DBS Group, Southeast Asia's largest lender, is shrinking its Singapore-based Islamic unit in yet another sign that the city-state's efforts to promote sharia banking is struggling.

Islamic Bank of Asia (IB Asia), in which DBS has a just over 50 per cent stake, has transferred 10 of its 65 staff to DBS and redeployed others to new roles within the Islamic bank, a spokeswoman said.

"IB Asia will continue to focus on wholesale banking but prioritise its business focus on fee-based investment banking business activities and in private equity," she added in response to queries from Reuters.

"We remain committed to growing our Islamic banking franchise in this region."

IBA, Singapore's only wholly-owned full licensed Islamic bank, suffered a loss of $77.1 million in 2009 after making specific allowances on debt owned by customers in the Gulf region. The bank had $725 million in assets as at end-2009, including $453 million in payments due from non-bank customers.

A source had earlier told Reuters the Islamic unit of DBS planned to get out of the lending business entirely. The bank has also not replaced departing staff, including former CEO Vince Cook who left in December.

Islamic finance has been slow to take off in Singapore despite the central bank's support and the city state's reputation as an Asian banking hub.

Sukuk sales have been sporadic and there has been little interest from retail investors and sharia-compliant funds.

A thriving Islamic finance industry would complement Singapore's position as a regional banking centre and enable it to tap cash-rich Gulf investors who can only invest in sharia-compliant assets.

But practitioners see little growth in Singapore's Islamic finance industry in the coming years.

"Islamic finance will take off in Singapore but it's going to be quite slow," said Haszeri Hussin, Islamic treasury head at the Malaysian unit of Singapore's No. 2 lender Oversea-Chinese Banking Corp.

"Singapore must encourage more issuance of sukuk. The MAS (Monetary Authority of Singapore) must be able to issue more, then they can create a lot of liabilities to match assets.

Retail doesn't have the critical mass to make it a big presence in Singapore."

Kuwait Finance House Singapore, which was set up to manage regional funds of Islamic bank Kuwait Finance House, recently cut its workforce, citing an internal structuring. It had not managed any funds since its inception.

To encourage the growth of Islamic finance, Singapore has removed double stamp duties and given similar tax treatment for sukuk investors.

But there haven't been many sukuk issuances. Singapore saw $123.6 million of sukuk issuance last year, compared with $8 billion for Malaysia and $1.2 billion for Indonesia, its nearest Islamic banking competitors, according to Thomson Reuters data. – Reuters