Editorial structure and main topics/themes to be covered in each country

Brunei: Darussalam Breaks the Mould

The Bruneian financial services industry is blossoming, due to a surge in retail banking and insurance. Thanks to a fortuitous combination of government initiative and renewed private sector interest, the financial services industry is putting its best foot forward at the dawn of the 21st century. The Bruneian government, notorious for a hands-off approach to financial services, expects that foreign firms will self-regulate and adhere to international best practice standards. Several new initiatives could enhance regulation, without curtailing the industry’s treasured independence.

Sultan HASSANAL Bolkiah

The Treasury Accounting and Financial Information System (TAFIS) is the flagship of the Bruneian government’s e-government strategy. TAFIS will redesign the government’s financial business practices and processes by integrating information from financial services and accounting, as well as emphasizing financial processing. Although the program is intended to improve government payments to suppliers and contractors, positive spillover effects are expected for other areas of the financial sector, such as private e-commerce.

The Brunei International Financial Center (BIFC), the national regulator, is eager to stimulate growth in all areas of the financial services industry. Since its establishment in 2000, BIFC has pursued four main goals: to diversify and expand the financial services sector; to provide a secure, regulated facility for regional and international businesses; to encourage expatriates to set up shop in Brunei and promote knowledge-sharing with Bruneians; and to generally encourage national and individual self-reliance in the industry. Since 2000, legislative and regulatory changes have made Brunei a more attractive, tax-free location for international banks. Brunei's location in Southeast Asia is another factor of the attraction. Asian banks have discovered that, not only can they take advantage of tax-free status, but that they can also operate in the same time zone as head offices and customers.

Despite such progress, the Bruneian banking and financial services industry faces serious challenges. Development of viable bond and equity markets has been stymied, despite encouragement from the International Monetary Fund to develop a bond market so Brunei-based banks maximize the usage of otherwise-idle capital resources. While the government has established the Brunei Currency and Monetary Board, empowered to issue treasury bills, a mature bond market is not yet within reach.

BANKING: Retail Customers - The Target for Expansion in Services

The market for retail banking is heating up in Brunei as nine foreign and domestic banks pull out all the stops to attract new customers. Some bank branches even stay open as late 10pm to provide the best possible service. Major foreign players such as Citibank and HSBC are active in the market. For its part, HSBC is investing in the savings portion of the retail market. In June of 2004, the bank offered a financial planning seminar to teach parents how to save for their children's education. HSBC is also leading the charge to combat cyber-banking crime. In line with the Brunei Association of Banks' customer education "Protecting yourself on e-fraud" campaign, HSBC has put new emphasis on training its staff to spot potential e-banking and credit card fraud and to provide customers with tips on how to avoid problems when using e-banking facilities.

Many local banks are eagerly competing for market share. Baiduri Bank, named as the Bank of the Year Brunei by The Banker for 2002 and 2003, has boosted its training budget by 80 percent, in addition to sponsoring MBA students at Universiti Brunei Darussalam to ensure that it attracts the best local talent. Baiduri Bank also launched a new product, called “Personal Loan,” in April of 2004. This distinctive new loan product offers a payment-break feature, enabling applicants to pay interest only in the first year of the loan. Another Baiduri product is a consumer credit card that offers big interest savings if new customers transfer balances from other cards. Both of these services are firsts in Brunei. Earlier this year, Baiduri achieved another national landmark when it opened a bank branch inside a shopping mall. More innovative products will be launched, including customer rewards schemes, as well as new deposit, loan and card products.

ISLAMIC FINANCE: Sharia Compliance Proves Popular

Brunei has two Islamic banks, both state-owned, that hold an estimated 30 percent of all retail deposits. According to Robert Miller, Head of Supervision at BIFC, "The country possesses a competitive edge and the right niche for Islamic banking and finance." The Bruneian government has issued several orders, including the International Banking Order of 2000, the Mutual Funds Order of 2001, the Securities Order of 2001 and the International Insurance and Takaful Order of 2002, to ensure that financial institutions are able to promote Islamic finance products. Brunei is a member in good standing of the International Islamic Financial Market, and the International Trusts Order of 2000 provides incentives for individual clients and corporations to establish charitable and special trusts in Brunei.

Earlier this year, a critical milestone was passed when the Islamic Development Bank of Brunei, Berhad, launched two sharia-compliant investment funds. The first fund, known as High Yield Murabaha Investment, is a short-term product covering periods of one to three years. HYMI offers 100 percent capital preservation while maximizing the expected rate of return. The second fund is the Physical Gold Investment. Investing in a valuable commodity offers customers the chance to diversify portfolios without maximizing risk.

INSURANCE: Charting New Courses

Asia Life Assurance Society has launched a line of comprehensive and affordable protection plans. The new products are offered as part of the firm’s whole life plans, which offer a wide range of choices. Titled 'Asia LifeSecure', the new plan provides coverage for death and permanent disability without requiring lifetime premium payments. The plan offers lifetime coverage and higher protection values with each passing year. Participants may choose between premium payment terms of 10 to 25 years and can include coverage for up to 30 diseases.

Brunei is receiving foreign assistance from the U.S. and Singapore to support its budding insurance industry. In August of 2004, 47 Bruneians received the title of Chartered Financial Consultant following a five-week course backed by the American College in Pennsylvania, U.S. and the Singapore College of Insurance. The new Chartered Financial Consultants, many of whom are among the sultanate’s top insurance leaders and financial consultants, join the ranks of 38,000 professionals around the world who hold that title. The program aims to bring international best practices to the Bruneian financial services industry while driving growth to new heights.

Indonesia: Picking Up The Pace

Over the past two years, the Indonesian banking industry has truly overcome remaining difficulties from the 1997-98 Asian financial crisis. Clear signs of recovery include significant drops in non-performing loans (down to 2 percent by Q3 of 2004), more lending to households and small businesses, and improved capital adequacy ratios (21 percent, well above the minimum 8 percent required by the Bank of Indonesia). Bank industry profits rose more than 30 percent year-on-year over the first three quarters of 2004. What’s more, the lending to deposit ratio is expected to reach 50 percent by year’s end.

President Susilo Bambang YUDHOYONO

But other challenges must be faced. Corporate lending remains low, as banks continue to steer clear of debt-laden companies. This situation, however, must change. Some analyses indicate that bank lending must expand by 22 percent, in order to support the larger goal of attaining a 5 percent GDP growth rate. Another problem is that the share of dispersed loans currently exceeds 25 percent, indicating that the real sector has not used bank loans as efficiently as possible. In addition, most of Indonesia’s total banking assets are spread among only a few large banks, so the government must be vigilant about the impact of potential mergers. As President Yudhoyono designs a three-part strategy for economic development, he has emphasized his staunch commitment to combating banking crime. The president has asked regulators to strictly enforce banking laws and to take action against delinquent players.

BANKING: A Retail Focus Brings Fresh Opportunities

Retail banking is making great strides in Indonesia. One area in particular, Islamic banking, based on Shariah law, is shining. Although the sector is small, it is the most dynamic niche banking industry in the world, and especially in Asia, where both Muslim and non-Muslim investors are driving growth. The Indonesian Association of Islamic Banks believes that Islamic banking will command 5 percent of the domestic financial services market by 2007, partially due to favorable government actions to foster the industry. At present, 14 Shariah banks operate in Indonesia, including Islamic units of traditional banks and one foreign Islamic bank, and several general and regional banks. Total assets for the sub-sector are valued at $12.6 billion. Islamic bankers are calling on President Yudhoyono to appoint a Shariah representative to the National Economic Council, a move that would signal government acceptance of the Islamic banking sector. Bank Indonesia (BI), voicing support for Islamic banking, is encouraging local banks to open Islamic branches. BI has expressed hope that by 2010 the Islamic finance sector will have as many as 2,000 branch offices throughout the country.

Credit card usage is enjoying an unprecedented boom. Analysts predict that in 2005 the number of Indonesian card users will rise by 20 percent, and the amount of credit card spending could grow by 10 percent. This type of growth is realistic, given the size of the Indonesian market. Out of 28 million potential credit card users, only 5 million currently have credit cards. Citibank is the dominant player, holding a 35 percent market share.

Banking services are improving, particularly with respect to technological access. Bank Tabungan Negara, for instance, is working with Telkomsel, XL and Indosat to provide SMS banking features. Services available via SMS include changing PIN numbers and obtaining information on account balances, deposits and credits, as well as foreign exchange rates, interest rates, and new services.

INVESTMENT BANKING: The Upward Trend

In a bold move to better meet the needs of businesses, major players in the Indonesian banking sector are asking the new government to create a roadmap for national industrial development. According to industry sources, the banking sector is sitting on roughly $21 billion in idle capital that could be used for commercial lending, excluding available long-term funds such as insurance. Lending to small- and medium-sized enterprises consumed about $3.9 billion in the first seven months of 2004, representing more than 93 percent of the target rate for SME lending. Lending to SMEs is important in Indonesia, where such businesses generate 57 percent of GDP and employ 70 million people.

According to Elvin Massasya of the Bank of Permata, Indonesian businesses have not fully taken advantage of lending capacity. Some experts are urging banks to trench loans to the commercial sector, with special emphasis on new investments. Meanwhile, Industry Minister Andung Nitimihardja has identified the textile sector as a target industry, for it is both capital- and labor-intensive. The Ministry of Industry has indicated that a primary focus will be placed on three areas: technology, natural resources, and human resources.

BONDS: New Issues Breathe New Life into Local Finance

The Indonesian bond market is picking up steam, thanks to volatility in equity markets and increasingly risk-averse investors. New bond issues have been promised by the government and private sector. Notably, many of these bonds will be issued in the local currency. Many economists are cheering this trend toward local-currency issues. In October 2004, bowing to strong demand, the Indonesian government issued 4 trillion rupiah ($400 million) worth of bonds, or fully one trillion rupiah more than expected. The government received 5.4 trillion rupiah in bids for the seven-year bonds, which offer a weighted average yield of nearly 11 percent. Demand was very strong from banks, understandably searching for high returns on idle funds. Another bond issue is scheduled for end-November in 2004; this one will be worth 1.7 trillion rupiah ($188 million) and offer maturity of seven years with a fixed coupon of 10 percent.

The government planned a non-deal roadshow early in 2005 to publicize a $2 billion global bond offering. Bonds will be marketed to several foreign countries and two of the best-known international ratings agencies, Moody's and Standard & Poor's. At present, Standard & Poor's gives Indonesia's local currency debt a rating of B-plus. Altogether, the government hopes to raise 43 trillion rupiah ($4.8 billion) from offshore and local bond markets in 2005.

In the private sector, PT Bank NISP has announced a 750 billion rupiah ($83 million) bond issue in early 2005; funds will be used to strengthen long-term loan provisions and secure the bank’s risk-management system. Analysts expect high demand, thanks to the bank’s sound financial position. Between January and September 2004, Bank NISP’s net profits soared 70 percent, due to surging interest income. In other news, gas distributor PT Perusahaan Gas Negara Tbk (PGN) will hold a 1.5 trillion rupiah ($167 million) bond issue in the first quarter of 2005; the issue will finance a $1 billion expansion project. Other bond issues will be forthcoming from PT Media Nusantara Citra, PT Federal International Finance, Bank Niaga, and Apexindo.

Malaysia: “Its Plan Looks Like a Winner”

Banking and financial services are undergoing exciting changes in Malaysia. Since the dark days of the 1997 Asian financial crisis, top officials have restructured the country's financial system, vastly improved regulatory oversight, and have engineered consolidation and mergers throughout the industry, moves that have tremendously shored up the nation's capital base. Non-performing loans (NPLs) from 1997 have been virtually eliminated, and the industry is moving forward with a far-sighted reform agenda that is designed to transform the nation into a global financial hub.

Prime Minister ABDULLAH bin Ahmad Badawi

In 2002, under a state-sponsored merger program, 71 financial institutions were consolidated into 10 domestic banks and 30 banking institutions. The government also launched a ten-year Financial Sector Master Plan in 2001, which has become a blueprint for fostering a strong domestic banking industry that will be highly competitive on the world stage.

Doors are opening to foreign investment, especially in financial services. Thirteen foreign-owned banks now operate in Malaysia, and large domestic banks, such as Maybank, are expanding into other ASEAN countries and China. In a controversial move, Prime Minister Abdullah announced that five foreign stockbroker firms and five mutual fund companies will be allowed to operate in Malaysia. The government is allowing foreign companies to engage in futures broking and venture capital; foreign participation in these two important niche sectors should increase liquidity and improve risk management in Malaysian capital markets.

As banking reform and liberalization take effect, Malaysian banks are increasingly looking abroad for new opportunities. Commerce Asset-Holding Bhd, for example, has purchased a controlling stake in Indonesia’s PT Bank Niaga. Maybank now operates in Singapore, the Philippines, Indonesia and Papua New Guinea. Furthermore, new ties with regional financial centers are breaking down investment barriers. The Kuala Lumpur and Singapore stock exchanges will create a cross-trading platform by the end of 2005, which analysts believe will attract considerable capital into Malaysia. And, by mid-2005, all financial institutions in Malaysia will be required to use a new electronic payment system, the Financial Process Exchange (FPX). FPX will dramatically reduce payment settlement times, and it will facilitate secure e-commerce transactions. In due time, officials are eager to link FPX with electronic clearance systems in other ASEAN countries.

Although Malaysia’s financial industry appears to be performing well, challenges remain. As retail and SME lending increases, some analysts fear that another market bubble might be forming. Meanwhile, in the dynamic though still small sector of Islamic banking, some observers are anxious about rising global interest rates, saying that the profitability of Islamic banks could be seriously threatened, for these special banks are unable to pass on high interest rates to their customers. There are rising concerns that the number of risk specialists, trained professionals who possess specialized expertise to implement sophisticated risk-management models, is simply too small to adequately protect domestic banks. These, and other, issues will be discussed in our report.

THE NEXT WAVE OF BANKING: SMEs, Retail and Islamic Finance

Small- and medium-sized enterprises (SMEs) are the heart of the Malaysian economy. Without the dynamism and vision of these smaller companies, the country would be far less resilient and prosperous. A recurring complaint by SMEs, however, is that financing is often difficult or too expensive to get. To remedy this problem, financial institutions are being actively encouraged to offer loans at reasonable cost to small businesses. The strategy seems to be working, as banks have loaned SMEs more than $19 billion in the last two years. In the first nine months of 2004, bank loans to SMEs rose by 5 percent. The Central Bank also has launched a special SME unit, which has earmarked over $58 million in grants and soft loans for SME development.

Retail banking is enjoying good times, thanks to rising per-capita incomes and strong growth in the domestic economy. Credit card usage is entering an unprecedented period of popularity. AmBank, for one, has announced that its credit card business is on pace to add 250,000 new customers by end-March 2006. Over the past two years, AmBank’s credit card division has grown by 60 percent, a startling rate of expansion and one that bodes very well for more advanced retail services. Citibank is another dominant player in the credit card market, with more than one million credit card holders.

Mortgage lending is booming. Standard Chartered Bank reported that, between March and July of 2004, mortgage sales jumped 50 percent. But the big news came in October, when Malaysia’s first-ever Residential Mortgage Backed Securities (RMBS) were issued through Cagamas MBS Bhd. Domestic and international investors demonstrated ample appetite for the securities, leading the government to plan for additional RMBS issues in 2005. The RMBS securities make it easier and cheaper for Malaysians to own homes, which, in turn, will fuel mortgage financing. What is more, Ooi Sang Kuang, Chairman of Cagamas MBS, notes the positive impact on domestic bond market development: "Securitization of the government's staff housing loans also represents a new strategic initiative to broaden the domestic bond market with a new asset class, while creating a benchmark yield curve for long-term asset-backed securities bonds," he says.

Kuala Lumpur is on a fast track to becoming a global Islamic financial hub. Eight Islamic banks, including three foreign firms, operate in Malaysia, and, at the end of 2003, Islamic banks held nearly 10 percent of the banking system's total assets and deposits. Growth in Islamic banking services is stronger than expected. Some observers even believe that the goal of the ten-year Financial Sector Master Plan (which calls for Islamic banks to comprise at least 20 percent of banking assets by 2010) will be reached in advance of the target date. The Central Bank has awarded Islamic banking licenses to three foreign companies: Kuwait Financial House, Saudi Arabia's Al-Rajhi Banking and Investment Corporation, and a consortium led by Qatar Islamic Bank compete aggressively with Malaysian banks to offer innovative Islamic products and services. Central Bank Governor Zeti, a prominent supporter of the Islamic sector, has also indicated a yearning for the establishment of an Islamic universal bond market.

Liberalization of Islamic banking is encouraging more banks to offer new Sharia-compliant products for retail customers, and the response has been overwhelming. 'No interest' Sharia credit cards are gaining popularity. Customers of Bank Islam Malaysia can now pay their bills via SMS on a mobile phone. By the end of 2005, AmBank expects to double its Shariah-compliant credit card business to 200,000 cardholders. Another contender, Affin Discount Bank, says that its Islamic banking operations will boost revenue by more than 30 percent. Moreover, customers of Islamic banks are assured that their savings are secure, for Malaysia is the only country in the world to offer deposit insurance on Islamic bank accounts. The Central Bank, moving to ensure Shariah compliance in the country’s Islamic financial system, has appointed ten top Islamic scholars to the Shariah Council for Islamic Banking. On the strength of these innovations and protections, business in booming.

THE BOND MARKET: An Improving Performance

As part of the ten-year Capital Market Master Plan, Malaysia is deepening the local corporate bond market, reducing transaction costs, and bringing foreign players into the fold. The plan is working, as more Malaysian corporations turn to bond markets for their capital needs. For example, network operator Maxis Communications recently sold bonds worth $263 million, and, Arab-Malaysian Corporation Bhd is planning to sell five-year bonds totaling $120 million. Even the government is getting in on the action. The Ministry of Finance will issue long-term bonds with maturities up to 25 years.

To much fanfare, the Asian Development Bank launched its first-ever Malaysian ringgit bond offering in November of 2004. The $105 million issue, arranged by Citigroup and Malaysia’s AmMerchant Bank Bhd, was popular among Malaysian institutional investors, banks, insurance companies and pension funds; bids totaled $684 million, or 6.5 times the issue amount. The ADB ringgit bond marked Malaysia’s first issue by a foreign entity, and it was the first-ever supranational bond issue to be rated AAA by Fitch Ratings, Moody's Investors Service, and Standard & Poor's. The ringgit bonds are widely expected to improve liquidity in currency swap markets in the ASEAN region.

The Philippines: Taking on Financial Reforms

Financial reform is the name of the game in The Philippines. Over the last two years, the Central Bank has overseen a host of reform initiatives. In 2002, the Special Purpose Vehicle Act (SPV) was established, thus allowing special entities to buy non-performing loans and try to rehabilitate them. Banks are now being required to place securities with independent custodians for safekeeping, to avoid double sales of stocks and bonds.

President Gloria MACAPAGAL-ARROYO

Analysts believe this step will improve capital market integrity and enhance liquidity in secondary debt markets. A task force composed of the Bankers Association of the Philippines, the Central Bank, and the SEC is pushing for implementation of International Accounting Standards by June of 2006. The Central Bank recently proposed another important reform: new rules to tighten borrowing by bank directors, officers and shareholders. This move is designed to reduce corruption and enhance transparency in lending practices.

Due to the reform agenda, the Philippine financial system is steadily improving. Banks are shedding bad loans, and total assets held by private banks rose 10 percent in the first half of 2004. Net investments, the majority in government securities, increased 24 percent from a year ago. The top six Philippine banks saw a 12 percent improvement in cost efficiencies. The Central Bank is now moving forward to establish a central credit bureau, a prerequisite for the Basle 2 Capital Accord. Alberto Reyes, Deputy Governor of the Central Bank, predicts that this new central credit bureau will improve the assessment of risks and lessen costs to loan accounts.

Significant challenges, however, must be confronted if true progress is to be achieved for the financial industry. Personal saving rates are low, and debt markets are shallow. The burden of non-performing loans has squeezed profit margins for banks, thus contributing to muted lending practices. With more than 40 banks competing in the country, analysts believe that bank consolidations will strengthen the capital base. Banks appear to be over-reliant on government securities, which carry high interest rates but low international credit ratings. In the retail-banking sector, past-due credit card receivables are on the rise, a sign that collection activities and credit regulations are lax.

BANKING: A New Hope for SMEs and Retail Banking

According to a recent report by the Asian Development Bank, a weak Philippine banking system is starving companies of the credit they need to expand operations. Teresita Manguerra, President of the Cebu Federation of Rural Bankers Association, notes, "Those who have a little money don't want to borrow money anymore. They don't want to go into business because they don't want their properties to be mortgaged. They're not sure of the economy." This mentality could be changing, however, as banks recapitalize and offer more affordable financing to SMEs and other ventures. According to Central Bank statistics, lending to the manufacturing sector jumped 18 percent in the first nine months of 2004, accounting for one-quarter of the total loan portfolio for commercial banks. There is hope that interest rates will decline, credit reporting will improve, and commercial banks will resume lending to SMEs and businesses.

Retail banking is a fast-growing segment of the financial industry. East West Bank, for one, has posted strong growth, with traditional deposits growing to $250 million. East West attributed this growth to new retail products aimed at enhancing customer convenience, such as online banking. Elsewhere in the sector, technology is also making a clear difference. In November, United Coconut Planters Bank (UCPB) reported that the company's electronic transactions jumped 66 percent. UCPB Vice President Margarita Lopez says, "The jump indicates that the banks' clients have reached a higher degree of sophistication and are ready for more electronic banking offerings, which means we may see a marked change in the way banks provide financial services."

BONDS: A New Beginning for Philippine Debt Markets?

The Philippine bond market seems to be picking up steam, thanks to Central Bank reforms and an improving budget picture. Now that banks must transfer securities to an independent custodian, there is room to expand secondary debt markets. Yet, most Philippine banks continue to invest in high-yield government bonds. Analysts warn that over-reliance on government debt will have a ripple effect on the whole economy, a scenario more salient in light of the fact that Moody’s Investor Service has placed the Philippines’ long-term foreign and local currency ratings on review for a possible downgrade.

One of the few Philippine companies well received in international bond markets is Globe Telecom. In November, Globe issued $300 million in bond notes, which were listed on the Singapore stock exchange. The debt offering was Globe’s second of the year. CEO of Globe Telecom Gerardo Ablaza says, "The exceptional investor response is a testament to the high credit quality of Globe in international capital markets." Analysts say the transaction broke new ground in the Philippines: the bonds were five times more oversubscribed by investors, and they carried one of the lowest interest rates in the country. Other Philippine corporations are testing the temperature of the domestic bond market. First Metro Investment Corp., the investment-banking arm of the Metrobank Group, plans to issue $35 million in five-year notes. Analysts believe that companies like Metrobank will play fundamental roles in the establishment of deeper, corporate financial structures in the Philippines.

Singapore: At its Core

Singapore is the financial capital of Southeast Asia. Singaporean banks are among the most mature and highly capitalized in the region, and are able to offer significant global and regional reach. Some of the biggest names in finance rely on Singaporean financial expertise to tap emerging markets in ASEAN, India and China. The country also offers an efficient legal system, international accounting standards, transparency, efficient markets, and world-class infrastructure systems.For these reasons among others, investors are pouring capital into Singapore's bond and stock markets.

President Sellapan Rama NATHAN

New ties with other regional financial centers are breaking down investment barriers. The Kuala Lumpur and Singapore stock exchanges will establish a cross-trading platform by the end of 2005, for example, which analysts believe will attract considerable capital into Singapore. Top banking leaders are eager to extend their influence much further afield. David Connor, CEO of the Overseas-Chinese Banking Corporation (OCBC), states, "We are eager to make more investments in Malaysia. By 2007, we would love to double or even quadruple the size of our branch network." OCBC operates in 14 countries, with 110 offices worldwide. Other players are expanding financial ties with ASEAN members. United Overseas Bank (UOB) recently purchased Bank of Asia (Thailand), and state-owned Temasek Holdings has controlling stakes in Bank Danomon, Bank International Indonesia and the Indonesian Satellite Corporation.

The Singaporean banking industry is famous for opening doors. The Monetary Authority of Singapore (MAS) welcomes foreign banks into the local industry. The results are very inviting. In September of 2004, for example, the three largest foreign banks reported loan portfolio growth of 20 percent; together, these banks hold two-thirds of the consumer loan market. Global banking giant Citigroup considers Singapore to be the nerve center of its regional operations; the group operates a wholly owned subsidiary, Citibank Singapore Ltd. Britain’s HSBC boasts 10 branches and strategic alliances with 425 retail outlets in Singapore; the bank is opening three more branches in this year.

Banking and financial services are undergoing exciting changes. MAS lowered minimum capital adequacy ratios to 10 percent, but more capital must be set aside for higher-risk investments in non-financial companies. These moves will make Singapore’s banks more competitive, as well as strengthen the banking system. MAS also established a Financial Industry Disputes Resolution Center as an independent and affordable avenue for resolution of bank, insurance, and equity disputes.

Although Singapore’s financial industry appears to be performing well, some challenges remain. If Singapore is to become an Islamic finance hub, it must first catch up with Malaysia. Also, as markets elsewhere in Asia liberalize, some analysts are calling for Singaporean banks to consolidate. Such consolidation, some say, would better position these banks to compete in international capital markets and serve major corporate customers overseas. On the insurance front, Singapore has one of the highest mandatory professional indemnity insurance rates in Asia, to the detriment of smaller domestic mutual fund companies. Moreover, some observers have complained about a double standard in the law, since foreign mutual fund houses are exempted from this insurance requirement. These, and other, issues will be analyzed in our report.

RETAIL BANKING: Increasing Competition

While the fundamentals of retail banking are well established in Singapore, competition is heating up, driving banks to develop more products better suited to the specific customer needs. The government plays a key role in the regulation of retail banking. Rules are in place to determine who can qualify for loans and credit cards, and to what extent credit can be extended. For example, banks may lend money only to consumers with annual incomes of at least $18,000. While this rule limits eligibility for loans and credit cards (Citibank estimates there are only 750,000 credit-eligible Singaporeans), banking officials view the policy as a vital risk-management strategy. Fortunately, such rules have not deterred Singaporeans from carrying and using credit. Qualified consumers possess an average of three or four credit cards each, and these cards account for approximately 20 percent of consumer spending. Citibank, with 30 percent of the market share, enjoys a dominant presence in the credit card market. Serious competition, though, is coming from HSBC, which reported a 68 percent year-on-year increase in credit card issuance as of August 2004. Competition is fierce. Just five years ago, 25 different kinds of cards, both credit and debit, were available in Singapore. Today, consumers are able to choose from over 50 different types.

One of the most exciting areas is Internet banking. As local branches adopt sophisticated security measures, online banking is increasingly perceived as a safe and efficient way to handle transactions. Banks like OCBC – which offers Chinese-language online banking – report that the number of retail customers using online services has risen 24 percent. DBS Bank and Citibank have launched new and improved online services. DBS created Singapore's first SMS payment system, allowing customers to pay bills via SMS text messages. Citibank, meanwhile, offers a 'dynamic PIN-Pad', a one-of-a-kind innovation that rotates the number display randomly, making it more difficult for hackers to steal access codes. Citibank hopes that 80 percent of its Singaporean clientele will bank online in the near future, and DBS hopes to increase its internet-user base from 590,000 to 800,000 by end-2005. DBS's online transactions, worth $1.1 billion per month, is the most popular internet banking service in Singapore.

THE NEXT WAVE OF BANKING: Islamic Finance

Singapore is eager to become one of the largest Islamic financial hubs in the world. The government has announced a plan to establish an Islamic finance center. The overall goal is to attract foreign capital and position local banks to handle major international Islamic finance deals. Goh Chok Tong, Chairman of the MAS and a former prime minister, has clearly stated an intention to work and collaborate with Malaysia and Brunei. "It will help us to expand our reputation as a financial center, because we will also offer Islamic banking products."

Muslims comprise about 15 percent of Singapore's population, but analysts believe the real market lies outside the country. Nearby nations such as Malaysia, Indonesia and Brunei offer huge potential, as do markets in the Middle East. MAS sent a team to the Middle East to examine investor interest and gain international exposure for Singapore. Thanks to free trade agreements with several Arab states, analysts say the country will be well positioned to capture part of the estimated $1.1 trillion global Islamic finance industry.

Banks in Singapore are rushing to offer Islamic banking services. The Development Bank of Singapore operates Islamic investment trusts. OCBC offers Islamic banking services at 60 branch offices. HSBC is gearing up to offer a wide range of Sharia-compliant products, such as mortgages, credit cards and electronic zakat, or charity payments. The bank is negotiating vast Islamic business deals, which, according to HSBC officials, range in the“tens and hundreds of millions of dollars.

Yet, challenges loom ahead. Firstly, Singapore must distinguish itself from established Islamic financial hubs such as Kuala Lumpur, Jakarta, Jeddah, and Bahrain. Secondly, officials must establish a Sharia compliance board, so that investors can be sure that their money is being used properly. Thirdly, the country must spread the word that Islamic banking is not only for Middle Eastern and Islamic investors; it is also becoming popular among non-Muslim investors.

THE BOND MARKET: ASEAN'S Premier Bond Market

Asian countries hold two-thirds of an estimated $3 trillion in global foreign exchange reserves, and Asian bond offerings exceeded $26 billion in 2004. Analysts say this bodes well for development of an Asian bond market, and Singapore will no doubt play a prominent role. Eleven Asian central banks and monetary authorities recently launched the $2 billion Asian Bond Fund 2, which includes the Singapore-based Pan-Asian Bond Index Fund and eight country sub-funds. Commenting on this move, the Monetary Authority of Singapore stated: "Such regional initiatives complement our own bond market development efforts and add to the significant strides made in the growth of our domestic bond market and fixed income fund management activities." Singapore contributed more than $200 million to the initiative.

American companies are amongst the biggest movers and shakers in the Singaporean bond market. JP Morgan, Merrill Lynch and Citibank participated in some of the largest bond offerings. Citigroup, which moved 27 percent of all Singapore-dollar bonds in the first ten months of 2004, will include Singapore government securities in its widely followed World Government Bond Index. This marks a milestone; Singapore would be the first Asian country outside Japan to enter the index. MAS predicts that the listing will encourage more international participation in the Singapore dollar bond market, resulting in increased trading and better liquidity.

In the ASEAN region, Singapore is the premier place to buy and sell bonds. Brad Durham, Managing Director of Emerging Portfolio Fund Research, notes, "With downward pressure on U.S. bond yields, investors have been gravitating to higher yielding emerging market debts." ASEAN nations are net issuers of higher-yielding assets, and Singapore is the place where they are traded. Many bond and mutual fund managers perceive Singapore as a safe investment proxy for the ASEAN region. For example, Globe Telecom of the Philippines floated bonds worth $300 million on the Singapore exchange. The tactic worked. The bond was oversubscribed by five times, mostly from international institutional investors.

INSURANCE AND REINSURANCE: In the Move for Reassurance

Where would Singapore’s leading businesses be without insurance? Considering that Singapore imposes strict insurance requirements for businesses and professionals, the simple answer is: nowhere. Fund management firms must maintain professional indemnity insurance (PII) covering 3 percent of assets under management. Moreover, as Singapore and other Asian firms expand operations abroad, they will be more exposed to litigious societies such as the U.S. What is more, consumers in Asia are becoming more aware of their rights. Lawsuits against company directors and officers have increased from just nine between the years of 1975 and 1984, to 56 between 1995 and 2003. Companies must be more serious about protecting assets, so the market for corporate insurance, especially for liability, has grown significantly. Liability insurance in Singapore accounted for 7 percent of all non-life insurance premiums paid in 2003.

Foreign firms have taken note of the changing market environment. Axis Capital Holdings Ltd of Bermuda, a specialty insurer, will open a Singapore office once approval is obtained from MAS. Other new entries will include Groupama, a French mutual insurance group; the company will offer transport and marine insurance. These moves bolster a Singaporean ambition: to grasp a larger share of the $14 billion marine insurance market.

Observers also consider Singapore to be one of Asia’s foremost reinsurance centers, due to scrupulous regulations and the number of markets it serves. The biennial Singapore International Reinsurance Conference, first held in 1991, is an important event on the regional reinsurance calendar and serves to market Singapore’s status as a major reinsurance provider for countries like Japan, South Korea, and India. To date, nine of the world’s top ten reinsurance providers operate in Singapore, along with seven of the top ten reinsurance intermediaries. In total, there are 29 reinsurers in Singapore. Mergers, acquisitions, and restructuring activities have contributed to the sector’s consolidation in recent years.

Thailand: Moving Towards Revitalisation

The Thai financial services industry is in the midst of a momentous transformation to meet the demands and expectations of modern investors. A series of legislative reforms are underway to strengthen the overall health of the financial industry and upgrade the banking system to international standards. The Bank of Thailand (BOT) is implementing the IMF and World Bank’s Financial Sector Assessment Program; completion is expected in 2007. Steps are being taken to encourage corporate consolidation; for example, foreign

Prime Minister THAKSIN Chinnawat

Thai banks are implementing strategies to improve risk management. Loan loss provisions are being raised to track the overall risk environment more accurately. According to the BOT, the amount of outstanding credit in the financial sector has expanded by nearly 10 percent this year. But, unlike the situation in 1997, loan quality has improved, and the percentage of non-performing loans (NPLs) has declined to 10 percent. Moreover, thanks to strong economic growth and financial sector reforms, analysts estimate that the NPL load could drop to two percent by the end of this year. Thailand's overall investment image was boosted recently when Standard an& Poor's maintained its BB+ rating and stable outlook on the banking sector.

But significant challenges remain. The Stock Exchange of Thailand faces stiff competition from other exchanges in the region. Capital levels are comparatively weak as well. Saving has not kept pace with lending. Loans have grown 9.6 percent, but the deposit base, according to the BOT, has edged up only 3.3 percent. Some observers warn that a household debt bubble might be forming. Other analysts, however, are confident that precautions have been taken, and that the financial market expansion is solidly based on strong fundamentals.

BANKING: Retail and Corporate Banking Lead the Way

Retail banking is showing clear signs of being the next wave of growth for the financial sector. According to the BOT, consumer loans in the first nine months of 2004 were the third fastest-growing segment of retail banking. Household income is rising, employment is growing and exports to China, the U.S. and Europe are booming. This rosy economic picture is spurring consumer spending and mortgage lending, which, in turn, is generating lucrative opportunities for retail bankers. BOT reforms require many Thai banks to offer retail services by next year, or else they must merge with banks that offer retail banking. The BOT’s Risk Supervision and Analysis Department (RSAD), strongly committed to raising competitive levels, has set a ceiling on customer fees. Samart Buranawatnachoke, Senior Director of the RSAD, believes that the move will help customers compare the costs charged by each bank properly.

Banks not previously involved in retail services are getting in on the action. Executive Chairman of Siam Commercial Bank Vichit Suraphongchai predicts that private banking will emerge as one of seven key engines of growth at his bank. Another bank, BankThai, projects a 100 percent surge in net profits after it enters retail banking next year. To be sure, the demands of retail banking will require additional investments, especially in technology, but payback seems positive. To satisfy increasingly tech-savvy Thai consumers, Bangkok Bank launched an online banking site called Bualuang iBanking; it promptly saw the value of its online transactions double and its client base swell by 218 percent.

Lending to small- and medium-sized enterprise (SMEs) is growing too. According to government statistics, industrial capacity utilization has risen to 70 percent. Busy SMEs and other businesses, driven by the need to expand production facilities, are fueling demand for corporate loans. Kasikornbank, for one, reports that SME lending has expanded by 14 percent, on the strength of promotional strategies, such as offering business development seminars throughout the country. The seminars provide SME owners with strategic advice about how to expand their businesses prudently. In 2005, Kasikornbank expects that loans to SMEs will rise 15 percent and reach $1.7 billion.

INSURANCE: Reaching Out to the Rest of the World

The orientation of the Thai insurance industry is changing. Finance Minister Somkid Jatusripitak has asserted that Thailand is ready to establish a regional insurance business network to access capital sources elsewhere in Asia. Meanwhile, insurance companies from the U.S., Japan, and the EU are entering the Thai market, and demand for banking reassurance is rising rapidly. The Central Pension Fund will buy shares in Prudential’s TS Life Insurance, allowing it to provide more products and options for pensioners. Such a move clearly signals Thailand’s willingness to open the financial sector to foreign players. The CPF-TS alliance will also enable Prudential to reach 1.3 million new customers in one of ASEAN’s most dynamic markets.

The insurance industry demonstrates remarkable vitality. Bangkok Insurance, an affiliate of Bangkok Bank, reported that premiums rose 12 percent on average over the past three years. The company is now Thailand’s third-largest non-life insurer. Other insurers are taking advantage of this economic expansion through recapitalization. For example, Thanasin Insurance will raise its registered capital by 14 percent.