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Growth of Islamic Finance

March 2009 - Finance. Legal Developments by Loo & Partners.

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With the efforts of the Monetary Authority of Singapore (“MAS”), Singapore is moving closer to its well-published desire of becoming an Islamic finance centre in Asia. Singapore has been chosen as the first Asian country to host the 6th annual summit of Islamic Financial Services Board in May 2009. The hosting of the scheduled event underscores Singapore’s role as an international financial centre.

In January 2009, an Islamic Sukuk Al-ljarah Trust Certificate Issuance Programme worth $200 million ("Sukuk Programme") has been set up to stimulate the growth of Islamic finance by the MAS. The instruments issued under the Sukuk Programme are subject to the same laws and regulations as that applicable to the investment instruments of Singapore Government Securities.

It is viewed as a strategic milestone for the growth of Islamic finance in Singapore, as sukuk is one of the most widely accepted Islamic investment products, which could pave the way for the launch of Shariah compliant investment products for the retail investors in Singapore dollar. This signifies the expansion of Islamic finance in a non-Islamic country.

The Sukuk Programme will capitalise on Singapore excellent track records in conventional banking thereby enjoys the prestige of AAA sovereign's rating in parallel. This value added point may help to boost the investors' confidence in the Islamic finance in Singapore.

Overall, the MAS has announced three essential tasks to maximise the growth for Islamic finance. The first task is to promote greater integration of Islamic markets in Singapore, in view that trade flows between the Middle East and Asia (in particular with Singapore) has grown significantly. The second task is to address the need for appropriate legal, regulatory and supervisory frameworks for Islamic finance. The third task is to promote greater cooperation while looking at technical issues such as accounting, regulations and capital adequacy.

As regards the legal framework to facilitate the MAS's effort, Regulation 23 of the Banking (Amendment No. 2) Regulations 2006 sanctions the banks to carry on Murabaha financing as a "prescribed alternative financing business" whereby the banks can trade on the underlying assets in compliance with the Shariah's principles. The mark-up or the profit element generated from the Murabaha transactions shall be regarded as the equivalent of interest for income tax purposes. Additional goods and services tax ("GST") will be exempted from the Islamic property financing arrangement in line with the GST payable in the conventional financing arrangement.

Further, the authorities have granted tax incentives to lure the investors and the industrial players. Under the Enhancement of Financial Sector Incentive Scheme, it provides 5% concessionary tax rate on income derived from performing Shariah compliant activities relating to lending, fund management and other investment advisory for a period of five years.

In accordance with the Qualifying Debt Securities Scheme, Islamic bonds or sukuks, is subject to the condition that any amount payable by the issuer to the investors of sukuks is not deductible against any income of the issuer accruing in or derived from Singapore, and the proceeds from the issuance are used outside Singapore. Remission will be granted in respect of stamp duty on instruments related to the transfer of immovable properties for the purpose of issuing sukuk, in excess of that chargeable in the case of equivalent conventional bond issue, subject to the prescribed conditions.

In summary, the authorities have built up a practicable legal structure and investor friendly environment to capture the fast-growing Islamic finance market which is estimated to be worth US$1 trillion (S$1.53 trillion).

 Loo & Partners LLP