Renowned for its strong Islamic philosophy, Brunei Darussalam envisions itself to become an international Islamic financial hub. Islamic finance is one of the key focus areas in Brunei Darussalam Central Bank (BDCB)’s strategic development agenda as set out in the Brunei Darussalam Financial Sector Blueprint 2016–25. Brunei Darussalam has a dual financial system comprising both Islamic and conventional financial institutions. The Islamic financial system is made up of Islamic banks, Takaful operators, Islamic investment dealers, Sukuk and other ancillary services. As of the second quarter of 2022 (Q2 2022), Islamic financial assets accounted for 57.6% of the total market share. There are vast opportunities that are yet to be fully explored and continuous efforts are being made to further deepen the Islamic financial market.
Review of 2022
The impact of the re-emergence of the COVID-19 pandemic in Q3 2021 in Brunei Darussalam has further accelerated the digitalization of financial services and delivery of products through digital means. The range of digital payment services has also expanded with an increase in the pace of financial technology adoption. Despite heightened uncertainties due to the pandemic and the relatively low global interest/profit rate environment, the Islamic financial sector showed resilience and recorded 7.8% year-on-year growth in total assets as of Q2 2022, from BN$13 billion (US$9.21 billion) to BN$14 billion (US$9.92 billion).
The Islamic financial sector in Brunei Darussalam continued to be dominated by the Islamic banking industry. Comprising 61.5% of the entire banking sector, the Islamic banking industry grew by 9% year-on-year with BN$12.5 billion (US$8.86 billion) in assets as of Q2 2022. Beyond Islamic banking, the Takaful industry also recorded positive growth of 0.4% year-on-year as of Q2 2022 with BN$619 million (US$438.53 million) in assets. Since the launch of the Islamic window in 2021, the capital market industry saw an increase in Islamic investment offerings in Brunei Darussalam from seven to 10 Islamic collective investment schemes to cater to market demand.
Brunei Darussalam continues to introduce Islamic securities to further develop this market. The availability of Brunei Darussalam Government Sukuk Ijarah securities and BDCB Islamic Bills (BDCB I-Bills) allows Islamic banking institutions to meet their investment and liquidity needs. As of Q2 2022, the government of Brunei Darussalam has issued over BN$15.4 billion (US$10.91 billion)-worth of Sukuk Ijarah securities since the maiden offering in April 2006, while BDCB has issued BN$2.2 billion (US$1.56 billion)-worth of short-term BDCB I-Bills, since the maiden offering in October 2020.
Recognizing that knowledge and awareness play pivotal roles in the overall Islamic finance development in Brunei Darussalam, Islamic finance was featured as part of the showcase of the Islamic week during the annual thematic Brunei Darussalam Mid-Year Conference and Exhibition 2022, which is one of the most significant exhibitions in the country. During the Islamic week, several events were held, including conferences, workshops and forums to share and exchange Islamic finance knowledge, such as the Syariah Governance Conference, organized by BDCB’s training arm, the Brunei Institute of Leadership and Islamic Finance (BILIF).
As one of the Islamic finance thought leaders, BILIF continues to champion human capacity development in Islamic finance by providing certification programs such as the CISI Islamic Finance Qualifications, as well as learning solutions such as its signature programs of Fiqh Mua’malat Professional Programme and Leadership in Islamic Finance and Economics.
In the Islamic finance regulatory landscape, Brunei Darussalam has made great strides in the formulation of Shariah standards to facilitate product innovation and harmonization, under the guidance of the national Shariah Financial Supervisory Board. BDCB has introduced guidelines for Shariah standards on Tawarruq, Murabahah, Wakalah and Mudarabah as best practice references in structuring any Islamic finance products.
Additionally, BDCB has also issued the ‘Notice on Application Process of Islamic Product’ to enhance the approval process for new products. In the Takaful sector, all operators are now required to establish an operational framework governing the management of Takaful operations in accordance with the ‘Notice on Takaful Operational Framework’.
In the general regulatory landscape, BDCB has issued the ‘Guideline on Issuance of Debentures’ that sets out the necessary standards for any issue, offer or purchase of debentures, including Sukuk in Brunei Darussalam. To facilitate the digital onboarding process, BDCB has also issued the ‘Notice and Guidelines on Measures for Non-Face-to-Face Customer Onboarding and Ongoing Customer Due Diligence’ to allow financial institutions including Islamic financial institutions to utilize electronic know-your-customer solutions.
Preview of 2023
Based on the issuances of new regulatory notices in 2022, Islamic financial institutions are expected to adopt more digitalization initiatives, especially in the customer onboarding process and the creation of new Islamic finance products. Within the Islamic finance sector, the Takaful sector may present growth potential as the reopening of economies and borders may spur demand for more Takaful products.
On the regulatory front, BDCB will further strengthen its regulatory framework with plans to improve Shariah governance in order to boost market confidence; issue notices and guidelines to encourage new Islamic finance players; issue guidelines on Shariah standards for other types of Islamic finance products, as well as introduce development initiatives to increase the utilization of Islamic finance products.
Conclusion
Against the backdrop of the COVID-19 pandemic recovery, Brunei Darussalam will continue to place high priority on the development of Islamic finance to achieve a more inclusive, resilient and sustainable future.
Mohammed Roaizan Johari is the head of financial development at Brunei Darussalam Central Bank. He can be contacted at [email protected].