Crisis will drive more Mid-East funds to S’pore

May 7, 2009 |

(SINGAPORE) Singapore and the region will attract more funds from the Middle East as the global financial crisis has underscored the importance of diversification, says Monetary Authority of Singapore (MAS) managing director Heng Swee Kiat.

In an interview with The Business Times, Mr Heng said the ability of Islamic banks to mobilise savings and deploy them productively will make Islamic finance more relevant.

This week, Singapore is hosting the 6th Islamic Financial Services Board (IFSB) Summit, an annual event that discusses key issues and developments in the regulation and supervision of Islamic financial services.

Mr Heng said that the Islamic finance sector faces some problems as a result of the financial crisis, but growth will resume in the medium term, bolstered by a trend in the financial world of going back to basics.

‘Greater Middle East flows moving to Asia will happen for a number of reasons,’ he said. ‘First, the financial crisis underscored the basic point of the need for risk diversification, and this will accelerate.

‘Second is the opportunity for investments. A lot of investment is going to be driven by economic growth and dynamism in this region.

‘Third, the capabilities for managing that flow have been increasing, over the years.

‘The opportunities for joint ventures - the sharing of management know-how and technology network - have grown very significantly. The talent pool has grown over the years.’

Many Asian countries are pushing to offer Islamic financial services, an estimated US$1 trillion industry. As part of its financial liberalisation strategy, Malaysia said last month it will let foreign law firms set up offices to advise on Islamic finance - a move opposed by the country’s Bar Council. Malaysia will also give out two foreign Islamic banking licences.

In February, Hong Kong said it will amend its tax laws in 2009-2010 to promote Islamic finance. And Korea is one of two countries that is showcasing its Islamic finance initiatives at this week’s IFSB Summit.

Since 2005, Singapore has taken several steps to develop Islamic finance. MAS’s approach has been to create a level playing field. It has refined banking regulations and put in place a tax framework to facilitate the growth of Islamic finance.

Singapore’s first Islamic bank - the Islamic Bank of Asia (IB Asia), a joint venture between DBS Bank and 33 Middle East investors - was launched in 2007.

Eleven Middle East banks, two Middle East reinsurers and two Middle East exempt fund managers are now operating in Singapore.
MAS’s Mr Heng said one outcome of the financial crisis will be a return to basics, and that will increase the relevance of Islamic finance.

‘I made a comment recently when I was in China, that in the case of the US and Europe, the financial systems have run too far ahead of the real economy,’ he said.

‘Some parts of the systems have become detached in supporting productive economic activity (and) turned very speculative. Complex securitisation was being done - not quite the economic functions they were intended to serve.’

But in Asia and the Middle East, where economic development has been rapid in the past 20-odd years, financial systems had yet to catch up, Mr Heng said.

This is partly why many Asian financial institutions did not run into problems - they had real economic opportunities to pursue.
In the medium term, new opportunities will arise as the symbiotic relationship between financial services and real economic development is restored, Mr Heng said.

‘A key Islamic finance precept is that finance has to support real economic activity, support productive uses - and make sure that it is not used for speculation.

‘I think this is a very important precept that will create momentum for growth once we get over this bump. At the same time, when we look at the Middle East and East Asia when the (global) economy recovers, demand for oil and natural resources will grow, and that will continue to generate wealth in these two regions.’

As for current financial systems, whether it’s conventional finance or Islamic finance, risks remain high. ‘Clearly, the global financial system is still fragile,’ Mr Heng said. ‘We (MAS) have stepped up significantly our surveillance in two aspects.’

At macro-economic level, MAS is more closely monitoring indicators such as the overall growth of credit and corporate lending in different areas. It has also stepped up supervision of financial institutions. ‘We have stepped up our supervision of individual financial institutions, local entities as well as foreign entities, ensuring that boards and management are closely looking at their risks and operations, and that they have complied with the rules and regulations and taken relevant mitigation measures,’ Mr Heng said.

‘The other area is working with various industry bodies to step up investor education. I think for the next 12-18 months, we need essentially to be on high alert - not just MAS but all financial institutions, financial intermediaries as well as investors - so we can navigate this very uncertain period successfully.’

Source: Business Times, by Siow Li Sen

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