Interview: Javed Ahmad
In what ways have local banks responded to tighter credit conditions, and to what extent has there been a shift in focus in terms of lending?
JAVED AHMAD: The new regulations have been effective at limiting the amount of personal financing that can be provided, establishing a fixed-rate pricing framework and setting a minimum deposit rate for investors. To a large extent, every nation wants to see how the economy can be made more vibrant, and financing plays an important role in providing capital for productive economic activity.
Whenever there are good, solid businesses, there is no shortage of funds. Often, however, good business ideas are in short supply. That is where I hope to see a greater level of activity.
Money needs to go into activities in sectors such as oil and gas, which form the backbone of the Brunei Darussalam economy. Thus, although most of the financing from the banking sector should go to this sector, this has not been the case for a number of reasons. There may be capacity constraints in terms of single borrower limits at some banks in the country, or some of the companies might have a preference for international banks.
However, with the stronger push towards developing local businesses, we now see that there is a higher usage of financing from banks in the country. Capital from the banking sector can be used productively for the benefit of the economy and to encourage more robust development of businesses within Brunei Darussalam. Financing domestically contributes to the economy in other ways as well, as profits are generated domestically and taxes are paid to the Bruneian government.
These days, in the hydrocarbons industry, especially in segments such as oil and gas production, there is greater local activity, where previously a big portion of this segment went to the international institutions. This development is certainly a good thing for the future of the Bruneian banking sector.
Through which sharia-compliant instruments can Brunei Darussalam attract more capital flows from foreign and regional investors?
AHMAD: Asset management services are one specific area that could attract global investors to the country. In this segment, Brunei Darussalam has developed capacity thanks to management of the country’s sovereign wealth funds, and this expertise could be attractive to investors. The country’s asset managers are used to operating with a global perspective, as there is relatively limited need for domestic financing. If you look regionally, Islamic banking in Malaysia, for example, is more focused on the domestic market. The Malaysian economy requires far more financing than Brunei Darussalam. There is potential for regional investors to opt to have their assets managed in Brunei Darussalam, rather than in other asset management centres such as the Cayman Islands or Luxembourg. Brunei Darussalam has a stable political and legal system, which would further facilitate the realisation of this potential.
How can a culture of saving be developed in Brunei Darussalam, and what role does education play in this process?
AHMAD: The key to promoting a savings culture in Brunei Darussalam is not, for example, to increase the minimum return on savings accounts from 0% to 0.15%. I do not think that the majority of the population would be moved to start saving by this. Rather, saving needs to be promoted from an angle that emphasises how important it is to have funds available for any emergencies that an individual might have. Through financial literacy, which has been a priority during Brunei Darussalam’s chairmanship of ASEAN, this can be achieved. When you have a greater level of literacy and more responsibility taken on by individuals and households to save funds for things like education, only then will a savings culture really take hold. The purpose of financial literacy is to enable individuals to plan early so that by the time there is a need to use their savings, they are in a much more independent and secure position.
I am pleased to see that, in many instances, households are increasingly planning for their children’s education. Also, the types of sacrifice that need to take place in order to have a savings culture are beginning to take form. While it is true that the government provides a generous safety net for its citizens, these benefits only go so far. This is true not only for banking but also for financial services in general, including the insurance sector.
As nationals, we have a further responsibility to the nation to not rely on the benefits of public assistance. This mindset of being independent rather than dependent is a very important element within Islam and is something that is certainly being promoted by Islamic financial institutions.
Does the prevalence of Islamic financial services in the country leave any room for the growth for conventional banking?
AHMAD: My view is that customers choose how they want to bank and whether they prefer Islamic or conventional banking. From a regulatory angle, institutions are playing a fair game in that they are not trying to push each other over in an attempt to get customers. What is taking place in Brunei Darussalam is that Islamic financial institutions have grown rapidly because they are taking on the responsibility of generating growth as a business challenge.
Islamic financial institutions cannot rely solely on customers’ desire to be “more Islamic” in order to attract them to come and bank with us. Rather, at the end of the day our objective is to provide as good a service as any other bank, with the added benefit of being sharia-compliant. This is the reason that we are seeing many of the major players in international banking, from both Muslim nations and elsewhere, enter the market for Islamic banking.
There is no danger of conventional banking being pushed out, and it is entirely possible for the two to coexist. Through the improvement of services, branch structure, branding and technology, Islamic financial institutions have been expanding and appealing to a larger portion of the population, just as conventional banks would. On this kind of a level playing field, it remains up to the customer to determine with which institutions they want to bank.
In what ways can Islamic banks both financially assist small and medium-sized enterprises (SME) and help them to develop?
AHMAD: Banks can play two roles with regard to the development of SMEs: firstly, as an allocator of capital, and secondly, as a generator of new ideas.
Furthermore, if you are running a successful business and are looking to expand, a bank may be able to help through its customer network, as it could effectively pair small businesses for mutual development. The efficient allocation of capital is very important, and if banks give money to a business that is undeserving, they create problems both for themselves and the business in question. Banks can provide SMEs with capital, but they must also make sure that this capital is properly deployed.
In the overall economy, I believe that all banks play a very important intermediary role in terms of allocating capital resources and coming up with ideas that can help these smaller businesses grow into medium-sized or large companies.
Our role is to be mentors and catalysts for bigger things to happen. We can play a further role in setting aside some capital for the purpose of providing equity to businesses so that, rather than being purely dependent on larger companies, as you see happening in the oil and gas industry, for example, they can do something more extensive with the expertise that they have obtained. We need to seek out good, quality management and invest in them.
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