Brunei eager to move forward in Islamic finance
Brunei’s involvement in Islamic finance came about by way of the establishment of Tabung Amanah Islam in 1991. Tabung Amanah, the country’s first Islamic trust fund, was established to help local Muslims undertake their holy pilgrimage. Not long after, it was followed by the county’s first Islamic bank, the Islamic Bank of Brunei (IBB).
Currently, Bank Islam Brunei Darussalam (BIBD), a merger between IBB and the Islamic Development Bank of Brunei, is the largest and only Islamic banking provider in Brunei with assets totaling BND4.98 billion (US$3.81 billion).
Despite a large Muslim majority, (about 67% of the population), this oil-rich nation did not see much development in the area of Islamic finance until 2006 when the ministry of finance launched the Banking Order and Insurance Order, established the Brunei International Financial Centre, launched its first Sukuk and introduced the Shariah Financial Supervisory Board on a national level. This was seen as a much needed boost to open the Islamic banking industry in Brunei for its locally based companies and for foreign Islamic banks to plant their operations in the country. For the Takaful industry, the Takaful Order 2008 provided regulation to the industry that helped create a level playing field with the conventional insurance companies.
Similarly, tax incentives play an important role in creating a level playing field for Brunei’s Islamic finance industry. Previously, the taxation imposed on Islamic banking was similar to its conventional peer. This caused Islamic financial institutions to once be subjected to a 30% corporate tax and an additional 2.5% zakat contribution. According to Sri Anne Masri of ETHICA Consultants, the tax incentive now allows Islamic financial institutions (IFIs) in the country to deduct the 2.5% zakat contribution from the required 30% corporate tax while receiving an exemption from stamp duty as well. Javed Ahmad, BIBD’s acting managing director, said that there were concerted efforts by the government to make Islamic banking attractive in Brunei.
Brunei does not have a central bank and as such, all formulation of policies and supervision of financial services are regulated by the ministry of finance. The country’s Shariah Financial Supervisory Board approves all Islamic financial products and services offered at national level.
The bulk of the Islamic banking assets are from the institutional sector, which in turn derives its assets from the retail market. Financial institutions in the Sultanate are known for their excess liquidity. According to Sri Anne, statistics provided by the ministry of finance’s financial institutions division (FID) revealed that the loan-to-deposits ratio (LDR) has been quite low compared to that of international standards. “At the moment the IFIs in Brunei are still in the developmental stage of growing their investment banking sector. Hopefully, infrastructure development projects in Brunei will assist in the growth of the investment sector as it calls for an active participation locally and regionally. This is a growing challenge for IFIs as Brunei is a small player in the international arena,” she said.
On the surface, there seems to be a lack of innovative products being offered in Brunei’s Islamic finance industry. Javed explained that product development was determined by market demand. On a retail level, the market demand of Brunei differed from many others in the region because there is no personal income tax or capital gains tax. He believes product innovation takes place as a result of tax requirement. At the corporate level, he said the bulk of companies – mainly oil and gas – did not generally borrow, resulting in very little requirement for debt capital.
“So it is not that we are complacent but it depends entirely on customers’ needs. They have not been very demanding due to the no-income tax regime, while large industries are very high cash generators; and should the need for expansion arise, it would normally be obtained through internally generated funds,” he said. However, he explained, as privatization of public sector services such as telecommunication, electricity and water in Brunei occur, so too will the opportunities of borrowings from banks.
On the other hand, Sri Anne offers an alternative insight on what she terms as “the uniqueness” of the financial scene in the country. She explained that the government is focused on developing and shaping its society into the culture of saving and being debt-free, a truly Islamic concept. Among the government’s initiatives is the reduction of consumer lending by 30% and the curb on credit card spending.
Sri Anne believes that before innovative products — retail or institutional — can be introduced, Bruneians have to be educated on how to save and invest wisely while Islamic banks would have to deliver products that are truly Islamic. She feels that these symbiotic elements need to exist to make Islamic finance successful and meaningful. “I believe Brunei cannot compete with the likes of Malaysia or Singapore as an Islamic financial center. However, Brunei can create its own unique brand for its own people (market) then export the model to other Islamic centers globally,” she said.
Sukuk in Brunei continues to be dominated by sovereign issuances, with the first coming in 2006 based on the Ijarah concept. To date, there has been only one corporate Sukuk issuance, Brunei LNG’s BND100 million (US$71.7 million) Ijarah issue.
According to Sri Anne, Sukuk issuance has been solely driven by the government to lower excess liquidity in the market although there are no regulatory restrictions on corporate Sukuk issuance. “Maybe in the near future, with the upcoming infrastructure and development of Brunei and a good understanding of the process from corporate players for alternative financing, increased market players and participation from other than the few financial institutions, I am sure there are endless possibilities given the right ingredients,” she said.
The progress of Brunei’s Islamic finance industry is due to its want of size, noted several of the country’s academicians. There is a need to enhance Islamic banks and Takaful companies in terms of product offering and innovation, corporate governance and human capital. Local analysts say an overseas expansion would be the appropriate next step for this oil-rich nation. When asked, Javed did not dismiss this proposal but said BIBD would have to first strengthen its base by investing in its human capital and technology, something that has been ongoing for the bank over the last two years. Javed said: “We do not want to rely on manual processes so a lot of the investment we are making is really for state-of-the-art technology that will truly transform the bank in terms of how we serve our customers.”
He added that despite having several opportunities come its way, there was nothing, the bank felt, worth venturing into. Javed said the criterion for expansion was having investments that would be independently managed due to BIBD’s lack of management capacity.
According to Brunei’s ministry of finance, Islamic banking assets in 2009 stood at about BND6.3 billion (US$4.81 billion), or 40% of the total banking sector growth in Brunei. This percentage, which rose from 33.9% in 2008, is expected to grow to 55%–60% over the next three to five years. If positive statistics are of any indication to the sign of the times, then Brunei Darussalam is slowly but surely setting the stage for exponential growth in Islamic finance.