Islamic Financial Growth

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The government of Brunei is taking steps to further develop the Islamic banking and finance sector in a move to establish the country as an Islamic financial services hub in the region. With the absence of a conventional capital market, the government is paving the way for Brunei to develop an Islamic capital market instrument instead.

"The way we see it, Islamic finance is actually a huge growth area in Brunei that we can leverage our economy on. We are not here to compete with Singapore and Malaysia but we do know we have strengths in certain areas that we can enhance," Mohammad Rozan, deputy permanent secretary at the ministry of finance, told OBG.

The first step towards establishing an Islamic capital market and strengthening the sector came in 2006 when the government launched its first short-term 91-day sukuk Al-Ijarah, worth $98m.

The Al-Ijarah programme is geared towards making Brunei's financial market an attractive funding source. The aim is to promote the concept to both domestic and international investors and encourage them to issue sukuk as an alternative means of funding business developments and expansions. To date, the government has issued short-term sukuk six times, reaching a cumulative nominal issue of $477m.

Rozan told OBG, "There are a number of products we can actually sell through Brunei. I think we see the sector more in terms of product development and short-term securities. In addition to this, after the success of the short-term sukuk, we may begin issuing long-term sukuk in the future."

Haji Abdul Rahman, deputy minister of finance, said that with the global demand for sukuk issuance still largely unsatisfied, he believes Brunei is in an ideal position to capitalise on the huge potential of the Islamic financial market, particularly since the sector's total of $9bn is a small fraction of the global debt market.

Another development is the merger of Islamic Bank of Brunei and Islamic Development Bank of Brunei in 2006 forming Bank Islam Brunei Darussalam. Now Brunei has a single Islamic banking entity with 27% of the market share in terms of assets and the necessary resources to develop investment banking, fund management and corporate finance.

Muhammad Syaippudin, managing director of Bank Islam Brunei Darussalam, told OBG, "Islamic finance should not only focus on retail and corporate banking but it should provide investment banking and opportunities to local institutions and consumers to invest their excess liquidity because Brunei has too much excess liquidity."

Syaippudin added, "With this merger, we are able to compete directly with other foreign banking institutions such as HSBC and create a strong platform for Islamic finance. The merger has also opened up opportunities for us to expand our operations internationally."

To ensure efficiency, transparency and credibility, the government has recently called for continuous monitoring and supervision of the Islamic financial services sector to further strengthen its position in the economy. The ministry of finance has said that in order to enhance the nation's capabilities, it must continue to measure itself against international standards, particularly on matters concerning supervision and regulation.

Islamic banking has existed in Brunei only for the last 12 years but it has witnessed rapid and promising growth. Rozan told OBG, "I think Brunei, as a Muslim country, is a selling point by itself but our Islamic banking [sector] is still fairly new and conventional banking is more established here. We would like to see the conventional banks apply for Islamic banking licences and actively encourage them to set up subsidiary companies or alternatively to convert themselves from conventional to Islamic [banks]."

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