Today, Singapore ranks as one of the world’s largest financial centers. The city’s financial industry is underpinned by its role as a center for foreign exchange trading and foreign currency lending. It developed this role not so much organically or spontaneously but as a result of planning. Still, this doesn’t tell the whole story. A country cannot simply transform any city into a financial center by legislative consensus or executive decree. Singapore benefited from a myriad of good fundamentals as well.
Singapore was established as a trading post of the British East India Company by Stamford Raffles in 1819. The location was sensible; the island of Singapura, as it is known in Malay, was well placed on the Straits of Malacca. From a post of the East India Company, the city became part of the British Straits Settlements, administered from India, in 1826 before Straits Settlements become its own crown colony in 1867. Under British administration, the city was a vital entrepôt, a waypoint in global shipping. Ties to London allowed the city to deploy foreign capital for use in trade.
A trading city is easier to transform into a financial center because trade itself creates demands for financial services ranging from merchant banking to currency exchange to insurance. Among the other attributes Singapore gained in its colonial era that would prove useful in finance were English common law, the English language, and links to London that were neither too close nor too far.
Besides Singapore, many other modern financial centers outside Europe, from the Cayman Islands to Hong Kong, were former British colonies. They, like Singapore, were close enough to Britain to inherit good legal practices but not so close that their financial business was controlled from London. In any case, whatever the promising potential of Singapore in the 19th and early 20th centuries, it only developed into a global financial center after its independence. Even in the early 1960s, the future which Singapore achieved still looked farfetched.
In 1963, Singapore joined the independent Federation of Malaysia but unrest caused Singapore to be expelled from Malaysia in 1965. The country was now independent. Initial turmoil subsided and Singapore would hereafter benefit from its renowned political stability. Partly given the diversity of Singapore, the city-state adopted a neutral diplomatic stance, becoming a Switzerland of Asia. In time, banks from both capitalist and communist countries would be found in Singapore.
Singapore’s pro-free-enterprise government was led by Prime Minister Lee Kuan Yew. However free-market oriented though, the city still deliberately developed policies to favor certain industries that could support the nation’s prosperity. Indeed, compared to other cities, Singapore’s rise as a financial center was to a large extent a planned rather than an organic development. Singapore did not have a centuries-long history as a financial center nor was it the capital or largest city of a larger country.
A new economy had to be built now that links to Malaysia were lost. The city-state, on account of its size and limited resources, also had little capacity for agriculture or industry. The government identified trade and finance as a potential driver of growth. Finance was envisioned as more than just as a stimulant to other industries but as a growth driver in and of itself. The domestic banking sector benefited from protectionist policies for about thirty years starting with independence. If the colonial era gave Singapore good potential as a financial center, independence gave the country flexibility that other cities, like Hong Kong, still controlled by Britain, did not have.
After independence, Singapore had left most of its reserves in sterling-denominated assets but declining confidence in the pound caused the country to switch to the U.S. dollar. Singapore adopted a currency board, meaning that each Singapore dollar was backed by an equivalent value in foreign currency, and this largely meant U.S. dollars. Domestic firms were also encouraged to hold dollars. A stable currency and freedom to move capital in and out of the country allowed Singapore to gain the confidence of banks and investors around the world.
Central to Singapore’s development as a financial center is the Eurodollar market, the market for U.S. dollars outside the United States. Foreign banks introduced a Eurodollar market to Singapore from their experience in London, the center of such market in Europe. Asia’s Eurodollar market, also known as the Asian Dollar Market, became the market for U.S. dollars in Asia and it was centered in Singapore. The city deliberately sought to be a financial center by marshalling U.S. dollars in Asia.
Expatriate Chinese merchants had large holdings of dollars and dollars flowed to Asia with spending on the ongoing Vietnam War. These were eventually augmented with savings from other Indo-Pacific countries and eventually even the larger world. As a result, borrowers in countries like South Korea and Australia raised money in Singapore. Asian Dollar Market bond issuance rose from a single issuance of USD 10 million in 1971 to twenty-two issuances of USD 1.2 billion in 1981.
In developing this market, Singapore relied on the expertise and roles of foreigners in the city. J. D. van Oenen and Albert Winsemius, a banker and an economist respectively, were instrumental in turning Singapore into a haven for U.S. dollar deposits in the late 1960s and 1970s. The pair believed that Singapore’s time zone was conducive to conducting business since it could bridge the gap between the end of the American business day and the start of Europe’s day. The former, a banker at Bank of America, got permission to raise dollar deposits in Singapore and these operations began in 1968. By the end of 1969, several banks from all over the world had such licenses.
The Monetary Authority of Singapore, created in 1971, together with the government, implemented measures favorable to foreign capital looking for a home and limited regulation. The country abolished stamp duties on financial instruments as well as a 10% withholding tax on interest from nonresident foreign deposits. Hong Kong by contrast had an interest withholding tax on foreign currency deposits in the city, preventing its use as a hub for Eurodollar financing. Bank secrecy was enhanced with the introduction of numbered accounts in 1970. There were no foreign exchange controls on Eurodollars in Singapore and when all foreign exchange restrictions were lifted in 1978, Singapore became a center for foreign currency transactions.
Policies towards the admission of foreign banks into Singapore were liberalized in 1970 and more foreign banks were attracted to the city. The number of foreign banking firms in Singapore was 98 in 1972, most of which were from Malaysia, the United Kingdom, Hong Kong, and the United States. In the early 1970s, the number of foreign bankers in the city likewise grew. Singapore had become an international financial center within twenty years of achieving independence.
Other countries began to deregulate their financial sectors, creating more intense competition in the 1980s. Singapore in turn removed its own protections for its domestic banking sector. This was bound to become a necessity under the free trade agreements it was pursuing and, in any case, the industry had come a long way already. A 1985 ‘Economic Review Committee’ identified seven new areas of growth for Singapore’s financial sector; capital markets were just one; the others included fund management and reinsurance. Besides finance but still relevant, the country developed good infrastructure, in transit and communications most notably, and a broad set of free trade agreements with other countries.
For long stretches of time, like the early-to-mid 1990s, the financial sector was growing much faster than the rate of the overall economy. By 2013, banks in Singapore held USD 2 trillion in assets. These were held by five local banks and 121 foreign ones. There were also 628 registered and licensed fund managers in Singapore by 2015 along with 182 licensed insurers.
Over USD 120 billion in debt issuance in different currencies were conducted in Singapore. The city was now home to over USD 500 billion in average daily foreign currency trading volume, as compared to USD 139 billion in 1998, USD 81 billion in 1992, and just USD 12 billion in 1985. Singapore had also become a large offshore trading center in Chinese Renminbi. As in peer cities, the financial services sector makes a large economic contribution to the country, justifying the project to make Singapore into a financial center in the first place. The city has been recently ranked as the third largest financial center in the world after New York and London.
The case of Singapore highlights the factors relevant, maybe even crucial, to developing a financial center in a given city. They are commerce, law, language, regulation, taxes, talent, infrastructure, and accessibility. Prime Minister Lee Hsien Loong described some of these as the source of Singapore’s comparative advantage over other cities but they all had a role. Singapore developed some strengths in these areas before independence but most of them since. Still, it isn’t so simple; many cities struggle to replicate this.
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1. Battilossi, Stefano, et al. “Chapter 12 – The Asian Dollar Market.” Handbook of the History of Money and Currency, Springer, Singapore, 2020, pp. 315–333.
2. Jie, Woo Jun. “Singapore’s Transformation into a Global Financial Hub.” Lee Kuan Yew School of Public Policy at the National University of Singapore, 2017.
3. Jin, Ngiam Kee. “Singapore as a Financial Center: New Developments, Challenges, and Prospects.” Financial Deregulation and Integration in East Asia, vol. 5, Jan. 1996, pp. 359–386.
4. Wang, Jiangyu. “The Rise of Singapore as International Financial Centre: Political Will, Industrial Policy, and Rule of Law.” Finance, Rule of Law and Development in Asia, 2016, pp. 3–17.