Brunei Darussalam: Strengthening the base

Brunei Darussalam’s Islamic financial sector is set to expand in the coming years, following a series of advances that will strengthen its operational and regulatory base and bridge some of the gaps that have restricted the development of new products and services.

Islamic financial products already play a central role in the local economy, with sharia-compliant banking holding a 40% market share, a total forecast to reach between 55% and 60% in the next five years or so. The performance of the Sultanate’s Islamic banks compares favourably to its neighbours. The segment, for instance, holds a 20% market share in Malaysia, widely seen as a leader in Islamic finance internationally, and accounts for just 2% of financial services in Indonesia, where around 90% of the 250m-strong population is Muslim.

Though popular with both businesses and the public, local and international authorities have pinpointed some key areas for improvement in the local Islamic financial sector, most importantly in the areas of regulation and monitoring. However, 2011 could well be a year of positive change in that regard.

On January 1, the Monetary Authority Brunei Darussalam – or Autoriti Monetari Brunei Darussalam (AMBD) in Bahasa – formally opened its doors, having been established on December 31, 2010. The AMBD has taken over the functions of a number of other state agencies but most significantly it has assumed one role that previously did not exist, that of the country’s central bank. As such, it has been tasked with the formulation and implementation of monetary policy, supervision of financial institutions and currency management, tasks that will become increasingly important to the development of Islamic finance.

With a special secretariat for Islamic advisory services, along with a unit for banking and specialised market supervision and another for takaful, insurance and capital market supervision, all part of a wider directorate charged with monitoring and developing regulatory issues in Brunei’s financial sector, the AMBD is expected to maintain a watchful eye on the banking and insurance industry, both its Islamic and conventional segments.

For many in the Islamic financial sector, the establishment of the AMBD is particularly timely and is expected to help foster confidence and growth. According to Javed Ahmad, the acting managing director of Bank Islam Brunei Darussalam, in its role as regulator and policy development agency, the authority should be able to level the playing field in the country’s financial markets.

“A level playing field meaning that there is one set of rules for everyone and I think those are going to be important factors for all banks and you know, that’s actually what we want to make sure, is that banks have to be regulated,” he told the Brunei Times in early January.

In an earlier interview with local media, Javed said that it was essential that regulations ensured Islamic institutions had the same opportunities as the conventional lenders and that there was transparency and consumer protection.

With a stronger regulatory body now in place, one of the potential potholes in the Sultanate’s road towards becoming an internationally recognised Islamic finance centre has been filled, while steps are being taken to addressed another – that of a shortage of trained industry professionals.

According to Sri Anne Masri, the executive manager of Ethica Consultants, Brunei Darussalam’s Islamic finance sector still has much to do before it can challenge traditional regional leaders such as Malaysia and Singapore.

“We still have a lot more to go in terms of market capability, human capital development, international Islamic banking, international takaful. In terms of capital market, we are not yet ready,” she told a conference in mid-December 2010.

According to Masri, the biggest hurdle that the Sultanate needs to overcome is the limited pool of human resources. “There is still opportunity because the projection of the whole Islamic industry is about $1trn,” said Masri. “We could just get a piece of that pie; 1% of it is good enough for us.”

Having bolstered its regulatory framework, Brunei Darussalam is now working to train more staff to work in the sector, with the Universiti Islam Sultan Sharif Ali offering a bachelor’s degree programme in Islamic finance, and local online educational and consultancy services provider Crescent developing a master’s degree in Islamic banking and finance, to complement its existing list of courses dealing with various aspects of sharia-compliant finance.

By adding to the pool of trained professionals, Hjh Salma Hj Abdul Latif, the managing director of Crescent, believes Brunei Darussalam’s financial sector will overcome the “catch-22” that currently hampers growth.

“On the one hand, our market is a small market and so the basic products are all that is needed, because we don’t have the market to be able to support more sophisticated products,” she told delegates attending a seminar on Islamic finance in mid-December. “At the same time, if we do not have the human resources or experts in our market, we are unable to come up with new products as well.”

While Brunei Darussalam is likely to remain a niche player in financial services, it is nonetheless working to build up its credibility, skills base and product range to position itself as a significant centre for Islamic finance, and one that investors and clients can have faith in.