Another sign of the growing march of Islamic finance in South and East Asia is the numerous developments that emerged at the 6th Annual Islamic Financial Services Board (IFSB) summit held in Singapore last week. No sooner had Malaysia announced that it was liberalizing its financial services sector, including the issuing of two new mega-Islamic banking licenses in 2009 with a minimum capital of $1 billion each to foreign players, that Singapore launched at the summit another two regulations, as well as a consolidated set of guidelines on the application of banking regulations to Islamic banking.

The Monetary Authority of Singapore (MAS), the central bank, is so keen to establish the island state as an international Islamic capital markets hub that it is boosting the island’s human capital pool in Islamic finance. From this year MAS, according to Managing Director Heng Swee Keat, will sponsor eligible students for undergraduate courses in Islamic finance at The Singapore Management University; and for master’s courses in Islamic finance at the Wealth Management Institute of Singapore.

The guidelines, announced by Keat during his keynote address at the IFSB summit, stressed that the two regulations and guidelines “provide clarity on how our banking regulations apply to Islamic banking, and offers specific information of the regulatory treatment of various Islamic banking structures. This set of guidelines will provide greater clarity and certainty for financial institutions offering Islamic banking products in Singapore. Taken together, these various changes will allow banks to conduct a wide range of Islamic financing activities, and to have greater flexibility to structure instruments to meet their risk management needs.”

The two regulations allow with immediate effect Singapore-based banks to enter into Diminishing Musharaka financing and Spot Murabaha transactions. Singapore already has adopted equal tax, regulatory and liquidity treatment of the Singapore dollar Sukuk with Singapore Government Securities, introduced in January this year.

At the same time, newcomers such as Korea, Hong Kong are Indonesia are all gearing up to meet the challenges and opportunities in the Islamic finance sector with their own initiatives which range from issuing Sukuk to reviewing their legal codes to facilitate tax neutrality for Islamic financial products.

Keat, summit host, put the case for both Singapore and Asia in his keynote address and subsequent remarks. Despite the lowering of growth forecasts in 2009 and beyond globally by the World Bank, the trend of a dynamic Asia, which includes the Middle East, remains. Keat predicted that Asia will remain the fastest growing economy in the world and cross-border capital flows between the GCC (Gulf Cooperation Council) and East Asia will grow significantly in the coming years. Perhaps more importantly, the middle classes and high net worth sector in Asia are growing stronger than Europe and the US, thus providing growing opportunities for Islamic fund and asset management.

“In this crisis, both conventional and Islamic financial markets have been affected, but the restrictions on the use of leverage and speculation has put Islamic finance in a better stead. In the coming years, as the Shariah principles of using capital to build productive capacity gain wider recognition, Islamic finance will assume a more prominent role.

“Countries in Asia are using Islamic finance to fund urban development and public infrastructure projects to meet the growing demands of their populations.

Despite the intrinsic strengths of Islamic finance which makes it robust, the industry also has risks such as liquidity and concentration risks that demand special attention. As such Islamic finance is faced with regulatory challenges just as the conventional sector.

Singapore of course being a non-Muslim jurisdiction, applies a single regulatory framework to both conventional and Islamic banking. This is because MAS regulations address prudential issues of liquidity, credit, market, operational and concentration risks relevant to both conventional and Islamic banks.

“While Islamic funding and financing structures are different, we consider the economic substance the underlying risk of these structures, and apply the regulatory treatment that is consistent with the risk. Our regulatory framework therefore provides a level playing field for Islamic and conventional banking. MAS has for some time now issued regulations to clarify the regulatory treatment of various Islamic finance structures under our rules,” he added.

Keat said that he was committed to working with fellow regulators, and to developing the infrastructure and talent to support the growth of Islamic finance in Singapore.