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Islamic bank set up as part of move to offer more products

DUBAI — The Development Bank of Singapore’s (DBS) announcement two weeks ago that it was launching an Islamic bank to offer products and services to customers in Gulf Cooperation Council (GCC) countries and in Asia is an indication of Singapore’s growing importance as a centre for Islamic finance.

DBS, Southeast Asia’s largest bank, will own 60 per cent of the Singapore-based lender, named Islamic Bank of Asia (IB Asia), with the remaining shares owned by a group of 22 investors from prominent families and industrial groups from the GCC.

It’s an interesting move at a time when Malaysia is positioning itself as Asia’s centre for Islamic finance and one that could be seen as Singapore competing with, rather than complementing, its neighbour’s initiatives. Not so, says Teo Swee Lian, deputy managing director, prudential supervision, at the Monetary Authority of Singapore (MAS). Speaking to Khaleej Times during the Islamic Financial Services Board (IFSB) summit held in Dubai last week. Lian says that Singapore’s “aim is not to be a purely Islamic financial centre,” but to “offer a wider suite of products and services”.

Even though the Malay population in Singapore is predominantly Muslim, and accounts for about 15 per cent of the population, this group alone is not driving demand for Islamic products. “What we have noticed over recent years is that we are getting more requests from fund managers and bankers to offer Islamic products, and not necessarily to Singaporean customers but to other customers in the region,” says Lian. “The interest we have seen is from fund managers, not for any religious reason but for the diversification that this asset class provides. (Islamic financing) is beginning to get more interest from mainstream asset managers as well,” she adds.

The Monetary Authority of Singapore is the country’s financial authority— an integrated financial supervisor covering the regulation of banking, insurance and capital markets — that carries out the central bank function as well. Like all regulators, it has to walk a fine line between putting in place the necessary regulation to ensure effective control of the financial markets and having too much. Lian says: “The challenge that regulators face is to keep pace with market regulation and not be ahead of what the market does because that would be one way to stifle innovation.“ She adds: “The important thing is that regulators come up with responsible regulation that can accommodate all the new hybrid products that are coming out.”

Typically, financial institutions prefer principles-based regulation, but as a regulator this can have drawbacks. Lian explains: “Industry is always saying that they want less prescriptive regulation and just want principles, yet you can’t operate on principles alone. There must be underlying guidance to give the industry an understanding of the principles and how they are to be applied. Otherwise you will end up with an uneven playing field, less transparency, inconsistency, and the worse thing is, no enforceability.”

To enhance its understanding of Islamic financing and to help promote its development, Singapore joined the IFSB, first as an observer and, two years ago, as a full member of the council — “the first non-Islamic country to do so”, says Lian.

Lian advocates greater co-operation and co-ordination between regulators, central banks and financial authorities to promote Islamic financing. “A coordinated approach is the right one,” she says. That is why the IFSB summit is so important, offering an opportunity to network and to get “to the point of trust in a relationship where you can share information without getting your lawyers involved”, she adds.

The IFSB is also looking at how Islamic financial institutions can better manage their liquidity and a working group, of which MAS is a member, is in place. “Liquidity is always a chicken and egg. People will not participate in a market that is seen to be illiquid but if they don’t participate in the market it will be illiquid,” says Lian. “The important thing is to have the architecture that allows for the use of more instruments, to educate the users about such instruments, and to put in place the infrastructure for those instruments to be traded and used,” she adds.

The formation of IB Asia illustrates the fact that Singapore and the Middle East are forging ever-closer relations. Eight Middle East banks have a presence in Singapore. Some have a wholesale banking licence, others have either an offshore bank licence or a representative office. Emirates Bank opened a representative office there on 2 March and MAS is encouraging more banks to open there. "We would welcome cross-border activity with Middle Eastern banks," says Lian. As Singapore strengthens its Islamic finance credentials the ties with the Middle East are likely to get much closer.