With a solid reputation as one of the world’s top financial centres, and sitting strategically in a region with a large Muslim population, Singapore seems to have the means to make Islamic finance extremely viable. The recent announcement on 4 October 2012 by Hong Kong and Shanghai Bank that it was restructuring its Islamic Finance business in the region and would henceforth focus mainly on Malaysia and Saudi Arabia and maintain a limited presence in Indonesia was significant in the fact that Singapore was omitted. Singapore was only mentioned as being one of the jurisdictions to be offered sukuk through HSBC Saudi Arabia Limited. Why has the early promise shown by Singapore not been sustained? Where lies the solution? In this paper, I will attempt to show why Singapore has to be more confident and innovative. Using the experience of MUIS (the Islamic Authority of Singapore) as an example, I will attempt to show how there can be room for development of sukuk in Singapore.
In his Opening Address at the 3rd Annual World Islamic Banking Conference (WIBC Asia 2011) in Singapore on 5 June 2012, Mr. Ravi Menon, the Managing Director of the Monetary Authority of Singapore (MAS) noted that ‘following the global financial crisis (of 2007), investors have become more averse to the unknown risks embedded in complex financial instruments ‘ and he made a call that ‘Islamic finance, with its stronger emphasis on transparency, price certainty and risk-sharing, can benefit from this renewed demand for more basic investments , from Muslim and non-Muslim investors alike’.
With its reputation as a financial hub, Singapore is in prime position to reach out to financial investors. It is thus curious and risk-sharingas to why there appears to be a lack of interest in the field of sukuk here. Apart from some, if there is indeed some, legal firms involved in sukuk, the rest of the legal industry seems to have adopted a ‘wait-and-see’ attitude. It has been the offshore firms who have manifested a more dynamic and vigorous attitude towards sukuk. While this can be put down to a lack of familiarity, it is possible that what is needed is for some key players to take the lead and help the surge of interest in this field.
Muslims in Singapore is a minority, constituting about 15% of the entire population. Given Singapore’s relatively small size of about 5 million people in total, it would be overly ambitious to expect a large buy-in in terms of numbers. Given such limitations, it is my view that the most realistic way for Singapore to enhance the development of sukuk is for a champion (or champions) to be found, both in terms of spreading awareness and as an initiator.
In any study of the development of sukuk in Singapore, 2 statutory boards in Singapore, MUIS and MAS, will feature prominently. They each have contributed towards the growth of sukuk in Singapore, albeit, in different ways and from probably different perspectives and motivations.
The MAS is the regulatory body of the financial industry in Singapore, with a much wider ambit than merely an enforcer. The MAS has played a hugely significant role in creating the conditions for the development of sukuk and Islamic finance here in Singapore. It has formulated and implemented policies and set up a supportive framework for Islamic Finance to thrive. MAS has introduced incentives such as reduced taxes for Islamic transactions, waived off stamp duties for real estate financing and a concessionary tax rate for Islamic financing.
As will be seen at a later part of this paper, MAS has even played a direct role in the development of sukuk in Singapore with the issuance of its own sukuk. It however appears that while MAS’ direct involvement has helped kick start sukuk in Singapore, it may be worthwhile to consider how MAS’s presence can also lead to a lack of push by other players. In my view, MUIS has to step up its efforts and more importantly, its expertise, if it wants to lead the growth of sukuk In Singapore. MAS’ giant apron strings, while comforting in some aspects, may have inadvertently impeded the growth of the sukuk.
MUIS is a statutory body in a unique situation. I will focus on the recent push by MUIS for Muslims to understand Waqf (also spelt as wakaf) and revive the noble act of perpetual giving by creating a new wakaf called Wakaf Ilmu. On its website, MUIS states that ‘the revenue generated through the investment of the wakaf in capital guaranteed instruments and possibly properties in future can help supplement and sustain MUIS’ long term financial commitments. …Specifically for the Islamic education in Singapore “. While this current campaign is primarily focused on development of institutions of Islamic education, it would be a wasted if MUIS does not extend this opportunity to wakafs in general.
Under the Administration of Muslim Law act (AMLA), a waqf is defined as a ‘permanent dedication by a Muslim of any movable or immovable property for any purpose recognized by the Muslim law as pious, religious and charitable ‘6. Most of the waqf is in the form of freehold real properties. It is common knowledge that in land scarce Singapore, freehold properties appreciate in value over time and command good returns.
In a speech in September 2012, the President of MUIS Mr. Alami Musa highlighted that ‘ unique to Singapore and not a common feature in many other Muslim minority countries, Muslims here have a good legal framework to govern our wakaf under AML…”Under AMLA , MUIS is empowered and given the responsibility to manage wakaf properties directly. Mr. Alami pointed out that in 1988; the Fatwa Committee (of MUIS) issued a groundbreaking fatwa ‘allowing wakaf properties to be sold off on the condition that the proceeds of the sale are reinvested in the purchase of other freehold properties which are then declared as wakaf. This is called ‘istibdal’ or wakaf asset migration.
Mr. Alami then posited that this fatwa may be the first of its kind in the world, but its benefits are clear in that MUIS could dispose off non-performing or poor-performing wakaf assets and acquire higher yielding ones. As an example, a total of 45 low yielding wakaf properties were sold off and the sales proceeds utilized in the purchase of 11, Beach Road, in close proximity to Raffles Hotel. This purchase is significant because it was one of two projects which formed the subject of the breakthrough Musharakah Bond issued, the other being Bencoolen Mosque project.
The issuance of sukuk to develop the Bencoolen Wakaf mosque cum mixed commercial development in early 2000s thus came about after years of little yield in wakaf properties.
It is quite a neat coincidence that the Bencoolen Mosque project is so near to the Singapore Management University, which is the first institution of higher learning to offer a programme on Islamic Finance. The Bencoolen mosque project was quite an innovation in Singapore, as funds were raised through the musharakah bond, a term which was hardly familiar beyond an esoteric few in the finance and legal sectors in Singapore. For its innovation, MUIS even received the Sheikh Makhtoum award for innovative Islamic financing. I will elaborate on the learning points of this Bencoolen Mosque project but at this juncture, I will just say that the optimism and ambition felt after its success have somewhat stagnated and there needs to be a renewed effort to spur the growth of sukuk in Singapore .
Some background on wakaf properties in Singapore
In 1995, AMLA was amended to make it mandatory that all wakaf property in Singapore be registered in MUIS. This was in the aftermath of a famous court case involving LS Investment which had bought and had already started redevelopment works on a certain property before MUIS took action in the High Court on the ground that no good title had passed as it was a wakaf property. For purposes of this paper, suffice to say that not only did this cause a panic amongst some developers in Singapore; it was the catalyst (in my view) for MUIS to come up with a proper programme to develop the wakaf assets in their care. While MUIS was successful in retaining this property, it exposed the lack of expertise and experience in Singapore on the management of wakaf properties.
In 2000, Warees Investments Pte Ltd, a wholly owned subsidiary of MUIS was formed. Warees acts as the agent for MUIS. This was an important development as hitherto, MUIS handled both the regulatory function, overseeing the mutawallis and trustees as well as acting as the developer of wakaf properties. Obviously, if MUIS were to be more innovative in developing the wakaf assets in its care, a more specialized and focused approach was required.
‘Necessity is the mother of invention’ is a cliché, which was quite apt in propelling MUIS to come up with the idea of issuing sukuk to build up its wakaf portfolio . Prior to that, financing of the redevelopment of wakaf property had been through traditional means, with the Baitul mal (or General Endowment Fund), managed by MUIS, acting as a joint venture partner. No external financing was obtained and my assumption is that the size and scope of the wakaf development then were modest by comparison to what MUIS subsequently ventured into later with the Bencoolen mosque project.
From a cursory look at published MUIS Annual reports in the 1990s and early 2000s, most of the wakaf redevelopment involved small shophouses.
The Bencoolen Mosque Project (and 11, Beach Road)
As already mentioned, the Musharakah Bond structure was created to raise $60 million (a relatively modest sum by global standards but a breakthrough nonetheless in Singapore) for this Bencoolen mosque project and 11, Beach Road. 3 parties formed a joint venture – Muis,Baitulmal, Warees and the Wakaf.
Bereft of precedents, and with no Islamic capital market issued in Singapore, MUIS was undoubtedly in unchartered waters. Legal advice and documentation was provided by Allen & Gledhill, an established law firm in Singapore with an outstanding track record in conventional bonds but could hardly be said to have made any proven mark in Islamic bonds. MUIS were involved in a sukuk for the first time and were relying on a law firm which was possibly in the same position too. To its credit, MUIS followed through.
In a paper delivered at the Singapore International Waqf Conference in 2007, Ms Shamsiah Abdul Karim, the MUIS officer in charge of wakaf, listed 4 challenges from the perspective of MUIS in the work leading to the issuance of the sukuk in the Bencoolen Mosque and Beach Road projects. These were:
(1) Documentation of the term return on capital employed which needs to be documented as interest so as to obtain a Qualifying Devt Securities concession.
(2) Forcing the use of the Musharakah Bond structure rather than sale of debt ( Bai-inah) or sale and leaseback ( BaiBithamin Ajil)
(3) Having to create an SPV ( special purpose vehicle )
(4) The lack of experts in Islamic finance in Singapore and difficulty in having to form a Syariah Panel
The Musharakah Bond was 100% subscribed. This was surely due to MUIS being a statutory board, enacted under an Act of Parliament, and thus carried a sovereign rating for its certificates issued. This was thus officially the first Syariah-compliant musharakah bond issued in Singapore. The profile of the subscribers are quite telling – mosques, statutory boards and institutional investors. From an annual rental of a paltry $19,000.00 per annum, the gross income rose to $5.3million in 2006.
It is unfortunate that since the Bencoolen Mosque project, there has not been much headway in terms of sukuk issuance in Singapore. In a Business Times report by Siow Li Sen dated 21 August 2012, a damning headline ran as follows ” Malaysia leaves Singapore trailing in Islamic finance business “. The BT reported that there had appeared to be some improvements in 2010 when Khazanah, the Malaysian sovereign wealth fund sold S$1.5 billion sukuk and Sabana Reits raised $664 million through its initial public offer. However,’since then, the Islamic finance landscape here has been rather barren’.
I believe that any comparisons between Singapore and Malaysia in Islamic finance cannot ignore the fact that one has a Muslim minority while the other has a majority. Simply because Singapore has the stronger reputation in conventional Finance does not necessarily mean that Islamic finance will simply follow suit. In fact, given strong Singapore is in conventional banking, it is more difficult to get investors to change to or add Islamic bonds to their portfolio.
There is no sustained mass education on Sukuk and Islamic Finance in general. Even though the Malay language newspaper Berita Harian has an annual Money Seminar , the public that attends tend to be attracted , if at all, to only the topics on Takaful or Insurance . This could be due to a lack of interest in sukuk outright or a clearer idea on takaful . The fact that in general, the overall Islamic Finance market is not as dynamic (as voiced out by Mr Ravi Menon) as it could be means we are in a chicken and egg situation. People tend to wait for the boom to happen before walking into anything.
Although it is logical to argue that there need not be full support of the local Muslim population for sukuk to grow, it is not unreasonable, in my opinion, that this lack of support does little to encourage nonMuslims to invest in Islamic bonds. The 100% subscription for the musharakah bond was by mosques, statutory boards and institutional investors. Frankly, and I stand corrected if I am proven wrong, it does come across as contrived. All 69 mosques in Singapore, except for one (Masjid Ba’Alwie at Bukit Timah Road) receive funding from MUIS. The relationship between mosques and MUIS already existed before the issuance of the bonds.
If MUIS were to embark on another project with a Sukuk structure, it is conceivable that mosques will be amongst the subscribers again. But what about new investors? What about the pool of seasoned and sophisticated investors that have experience in conventional bonds? The potential the latter pool can provide, as against the pool of mosques, is hugely disparate. Unfortunately, it is a pool largely untapped.
MUIS must do more to reach out to these untapped investors and it has to do it differently from how Malaysian issuers do it. In Malaysia, there are indisputably more Muslim owned companies that form a more ready (as opposed to Singapore) market for investors searching for Syariah-compliant investments. Singapore does not have the same profile. This probably explains why the sukuk issued thus far where MUIS has been involved are subscribed by such a small pool. MUIS can and should consider joint ventures with larger, including global brand names, if they are serious about developing sukuk . I am of course aware that in the first place, MUIS must want to play the role of developing the sukuk. Personally, I believe that there appears to be an expectation on MUIS part that the State will always be supportive and therefore there is insufficient drive to push for more sukuk on its own.
In 2009, MAS set up an Islamic bond programme, a Syariah compliant equivalent of Singapore Government Securities (SGS). At its launch of the S$200 million Sukuk Al-Ijarah (sale and leaseback) Trust Certificate, it was highlighted by the then Managing Director of MAS Mr Heng Swee Keat that these bonds (sukuk) were the first to be offered in a local currency by a non-Muslim- majority country. Mr Heng was quoted as saying that ‘this sukuk is the sharia-compliant equivalent of Singapore government securities and is of the highest credit standing….they are to be treated and regulated like the government securities and are to be issued according to the demand received from investors’.
In the last 2 financial years, ending March 2011 and March 2012, the Singapore Sukuk Pte Ltd, a subsidiary of the MAS, issued $105 million and $80 million Singapore sukuk respectively. From the subscription, it can be deduced that there is a demand from investors. But is the demand widespread? Could it be that the good response is primarily because it is the MAS who are the issuer? Otherwise, why do we hear that the sukuk situation after 2010 is ‘barren’?
In the minds of investors, investing in sukuk issued by MAS could hardly go wrong. This is so especially in light of the fact that the underlying assets are the office units of MAS’ head office building. It is not an unknown asset. The units are already tenanted out and therefore the Sukuk structure of forward leasing is not likely to overly worry risk-averse investors.
While the MAS have shown itself to be supportive of the development of Sukuk in Singapore, there should not be too much expectations on MAS initiating the issuance of Sukuk. Other players must come in. Big names like Capitaland seem to be unsure whether to commit or not and they are not alone. This reticence, in my opinion, is based on a lack of motivation in entering the industry and this is one of the reasons why Sukuk is not developing fast enough. To be fair, why would a company like Capitaland immerse itself in the world of sukuk if there are so familiar with the conventional market? More should be done to entice them. The fact that Sabana REIT (Syariahcompliant real estate investment trust) successfully raised more than $600million through its initial public offer ought to give an indication that there is real potential for development of sukuk in Singapore.
According to the list of wakaf properties on the MUIS website, there are several wakaf properties which could still be redeveloped .These include residential properties in Telok Kurau (wakaf Kassim), the Chancery Residence (wakaf Shia Dawoodi Bohra) and commercial properties in the central and eastern parts of the island. There is high-yield potential in these properties. According to MUIS Annual Report 2011, the market value of wakaf assets was about $500 million, which could increase exponentially upon redevelopment.
The Bencoolen Mosque Project is an important learning experience that ought to be shared. In fact, MUIS has been sharing this story at various seminars and forum, and it can be assumed that its intended target is the international investor. The Middle Eastern investors are the one of the groups with the potential. The real challenge is how to make these Middle Eastern investors invest in sukuk issued in Singapore. As mentioned earlier in this paper , MUIS was awarded the Sheikh Makhtoum award for its innovation but there must be a greater concerted effort to enhance the image of Singapore in the sukuk world . Malaysia has been more aggressive in its marketing to the world and that could be something Singapore can emulate.
For sukuk to grow, MUIS should consider teaming up with international players who have the experience and expertise. If there is a dearth of experts here in Singapore, then MUIS should set up an international panel of advisers. There are two sets of panels I am thinking about. One is the team that consists of experts in international finance, law, real estate, taxation and related fields. The other is the Syariah expert. The fatwa issued by MUIS is made up of local religious scholars and with due respect, could be enhanced with a broader international outlook. Unlike Malaysia where the Bank Negara (Central Bank) has its own Syariah Advisory Council, our MAS here do not. Individual banks create their own advisory panels. Dr Shamsiah Karim, in her paper sharing the challenges that MUIS faced in the work leading to the sukuk in the Bencoolen mosque project, lamented how onerous it was for MUIS to empanel a board of Syariah scholars who possessed the necessary knowledge and background to advice on the Syariah issues in the course of the project.
If a statutory board like MUIS were to create a separate Syariah Advisory Board made up of highly reputable scholars with impeccable track record, this will boost the standing of Islamic Finance in Singapore and consequently, the issuance of more sukuk. While banks can and do set own individual panels or boards, the influence on the industry by having a statutory board’s own set of experts can be far-reaching. Big names like the Capitaland of Singapore may be more motivated. As can be seen by the subscription of the MAS issued sukuk, the reputation of the issuer is hugely influential. By extension, the perception of the issuers by the investors will also be enhanced upon knowing who the Syariah experts are. By way of illustration, the Sabana Reits issuers made it a well-known fact that they had eminent experts on their independent syariah committee, including Dr Mohamed Ali Elgari.
While MUIS has received international recognition for its innovation in the asset migration of assets (Beach Road project), there can still be more creativity and imagination, subject to Syariah principles not being compromised. The manner in which the Sabana REIT was crystallized could be studied and adapted as and where necessary. Sabana REIT has 21 buildings all over Singapore and this can be categorized in 4 areas – high tech industrial. Chemical warehousing and logistics, warehouse and logistics and general industrial. The asset migration exercise MUIS had embarked upon mainly consisted of commercial /residential shophouses, an area quite familiar to MUIS and Warees. It may be time to be bolder and consider asset migration involving industrial buildings in the future instead of sticking with the ultra-safe areas.
I do note that in her paper, Dr Samish Abdul Karim had described the Beach Road asset migration exercise as an ‘internal reits for wakaf purposes’. I cannot help but sense a hesitation in exploring beyond an ‘internal reits’, which is an ambiguous term anyway. I suspect that MUIS may be held back by the lack of a clear definitive expert opinion on the Syariah aspects as regards asset migration. I understand that there diverging views on whether waqf can be being ‘exchanged’, and if so, what type of assets could the waqf be exchanged with. The issue of the type of ‘hall’ activities carried out in these assets is another sensitive area. These are areas in which the Syariah experts can and should play an influential role.
It is a given that a key consideration for Syariah-compliance in real estate is the usage of the property. While the ‘haram’ activities such as casino are clear-cut, the debate is usually over properties where the non-halal activities form only a part of the overall space. Most scholars take the position that Islamic financing can be used for multi-purpose buildings where the non-halal activities constitute less than 5 per cent. The income from such activities must however be cleansed by donating to charity.
MUIS may not be willing to partake in any asset which has even a scent of impurity as it has to take into account its status and standing as the Islamic authority in Singapore. Under section 3 of AMLA, its statutory duties include giving advice to the President of Singapore in matters relating to the Muslim religion in Singapore and to administer matters relating to the Muslim religion and Muslims in Singapore. With such an imposition, it is conceivable that there will be serious implications on its credibility if the public perceives that MUIS is not living up to its role and standing. This is somewhat ironical as one can also take the view that if most scholars worldwide have agreed that it is allowable to have less than 5% of non-halal activities, then MUIS can educate the public of this leeway. I understand that in the case of Sabana Reits, the issuers were mindful of this and went well below the 5% threshold. But then again, MUIS does have other sensitivities to be mindful of.
The banks that operate in Singapore are likely to have their own corporate stance with regard to Islamic finance. CIMB appears eager to widen its reach in Islamic finance here and has positioned itself as the go-to bank for SMEs. The HSBC however has announced that it will no longer be involved in Islamic finance. Its future role could be limited to merely promoting sukuk issued by HSBC Saudi Arabia.
According to media reports , some banks have been trying to bring issuers and investors together, especially from the Middle East. OCBC’s co-head of capital markets Sim Buck Kim was quoted in a BT report that the additional cost of time and education for Islamic products are factors that hinder the attractiveness of Islamic finance to issuers and investors. He added however that ‘with continual efforts by banks and other stakeholders such as central banks , rating agencies and law firms to raise awareness , market receptiveness will grow , and consequently we may see more issuances in the future “. I would certainly hope that banks put their money where their mouth is and do more to promote and support the development of sukuk industry in Singapore. Instead of using a mass approach and reach out to unknown investors, they could target their own database of existing investors in the conventional bond and then move to the new investors. It need not be a mutually exclusive situation. I would also like to see MUIS being more proactive in working with banks.
I do not agree with the view that the Islamic finance industry in Singapore is barren. The time span of just 2 years between the Sabena REIT and that negative comment is way too short a period to make any judgement .
Many industry players and academics have remarked that the root of the problem lies in the lack of awareness and knowledge, both by issues and investors. If this is the problem, then more can be done. Has the public education been so esoteric that many do not understand and that deters them form coming on board. If Islamic bonds ( and Islamic finance in general ) is so complicated and confusing to many, then should not the solution be to simplify it, not necessarily to a lowest common denominator level , but at least so that even the average investor can understand . Has the reach to nonMuslims been exploited enough? By way of analogy, halal food is consumed by not just Muslims but non-Muslims too. Similar acceptance in mindsets could be worked towards. Are the Arabic terms intimidating to the would-be investors? Even students of Islamic finance struggle to master the foreign terms, so one can imagine the public’s apprehension in buying or holding bonds that they cannot even pronounce. Marketing and communication efforts must be revamped. At the moment, it seems that issuers are mainly preaching to the converted.
Finally, for sukuk to develop, the investors need to be assured that the dispute resolution or Court adjudication mechanisms are in place and reliable. Recourse to justice is a comfort that any investor must have. There is a lack of information on this in Singapore and these unknown factor only fuels the caution an investor may feel. Likewise, the potential issuer may prefer to hold back until it has studied more actual cases. This is where the Bencoolen mosque, Beach Road and Sabana REIT projects stand as good case studies. There ought to be more discussion and academic writings on such developments. Information could be shared through the relevant institutions’ websites or publications.
Knowledge is a powerful tool. Unfortunately, there is not enough of this in field of sukuk in Singapore at the moment. Knowledge is held by too few. Hopefully, more practitioners and observers of the Sukuk industry in Singapore can share their knowledge and help bring out more vigour and dynamism to this un-barren field. MUIS should tap the knowledge out there and match it with their aim of being more innovative and creative.
27 November 2012.
Ahmad Nizam Abbas
Straits Law Practice LLC