- Islamic Bank of Asia unable to achieve economies of scale
- City had no sukuk this year until this week's by Cagamas
Singapore’s goal of becoming a regional Islamic finance hub has been dealt a blow by DBS Group Holdings Ltd.’s decision to close its Shariah banking unit that had aimed to develop the industry across Asia.
The Islamic Bank of Asia will be gradually wound down as it was “unable to achieve economies of scale,” DBS said in a Sept. 14 statement to the stock exchange. Southeast Asia’s largest lender and Middle Eastern investors set up the bank in 2007 with $500 million of paid-up capital and a focus on investment, advisory and capital-market services, plus wealth management.
Singapore, Asia’s biggest currency-trading center, introduced tax rules to allow Islamic bond sales in 2006. The city-state, where 14 percent of the population is Muslim, had S$240 million ($171 million) of offerings last year in an international market that saw $48.5 billion of issuance and this year only Malaysia’s Cagamas Bhd sold sukuk. Its experience casts doubt on the potential for cities without sizable Islamic populations, such as Hong Kong and London, to become Shariah-finance hubs.
“The key supportive customer base is relatively absent from Singapore,” said Khalid Howladar, global head of Islamic finance at Moody’s Investors Service in Dubai. “Singapore can build on its strengths as a capital markets hub to attract global sukuk listings, but I think building up Shariah commercial and retail financing activities will remain difficult.”
Singapore is among a growing number of countries that are trying to grab a share of the Islamic finance industry, whose banking assets Ernst & Young LLP forecasts will double to $3.4 trillion by 2018. Hong Kong, Luxembourg and the U.K. sold debut sovereign sukuk in 2014, although there have yet to be any corporate sales in those markets.
Cagamas, a mortgage firm based in Kuala Lumpur, raised S$163 million from a sukuk sale in Singapore this week, which was arranged by Oversea-Chinese Banking Corp. That was the first offer since last October, when Swiber Holdings Ltd. sold S$50 million of Islamic bonds with RHB Capital Bhd. as arranger.
Islamic Bank of Asia, which has branches in Singapore and Bahrain, invested $15 million in Singaporean firm Ley Choon Group Holdings Ltd. in December 2013. The construction company’s share price has lost 74 percent since then. The bank underwrote a $20 million Islamic loan for privately held Indonesian coal miner Param Mitra Coal Resources Pte in June 2014.
DBS will continue to offer Shariah-compliant products in Singapore, including arranging sukuk sales, it said in the Sept. 14 statement. Islamic Bank of Asia was in discussions with marine, energy and logistics companies on potential Singapore dollar Islamic note offers, Harish Parameswar, the lender’s investment banking head, said in May.
Lack of Incentives
“Islamic Bank of Asia did explore shifting their focus during the course of their lifetime but that may not have yielded the desired result,” said Raj Mohamad, the Singapore-based managing director at Five Pillars Pte, a consultancy. “DBS has a very strong brand name and if it continues to consider offering Islamic products it may augur well for the bank in the long run.”
A lack of incentives for Islamic finance in Singapore and the absence of pension funds and bond investors that need to invest in a Shariah-compliant manner have hampered industry growth. Malaysia, the world’s biggest sukuk market that pioneered Shariah finance in the 1980s, offers income tax and stamp duty exemptions to encourage sales.
Singapore’s government hasn’t done enough to support the industry, said Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd.
“Promoting Islamic finance and building up the market requires the government’s active participation,” he said from Kuala Lumpur. “That’s what we have seen and continue to see in Malaysia and Indonesia.”