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Legal Developments worldwide

Islamic Finance in Singapore

May 2010 - Finance. Legal Developments by Loo & Partners.

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The global economic crisis brought attention to Islamic banking and finance as a more ethical alternative to the western approach of the conventional interest-based finance system. It was perceived that the risk and profit-sharing feature inherent in Islamic finance transactions promotes better financial stability given that such transactions are likely to be less speculative, more prudent and carries less leverage.

Singapore joined the race in 2005 to become a centre of Islamic banking and finance in Asia. Despite having a Muslim population which is dwarfed by the likes of Malaysia, Indonesia and even Thailand, Islamic finance continues to thrive in Singapore.

The formation of Islamic Bank of Asia in 2007 with Singapore's largest bank, DBS holding the majority share together with Middle East investors was touted as one of the more significant steps towards the push for Islamic finance in Singapore.

In 2009 Monetary Authority of Singapore (MAS) became the first central bank from a non-Muslim country to create a local-currency sukuk (Islamic bond). Since then, other Singapore-based banks have also entered into interbank placements and sale and lease-back financing that are Shariah-compliant such as the collaboration between Olam International, a Singapore-based trading firm and Islamic Bank of Asia to launch a Commodity Murabaha based on agricultural trade flows; and the establishment of a joint venture asset management company by Singapore's Keppel T&T and Saudi Arabia's Al Rajhi Holding Group to manage the world's first Shariah-compliant data centre fund.

Singapore's first Shariah-compliant Exchange Traded Fund (ETF), the DaiwaETF was launched by Daiwa Asset Management in May 2008 where it tracks the performance of the largest and most liquid listed Shariah-compliant companies in Japan.

The recent Dubai debt crisis has however thrown a spanner in the surging growth of Islamic finance in Singapore and across the globe. The issuance of sukuks, in particular, which is one of the main sources of investment assets, has come under intense scrutiny over fears of a debt default in Dubai. Suddenly it appears that Islamic finance is no different from conventional finance that led to the global economic crisis.

Mr. Tai Boon Leong, Executive Director of MAS has, in his welcome address at the 5th Asian Takaful Conference held in Singapore on 9 - 10 March 2010, aptly advised vigilance despite growth of the takaful industry and that continued expansion should not be taken for granted.

In spite of recent times, it is likely that Singapore may see an upswing in the emergence of more Islamic financial products and services. CIMB Islamic, the world's top sukuk arranger, announced in February 2010 that it has chosen Singapore to be one of 2 countries in which it shall be offering new Shariah products in line with its expansion of business.