Brunei Darussalam: Faith in Islamic Finance

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Having easily weathered the turbulence of the international economic downturn, Brunei Darussalam’s Islamic financial service sector is looking forward to new opportunities as the tide of the global recession recedes.

Thanks to the sound regulatory environment created by the state over the past decade, Brunei Darussalam’s Islamic financial institutions have gained a reputation for meeting the highest standards of sharia-compliant banking. To ensure that products meet exacting standards, each lender in the segment is required by the Finance Ministry to have its own sharia board, tasked with supervising all activities.

In Brunei Darussalam, an additional layer of quality assurance is provided by the National Sharia Financial Supervisory Board, established by the state to act as a higher authority on issues relating to Islamic finance. Formed at the beginning of 2006, the board has served not only as a final reference point for questions of compliance and standards for the domestic market but also to help establish Brunei Darussalam’s credentials as an Islamic finance centre. Investment products and services approved by the supervisory board are recognised internationally as being sharia-compliant in the strictest sense, giving a value-added component to any offering.

Having laid the groundwork for a successful Islamic financial sector, the Sultanate is starting to reap the benefits, including attracting overseas investors and foreign companies keen to operate in the potentially lucrative market.

One such firm is the Singapore-headquartered UOB Asset Management, which set up a Brunei Darussalam subsidiary – UOB Asset Management (B) – in mid-2007 to take advantage of the demand for Islamic financial products in the Sultanate, a market that the general manager, Kamal Hj Muhammad, says will only expand.

Moves by the government to strengthen the country’s capital markets infrastructure will make Brunei Darussalam even more attractive to investors focused on Islamic forms of finance, he said in an interview with the Brunei Times in mid-January.

“The commitment from the government to develop the capital markets industry is a big plus. We anticipate more developments taking place in the financial sector, and having a presence in Brunei Darussalam enables us to gain more insight,” said Kamal.

If the government went ahead with the privatisation of some state activities, as had been discussed in the media, there would be even more potential for growth in the sector, he said.

“There are also talks in the papers about privatising some of the government institutions that deal in utilities and promoting private funding for some of the government projects,” he said. “Issuing sukuk will be a way to raise funds and develop the market. Again, this will give rise to an opportunity for us to bring in foreign direct investments, provided that they meets our criteria.”

The company is also planning to set up its own Islamic research centre in Brunei Darussalam, which Kamal said would carry out studies and analyse financial products to determine whether they comply with the dictates of sharia.

“We could work on this with established local or overseas scholars as well. Brunei Darussalam is obviously an ideal place for all this to take place in,” Kamal said.

Hamel Shah, a partner at UK-based sharia-compliant global investment management group Amiri Capital, agrees, describing the Sultanate as a “great place to develop an asset management industry” thanks to its expertise and regulatory support.

Brunei Darussalam’s economy is more diversified than other countries, Shah told an Islamic finance seminar late last year, with a pool of talent and knowledge of international investing that is more advanced compared to countries in the Gulf.

However, Shah also sounded a note of caution, saying that it was essential to bring both the expertise and the regulatory bodies together in order to enter the asset management market.

“Brunei Darussalam has to take the step-by-step approach and it already has a certain number of retail products so there is no real need to rush. It is important to get the products right and that is the key thing.” he said.

Given that there have been some doubts cast on the full compliance of Islamic financial products offered by banks or institutions in other countries, it is important for Brunei Darussalam to maintain the highest possible standards for all services. Having made a name for itself in terms of quality, the Sultanate is now in a position to attract new investors.

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