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Singapore: High expectations
Yeo Wico and Suhaimi Zainul-Abidin

2010 was undoubtedly a hugely successful year for Islamic finance in Singapore, featuring deals such as the initial public offering of Sabana Shariah Compliant Real Estate Investment Trust, the largest Shariah compliant REIT by total assets globally, which raised gross proceeds of approximately S$664.4 million (US$523.3 million), garnering the IPO Deal of the Year Award 2010 and the Real Estate Deal of the Year Award 2010 by Islamic Finance news; and the issue by Danga Capital of S$600 million (US$472.5 million) trust certificates due 2015 and S$900 million (US$708.7 million) trust certificates due 2020 with Khazanah Nasional as obligor (garnering the Singapore Islamic Finance Deal of the Year Award 2010 and Corporate Finance Deal of the Year Award 2010 by Islamic Finance news).

On the back of the strides made by the Islamic finance industry in Singapore in 2010, the achievements made in the Islamic finance markets in Singapore in 2011 appear modest in comparison but have the potential of laying the groundwork for long-term growth. Existing Shariah compliant structures have continued to evolve in Singapore in 2011, indicating the development in both the depth and breadth of Singapore’s Islamic finance market. Furthermore, there have also been regulatory and tax developments made to support the Islamic finance industry in Singapore. These factors suggest that Islamic finance will continue to have good prospects in 2012.

A round-up of 2011
Despite the relatively quieter 2011 for Islamic finance in Singapore, there were still notable deals concluded. One of the more significant deals in 2011 was the S$144.3 million (US$113.6 million) additional term and commodity Murabahah facilities made available to Sabana Shariah Compliant REIT, which enabled the Shariah compliant REIT to acquire further industrial properties in Singapore and further grow its portfolio and strengthen its position as the largest Shariah compliant REIT globally. The Murabahah facilities have been innovatively structured to incorporate a profit rate hedge into the Murabahah structure to increase transaction efficiency by minimising the number of Murabahah trades.

Even though fewer large Islamic finance deals were concluded in 2011, many deals remain in the pipeline and the prospects for Islamic finance in Singapore remain bright.

Regulatory developments
New regulatory developments took effect in 2011 which reaffirmed the dedication of the Singapore government, regulatory and tax authorities to grow the Islamic finance market and ecosystem in Singapore. Regulatory and tax changes to promote and facilitate Islamic finance in Singapore have been systematically promulgated since from 2006, first to allow banks to carry on Murabahah financing transactions and subsequently to carry on Ijarah-based financing and Murabahah interbank placements and undertake diminishing Musharakah and spot Murabahah transactions, with the addition of Istisnah transactions to the list of permitted transactions in 2010.

Tax treatment of the prescribed types of Islamic financing was further clarified in 2011. This is in line with the Singapore government’s policy of harmonizing the tax treatment of Islamic financing contracts with that of their equivalent conventional counterparts, an approach which dates back to 2006.The previous circular issued by the Monetary Authority of Singapore (MAS) on the tax treatment of Islamic financing arrangements in 2006 covered only Murabahah, Mudarabah and Ijarah Wa Igtina transactions and Sukuk issuances. The MAS Circular issued in 2011 further clarified the position relating to Murabahah and also explained the income tax, stamp duty and GST treatment of Musharakah, Istisnah and Wakalah-based structures. For example, the 2011 Circular confirmed that double or triple stamp duties would be waived on Murabahah deposits where the asset was immovable property, as additional imposition of stamp duty would result in Murabahah deposits being less competitive than comparable conventional deposits. The measures outlined in the 2011 Circular were also mirrored in Singapore’s income tax subsidiary legislation with retrospective effect.

The guidance provided in the circulars and the income tax legislation has provided greater certainty to banks and investors by confirming positions which had previously been adopted by regulators in dealing with specific transactions. These tax clarifications will help ensure that the regulatory and tax framework in Singapore remains transparent and predictable with regard to Islamic financing transactions.

Looking ahead: 2012
Singapore’s regulatory authorities have continued in their efforts to accelerate the development of Islamic finance in Singapore, reinforced by MAS’s launch of its own Sukuk facility in 2009. In addition, efforts have been made to develop human capital for Islamic finance in Singapore, by focusing on education through Islamic finance courses offered by institutions such as the Center for Islamic Management Studies and the Singapore Management University. The trajectory for growth of Islamic finance in Singapore is firm and it is anticipated that deals in the pipeline will come to fruition.

Yeo Wico and Suhaimi Zainul-Abidin are partners at Allen & Gledhill. They can be contacted at yeo.wico@allenandgledhill.com and suhaimi.zainul@allenandgledhill.com respectively.

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