National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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this route when they have wide access to other parts of the international capital markets. At
the same time, the falling oil price has reduced surplus liquidity in a number of important
Islamic countries. In addition, the tax incentives available in Malaysia mean that Hong Kong
has serious competition to overcome in challenging for Asian issuances.
The Hong Kong interest in Islamic REITs has also, so far, led nowhere, despite a very active
property market in that jurisdiction. One reason may be the challenge of putting together a
viable and attractive proposition when other elements of an Islamic financial system, notably
Islamic mortgages, are not in place there. In addition, the requirement that property uses be
Shari’ah compliant62 limits the use that can be made of REITs in the commercial property
sphere.
Singapore
Hong Kong’s traditional rival as a financial centre for Asia has been Singapore. Singapore
moved more quickly into the field perhaps because of its proximity to Malaysia and with a
domestic Muslim minority as a possible target for retail offerings. Like Hong Kong, it has had a
strategic approach, formulated and driven by government. That approach has been broader
than Hong Kong’s, covering banking and Takaful as well as capital markets, and it has included
education and supporting professions. However, that approach has not been uniformly
successful. Islamic banking has struggled to gain scale and Takaful has proven to be a failure at
the retail level. As in the case of Germany, this suggests a rather soft demand in a mixed
developed economy, with the Muslim minority of Singapore apparently not showing any
marked preference for Islamic products at the retail level. Singapore has been more successful
in capital markets where it has achieved a reasonable share of sukuk issuances but its presence
in the collective investment funds market is limited.
With a more limited retail market than might initially have been expected, Singapore, like the
other centres discussed in this chapter, is finding that it is pursuing mainly internationally
mobile business. In this context, one critical issue is its proximity to Kuala Lumpur. The two
cities are close enough (a little closer than Frankfurt and Munich) that they can effectively
share the “soft” elements of Islamic finance infrastructure – education, lawyers, other advisers,
etc. So the challenge for Singapore will always be, “Why should the business be done here
rather than in Malaysia?” especially when Singapore’s more active secondary market is of only
marginal relevance. On the other hand, this does allow Singapore’s supporting professions,
like lawyers, the ability to benefit from Islamic finance business done in its neighbour. There
are no hard data to indicate the extent to which this is happening, but several law firms63 list
Islamic finance teams based in Singapore.
Singapore’s great strength is its position as a regional hub across a wide spread of financial
services. It is one of two natural choices (the other being Hong Kong) for a financial services
firm from outside seeking to establish an Asia-Pacific regional headquarters. It is therefore
likely that it will benefit from growth of Islamic finance in the region, through headquarters
functions as well as through the supporting professions, even if that business is ultimately
booked through other centres.
62 Or alternatively the impact on returns of purifying non-compliant income.
63 Including Norton Rose Fulbright, Linklaters, Clifford Chance, and Allen & Overy