Size Really Doesn’t Matter

Brunei may have missed the boat when Islamic finance really took off in Asia, but it has since made amends. Islamic finance now has a firm foothold and the country is more than equipped for bigger challenges ahead. Rahayu Musa Kamal spoke to key players on what Islamic banking in Brunei is all about as it begins to focus on making its presence felt in the international market.

Brunei Darussalam has come a long way since the launch of its first Islamic bond, the Short Term Government Sukuk Al-Ijarah program worth B$150 million (US$111 million) for a three-month certificate in April 2006. It was dubbed by finance minister II Abd Rahman Ibrahim as the first step to develop the nation’s capital market that will further enhance the country’s position in the growing regional and global Islamic financial community. This development led to it becoming the first country in the world to bypass the conventional capital markets and move straight into developing Islamic debt instruments. Abdul Rahman said this would pave the way for the development of a wider range of Islamic financial instruments and products.

In its effort to further promote Islamic banking, Brunei also introduced new laws and amended several existing legislation. These are the Insurance Order 2006, Banking Order 2006, Hire Purchase Order 2006 and Finance Companies Amendment Order 2006. The government issued B$28 million (US$20.7 million) worth of Sukuk in June this year, bringing the total of Sukuk it has issued since April 2006 close to B$1.1billion (US$815 million).

This is only the tip of the iceberg when we talk about Islamic banking in Brunei, as the nation is aggressively promoting Islamic banking to the masses. The growth and acceptance level by Brunei consumers has been overwhelming, according to industry players. The optimism level for Islamic finance in Brunei is at an all time high, say observers, and this can be gauged by the participation and support of the players and users.

According to Javed Ahmad, managing director of Bank Islam Brunei Darussalam, the nation, which has a Muslim majority population, did not face that many problems when Islamic banking was introduced. “It is a desire for any Muslim community to adopt the Islamic way of banking and there was actually an overwhelming response from the public when the concept was introduced.

“The non-Muslim community, though a minority, is nonetheless equally important and need to be respected for their diversity but this was not a problem at all since Islamic finance is an inclusive industry, never an exclusive one. Hence it is applicable to everybody,” explained Javed. He pointed out that currently Brunei’s Islamic finance industry already has a strong following among the non-Muslim community, as their concerns especially on returns have been addressed.

CIMB Islamic CEO Badlisyah Abdul Ghani pointed out that Bruneians are no different from customers in other countries. “Good products, good service and a positive impact on their bottom line — these factors are paramount when they make an investment decision. So long as they get optimum benefits from their investment Bruneians, whether they are Muslim or non-Muslim, would invest in Islamic instruments. However currently, the range of Islamic investment instruments available to Bruneians is still fairly limited,” he said.

Currently, Brunei’s economy is strongly dependent on its oil and gas revenues but as these resources are bound to decline, the nation is now aggressively marketing itself as an Islamic financial hub as well as an offshore financial center.

Badlisyah pointed out that more needs to be done to give Bruneians a wider choice of Shariah compliant investment. “In Brunei I would have to say it is more a question of whether there are enough Islamic finance products and services to entice Bruneians to invest rather than a question of whether Islamic finance is enticing enough. Islamic finance has been proven everywhere in the world to be equally economically viable and beneficial to investors.”

Javed on the other hand stressed that a lot of work and effort is being put in to broaden Brunei’s overall Islamic finance products to complement the existing ones such as Mudarabah deposits, consumer financing, home financing and personal lending. “Industry players are going into areas which have not been addressed but have tremendous latent demand such as wealth management solutions for the affluent market, savings for long-term financial commitments, education and retirement planning,” he added. For instance, apart from having purely investment products, there should also be protection products which are focused towards long-term financial commitment such as education and retirement plans as well as Takaful which are packaged in investment products, as this will be of interest to consumers who are looking for more than just the ordinary financial products.

“Consumers should be approached not in the form of a sales culture but more in an advisory manner, and this will slowly be introduced in Brunei,” said Javed. Among the more popular Islamic financial products in Brunei are personal loans and mortgage lending products.

Osman Mohd Jair, the managing director of Insurans Islam Taib, felt that more Shariah compliant savings and investment products should be introduced in order to support the initiative of the Ministry of Finance and to encourage the public to have financial plans.

He also spoke on the popularity of Takaful in Brunei. “Takaful has been popular since it was introduced in Brunei with the setting up of two Takaful operators, Takaful TAIB (now known as Insurans Islam TAIB) and Takaful IBB,” said Osman, adding that there are now three Takaful operators in Brunei and that the industry will see another development with the coming merger of Takaful IBB and Takaful BIBD.

He said the regulator, the Financial Institution Division of the Ministry of Finance, has been supportive of the public awareness drive on Takaful products and services, inviting Takaful operators to join the conventional players in highlighting together the importance of being insured.

Javed agrees with Osman on the acceptance level of Takaful in Brunei, noting that general Takaful has to some extent overtaken or is on par with the general insurance scene and people are very much into the Islamic way of finance, which explains the fact that there are already three major Takaful companies in the country. These industry players also share an extremely positive view on the prospects and growth of Islamic finance in the Sultanate.

According to Javed, the latest figures show that Islamic banking represents 45% of the total banking assets of Brunei and has a lot of room to grow. He said historically, at the beginning of Islamic finance in Brunei, there was no institutional model to be followed. “We had to look at Malaysia at that time, we tried to emulate Tabung Haji and also Bank Islam Malaysia. We benefited from an existing model and the conversion from purely conventional banks to Islamic banks was a rare but, all in all, a good experience for us,” said Javed.

He noted that, due to the size of Brunei, adopting a model proved to be an advantage because this enabled it to come up with products and services in a fairly efficient manner for the industry to capture a bigger market share.

Badlisyah, who is also in charge of CIMB Brunei, agrees that Brunei has huge potential. “Its government, through various agencies such as the Brunei Economic Development Board, is tasked to look at long-term diversification plans for the economy away from the oil and gas sector. With financial sector development — which covers Islamic banking and finance — as one of the key components of this major national initiative, the outlook for the industry in Brunei is very positive,” he said.

Osman pointed out the significance of the Brunei International Financial Center (BIFC). According to him, one of the reasons that led to its establishment was to help develop Brunei as a regional hub for Islamic finance. “Of course BIFC is open for both conventional and Shariah compliant companies, but its role is also as a major player in developing the Islamic financial market in the country,” he said.

He added that the Islamic financial services have grown fast in Brunei with most offshore investment banks offering Shariah compliant products in expectation of capturing the market and taking advantage of the niche.

Asked to estimate the amount of investment that Brunei’s Islamic finance sector can expect, Badlisyah said this is very difficult to do. “We do think there is plenty of untapped liquidity in Brunei; if we look at it in terms of what has been done in the banking sector, we can say the investments made under Islamic finance have been quite significant. After all, the total assets in Brunei’s banking sector is estimated to be about B$16 billion (US$11.8 billion) with total deposits at B$12 billion (US$8.9 billion),” said Badlisyah.

He said other than the banking sector, the Islamic asset management business is also growing. “Brunei’s employee provident fund, Tabung Amanah Pekerja, announced that it has B$1.2 billion (US$888 million) of investments, given that the majority of the workforce included in the scheme are Muslims. More Islamic investment is expected in Brunei as new Islamic asset management companies are set up in the BIFC,” said Badlisyah.

Applying the concepts of Islamic finance is never an easy task, even for a country with a majority Muslim clientele like Brunei. The need to promote and educate the masses is always a task that needs be taken seriously and the responsibility has to be shouldered by not just the public sector but the private sector as well. In Brunei, both sectors have continuously worked hand in hand to strengthen the Islamic banking sector and have gone the extra mile in targeting expansion not only locally but also internationally.

“The commitment of the Brunei government to developing the industry is long established; its interest in the industry is long-term and is not done merely on an opportunistic basis. Unlike other countries which are also keen on promoting Islamic finance, Brunei has set up a centralized Shariah Financial Supervisory Board that approves all Islamic financial products and services to be offered in the country,” commented Badlisyah, adding that some of the biggest and most active banks in Brunei are Islamic banks and they take a very significant share of the whole financial market there, very unlike other countries where Islamic banks are small players with very little market share.

On the private sector side, Osman said Insurans Islam TAIB has always supported the government’s initiative to promote Islamic finance and Takaful products. “We believe that as a corporate body we can support the finance industry and as a component in the supply-chain we are confident that we can make the chain complete with the support that we have,” he said. These efforts to boost Islamic finance are being bolstered with significant moves to ensure a smooth and comprehensive development of the Islamic finance sector in the country, from the regulatory and legislative aspects to the matter of Shariah scholars.

With CIMB being a foreign player in Brunei, Badlisyah appreciates the country’s comprehensive and effective regulatory and legislative framework for the financial services sector, with a single financial regulator. “Brunei also boasts of a low cost and liberal business environment as there is no personal income tax and no foreign exchange controls, and also ample liquidity,” he said, pointing out that the country produces about 220,000 barrels of oil per day and is flushed with cash due to the high oil prices.

Javed meanwhile commented on the issue of Shariah scholars who are in demand everywhere else in the world and the important roles they play as a major contributor to the growth of Islamic finance. “Brunei is a conservative society and so religion has played a major role here and the quality of Shariah scholars is not in short supply. They are individuals who have learnt at the best centers and colleges and they have and will contribute robustly to the industry,” said Javed. This view was echoed by Badlisyah, who was all praise about the efforts shown by the Brunei government in taking commendable steps to improve the quantity and quality of Shariah scholars in the country. “Universiti Islam Sultan Sharif Ali (Unissa) was set up in 2007 to offer degree programs based on Islamic teachings and beliefs. With lecturers hired from Malaysia, Egypt and Jordan, UNISSA is expected to produce world-class graduates who can immediately contribute their skills and knowledge to the industry,” said Badlisyah, adding that Universiti Brunei Darussalam’s Center for Islamic Banking, Finance and Management has also been very aggressive in organizing talks and courses to educate the public on various aspects of Islamic finance.

According to Javed, Sultan Hassanal Bolkiah wanted to see the merged entity of the Islamic Bank of Brunei and the Islamic Development Bank of Brunei — Bank Islam Brunei Darussalam (BIBD) —become a major player in the domestic market and is delighted that this has happened. BIBD is already planning to expand externally, at least regionally.

“By the end of next year, we will be in very good shape to enter selected markets. By early 2010 we will definitely be present in a few other countries,” said Javed, declining to name the countries for now. According to him, the expansion will be at least regionally as BIBD continues to strengthen its domestic presence.

Fact File