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How S’pore can stay ahead as a financial hub

In a recent global ranking of financial centres, Singapore was placed fourth, trailing only London, New York, and Hong Kong.

In a recent global ranking of financial centres, Singapore was placed fourth, trailing only London, New York, and Hong Kong.

The Global Financial Centres Index (GFCI) 18, which measures and ranks competitiveness among the world’s financial centres, also saw Tokyo retain its fifth spot and Seoul move up to sixth. This means four of the world’s six top financial centres are now located in Asia.

Other major Asian financial centres such as Shanghai, Shenzhen, Busan and Taipei saw marked improvements in their rankings. The rising fortunes of Asia’s financial centres reflect the region’s growing economic strength and its rapid financialisation.

Beginning with the emergence of the four “Asian Tigers” of Hong Kong, Singapore, South Korea and Taiwan, which culminated in the meteoric rise of China, the rapid growth and rising sophistication of Asia’s economy has stimulated a growing demand for financial services and investments.

The development of regional financial frameworks such as the Chiang Mai Initiative and the Asian Infrastructure Investment Bank further serves to iterate the point that Asia is truly emerging as a financial powerhouse in its own right.

However, a consequence of all this is greater competition among financial centres in Asia. While Singapore has leveraged on traditional strengths such as its strategic location, strong rule of law and highly skilled workforce to achieve its current position, other financial centres are now seeking to emulate these factors.

To stay in the top spot, Singapore will require greater attention to two drivers of future financial success: Financial technology (“FinTech”) and financial governance (“FinGov”).

 

FINTECH HERE STILL NASCENT

 

The first driver is technology. With financial products becoming increasingly complex and financial markets more volatile, banks and financial institutions have increasingly turned to technological innovations to manage such financial complexity. These include electronic and digital banking, machine trading, and data analytics.

While technology helps, it also introduces challenges such as cybersecurity threats, privacy protection concerns and fraud. Furthermore, real-time and machine trading have led to an unprecedented level of complexity and potential instability in financial markets.

Financial technology, or FinTech, in Singapore is still at a relatively nascent stage, but it has the potential to grow. As participants at a recent Sim Kee Boon Institute for Financial Economics conference noted, Singapore is well-positioned to develop FinTech capabilities as it already has a vibrant ecosystem of banks, technology companies and research organisations.

This ecosystem represents a stock of “knowledge capital” that, through the use of FinTech, can enable financial sector innovation and development. It also promises to help financial institutions and regulators deal with financial complexities through the use of tools such as data analytics.

But for this ecosystem to develop, policymakers will need to ensure that technopreneurs and researchers find the space to grow and innovate. This may entail providing incentives to attract technology companies to Singapore or tailoring regulations to take into account the diversity and dynamism involved in FinTech, as compared with traditional financial firms.

 

INNOVATIONS IN FINGOV

 

Aside from technology, a second crucial driver of a financial centre’s success is a new form of financial governance that is more coordinated and integrated with other aspects of city governance. Let us call this FinGov.

In ranking the world’s financial centres, the GFCI grants strong weightage to governance-related indicators such as rule of law, regulatory stability, transparency of tax regime, reliability of urban and ICT (information and communications technology) infrastructure, and security. These indicators suggest that at the heart of a successful financial centre is a safe, vibrant and efficiently run city.

Singapore has consistently scored well on these variables. However, these advantages may prove transient, as other financial centres are also looking to emulate and develop them. For instance, Shanghai is seeking to enhance its legal-regulatory infrastructure to improve investor confidence.

As is the case with financial technology, Singapore will need to introduce greater sophistication into its financial governance to keep ahead of the competition and deal with increasingly complex financial markets.

It is already beginning to move in this direction. For instance, the recent reshuffle of the Cabinet has yielded two important changes that will prove crucial to Singapore’s development as a financial sector.

First, Mr Heng Swee Keat was appointed Minister for Finance. As a former Monetary Authority of Singapore managing director who had overseen Singapore’s swift recovery from the 2008 global financial crisis, Mr Heng brings with him a wealth of experience in financial governance and strong technical knowledge of the workings of financial markets.

Second, but by no means any less significant, Singapore’s former Finance Minister Tharman Shanmugaratnam will take on the role of Coordinating Minister for Economic and Social Policies while retaining his appointment as Deputy Prime Minister. This provides Mr Tharman with centralised oversight of Singapore’s economic and financial development.

The introduction of this Coordinating Minister role represents an important innovation in FinGov. By introducing centralised coordination, it boosts the Government’s capacity to address complex policy issues that cut across traditional functional areas.

In light of the increasingly intertwined nature of finance and the real economy, Mr Tharman’s oversight over other aspects of economic policy also ensures that FinGov is integrated into Singapore’s overall economic governance. This contributes to greater economic stability.

 

MERGING FINTECH, FINGOV

 

In several speeches delivered earlier this year, MAS managing director Ravi Menon had called for Singapore’s development as a “smart financial centre” that is governed through “smart regulation”. At the heart of this “smart regulation” is a merging of FinTech and FinGov.

This emphasis on technological and governance innovation will provide Singapore with a unique comparative advantage.

Rather than compete with other financial centres on the basis of market size, Singapore should seek to find a niche for itself as a hub for financial innovation within a growing network of Asian financial centres. This will ensure our survival and, at the same time, contribute immensely to regional financial development.

 

ABOUT THE AUTHOR:

Woo Jun Jie is an Assistant Professor in the Public Policy and Global Affairs Programme of the School of Humanities and Social Sciences, Nanyang Technological University.

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