Currently there are eight conventional banks and one Islamic bank operating directly in the Brunei marketplace, competing for the custom of just over 350,000 potential clients. There are also four finance companies that offer some loan and bank-related services.
However, existing restrictions limit banking activity, including the entry of international Islamic financial institutions into the market. For the past two years, the state has been deliberating on amending the regulations governing the sector, with a view to opening up the industry to more competition and broadening the base of the existing Islamic finance market.
Though only two of Brunei's financial institutions, Bank Islam Brunei Darussalam (BIBD) and the Brunei Islamic Trust Fund (TAIB), work exclusively in the Islamic services sector of the industry, a recent report by the Moody's investor service said that Islamic banking has achieved relatively high market penetration in the sultanate.
It is estimated that Brunei's Islamic finance sector accounts for around one third of bank assets and more than 25% of deposits while providing nearly 60% of total financing.
Despite that, the report, released on April 14, commented that there needed to be more support from regulators if Islamic financing was to flourish in Brunei and the rest of East Asia.
The report cited Malaysia, where it said nearly 30 years of reforms had greatly assisted to put in place the necessary legal and regulatory framework and institutions for the industry.
"We believe the Malaysian experience over the last three decades demonstrates how instrumental regulators can and need to be in order to grow the Islamic banking sector," said Christine Kuo, who prepared the Moody's study, entitled "Islamic Banking in East Asia - Growing but not without Challenges".
It is this experience that Brunei's bankers want to see implemented in their own country.
At present, Brunei offers four types of banking licences: full international banking, international investment banking, international Islamic banking and a restricted banking licence. While having allowed international commercial banks to operate, the Islamic sector of the industry is restricted to local companies only. One of the key planks of the regulatory reform package being considered by the government is opening up the market to international Islamic finance institutions.
If Brunei's banking sector is to develop into a regional financial hub, there needs to be flexibility in the regulations that control its activities and greater competition that would come through allowing the entrance of international players, said Tareq Muhmood, the chief executive officer at HSBC Brunei.
"If the regulations are very restrictive in terms of what it allows and what it does not allow in the operations then it would restrict the ability for the industry to grow," Muhmood told local press on April 15.
While flexibility is essential to foster the Islamic banking industry in Brunei, there is also the need for some degree of protection, argues Barudin Kudil, Takaful IBB Islamic Insurance's head of general takaful.
"The regulations should be attractive enough to draw foreign players," he said. "At the same time, it should protect local players like us because we are heavily dependent on the local market."
The views of these two senior banking officials in part highlight the dilemma faced by the government in drafting its new regulations: while trying to bolster competition and strengthen the sector the state does not want to see the domestic banks swamped by stronger newcomers from overseas.
One suggestion on how Brunei's Islamic financers can both corner a section of the local banking market and directly fulfill the tenets of their code of financing came from management and business development consultant Alfred Yong Foh Sen. According to him, there should be a greater emphasis by Islamic banks on supporting small businesses.
"Since majority of businesses are microenterprises and self-employed entities, whether Brunei should have Islamic microfinance institutions to cater for development in areas such as agriculture must be critically considered," he said.
In his study, entitled "Islamic banks can shine beyond comfort zones", Sen said there was no reason why micro businesses cannot be a major component of the nation's economic development and could play a significant role in reducing unemployment and promoting investment.
"By focusing on the needs and diversification effort of the economy, Islamic banking should be the alternative banking system that can serve the country and its people," he said.
Until the government does promulgate its new banking regulations, Brunei's Islamic finance sector can either stay in its comfort zone or prepare for the day when it will be challenged on its home turf.