According to the central bank of Brunei, Autoriti Monetari Brunei Darussalam (AMBD)’s report, the financial sector currently contributes about 3% of the country’s GDP. A large portion of this contribution is from the banking industry followed by the insurance and Takaful industry along with some fund management/investment activities. There is a growing pressure on Brunei to diversify its economic reliance from oil and gas, which makes up 90% of current exports. Of concern is not only the fast-depleting oil resources that are estimated to only last another two decades, but also the tumbling crude oil price which has dropped more than 60%. Nonetheless, the strong financial reserves accumulated over the decades will sustain the country in its transition period.
The financial sector has vast potential to increase its contribution to GDP especially in the areas of Islamic finance and capital market activities. From the establishment of AMBD in 2011 to the implementation of the new Securities Market Order in 2014, these developments paved the way for a better financial structure, hence establishing the capital market in the Brunei Exchange that is targeted for 2017.
There were also several key milestones in the development of financial infrastructure which contributed to the productivity of the financial sector. First, it was the introduction of the Credit Bureau Self-Inquiry and Dispute Resolution services to the public which has allowed borrowers to access their own credit reports. The service is aimed to generate more transparency, greater credit awareness, and incentivize borrowers to maintain a good credit reputation. Second, it was the launching of the Real-Time Gross Settlement System that allows the efficient and timely transfers of large value funds between banks. AMBD has also taken over the Brunei Association of Banks’s cheque-clearing system through its Automated Clearing House.
These milestones were acknowledged by the IMF’s most recent report, published in June 2015, where it said: “Brunei Darussalam has stepped up its commitment to market reforms in recent years, developing a credit information bureau and launching a national payments and settlement system.”
With the global Islamic finance market doubling in size since 2011 to an estimated US$2 trillion in 2015, Brunei’s plans also coincide with the growing contribution of Islamic financial services to the local economy. Bank Islam Brunei Darussalam (BIBD), the country’s largest Islamic bank, reflects the strong growth driven by the demand for Islamic banking in the country. In May 2015, BIBD announced its international banking aspiration with the opening of its representative office in Singapore, which set the tone for BIBD’s global expansion strategy, as it plans to open two more international offices in the near future. BIBD is ranked 14th by the Asian Banker in the Asia Pacific 500 Strongest Banks by balance sheet list in the year 2014.
Industry stakeholders in Brunei, including the regulators, policymakers and practitioners, should be commended for facilitating local, regional and international efforts to advance Islamic finance. Brunei’s conducive and enabling economic environment, together with a strong demand for Islamic finance, is leading to the deepening of the Islamic banking market share.
Brunei in 2016 and beyond
Brunei is a strong, stable, and important market for Islamic financial services. The tiny energy-rich state located on Borneo island in Southeast Asia benefits from a tiny 600,000 population enjoying one of the highest gross national incomes in the world of US$31,500. According to Thomson Reuters Global Islamic Economy Index, the country is rated in the top 15 and is particularly strong in a number of sectors including food, finance, travel and pharmaceuticals. Brunei scored 33.3 in the overall index score; in comparison, Indonesia scored 33.8 and Saudi Arabia 46.6.
The government views the financial services sector as a key area for Brunei’s long-term growth and prosperity and is keen to promote Islamic finance as a key driver of growth within the financial services sector. The plan to develop the Bruneian capital market with the launching of a securities exchange in 2017 is well on schedule. This will help Brunei to diversify its economy away from a total reliance on the oil and gas industry.
The Bruneian government is also committed to grow the country’s talent pool to support the Islamic finance industry and one way is through collaboration with leading education centers in the UK. Indeed, investment in the education sector is one of the means to achieve Brunei’s ambition to establish itself as one of the Islamic financial centers in Southeast Asia.
When it comes to Sukuk or debt capital markets, clearly there are opportunities. High-quality issuers from Brunei could look to raise money domestically and internationally. In the international markets, they may find demand in both the Singapore dollar and the US dollar. This is illustrated by the recent Islamic financing: BIBD raising debt-financing for Icon Offshore’s vessel purchase in the oil and gas Industry. The corporate financing transaction of a Bai Bithaman Ajil-term financing facility was worth BN$37 million (US$26.07 million). This indicates that there is certainly space and room for issuers from Brunei to tap the Islamic debt capital markets or Sukuk to raise money for productive investments.
According to the Global Islamic Finance Report, by 2020 Brunei will be one of just six countries where Islamic banking and finance accounts for more than half of the financial sector. Islamic banks already hold a 41% share of total banking deposits in the Sultanate, with forecasts suggesting this will rise to 50% in the next two to three years. Brunei can also be developed as a base for manufacturing Halal pharmaceuticals and cosmetics given its strategic location and the government’s funding support for research and development. The Sultanate has implemented standards that cover different aspects of the Halal food industry and appropriate networks through the ASEAN trading system. All in all, Islamic finance in Brunei is well on track, with the country’s financial blueprint well-planned and executed for 2016 and beyond.
Dr Aimi Zulhazmi is an Islamic finance consultant via his own Draznine Advisory and an associate professor in the Islamic Finance Department of UniKL Business School. He can be contacted at [email protected].