With oil and gas prices currently experiencing a sustained low, the Sultanate’s economy has been facing some challenging times. Declines in GDP and a shrinking of government revenues and expenditures have also affected the banking sector, as consumers and businesses act more cautiously and the need for project financing dwindles. Yet the Sultanate’s banking sector is also seen by many as the key to driving future economic growth. Under the country’s long-term development plan, Wawasan 2035, diversification away from oil and gas is key, with a shift to high-value, innovative private sector businesses in services and manufacturing being a principal pillar of the strategy. Recent times have seen new initiatives in this field, however, with the Monetary Authority of Brunei Darussalam (AMBD) seeking to balance a prudent banking policy with the need for sustainable growth.
A salient feature of the Sultanate’s banking sector is its high liquidity and low loans-to-deposits ratios. AMBD figures from February 2016 showed a liquid-assets-to-total-assets ratio of 45.5% in 2015, with a financing-to-deposits ratio (excluding government deposits) of 46.3%. The AMBD and banks have worked to reign in household debt. A joint study by the AMBD and Centre for Strategic and Policy Studies in 2015 revealed that half of the households surveyed did not have active savings, while one in four required loans to finance daily expenditure.
Thus, in May 2015 the AMBD issued several decrees, which came into force in June 2015, aimed at capping household debt. The total debt service ratio (TDSR) scheme stipulates a maximum level of debt of 60% for those on a net monthly salary of BN$1750 ($1240), while another ruling capped the value of loans an individual can obtain at 18 times their net salary, as opposed to the previous limit of 12 times the gross salary. Individuals must also obtain insurance protection for each new or topped-up loan. The regulation also provides flexibility to restructure or topped-up an individual loans when 50% of the original tenor has lapsed, subject to certain conditions. Other regulations were also eased in 2015, with credit cards issuance no longer requiring a precondition of salary assignment. Credit cards secured by fixed deposits are also not included in the calculation of an individual’s TDSR.
Meanwhile, on the corporate side the government and banks have encouraged the financing of small and medium-sized enterprises (SMEs) through several schemes. These include the Enterprise Facilitation Scheme, which is run through Bank Islam Brunei Darussalam and Baiduri Bank, and backed by the Ministry of Primary Resources and Tourism. Other programmes include Standard Chartered’s Business Instalment Loan and the Brunei Economic Development Board’s grant schemes, such as the Youth Entrepreneurship Development Programme. The Ministry of Finance also has a Strategic Development Capital Fund, while SBI is a private equity fund looking at co-investment partnerships.
In addition, at the start of 2016 His Majesty Sultan Haji Hassanal Bolkiah announced the establishment of a dedicated SME Centre. Recent times have also seen some growth in loans to SMEs, with the latest AMBD figures showing credit growth in the corporate sector of 10.8% between 2014 and 2015, with this mainly to the services and manufacturing segments. Yet the pressure is undoubtedly on banks to do more. Obstacles to greater loan growth to SMEs, however, include the lack of bankability for projects and financial literacy among entrepreneurs. Many SMEs are family businesses that are not used to the degree of transparency necessary for bank assessments. Promoting financial literacy will thus likely be a major plank of any strategy going forward, with the new SME Centre likely to have a vital role in this. Once banks can be sure that a diversified business is worth investing in, liquidity should start to flow more freely.
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