Islamic Banking in Singapore

Reuters reported that DBS, Singapore and south East Asia’s largest bank is scaling down on its Islamic banking operations, signalling the city-state’s efforts to promote Shariah banking are not bearing fruit.

DBS’ Islamic Bank of Asia (IBA), Singapore’s only wholly-owned full licensed Islamic bank, suffered a loss of US$77.1 million (RM256 million) in 2009 after making specific allowances on debt owned by customers in the Gulf region. The bank had US$725 million in assets as at end-2009, including US$453 million in payments due from non-bank customers. A source had earlier told Reuters the Islamic unit of DBS planned to get out of the lending business entirely. (Reuters; May 24, 2010)

What struck me was the statement on “lending business”. I have argued in past and still maintain my stand – Islamic banking is not about lending. Islamic banking is all about putting resources together and sharing risks and rewards in an economically beneficial business venture. Any lending should be kept at a minimum and should only be for exceptional cases and given interest free.

So, given my stand, I’m not surprised that Islamic banking is not making much headway in the non-traditional markets. While the traditional markets (read Muslim countries) have the added advantage of having religious obligation as a marketing tool, the non traditional markets needs more than that to push Islamic banking. Focus has to be on the uniqueness of system, the part that differentiates it from conventional banking. One of it is that it promotes risk and reward sharing instead of just plain borrowing and lending.

It is often lamented that Islamic finance lack knowledgeable practitioners. I want to add that the industry also lacks knowledgeable investors. By knowledgeable investors I mean investors who appreciate what Islamic finance stands for. For as long as investors demand a solution that mimics conventional products, Islamic finance will not take off, even in traditional markets.