Source: IFN 

The Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually, covering bank and non-bank financial institutions, capital markets, money markets and Takaful. There has also been a surge of interest in Islamic finance from non-Muslim countries such as the UK, Luxembourg, South Africa, and Hong Kong. Singapore has never sold itself as an Islamic finance destination thus far and current investment and geopolitical climate is conducive to introduce this initiative to change the misconceptions. BOBBY TAY elaborates.

Islamic finance can help Singapore to work closely with China government initiated infrastructure programs which are favoring Shariah compliant activities thus it will augur well for investors who prefer sovereign or state-owned enterprise-owned projects and opportunities. With the New

Development Bank, formerly known as BRICS Development Bank, Singapore’s involvement in Islamic finance can directly link to the work by Brazil, Russia, India, and China on reducing poverty, expanding access to finance, developing the financial sector, and building financial sector stability and resilience in client countries.

From the beginning of 2024, Saudi Arabia, the UAE, Egypt, Iran and Ethiopia have joined the BRICS,

expanding the group to a combined 10 countries with a population of some 3.7 billion people. The enlarged BRICS bloc will see the inclusion of three of the world’s largest oil exporters: Saudi Arabia, the UAE and Iran, together with Egypt, a historic progress of four Islamic nations joining BRICS. As it begins building political and financial institutions and a payment mechanism for executing transactions, there are important potential implications for the future of energy trade, international finance, global supply chains, monetary policy, and technological research. As a result, global companies will need to factor these new geopolitical and economic realities into their investment strategies. They should also strengthen their capacity to capture the opportunities and to mitigate the risks they engender. The expansion, moreover, is heavily tilted toward the Middle

East, so further regional balance may be required as the group grows and this will open a good pathway for Islamic finance to be more widely used in the BRICS+. China’s growing role as a supplier of industrial and consumer goods, as well as an importer of commodities, has been a key force for integration. China has become a major market for Brazilian soybeans and iron ore, for example, and a major exporter of advanced goods such as electric vehicles, solar panels, and heavy machinery. Western sanctions relating to the war in Ukraine, moreover, have led to the diversion of Russian exports to BRICS+ markets, notably China and India. On top of that, Singapore can make good use of its status of a RMB clearing center in Islamic transactions for trades relating to BRICS+ as China is the world’s largest trading nation.

By helping expand the use of Shariah compliant modes of financing in BRICS+ operations, Singapore’s financial sector can help deliver benefits to client countries in three areas:

• The sustainable development of Islamic finance offers benefits for economic growth, reducing poverty and fostering shared prosperity. Islamic finance can significantly contribute to economic development, given its direct link to physical assets and the real economy. The use of profit- and loss-sharing arrangements encourages the provision of financial support to productive enterprises

that can increase output and generate jobs. The emphasis on tangible assets ensures that the industry supports only transactions that serve a real purpose, thus discouraging financial speculation.

• Islamic finance helps promote financial sector development and broadens financial inclusion. By expanding the range and reach of financial products, Islamic finance could help improve financial access and foster the inclusion of those deprived of financial services. Islamic finance emphasizes partnership-style financing, which could be useful in improving access to finance for the poor and small businesses. It could also help improve agricultural finance, contributing to improved food security. In this regard, Islamic finance can help meet the needs of those who don’t currently use conventional finance because of religious reasons. Of the 1.6 billion Muslims in the world, only 14% use banks. It can help reduce the overall gap in access to finance, since non-Muslims aren’t prohibited from using Islamic financial services.

• It helps strengthen financial stability. As the 2008 global financial crisis ravaged financial systems around the world, Islamic financial institutions were relatively untouched, protected by their fundamental operating principles of risk-sharing and the avoidance of leverage and speculative financial products.

Despite its recent years of rapid growth, Islamic finance is still in its early stages of development, and it will need to address several challenges. Singapore can also support countries to strengthen the legal, regulatory and institutional foundations of Islamic finance. Also expand efforts in promoting the systematic and sustained use of relevant knowledge of Islamic finance to raise awareness, build consensus and promote the worldwide use of Shariah compliant financing instruments.

As part of its work on Islamic finance, Singapore can partner with governments such as Malaysia, Indonesia and Brunei to develop an Islamic finance development center or a knowledge hub for developing Islamic finance globally, conducting research and training, and providing technical assistance and advisory services to countries interested in developing Islamic financial institutions and markets.

Singapore can also utilize its robust banking system to expand its Islamic wealth management sector. Shariah defines five necessities as the fundamentals of human existence, namely faith, self, posterity, intellect and wealth, thus it is the responsibility of every society to preserve and protect these fundamentals. These Shariah fundamentals serve as the foundation for the development of Islamic financial products. 

Wealth purification: The purification of wealth through the concept of Zakat. Zakat is the giving of alms to the poor and needy and is obligatory upon every Muslim who meets the requirements to pay Zakat. 

Wealth accumulation: The enhancement of wealth by generating returns via Islamic investments and instruments, such as Islamic equities, Sukuk as well as Islamic funds. 

Wealth protection: The protection of wealth through risk management, Takaful and Islamic trusts.

Wealth distribution: The distribution of wealth for future generations. This involves the transfer of wealth or assets (estate planning) through Wasiat (will writing), Waqf (endowment) and Hibah(gift).

Wealth creation: The creation of wealth through income derived from Halal/Shariah compliant businesses, professions or trade and savings with Islamic financial institutions. 

Another viable option includes Islamic estate planning. Estate planning provides an allocation and arrangement to pay the deceased's debts and obligations by appointing an executor or trustee to manage the deceased's assets. Through will writing, an individual would ensure the assets or properties are distributed to their loved ones for posterity.

Going one step further, there is an increased demand for sophisticated Islamic wealth management products, for example, the introduction of structured wealth management products to complement existing plain vanilla Islamic wealth management offerings. All these developments bode well for retail clients and the Singapore financial market, offering more choices to grow

and protect one's wealth. 

Although the common misperception that Islamic finance is only for Muslims, that is not the case. Everyone irrespective of their religious faiths can take up Shariah compliant financial products and services, which include Islamic deposits, investment, treasury and financing, and other value-added products and services at a retail bank or an Islamic financial institution.