brothers, the exchange value of the Hong Kong dollar remained firmly anchored even as other major currencies suffered wide fluctuations, causing a ripple effect to other currencies in the region. Several reasons accounted for this extreme global volatility: the repatriation of large amounts of capital to the US to rescue the market; repositioning by those outside of the US who came to realise the severity and the contagiousness of the crisis; and deleveraging of large amounts of exchange and interest rate arbitrage activities triggered by the financial crisis.

5.   These volatile conditions should, in theory, be destabilising for the Hong Kong dollar.  Yet, not only has there been no depreciation pressure on the Hong Kong dollar: it has in fact strengthened following capital inflows into Hong Kong since the outbreak of the crisis in mid-September last year.  Consistent with the principles of the Currency Board, the Hong Kong Monetary Authority (HKMA) has bought a total of US$23 billion, injecting HK$179 billion into the local money market.

6.   The inflow of funds to the Hong Kong dollar was a welcome development, paving the way for monetary easing, which was fortuitously the appropriate monetary policy stance to support the economy.  The reasons put forward for the inflow have not been a cause for concern for they did not seem to relate to exchange-rate speculation.  Market consensus about the causes pointed to the unwinding of carry trades and the repatriation of funds by corporates to finance operations in Hong Kong.  It is also likely that there have been some inflows to position for investment in Hong Kong, in light of the better economic prospects of the region, and in particular, China.

7.   The second factor in the resilience of Hong Kong’s financial markets is our robust banking system.  One of the lessons from this experience is that the stability and effectiveness of the banking system becomes even more essential when financial crisis shuts down the two other financial intermediation channels: the bond market and the stock market.  In economies across the world, new issuance of corporate debt and listing of new companies came to a halt, posing an enormous challenge for the banking channel to sustain economic activities: as we have seen, in many cases that challenge was insurmountable.

8.   At the same time, the financial crisis grew to such exceptional proportions that governments worldwide had to implement a series of rescue measures of a kind never seen before, using public money to bail out the banking system.  In a globalised world, it would be complacent to say that Hong Kong will continue to be less affected than their counterparts in Europe and the US: it is likely that the falling prices of financial assets, the economic downturn and other unfavourable factors will inevitably affect banks’ asset quality and drive up the ratio of non-performing loans.  Nevertheless, it is also true that Hong Kong has entered this crisis in a position of strength and should be able to weather it relatively well.

9.   Despite the complex and stressful financial environment, the fundamentals of the banking sector in Hong Kong has remained strong and sound.  The local banking sector here is well capitalised, at 13.8%, with a strong liquidity position averaging 45% in the fourth quarter of last year.  The asset quality of retail banks is also high by historical standards, with preliminary figures showing overall non-performing loan ratio edging marginally from below 1% before the global financial crisis to just above 1% at the end of 2008.  These very solid foundations will help Hong Kong cope with the challenge of a possible rise in non-performing financial assets and losses in the financial markets.  They also supply the conditions for moving beyond crisis towards opportunity, and for exploring what seems set to become one of the strongest and more interesting of growth engines in markets in this region and beyond: Islamic finance.

10.   Like most other asset classes, the growth of Islamic finance decelerated last year as a result of the global credit crunch and unfavourable economic conditions.  New sukuk issuance retreated to US$14 billion last year, down from a high of US$31 billion in 2007.¹ And without a doubt, there will continue to be great challenges in the coming year.  Market participants are reportedly expecting a slowdown in annual growth in global Islamic banking assets to 10–15% in 2009, compared with a growth of 20–30% last year.² Even so, a growth rate of 10–15% is robust by any standard, and especially so when set against the strong shrinkage in other areas of finance.  There remains a healthy stock of sukuk issuance in the pipeline for this year, thus providing a good market to tap: one report conservatively estimates planned or announced sukuk for 2009 as being in excess of US$45 billion³.

11.   As a new asset class, Islamic finance practices banking and investments in compliance with the principles of Islamic Shariah law, which prohibits excessive leverage, risk-taking and uncertainty, and promotes ethical practices.  These are indeed universal principles in all markets – or at least they should be: one of the lessons of the present financial crisis is that too little attention has been paid to them.  This is not to suggest that Islamic finance is without risk – indeed many of the risks inherent in Islamic finance are similar to those of conventional finance, and, in fact, Islamic financial institutions may be subject to other unique risks from the liquidity and operational perspectives.  But Islamic finance introduces an alternative form of financing, and one that offers many opportunities particularly when financial market conditions start to improve.

12.   From the perspective of Hong Kong, we are optimistic that the coming together here of Islamic finance with development opportunities in neighbouring Asian markets and China will provide an exciting growth stimulus for financial market participants.  A key part of the Government’s strategy for developing Hong Kong as an international financial centre is a focus on Islamic finance.  In support of this initiative, the HKMA, in collaboration with the Treasury Markets Association (TMA), has devoted considerable time and resources into establishing an appropriate infrastructure framework and developing an education and awareness programme both locally and worldwide.  Although we are still in the infant stages of development, we have accumulated some experience, which I would like to share with you today.

13. First, since it is now such a hot topic to talk about change, I trust that you will agree with me that Islamic finance, at least for jurisdictions like Hong Kong, means change – a change in perception, a change in skills, a change in structures and techniques, in contracts, standards, and so on.  Change, in all its many forms, is happening within the global Islamic finance arena, even as we speak.  In the past year or so, we have seen the inception of several standardisation initiatives for Islamic financial documentation, spearheaded by international institutions like the Islamic Financial Services Board (IFSB) and the International Islamic Financial Market (IIFM).  This form of change is significant towards facilitating harmonious practices, providing greater clarity for the Islamic financial services industry and thus acting as a boost to the development of global Islamic financial markets.

14.   There have also been many exciting developments in the new markets for Islamic finance in Asia, where there is a growing tendency for sukuk issuance, such as the sovereign issues from Indonesia and Singapore to support the development of Islamic finance.  At the same time, we have also seen enhanced co-operation and increased linkages, both internally within the region and externally with other Islamic financial centres in the Middle East.  Malaysia, for one, has announced its co-operation with Bahrain and Dubai, to jointly cooperate and develop Islamic banking and finance in the region.  At the market level, we have also seen a continuing trend of regional expansion by Islamic financial institutions beyond the traditional markets toward newly emerging centres in Asia.  Such changes are happening, despite the challenging environment that firms are currently operating in.

15.   One of the most daunting of the changes required for policymakers and regulators is the change in regulations and taxation rules to provide an equitable environment for the operation of Islamic finance within the overall financial market framework.  Within Hong Kong, with the wealth of expertise drawn from members of the TMA, recommendations were put up and analysed by the Government as a priority in its comprehensive tax review.  The Government has concluded that the legal system in Hong Kong is flexible enough to meet the demands of Islamic finance transactions.  This is because, with our robust rule of law and our simple tax structure free of capital or interest gains tax, there have only been a minimal number of taxation issues that have to be dealt with.  The legislation on tax also gives power to the Government to grant tax exemptions where necessary to those who apply for it.  The legal architecture in Hong Kong therefore lends itself well to Islamic finance.  There is therefore little time to spare, in the run up to a revival of the sukuk market and the lead time it takes to promulgate tax exemption rules for Islamic finance transactions; financial market players in Hong Kong must gear themselves up to embrace the change coming your way.

16. Secondly, there is in general a greater awareness of Islamic finance within the local financial community, particularly among banks.  Banks in Hong Kong are in the position of being both investors in, and suppliers of Islamic finance products.  Instruments, ranging from retail Islamic investment funds and Islamic treasury placements at the interbank and corporate level, to Islamic loan syndication, have started to emerge in Hong Kong within the past year.  Financial market participants have also set up Islamic banking windows here to signal their readiness to cater for these types of activities.

17.   But even with all the significant developments achieved here in such a short period of time, more still needs to be done.  While the recognition of Islamic finance as a viable fund-raising and investment alternative is gradually making its way to the corporate sector in Hong Kong, the pace of development is still rather slow.  Furthermore, this market awareness should also be promoted beyond banks and other types of financial institutions to all related service industries, such as investment managers, asset managers, securities and brokerage houses, exchanges and commodity firms, pension funds, insurance agencies, solicitors, accountants, and trustees.  Not only will this require a much wider network of collaboration among the trade associations in Hong Kong, it will also require the financial institutions themselves to play a role in educating their customers and stimulating the potential supply and demand of Islamic financial products in Hong Kong.

18. Last but not least, although Hong Kong is still a relative newcomer to this industry, it has the strengths and capabilities to make significant contributions to the global Islamic finance market.  Hong Kong is in many ways fortunate to have access to the Islamic finance talents and knowhow through an extensive network of international and regional players here.  And I believe that there is endless potential for us to innovate in the area of Islamic finance, especially in deploying our special strengths – our close affinity to China, our experience as an international fund raising centre and asset management hub, and our role as a testing ground for the Mainland’s financial liberalisation.  There is, for example, no obstacle to Hong Kong’s becoming a centre for Islamic IPOs, given our distinct record as a leading IPO centre in the region.  What is needed is maximum preparedness on the part not only of the regulators but also of financial market players, who are the driving force of financial innovation and growth.

19.   With great challenges come great opportunities, and Islamic finance is an area that has shown much promise over the past years.  I believe that now is the time to lay down the groundwork for future growth and development.  With these remarks, ladies and gentlemen, let me wish the inaugural Asia Sukuk Summit a great success and all of you a most productive time here in Hong Kong.

20.   Thank you.

¹ Source: Bloomberg.
² Source: “Islamic inroads” by AsiaRisk, February 2009.
³ Source: “Sukuk market declined sharply in 2008, but long-term prospects remain strong” by Standard and Poor’s, Islamic Finance News, 6 February 2009.

6 Mar 2007

SPEECH BY SENIOR MINISTER GOH CHOK TONG AT THE OPENING CEREMONY OF THE SINGAPORE INTERNATIONAL WAQF CONFERENCE 2007, “INTEGRATION OF AWQAF (ISLAMIC ENDOWMENT) IN THE ISLAMIC FINANCIAL SECTOR“, 6 MARCH 2007, 9.30AM AT THE FULLERTON HOTEL

Excellencies and Distinguished Guests

Ladies and Gentlemen

A very good morning to all of you, and a very warm welcome to our guests from the Middle East and the region.  I hope you will find time from your busy schedule of meetings to enjoy the sights, sounds and culinary delights of Singapore.  For Singapore offers you a unique experience – we are traditional yet modern, Asian but cosmopolitan, geographically small but with a large global outlook.

2               Singapore is indeed honoured to host this first international conference in the region on waqf.  I congratulate the Islamic Religious Council of Singapore (MUIS), the Islamic Research and Training Institute of the Islamic Development Bank Group and the Kuwait Awqaf Public Foundation for taking the initiative to organise this event.  We look forward to more such meetings.

Asia and Middle East Rediscovering Each Other

3               Asia and the Middle East have had a long and fruitful history of exchanges.  Links between our two regions are ancient.  Long before Marco Polo travelled to China, Arab merchants were already doing business in Asia using overland and sea routes.  The most famous trading routes were the Silk Road and Spice Route, which served as major conduits for the flow of trade, people, ideas and religious beliefs between Asia and the Middle East.  In the 14th Century, Muslim traders introduced Islam into Southeast Asia.  This was three hundred years before Catholic missionaries brought Christianity.

4              However, this flow ebbed some time in the last century or so.  Due to colonialism and the Cold War, Asia and the Middle East lost their close contact with each other.  Fortunately, recent global developments have re-ignited the mutual interest of countries in Asia and the Middle East in each other.

5               The key factor is globalisation.  Globalisation means that changes and events in one part of the world will impact on other parts quickly and in a variety of ways and across a broad range of areas.  The international landscape post-September 11 underscored this point dramatically.

6               Asian countries recognise that the Middle East is an increasingly important part of the global strategic balance.  Political developments in the Middle East will affect Asia, which is home to 60% of the world’s Muslim population.  Asian countries have therefore stepped up efforts to engage the Middle East and understand the region better.  Plans by Middle Eastern countries to invest more than US$1 trillion in infrastructure and other developments mean plenty of opportunities for Asian countries to participate in the Middle East’s growth.

7               Happily, this interest is not one way.  The Middle Eastern countries have also become more interested in Asia.  Post-September 11, Middle Eastern countries have started to look East to lessen their reliance on the West for management, science and technology, education, governance systems and developmental models.  They are also increasingly aware of the dynamism of a rising Asia.

8               Singapore began to take a focused interest on the Middle East three years ago.  My overall impression is that the Middle East is at a tipping point.

9               The region faces major political and security challenges like the Palestinian-Israeli conflict, situation in Iraq and Iranian nuclear issue.  These are deeply complex and inter-connected issues, made even more complicated by a long history of distrust and religious conflict.  We in Asia wish the Middle East well.  We hope that the Middle Eastern countries can find ways to either resolve the issues or at least manage them in such a way as to avoid the region from tipping over.

10            Despite the challenges, there are many positive developments to balance the negative challenges in the Middle East.  Breathtaking physical transformation and impressive development are taking place there.  High oil prices and sound policies underpin this strong economic performance.  Within the region, the Gulf states are taking the lead to modernise and diversify their economies in as quick a time as possible.

11            If these positive forces tip the region in the direction of peace, cooperation and development, the Middle East will, together with Asia, transform the world in this century.

12            Asia’s growth story is already well-known.  China and India will be the lead players.  Japan is experiencing renewed vigour.  Prospects for ASEAN on the whole are good, though there are occasional hiccups.  Asia is integrating through trade, tourism, people-to-people exchanges, investment flows and production chains.  If there are no mishaps, by 2050, half of humanity – the more than 3 billion people in Asia – will enjoy a standard of living which their grandparents did not even dream of.

13            Naturally, Asia’s growth trajectory will not be a straight line.  Asia has its share of problems too – the North Korean nuclear issue, tensions across the Taiwan Straits, Kashmir and terrorism.  But these issues can be and are being managed.

14            Many countries in the Middle East are keen to engage Asia but I have been told that their businessmen are not so familiar with doing business in China and Southeast Asia.  This is where Singapore can play a role.  As a key financial and commercial hub, Singapore is well-positioned as a gateway for Middle East companies to expand in Asia.  Middle Eastern investors can leverage on Singapore’s networks and knowledge to venture into Asian markets.

15            There is much that Asia and the Middle East can do together, as we embark on this journey of rediscovery.  Although there are significant differences between Asia and the Middle East, we also share common interests and common challenges.  We both want to reconcile tradition with modernity and change, to develop without losing our core values.  Both Asia and the Middle East can profit by sharing experiences.

16            This was the reason why Singapore had initiated the Asia-Middle East Dialogue (AMED).  AMED would help to share developmental experience, promote greater understanding and serve as a bridge between the two regions.

17            Before stepping down as Prime Minister, I stepped up Singapore’s relations with the Middle East, and continue to do so in my present capacity.  In the past three years, I have visited almost all the Middle Eastern and the Maghreb countries – Egypt, Algeria, Jordan, the Gulf States, Iran, Israel and the Palestinian Territories – to name a few.  Trade and investment between Singapore and the Middle East have shot up.  To date, Singapore companies have secured more than S$6 billion worth of projects.  Funds from the Middle East managed in Singapore have increased to around S$28 billion.  But there is room for greater growth.  I have started a second round of visits to the Middle East, beginning with Abu Dhabi this year.  I want to further strengthen Singapore’s relations with them.

18            Let me now turn to the theme of today’s conference – integrating awqaf into the Islamic financial sector.  I have dealt at some length on relations between Asia and the Middle East because I wanted to put this conference in a larger context.  The evolution of awqaf and Islamic finance is in a sense about how Muslims are adapting traditional concepts to modern living and how Islamic finance is moving out of the Middle East into the rest of the world.

Growth of Islamic Finance

19            The growth of Islamic finance as an ethical means of investing wealth arose because Muslims wanted to invest their monies to get good returns, but in accordance with Islamic principles.  While the proportion of Islamic banking assets as a percentage of total banking assets remains small – at about less than 20%, – this has risen over the years.  We are seeing more examples of successful and viable Islamic financing products in the international marketplace.

20            Islamic banking is getting more widespread in Muslim and non-Muslim countries alike.  Takaful insurance and Islamic mutual funds are becoming commonplace.  In fact, these products have become so popular, even non-Muslims are investing in them.  We can expect to see Islamic finance develop further globally, eventually becoming an integral component of the international financial system.

21            Singapore wants to develop Islamic finance as well.  This will make our international financial centre more complete.  The development of Islamic finance here can take advantage of our capabilities in wealth management, project financing and trade financing.  We have been working in close partnership with the industry to review our regulatory framework, and support and facilitate financial institutions to provide a wide suite of Islamic financial services and products.

22            More Middle Eastern banks are setting up offices in Singapore.  At the end of 2005, we had six Middle Eastern banks.  In 2006, two more came.  Since the beginning of this year, three banks have applied to set up representative offices here.  Many of these Middle Eastern banks service Islamic financing needs.  Singapore welcomes more banks from the Middle East to set up here and to partner us in the growth of our financial centre.

23            Beyond Middle Eastern banks, we have also seen international banks such as Citigroup and Standard Chartered introduce Islamic finance and murabaha products from Singapore.  More financial institutions are using Singapore as a launch pad for innovative new Islamic products.

24            Singapore will continue to co-operate with market participants and other countries like Malaysia, Indonesia, Bahrain, Kuwait and the UAE on the development of Islamic finance.

Integration of Awqaf into Islamic Finance

25            Let me now turn to waqf.

26            Historically, the revenue generated in waqf has been applied to traditional uses like maintenance of religious buildings.  But this is changing.  Proceeds from the estates are now used to contribute more widely to society.  Rules governing the administration of waqf have become increasingly progressive.  In Kuwait and Qatar, revenue from waqf has been used to build hospitals, universities and commercial and office complexes.  Townships have even been built in Morocco.  Such innovative financial uses help to unlock the economic potential of waqf.

27            In Singapore, we have the example of an integrated mixed-development at Bencoolen Street, comprising a mosque, service apartments and a commercial complex.  This was made possible through the innovative financing solution provided by the launch of the musyarakah bond.  MUIS, which administers a number of waqf, has also made use of the proceeds to fund Islamic education.  Non-Muslims have benefited from waqf as proceeds have been used to purchase medicine for needy Singaporeans, regardless of race and religion.

28            The Malay/Muslim community in Singapore, while holding fast to the values of Islam also maintains an open and progressive attitude in the practice of its faith in our multi-racial and multi-religious society.  The Singaporean Muslim’s identity stresses the importance of contextualising one’s beliefs to the environment, but without compromising the tenets of faith.

29            The environment required to ensure the growth of waqf is similar to conventional charitable trusts.  Singapore has established itself as a strong centre for the administration of charities and trusts.  We have introduced several initiatives to make Singapore a more conducive jurisdiction for trusts, a vehicle commonly used for philanthropic purposes.  This includes measures to modernise our trust laws, update our regulatory framework and make our tax regime more conducive for the establishment of trusts.  This will help Singapore to become a centre for the development of waqf.

Conclusion

30            Let me conclude.  Asia and the Middle East are becoming more interdependent.  With our destinies intertwined, it is critical for Asia and the Middle East to continue our efforts at engaging each other, strengthening our bonds and enhancing mutual understanding.  To overcome the common challenges we face, we should continue sharing our experiences.  I hope that this conference is the first of many in bringing together interested parties from all over the world to explore new and innovative ideas, and to learn from each other.

31            With goodwill and strong determination, I believe that Asia and the Middle East can overcome their challenges and prosper together in this century.  Certainly, we must all do what we can to make this an Asia-Middle East Century.

Thank you.