Executive Summary
Financial services in the financial sector are banking and finance, insurance and reinsurance, capital markets and financial technology. These financial services have played a significant role in Singapore being a global financial hub and driving its economic growth. The deposit and lending services offered by banks in Singapore have contributed to economic growth by enabling businesses to invest and create jobs. On the other hand, capital market services have impacted economic growth in Singapore through services such as initial public offerings raising enough capital useful in company expansion and the development of new projects. In addition, the insurance and reinsurance services have enhanced risk management by covering individuals and businesses from risks, encouraging entrepreneurship and business activities. Lastly, the financial sector in Singapore is made of financial technology services offering digital financial solutions such as digital payments and Robo-advisory services, contributing to the country’s competitiveness in the global market.
Introduction
Mills & Newberry (2005) consider the financial sector important as it connects businesses, individuals, and governments and shapes the foundation in which the economy thrives. In other words, the financial sector is a sector in an economy made up of firms and institutions that provide financial services to both retail and commercial customers (Mills & Newberry, 2005). Demirguc-Kunt, (2008) states that the financial sector is made up of insurance companies, regulatory agencies, banks, stock exchanges and investment firms. Demirguc-Kunt, (2008) further states that these institutions ensure efficient allocation of resources, efficient flow of capital, manage risks and provide financial services. In addition, Green et al. (2005) state that the financial sector acts as a catalyst for economic activity through which resources from individuals with a surplus are channelled to facilitate investment and to those in need of capital and innovation. To further grasp the enchanting realm of the financial sector, this essay has chosen Singapore for analysis. This essay will analyze Singapore’s financial sector in detail by overviewing its history and the available financial services it offers.
Singapore’s financial background
The origin of Singapore as a financial centre is traced back to the colonial period when Sir Stamford Raffles established the British East India Company trading post in 1819 (Chow & Pei, 2019). The establishment of the trading post in Singapore was due to its strategic geographical location (Kerimbek et al., 2019). During this period, the country offered financial services such as trade financing and money-changing to boost commerce in the region (Hew, 2005). However, Fama (1980) states that the country’s growth as a financial centre took off in the early 1960s with a more systematic approach when it acquired independence (Kerimbek et al., 2019). After its independence, Chow & Pei (2019) state that Singapore’s government saw financial services as a key driver to economic growth by implementing a series of policies. One key policy established was the Asian Dollar Market in 1968 which bridged the gap between the opening and closing of American and European markets (Hew, 2005). According to Ngiam (2003), the Asian Dollar Market policy would later lay the foundation for banking and finance in Singapore with the establishment of the Asian Currency Unit to allow the effective participation of foreign financial institutions and banks in Singapore.
Besides, Hamilton-Hart (2000) states that in the 1970s, the Monetary Authority of Singapore Act was enacted, enhancing the development of the Stock Exchange of Singapore and Capital Markets. With the need to unify securities trading, the Singapore International Monetary Exchange and the Stock Exchange of Singapore were merged into Singapore Exchange. Further advancements in the 1990s were experienced in Singapore’s financial sector when the establishment of fund management companies was passed into law (Ngiam, 2003). With the emergence of technological advancement in the form of financial technology in the 21st century forced Singapore to refine its financial sector leading to an exponential growth of private banks and the wealth management sector (Wilson, 2015). As of today, Singapore is regarded as one of the leading financial centres in the world due to its innovation-driven approach and appropriate regulatory environment. The country’s financial sector has attracted a large number of multinational insurance companies, banks and Fintech startups.
Financial Services in Singapore
There are a variety of financial services offered in Singapore, and they play a significant role in the economy, accounting for 14% of the country’s GDP (Statista, 2023). These financial services include banking and finance, insurance and reinsurance, capital markets financial technology (Fintech), Wealth Management and Islamic Finance.
Banking and Finance
Singapore is considered a major banking hub with about 430 billion USD in assets as of 2021, a 15% increase from the previous year (Statista, 2023a). Singapore hosts a total of 130 commercial banks, of which 121 are foreign banks and the rest are local. Of these foreign banks, 37 are offshore banks, 55 are wholesale banks, and 29 are full banks (Lam, 2022). In addition, the three largest local banks in Singapore are ranked among the most valuable and strongest banks in the world. In as much as these banks are more valuable in the financial market, they have contributed significantly to Singapore’s economy by providing essential services such as deposit-taking and lending, trade finance and wealth management that support individuals and businesses and facilitate economic activities. Firstly, these banks take deposits from businesses and individuals by providing a money storage environment that is secure and safe (Tan, 2005). The deposited money is then utilized by banks for investments, lending and educational purposes. In the case of Singapore, the country’s banking system had a deposit of 1,320 billion USD and total loans of 947 billion USD in 2023 (Statista, 2023a). The total loans processed by banks in Singapore contributed to overall economic growth and development as the loans allowed businesses to invest and finance their new projects and create jobs.
Apart from deposit and lending services, banks in Singapore provide trade services which are fundamental to the country as it heavily relies on international trade. These banks ensure trade transactions are efficient by providing guarantees, letters of credit and financing solutions to exporters and importers (Makaridze, 2021). These trading services reduce cross-border risks and ensure there are efficient and smooth trade flows bolstering the country’s trade volume. In support of this, approximately 798 billion USD of goods were traded and transacted in Singapore by banks strengthening the country’s position as a trading hub (Lam, 2022). In addition, the banking service in Singapore contributes to the economy through its wealth management services made up of asset management and private banking. These services attract high-net-worth individuals searching for efficient financial solutions in Singapore (Banna et al., 2019). Not only do wealth management services contribute to the economy through fees but also through foreign direct investments. It is approximated around 3 trillion USD is managed by the wealth management industry in Singapore, which has created jobs and enhanced the country’s reputation in international financial markets.
Capital Markets
The second most important financial service that has strengthened Singapore’s position as a major financial hub is its liquid capital markets (Chen, 2020). Capital markets are financial systems that aid in capital raising and facilitating liquidity and investment by dealing in bonds, shares and other long-term investments (Chen, 2020). A primary platform used by companies in Singapore to list and trade their bonds and stocks is the Singapore Exchange. The number of listings on the Singapore Exchange is 776, and have a market capitalization of 7.34 billion USD as of 2021. The platform offers a variety of services that impact the economy positively (Jie, 2017). Jie (2017) states that the services offered are initial public offering, equity and debt trading, and derivatives trading. The initial public offering has been a major service in Singapore Exchange as it has drawn attention as a preferred destination for initial public offerings in Asia (Lu, 2022). The Singapore Exchange recorded 15 initial public offerings in 2022 compared to 13 in 2021, indicating an increased interest by companies in raising capital through Singapore Exchange (Verma & Bansal, 2021). It is estimated about 40% of listing on the Singapore Exchange is owned by foreign companies (Jie, 2017). Besides, the increase in initial public offerings in Singapore Exchange contributes to economic growth by enabling companies to invest in new projects and expand their operations.
In addition, trading equities and bonds in the Singapore Exchange has made the markets more liquid and enhanced the efficient allocation of capital by investors (Bandura & Ramanujam, 2019). The liquidity of the financial markets facilitates the reduction of transaction costs, attracting more participants, such as foreign investors and Institutional investors, leading to the advancement of the financial sector in Singapore. Moreover, the capital markets in Singapore entail a derivatives market where options and futures are traded (Lu,2022). The derivative market in Singapore is regarded as one of the largest in Asia, with a daily average of one million contracts. This market is significant to Singapore’s economy as it aids in mitigating risks associated with foreign exchange rates, interest rates and price fluctuations by enabling investors to hedge their exposure to market risks (Bandura & Ramanujam, 2019). By effectively managing risks through derivatives, stability in the market is enhanced, and uncertainty is reduced, leading to businesses making appropriate investments that impact economic growth positively (Menon, 2020).
Aside from derivatives, Singapore has also emerged as a key location for foreign currency exchange (Suryanto et al., 2023). It is one of the largest foreign exchange centres in the Asia region and ranks third worldwide behind New York and London (Arjoon et al., 2020). As of 2016, Singapore averaged a daily trading volume of $705 billion, with its share of global foreign exchange rising to 8% (Suryanto et al., 2023). Such improvements in the foreign exchange market in Singapore have contributed significantly to the development of the financial sector by providing a range of services, such as hedging solutions and currency conversions (Arjoon et al., 2020). Besides, foreign currency exchange in Singapore has created jobs through the presence of bankers and Forex brokers contributing to economic growth.
Insurance and Reinsurance
Singapore’s insurance sector started off offering domestic business needs and, with the adoption of the Monetary Authority of Singapore in 2000, liberated the industry to accommodate offshore insurance and reinsurance business activities (IFC Review, 2023). Since then, Singapore has grown to become a top insurance and reinsurance regional hub totalling 3.6 billion USD in insurance premiums in 2015 (IFC Review, 2023). Besides, Andreeva (2021) believes that insurance premiums have grown by 40%, attributed to the ageing population, continued economic performances and increased cases of natural catastrophes. Additionally, Singapore’s insurance sector is made up of 127 licensed insurers and reinsurers and 83 captive insurers (IFC Review, 2023). Apart from the large market size of 210 insurers and reinsurers, the insurance sector has diversified into life insurance, general insurance, reinsurance and captive insurance (Andreeva, 2021). Much of these insurances contribute to economic growth significantly (Chen, 2022). The insurance and reinsurance services ensure businesses and individuals are covered from various risks, which encourages economic activity, entrepreneurship and capital management.
Financial Technology (Fintech)
Another essential financial service offered in Singapore is financial technology. The adoption of financial technology in Singapore has grown significantly through the 2000s due to the government implementing their Smart Nation initiative to enhance startup growth and introduce digital and advanced ICT technologies in the economy (Fan, 2018). As of today, Singapore accounts for 67% adoption of financial technology compared to a global average of 65%. In support of this, numerous financial technology solutions offered in Singapore are Robo-advisory services and digital payments (Anita, 2022). The digital payment services offered in Singapore by Fintech startups have gained significant popularity among the population (Anita, 2022). One of these Fintech players is GrabPay, with over four million users and 75% using it on a daily basis (Anita, 2022). Anita (2022) states that the GrabPay application allows users to access various virtual methods such as PayPal and others. Not only do the digital Fintech players make financial transactions efficient, but they also contribute to economic growth by supporting e-commerce growth (Singh & Kumar, 2020).
Also, the advancement of Fintech has enabled Singapore to adopt Robo-advisory services. The Fintech platforms such as StashAway have made it easier for individuals to make investments. These applications evaluate an individual’s risk profile and use it to personalize their investment strategies (Tech in Asia, 2022). Due to these services being easily accessible and cost-effective, it has attracted a large pool of retail investors. In support of this, 740 million USD of assets were under StashAway management in Singapore. In as much as these financial technologies (Fintech) are revolutionizing the financial sector through improved investment advisory and digital payments, they have also attracted large amounts of investments (Tech in Asia, 2022). Tech in Asia (2022) posits that Singapore raised a three-year high of Fintech funding of 4.1 USD across 250 deals, showcasing the growth potential of the financial sector in 2022. As a result, job creation and innovation were enhanced, contributing to the economic growth of Singapore.
Conclusion
In conclusion, Singapore has established itself as a progressive financial centre that serves both the Asia region and its domestic economy. As a global financial hub, Singapore is home to over 1200 financial institutions offering a variety of services across diverse asset classes. These services include banking and finance, insurance and reinsurance, capital markets, and financial technology and contribute significantly to economic development and growth. While it is difficult to identify the financial services that contribute the most to the economy, it is best to note that all of these services have impacted the economy significantly. The banking and finance service contributes significantly to the economy and is made up of international and domestic banks to facilitate smooth transactions, depositing and lending. The banks assist in depositing and lending of funds that are essential in business operations and key to economic growth. In addition, capital markets services, including foreign exchange, initial public offerings and equity and debt trading, have boosted liquidity in the market and fostered effective allocation of capital in the market. On the other hand, insurance and reinsurance services have assisted businesses and organizations in mitigating risks and encouraging business activities. Lastly, the financial landscape in Singapore has transformed due to an increased focus on innovation and financial technology.
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