The Islamic Banking Order 2008, which was prepared by the Finance Ministry and which has just been approved by the Sultan, allows for the entry of foreign banks into the sector, as well as fully codifies Islamic financial activities in Brunei.
Improving the regulatory regime, as well as opening up the sector to new operators, is vital, especially during the current period of economic uncertainty, according to Pehin Dato Abdul Rahman, Brunei's second minister of finance.
Though Shariah-compliant finance has suffered during the downturn, its losses have not been as extensive as those in the conventional segment of the banking industry, the minister said during a finance conference in Bandar Seri Begawan on November 25. This was due to the sector being governed by a philosophy based on ethics and integrity, he said.
"I am absolutely confident that as practical Islamic finance progresses and improves, it would only be a matter of time before it will be able to fulfill the expectation and prove the perception, that it is a less risky alternative to conventional finance," the minister said.
Combined with the September approval of the Takaful Order 2008, which governs the operations of Islamic insurance operators in Brunei, the new banking laws will help Brunei's financial sector weather the recent global economic storm, said Pehin Dato Abdul Rahman.
According to the minister, the new regulations have not only reinforced the existing regulatory and supervisory framework, but have also increased capital adequacy on liquidity requirements and enhanced risk management.
"Nonetheless, we should not be complacent," the minister said. "In fact if anything, the current crisis should awaken us to the importance of ensuring continuous effective governance, risk management and the upgrading of market skills and capabilities by all the market actors to ensure the healthy functioning of our financial system."
There are a number of international banks planning to take advantage of Brunei's new regulations to set up Shariah-compliant operations, including HSBC. The bank, which already conducts conventional financial activities in the Sultanate, hopes to open its first branch offering Islamic banking services early next year.
According to HSBC's chief executive officer in Brunei, Tareq Muhmood, the bank sees a strong potential client base in the Sultanate for an Islamic banking option. The demand would come both from existing customers interested in Shariah-compliant finance in addition to HSBC's conventional services, as well as from potential new clients who only engage in Islamic finance, but who are interested in dealing with an international bank.
"In Brunei, we've done a lot of homework and market research on it to understand the opportunity that exists for a bank like HSBC and we can deliver it in a number of ways depending on the law," Muhmood told the local press in late September.
Another foreign bank planning to enter the Brunei market is Singapore-based OCBC. On November 11, Jeffrey Chew, chief executive of OCBC's Malaysian operations, said the bank was looking to branch out into Brunei and Indonesia - regions where he said demand for Islamic finance was expected to grow rapidly.
"We do see that Brunei and Jakarta probably will also move quite quickly in the next couple of years," Chew told Malaysian media.
However, while Brunei wants to attract more overseas players to its financial sector, and especially to its Islamic segment, it does face stiff competition from other countries in the region.
Malaysia was an early entrant into the Shariah-compliant finance sector, enacting its first Islamic banking legislation in 1983, while Singapore has also embraced the banking model, with a number of local and international firms offering Islamic financial services.
Though Brunei's Islamic finance sector is relatively small in comparison to some of the Gulf states - with takaful insurance companies commanding about one third of the estimated B$175m in premiums last year, according to the Finance Ministry - it now has a firm base on which to build.
Dato Paduka Ali Apong, permanent secretary at Brunei's Ministry of Finance, told the conference on November 25 that the country had the all the characteristics to become an attractive destination for Islamic insurance and fund activities.
"The key feature of Brunei Darussalam as an international Islamic financial centre is the comprehensiveness of the international financial services and products offered to global market players, ranging from Islamic banking to insurance, takaful, mutual funds, fund management, wealth management and capital market activities," he said.