Singapore Banking System
Challenges and structural changes facing Singapore banks
It was in the 1980s when Singapore became a global financial centre, housing several famous and large financial institutions worldwide. What makes Singapore a viable place for branching out are its geography that provides time-zone advantage, strict regulations and framework, strong domestic economy, pro-business environment, good infrastructure and skilled labour force. As such, Singapore is an economy with no domestic natural resources that have to look outward to survive hence the internationalisation of the banking system. Nevertheless, such internationalisation strategy of the banking system is amped with several structural issues and challenges. These challenges and structural changes facing Singapore banks will be discussed in this essay.
First amongst these structural challenges is the extent of government participation in the banking system. Singapore still maintains efficient government participation through two banking arms namely Development Bank of Singapore (DBS) and Post Office Savings Bank (POSB). Singaporean government aims to pioneer new changes in banking practice and promote efficiency and productivity in the banking system. The goal is to mobilise funds from the public, which could explain computerisation, longer banking hours, branching out in established department stores and sophisticated savings and payment facilities. Seemed contradictory is the degree of foreign banks participation that shapes Singapore banking policies and leading to domestic banks unable to compete with foreign banks.
Singapore’s financial sector has a high level of foreign participation whereby foreign financial institutions play a very important role in Singapore not only in the offshore banking but also in domestic banking. This is especially true when it comes to enhancing the techniques of bank management, international connection and inducement of foreign industrialists to invest into Singapore. As such, for the purpose of protecting the domestic industry and avoiding being over-banked in the very small domestic market, the Singapore government has imposed various restrictions such as entry restriction and operations restriction on foreign financial institution.
Second challenge encompasses the mega-merger program initiated by the Monetary Authority of Singapore (MAS) intended for locally incorporated Singapore commercial banks with the aim of strengthening the banking sector to face future challenges. Scale efficiency which could jeopardise the going forward policy in return are the primary reasons behind such initiative. Although Singaporean banks had weathered the financial crisis of 1997-1998, it had created a strong incentive for banks to merge so that larger institutions could be created to cope with international competition. The consolidation of local banks, and restructuring of non-core business banking businesses, leads to integrating domestic financial institutions into two super banks. This was seen to be critical in weathering vulnerabilities to external shocks and financial contagion.
To remain competitive also, Singapore has recognised the need to deregulate closed sectors and to shift into a knowledge-based economy. Thirdly, such paradigm shift to the knowledge-based economy has several implications for the banking sector as new technologies fuel the transformation into a global economy. Singapore banks are then required to strengthen their information technology (IT) capabilities. Because human and intellectual capitals are the key competitive factors in a knowledge-based economy, Singapore commercial banks are also necessitated to encourage greater innovation and continue retraining and reskilling the workforce and also in investing in foreign talent for modern skill intensive positions. One of the core functions in a financial sector under a knowledge-based economy is risk-focused supervision. Corporate governance of commercial banks enhances greater transparency through the process although this also requires the institution to incorporate new roles in the organizational structure such as risk managers.
Focusing on effective risk management, Singapore banks are obliged to address its risks while also adhering into the books for control deficiencies. Evaluating risks profiles of banking institutions and the potential impact these risks would have on Singapore’s financial system, economy and reputation are also critical for individual banks to comply into. Prudential surveillance and other stability issues are important for banking institutions to deal with.
In sum, three of the structural changes in Singapore banking industry are: government participation, foreign participation that undermines domestic bankers and merger initiatives of weaker banking institutions.
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