Brunei Darussalam (Brunei) is located northwest of the island of Borneo and has a total land area of 5,765 sq km with a coastline of 161 km along the South China Sea. The tiny size has not impeded Brunei’s social and economic progress, as illustrated by its per capita GDP (PPP) which is among the highest in Asia at US$54,800 (2013).
The key event for Brunei in 2014 was the implementation of Shariah criminal codes as the prominent laws of the country. This deepens the role of Islam in the country’s judiciary, which was previously limited to marital issues.
The central bank, Autoriti Monetari Brunei Darussalam (AMBD), projected the Brunei economy to grow by 1.1% in 2014 as lower production is expected from the oil and gas industry. Non-oil and gas, conversely, grew 2.5% in the second quarter and was expected to reach 3.4% by 2014, which is in line with the government’s policy to diversify its reliance on oil and gas that make up 60% of Brunei’s GDP of US$22.25 billion (2013).
Review of 2014
Brunei continues to grow the Islamic finance industry with Sukuk issuances to shore up its oil and gas industry as well as infrastructure development. Seven Sukuk had been issued over the years, with a significant one in Sukuk Ijarah (IDB and Brunei LNG) raising US$1.6 billion in July 2014. The total holdings of the Brunei government Sukuk outstanding stood at BND700 million (US$514.29 million) to date.
The Islamic finance industry experienced double digit growth in Islamic banking and Takaful. As of the second quarter of 2014, their market shares stood at 47% and 32% respectively. An industry study has estimated that by the year 2020, the market share of Islamic banking and finance in the sultanate will grow to at least 50% of the total financial sector. This growth is on track to achieve the targeted 8% contribution of the GDP by 2035 from 2.8% in 2008.
In order to develop the industry further, AMBD planned to establish the Brunei Capital Market, via the Securities Market Order 2013, which took effect on the 22nd August 2014; the new order replaces the Securities Order of 2001 and Mutual Funds Order 2001; a significant milestone as the government intended to streamline the legal and regulatory framework and regulations as laid out by the International Organisation of Securities Commissions. AMBD also signed a memorandum of understanding with the Securities Commission Malaysia to enhance cooperation in the capital market.
AMBD had been very market proactive in 2014. It deregulated the capping set on interest/profit rates on residential property loans hence allowing the market forces to determine the competitive rates. It also established the Credit Bureau that provides comprehensive credit reports to the public. AMBD is also now undertaking the central clearing system of cheques, which was previously conducted by the Brunei Association of Banks. Moreover, AMBD introduced three new guidelines in July 2014 that required all insurance and Takaful agents to register with AMBD to ensure professionalism and enhance public confidence.
Preview of 2015
A lot is expected from Brunei in 2015 as it possesses a conducive environment for a strong Islamic finance industry hence the potential to be an Islamic finance hub for the global market. With a relatively small population, Brunei would not be able to speed up growth in the industry and the sultanate should look at offshore markets as a catalyst. The Brunei offshore industry with over 13,000 companies registered in 2014 can play a significant role in attracting development to the Islamic finance industry. This strategy should be integrated with the anticipated introduction of the Brunei Capital Market in 2015 as outlined by the Securities Market Order 2013.
The establishment of a stock exchange in the country is to realise the country’s vision of becoming one of the strongest financial hubs in Southeast Asia by 2035 and ASEAN’s vision of an integrated regional economy by 2015. The industry players hope the capital market will provide the right platform to strengthen Brunei’s indigenous market as it allows for Bruneian entities and even foreign entities to tap the equity market. It will also benefit medium to large-scale businesses as they would have an alternative avenue to access funds. Furthermore, it will lead to developments of secondary markets, where banks can play a greater role in driving investment.
The significant drop of 40% in crude oil prices towards the end of 2014 and Brunei’s declining production cast a pessimistic outlook on the economy in 2015. From a positive perspective, many believe this is an immediate pressure on the sultanate to accelerate its economic diversification beyond oil and gas. In Islamic finance, Brunei has the right industry to thrive in.
The Sultan of Brunei envisions his country to become a premier Islamic financial center in the near future. There is a niche for Brunei in the growing global Islamic finance of which assets have doubled to US$1.8 trillion from 20 years ago. A concerted effort by all stakeholders through a strategic development plan by combining Shariah laws with the established oil and gas industry and the growing offshore jurisdiction and coupled with the introduction of the capital market in 2015 should be able to position Brunei in the right direction to be a significant player in the global Islamic finance industry.