Brunei Darussalam: Turning the corner on debt

Despite declining profits in 2011, Brunei Darussalam’s banks are looking forward to a period of financial stability and new products, as tighter lending rules put in place by the government have created a clean slate for new, better-regulated credit activity.

In June, Baiduri Bank unveiled e-banking services and plans for new branches and ATM services, while in May HSBC reaffirmed its commitment to the country. Standard Chartered Bank, meanwhile, held a financial workshop focused on banking tools for small and medium-sized enterprises (SMEs).

Such developments are a sign of banks’ confidence in the future of the sector, spurred by the success of government measures to curb debt levels. While the country’s petroleum and natural gas resources have created significant wealth − the Sultanate’s per-capita income of $48,000 is the fifth highest in the world − this has also indirectly led to a culture of over-indebtedness.

Credit card debt rose to $343.6m in 2010, a 100% increase over the figure recorded five years earlier, while the Prime Minister’s Office revealed in March that civil servants alone owe the government $485m in unpaid housing loans and $84m in unpaid car loans.

Despite efforts to increase the level of corporate and small business loans, at the end of 2010 personal lines accounted for 64.6% of all loans issued. However, the total value of these loans, approximately $3.35bn, was lower than the level of $3.5bn in 2009 and $4.08bn in 2008.

High personal debt levels led the Ministry of Finance to issue tighter credit card rules in 2009, such as customers only being issued a card by the bank that keeps their payroll account, and stricter minimum salary and repayment requirements.

Under the initiative, the government plans to establish a credit bureau through the Autoriti Monetari Brunei Darussalam (AMBD) – the central bank − later this year, as well as create a special committee tasked with tackling unpaid dues and an e-payment gateway project that will allow the public to make online payments to government agencies.

In April, Pierre Imhof, the CEO of Baiduri Bank, said that the end of a three-year repayment period set by authorities as part of the credit rules would soon lead to stability. “The activity of the retail sector will resume normal operations,” Imhof told The Brunei Times.

Other banks have also welcomed the measures, with Lai Pei-Si, the country CEO of Standard Chartered Bank, stating in 2011 that consumers will soon aspire to better credit-worthiness as a result of the new credit body.

“Usually what we see in other countries when a credit bureau is implemented is that behaviour changes. You will see consumers being more responsible in their lending, as it affects them directly and they know the information is available across the board. It will therefore help them be more prudent in lending and more aware of what they are doing,” Pei-Si said.

While the June edition of OPEC’s “Economic Trends Analysis” warned that Brunei Darussalam and other economies dependent on European funding for domestic credit could be affected by tightening lending from EU banks, the group still expects the nation’s economy to grow by 3.2% in 2012.

Imhof said that while Baiduri’s net profits fell $4m in 2011 to $30m, this was not a major concern. “All of [Brunei Darussalam’s] banks are showing deteriorating profitability, though the objective of the regulator was to strengthen the banking system and reduce possible non-performing loans to reduce risk of default. The immediate effect during 2011 has been the reduction of profitability of most banks involved in retail banking,” he said.

A national budget of $5.9bn has been proposed for the 2012/13 period. The new budget will focus on greater business activity and investment, such as the development of SMEs, which is expected to boost the corporate lending segment.

In March, Pehin Goh King Chin, an appointed Legislative Council member, called on the AMBD to institute policy changes that will allow banks in the Sultanate to lend more than 20% of their capital asset funds, stating that if domestic banks were allowed to finance large projects, firms would not have to look overseas for financing.

While reforms to lending legislation are expected to benefit the country’s banking sector − particularly in retail lending − the government needs to better encourage links between SMEs in the private sector and the banking industry.

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