Formed as a result of a 2006 merger between Islamic Bank of Brunei and the Brunei Islamic Development Bank, BIBD announced its gross profit in the first seven months of operations were up 49%, to a total of $64.2m for the financial year ending December 31, 2006. This was up from the $42.9m profit accumulated by the two banks before the merger. Building on this, 2007 closed with gross profit of $88.7m.
Such statistics are the fruit of BIBD’s efforts in making inroads into consumer product financing and bringing investment opportunities directly to the public.
At higher levels, the bank recently launched its asset and fund management division, offering new services including strategic planning advice and global equity market appraisals. Additionally, BIBD and Royal Brunei Airlines negotiated a deal whereby the bank will finance the airline’s future purchases of planes. Meanwhile, state-owned PetroleumBRUNEI has made BIBD a primary financial partner in Brunei’s methanol plant programme.
Summarising the significance of these developments, Minister of Finance Pehin Hj Abd Rahman, said, “creating a vibrant financial sector represents one of the key elements of the country’s economic diversification”.
While BIBD is laying the foundation for its continued success, there remains ample opportunity for the growth of Islamic banking in the sultanate. Newly released statistics for the third quarter of 2007 show that Islamic banking in the country accounted for 39% of the total banking assets of $10.9bn and 36% of the deposits of $8.5bn. As BIBD is presently the sole provider of Islamic banking services in this market, competition is almost certainly in the offing.
Officials are increasingly expressing the need for Brunei to foster its banking institutions to harness the excess capital coming from high oil prices. The government has said that the time for conventional, interest-based banking has passed.
With this in mind, business strategies are being adapted to fit the market. UK-based HSBC is awaiting government consent to conduct Islamic banking under its sharia division HSBC Amanah. Additionally, the Islamic bank Kuwait Finance House (KFH) conducted an Islamic treasury seminar in Brunei in November 2007, as part of its ongoing assessment of the sultanate as a vehicle for expansion into the region.
Market observers hope Brunei will follow the path of its regional neighbours, notably Malaysia, which have welcomed foreign players, including HSBC and KFH, to help contribute to the growth of the sultanate’s Islamic finance market.
However, HSBC Amanah highlighted the need for improvement in the nation’s financial infrastructure, specifically referring to the ease of banking transactions. HSBC said the government should do more to market the sultanate as a good location for conducting Islamic financial activities. For instance, the government has issued sukuk, Islamic bonds, which are aimed at encouraging the Islamic capital market in Brunei. The ministry of finance issued 10 tranches of Brunei dollar short-tem sukuks in July 2007, amounting to $703.9m, followed by the issuance of a one-year sukuk in July 2007, worth $31.7m.
Brunei has excess liquidity and can therefore increase its role in international financial intermediation.
Analysts have said such action would yield economic benefits for Brunei, over and above any gains made in Islamic finance itself. The growing presence of private sector finance, both domestic and international, will be instrumental in promoting non-government enterprise. Commentators have said they hope that more and better Islamic finance in the region will aid banking standardisation for trade and capital flows, thereby helping Southeast Asia become economically integrated.
Within Brunei, the opportunity for change is significant. Access to capital has long been cited as a major problem among the nation’s smaller businesses. The growing strength of BIBD and Islamic finance in the region might well present a healthy tonic for the bedrock of Brunei’s economy.
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