heng swee keat : monetary authority of singapore ’ s initiative to develop singapore dollar sovereign - rated sukuks speech by mr heng swee keat, managing director of the monetary authority of singapore, at the 5th annual islamic financial services board summit, amman, jordan, 13 may 2008. * * * introduction it is my honour this afternoon to join my ifsb colleagues in discussion of this very current topic. i am very glad that we are addressing this issue of regional integration of islamic financial services at this point. this is very timely and relevant to both the soundness and vibrancy of islamic finance. let me explain. the global islamic finance industry has grown rapidly – it is estimated that total assets are now over us $ 750 billion. this is impressive. still, this is a small proportion of conventional finance. the potential for growth is hence very large. while each country is taking measures to promote islamic finance, we can grow much faster as well as increase the scope and depth of the industry if we work towards integration at an early stage. integration increases market size, efficiency and liquidity. this in turn provides for more competitive cost of capital, spurring further growth. second, having service providers from different regions allow risks to be distributed across a wider group of players, and can improve the overall stability of the financial system. regional integration between middle east and asia, which may have different business cycles, provides a cushion for financial institutions and investors from country specific shocks. third, integration promotes greater interaction and knowledge sharing, and can help lift the standards of the islamic finance industry. in short, the 3 facets – development, integration and stability of markets – are closely intertwined. proper attention to all these 3 facets will enhance the soundness and vibrancy of islamic financial services. we are in fact seeing greater integration already with more cross borders flows, both within the middle east and asia, and between the two regions. banking and capital markets are opening up to foreign investors, more shariah products are listed on stock exchanges and islamic financial service providers are expanding their operations overseas. this is a promising trend. three tasks we should build on this positive momentum. allow me to share my views on three broad categories of essential tasks in promoting greater integration in the coming years. 1st task : promoting more economic integration first, financial integration and economic integration are deeply linked, and mutually reinforcing. hence, to promote financial integration, we also need to focus on economic integration

important – a recent mckinsey report 2 indicates that investors are more likely to invest in shariah - compliant products if returns are comparable to that of conventional products. in facilitating the growth of islamic finance in singapore, mas works with financial institutions to ensure a level playing field between islamic and conventional financing deals. this includes the waiver of additional stamp duties incurred by qualifying islamic financing arrangements involving immovable property. in developing the islamic financial services market during its nascent stage, we also provide tax incentives to help offset the initial additional costs. in february this year, our finance minister announced a 5 % concessionary tax rate on the income derived from qualifying shariah compliant financial activities. in addition, all investors will enjoy tax exemption on income derived from qualifying sukuks. this is to create a seamless framework for the industry in singapore, although i understand that in the gcc and malaysia the tax framework is even more favourable. the various changes in our regulatory and tax framework are done in partnership with the industry. based on our latest consultation, to promote the further growth of islamic finance and to meet the needs of financial institutions conducting shariah - compliant activities in singapore, i am pleased to announce that singapore will develop a facility to make available sovereign - rated sukuks. our facility is likely to be different from traditional issuances in two respects. first, the issuance will be on a reverse enquiry basis, which means we will issue according to the needs of financial institutions in singapore conducting islamic finance. second, at the initial stage, we plan to price these against the liquid singapore government securities market. this will provide a transparent price discovery mechanism for this new instrument in singapore. as the s $ sukuk market grows and deepens in time, it can then develop its own pricing benchmarks. the design of our sukuk issuance facility reflects our effort to harness the price discovery potential of existing liquid instruments, while adhering carefully to shariah principles. further details of this arrangement will be announced in due course and we look forward to your feedback. we will also make significant progress in integrating financial markets when we provide greater market access for islamic service providers to operate across borders. i am glad that regulators in the middle east and south - east asia have been very supportive in this area. for instance, several major islamic banks in the middle east now have operations in malaysia. more recently, several middle eastern banks have also established themselves in singapore. the first home