International treasury: The sector looks to provide regional financial services

opportunities for the country. Currently, the banking sector has an average interest margin to gross income of 68.5%, suggesting that fee-based income still plays a relatively small role in boosting their balance sheets.

Opportunities to grow this in the corporate segment would, therefore, will be welcome.

However, as of now, there are no regional treasury centres in Brunei Darussalam. The country would need to change its regulatory environment and incentive structure to attract such business. The Sultanate already has certain factors working in its favour, such as a competitive corporate tax structure and a well-educated workforce. Indeed, Brunei Darussalam has been gradually reducing the corporate tax burden in the country, bringing down the corporate income tax rate from 30% to 22% and now in the last 12 months to 20%. This may still be slightly above the leading markets for regional treasury centres, Singapore and Hong Kong (both of which have a corporate tax rate of 18%), but it is still highly competitive internationally.

SHORTFALLS: The Sultanate has issues elsewhere, however. Polak said, “The main problem is the banking sector, which is not competitive in location criteria.” He argues that the country has high fees for corporations and poor quality services. According to Polak and Rady’s study, the Sultanate is a more expensive place to bank for corporations than the two leading markets for regional treasury centres, Singapore and Hong Kong.

It has the highest average monthly bank fees, at $18.64, compared to $13.52 in Singapore and $6.06 in Hong Kong. The country also has the second-highest average cost for a bank transaction at $7.51 (compared to $0.29 in Singapore and $9.39 in Hong Kong). Banks in Brunei Darussalam also lack a competitive edge when it comes to fees for incoming, outgoing and urgent foreign payments, charging the most out of the three countries on each criteria apart from the last.

The Sultanate’s sector must become more competitive. Indeed, the banking sector still has much work to do to be able to capture treasury services business. With the banking sector sitting on excess liquidity and looking for places to generate income, it is possible that market players will begin looking to muster new activity from international companies. Given the relatively new restrictions on personal lending and the stated intent of many banks to generate more business through fee-based income, the sector may try to turn its attention towards the increasingly attractive treasury services segment in the region.

REGIONAL TREASURY: With the emergence of regional treasury centres as a means of managing risks, accounting for cross-border transactions and managing currency positions among multinationals, global banking services have opened up a new and potentially lucrative revenue stream over the last four decades. Since the collapse of Bretton Woods, industry revenue in this segment has gone from almost nothing to as much as $100bn by 2005, according to Treasury Strategies, a global treasury consulting firm. There is potential to bolster this fee-based income even further. The firm estimates that companies spend over $1trn each year on activities conducting their working capital. Therefore, with a maximum of 10% of this spent with banks, even though they control financial settlement, there is significant room for further growth.

Multinational companies have been expanding their treasury operations in South-east Asia as well. Singapore as a leading financial centre has captured a large share of regional treasury centres. According to a study by academics Petr Polak and Rady Roswanddy Roslan, by 2004 treasury activities in Singapore had a total value of $204bn, while the country’s banking sector infrastructure had attracted 3600 companies to the state’s shores. As such, treasury activities have boosted the coffers of Singaporean banks through the growth of fee-based income at the corporate level.

FEE-BASED INCOME: With Bruneian banks looking for new opportunities for revenue growth and the government keen to position the Sultanate as a prominent financial centre, treasury services could provide new

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The Report: Brunei Darussalam 2013

Banking chapter from The Report: Brunei Darussalam 2013

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