Interview: Dato Haji Mohd Rosli

How would you assess the performance of Brunei Darussalam’s banking sector in 2012?

DATO HAJI MOHD ROSLI: The banking sector has remained sound and stable. The banks in Brunei Darussalam are well capitalised and have met the Basel III Tier I common equity capital ratio requirement. The banks also continue to hold high levels of liquidity. Credit risk management has improved, which is evident from the declining trend in banks’ non-performing assets ratios over the years. Alongside this achievement, the profitability ratios of banks continue to be well above the international norms with respect to return on assets and return on equity. Before, a large portion of the assets of banks was held offshore. Since the introduction of the asset maintenance ratio in 2011 as part of the banks’ obligations under the Deposit Protection Scheme (DPS), a shift in banking assets from offshore to onshore has occurred. This allows for more funds to be better channelled to domestic sectors, thus contributing to the country’s economic development. This is seen by an increase in lending to these sectors and demand for the subscription of government sukuk(Islamic bond) issuances since the requirement was enforced.

In what way will the new credit bureau strengthen the financial sector and consumer discipline?

DATO ROSLI: The establishment of the credit bureau has reduced information gaps, thus leading to improved credit risk management by the participating financial institutions. With the availability of more complete credit information, the participating financial institutions will be able to make more informed decisions. We believe this will strengthen the financial sector and instil greater financial discipline among borrowers so that they can maintain good credit history.

What will be the impact on lending to small and medium-sized enterprises (SMEs) and consumers?

DATO ROSLI: The credit history of borrowers, including SMEs, is now available for the first time to the banking industry. With their credit performance known, SMEs that found it difficult to access credit previously will be in a much better position to be assessed by banking institutions. Consumers with a default history can strive to enhance their credit standing. The availability of credit information will speed up turnaround time for loan approvals and provide those who have a good credit history with a cheaper cost of financing.

How has the market adjusted since the introduction of the consumer credit regulations?

DATO ROSLI: Prior to the implementation of the consumer credit regulations in May 2005, bank lending was dominated by personal loans and credit card financing. The banking industry’s exposure to the personal loans portfolio was 64% then. This was of concern because high exposure to the retail sector did not provide the desired multiplier effect on the economy.

To address this issue, the authorities took initiatives on consumer credit regulations that were also aimed at inculcating a savings culture and encouraging prudent spending by consumers. We have seen a positive result from these initiatives; personal loans now constitute 27% of total credit in the banking system, a significant reduction. In turn, this has enabled banks to diversify their credit portfolios and channel more funds to productive sectors, such as SMEs and corporations.

Other results have been reductions in both the total number of credit cards issued and the outstanding amount of non-performing loans.

What tangible results has the DPS provided?

DATO ROSLI: The DPS was an initiative that was undertaken by the Ministry of Finance. As the regulating body for financial institutions, AMBD works closely with the Brunei Darussalam Deposit Protection Corporation to ensure the DPS is implemented smoothly.

I believe that the scheme has helped to sustain depositor confidence in the financial system, with its smooth transition from the government guarantee that prevailed up to the end of 2010. The introduction of the DPS also puts Brunei Darussalam on par with financial systems in the region that already have similar depositor protection schemes, thereby preventing capital flight. The concurrent imposition of the asset maintenance ratio on the banks under the scheme has helped to improve the ratio of onshore assets held by the banks. Furthermore, now there are more funds available to be channelled to the domestic financial market to assist economic development in the country.

Going forward, what initiatives is the AMBD looking into to support the financial sector?

DATO ROSLI: As we know, the financial markets are dynamic and change is the only constant. As a regulator of the financial sector, the safeguarding of the public interest is our main priority. However, we also want to ensure that the banking industry can operate in a conducive environment, and that the laws and regulations do not impede the development of the industry. In this regard, AMBD will continuously review the legal and regulatory framework to ensure that it is always relevant, up-to-date, and consistent with international standards and best regulatory practices. One example of this on the banking side is that we have recently prohibited the requirement to obtain personal guarantees from third parties for retail purposes. These guarantors were previously made liable for the loans of others, even though they did not have the means to support the guarantee. In light of this new regulation, banks will need to strengthen their credit assessment of the primary borrowers and not just depend on third-party guarantees. In the area of capital markets, a new Securities Markets Order and its regulations have been drafted and are expected to come into force shortly. The new legislation and regulations will replace the existing Securities Order 2001 and Mutual Funds Order 2001, with the intentions of further facilitating the growth and development of the capital market, as well as enhancing investor protection. The new legislation will cover both Islamic and conventional investment activities.

In terms of insurance and takaful (Islamic insurance), amendments to the Insurance Order and the Takaful Order are under way. In addition, AMBD is in the process of finalising the framework for the registration of general insurance agents and takaful agents, in an effort to instil greater market discipline in the industry. We have also strengthened our compliance requirements for anti-money laundering and combating the financing of terrorism through the establishment of “know your customer” and customer due diligence guidelines, which have been incorporated into the recently introduced anti-money laundering legislation, the Criminal Asset Recovery Order 2012.

What steps can the AMBD take to further strengthen Brunei Darussalam’s banking infrastructure?

DATO ROSLI: Currently, the banking clearing system is based on the automated clearing house, which is run by the Brunei Association of Banks. Therefore, the next priority item on our agenda is to modernise the existing clearing system by establishing a national payment and settlement system (PSS) that is in line with AMBD’s objectives, as mandated under the 2010 AMBD Order.

The establishment of the national PSS is also fundamental in our efforts to further develop the domestic financial market. With the credit bureau now fully operational, the Brunei Darussalam Deposit Protection Corporation established and the PSS well in progress, I hope the financial infrastructure in the country will be significantly improved, thus enhancing our efforts to develop and promote the financial sector. Over the past few years, the relevant authorities have embarked on initiatives to create a strong foundation for the development of Islamic finance. One of the preliminary steps is to develop a pool of highly skilled and knowledgeable human resources in this field. I believe that Brunei Darussalam, as an Islamic nation, has strong potential to be a significant player in Islamic finance.