OBG talks to Javed Ahmad, Managing Director, Bank Islam Brunei Darussalam (BIBD)

Interview: Javed Ahmad

What is the outlook for the issuance of Islamic bonds in Brunei Darussalam?

JAVED AHMAD: Over the last five years or so, the government has been actively issuing sukuks (Islamic bonds), with the majority being short term. Brunei Darussalam is one of very few countries that maintains a budget surplus. In light of this, the government does realise and recognise that sukuk issuance is an important area to focus on in order to further develop capital markets. The cost is not great, rates are at an historic low, the surplus can be better invested in long-term investments and short-term needs can be easily funded by the government sukuk market. I think there have been discussions about, and certainly there is a demand for, a sukuk issuance programme by either the government or public sector entities. The ideal issuance would be for a longer term of two to 10 years, first to create a benchmark and second to provide domestic investors with the instruments to invest at home rather than overseas. Within the private sector, I suppose it would be the larger oil and gas firms like Brunei Liquefied Natural Gas (BLNG) that would have substantial capital requirements and would want to raise that capital through sukuk markets. Those in the oil, gas and petrochemicals sector that have a good track record would be able to raise sukuks through the markets. In addition, we have been active internationally, having worked with the government of Indonesia and several Turkish banks on their sukuk issuance programmes.

In what ways is regional cooperation important to harmonising the domestic Islamic banking system?

AHMAD: About 20 years ago, the finance industry was quite different from country to country. Now, investments are very much cross-border, and there is a greater level of cooperation and harmonisation of standards. There is also greater cooperation among financial institutions to come up with products or structures that are more widely accepted. For example, BIBD is a large investor in Khazanah’s (Malaysia’s sovereign wealth fund) programmes to issue sukuks in Singaporean dollars that would be available in Singapore, Malaysia, and the Middle East as well as locally. There are quite a few syndications at the regional and international level that we pay attention to. If there are issuances out of Indonesia or Malaysia that are going to be suitable regionally, we look at them carefully from an investment perspective. So cross-border Islamic banking is certainly more prevalent, and there are many conferences and seminars being held in the region, which also help to better inform investors.

How active is Brunei Darussalam in the Gulf Cooperation Council (GCC) sukuk market and what areas of further cooperation exist?

AHMAD: Just in terms of sukuk, looking at our current investment portfolio, about 60% or 70% of our sukuk portfolio is in GCC countries, because there is a greater volume of issuances in that part of the world. Of course, our preference is to always invest in Brunei or Singapore dollars, but if this is not possible, then the next best currency is US dollars because we can quite easily hedge our currency exposures. So, for example, while the Malaysian market might be quite a deep and active one, it is as good as closed to us because the ringgit is a fairly controlled currency and we do not have access to Malaysian ringgit liquidity. Only when corporates or sovereigns in Singapore, Malaysia or the GCC make issuances in US dollar are we able to participate.

The other avenue of cooperation available to us is Gulf-based financial institutions which have, from time to time, excess liquidity, just as we have excess liquidity. Therefore, we cooperate at the Treasury level to make sure we have a good working relationship with them. Three or four years ago our liquidity had been entirely invested in the Singapore market. It represented a huge amount of liquidity in a market that did not require liquidity, and we did not make any money. What we are doing now is looking at counterparties at a more strategic level. We look at regional counterparties either in South-east Asia or in the GCC, because it is where our inherent competitive advantage is. We also work very closely with financial institutions in Saudi Arabia, Qatar, the UAE, Kuwait, Malaysia and Singapore; these are core markets for us. We have also expanded selectively into Europe, for example, into the UK and German markets. This is a very dynamic process. We are conservative with our country exposure strategy, because our liquidity needs to be safe. However, within that safety net, the question of generating a decent return forces us to struggle between these parameters to find the best possible fit.

What are Brunei Darussalam’s comparative advantages that would allow it to become an Islamic financial centre in the ASEAN region?

AHMAD: Any financial centre requires a deep domestic market, and we certainly have that. The country’s key advantages are its geographic position and a strong regulatory environment as well as sound Islamic financial institutions. We need to market more aggressively and offer financial institutions solid reasons for an off-shore presence here. Regarding specific areas, I am a strong proponent of positioning the country as a wealth management centre. That is an area in this country for which investment products are needed. These products can be opened up to international investors, enlarging our customer base. In terms of policy, there has been quite a bit of discussion at the regional level. For example, some have brought up the idea of a fund passport whereby a fund approved in one particular country can be distributed without the need for further approval in other countries. This might not happen in the next two or three years, but it is exactly what happened within the EU. I think that if this type of environment can become a reality, it would represent a tremendous opportunity for a country like Brunei Darussalam and would provide a way for it to become a regional financial centre.

What regulations need to be put in place to further regulate Islamic financial services locally?

AHMAD: One of the key requirements is consumer protection. The personal financing directive came out six or seven years ago, and we had a credit card directive about two years ago. I think it is important that we have strong consumer protection legislation, particularly for financial services, and this is something I foresee coming about in the next few years. Another trend is legislation regulating the securities industry, which has several areas that require updating. These will be important for enhancing Islamic financial services.

How do your foresee competition in 2013 among local banking institutions?

AHMAD: When I look at Brunei Darussalam’s banking sector, where we have 400,000 people served by nine banks and probably more than 50 branches, I think it is a healthy, competitive market. A lot of the competition has been focused on the consumer sector, and banks need to rise to the challenge of making the private sector more dynamic. We have a key role to play. The country’s economic outlook is bright, so this is an opportunity to strengthen and build on our industrial base. When I look at the balance sheets of Bruneian banks and see one-third of liquidity gets used in productive domestic banking and the remaining two-thirds go purely into bank placement, I see a waste of resources. However, I think within the next few years this money will find a home in Brunei Darussalam.

Competition is the only way financial institutions can continuously be kept on their toes. If I had been the CEO of a Bruneian bank three years ago, I would have been worried about the competition we faced. Technologically, it was an entirely different picture, but in the last two years we have greatly focused on technology. Banking is a business and it has three key components: your people, your systems and your process. When all three are aligned you will then be in a position to provide your customers with quality service.