Brunei caters to strong demand for Islamic banking

Having moved early to establish Syariah-compliant services, the Sultanate is now well placed to carve out a niche for itself as an international Islamic banking centre. However, the industry will need to address a number of challenges, led by a shortage of skilled workers, if it is to fully support the segment’s development.

In mid-October, Standard Chartered Bank Brunei (SCB) said it was mulling plans to introduce Islamic banking products this year to meet increased demand for syariah-compliant banking services in Brunei. The announcement followed the September launch of the Islamic Bank of Brunei, which replaced the International Bank of Brunei as the sole domestically owned bank in the country.

The Tabung Amanah Islam Brunei was the first financial institution to offer savings and financing in accordance with Islamic principles when it was launched in 1991. It was followed two years later by the Islamic Bank of Brunei. They were joined in 2000 by the Islamic Development Bank of Brunei.

Standard Chartered Bank Brunei CEO Lai Pei-Si told the media in October that launching an Islamic bank was a “logical step to take and a logical step to consider because Brunei has an express need for Islamic banking products”. He added that the bank would begin modestly by offering Islamic products, with hopes of bringing “much more comprehensive Islamic solutions into the country”. 

In April, the managing director of Bank Islam Brunei Darussalam, Javed Ahmad, said the market share held by syariah-compliant banking was expected to increase to 60 per cent from its current levels of 40-55 per cent over the next five years.

At a seminar on Islamic finance, Ahmad said Brunei Darussalam’s strengths, led by strong economic and political stability, good infrastructure and government support, meant it was well placed to build a reputation as an Islamic financial centre. 

“With more aggressive marketing, Brunei Darussalam’s journey towards making itself an Islamic financial hub might become a possibility in the next few years,” he said.

A report in December by global consultancy Ernst & Young said the worldwide value of Islamic banking would reach US$1.55 trillion in 2012 and US$1.8 trillion this year. Growth in Muslim communities in the Middle East, North Africa and Asia were key drivers in the rising demand for Islamic financial services, it said. 

The Sultanate is benefiting from early participation in the Islamic banking segment, having launched its first Islamic bond, the Short Term Government Sukuk Al-Ijarah programme worth $150 million for a three-month certificate in April 2006.

In November, Autoriti Monetari Brunei Darussalam (AMBD, which acts as central bank), announced the successful pricing of its 82nd issuance of sukuk or Islamic bonds, worth $100 million at a rental rate of 0.16 per cent. The move followed a $100-million, 90-day issuance that matures this month.

While Brunei Darussalam is well placed to tap into growing interest in Islamic finance, observers have highlighted the need for the Sultanate to develop new Islamic banking products if it is to maintain its position in the market. 

“Understanding the theory of Maqasid al-Syariah (the objectives of Islamic law) and the defining characteristics of an Islamic bank could encourage the Islamic banking industry to improve and excel in their product innovation as well as financial inter-mediation that can be linked to economic growth,” Abdul Ghafar Ismail, a lecturer at the Research Centre for Islamic Economics and Finance, Universiti Kebangsaan Malaysia, said at a conference last May.

Industry experts believe Brunei is addressing these challenges, with an emphasis on staff training after human resources was identified as a factor that could limit its success. 

“Having strengthened its operational base and regulatory framework, Brunei is now taking steps to address a shortage of trained industry professionals in the Islamic financial sector by providing on-the-job training and local universities offering bachelors, masters and doctorate degree programmes related to Islamic finance,” said Javed.

The Sultanate’s early entry into the Islamic financial services market has provided it with solid foundations to develop the industry. Experts suggest the sector should now shift focus to exporting that expertise and consolidating a global role in syariah-compliant banking.