Brunei Darussalam's banks seem to be weathering both the slowdown of the domestic market and the world's financial sector, buoyed by their own sound loan positions and comprehensive state measures.
Though the Asian Development Bank (ADB) predicted that the Sultanate's economy will contract by 0.4% this year, in part due to lower hydrocarbon revenues, Brunei Darussalam's banking sector is not only expected to fare better than this, but be well placed to take advantage of the expected upturn in the economy in 2010, when the ADB forecasts growth of 2.3%.
The sector has benefitted from a number of measures enacted by the government to strengthen the position of banks, not least of which was the decision to guarantee all deposits until the end of 2010, announced by the Finance Ministry last October.
The ministry described the move as a pre-emptive and precautionary measure, "to ensure a level international playing field for its financial institutions so that the integrity and stability of its financial system remains uncompromised".
The guarantee was given despite the fact the ministry said all of the banks and the financial system remained stable.
Having offered the banking sector both tangible and psychological support, the government did however warn that the state's largesse should not be abused.
"The government of His Majesty, through the Ministry of Finance, will continue to enhance its supervisory capabilities and its regulatory mechanism, by introducing additional measures to strengthen its regulatory system and consequently, the health and soundness of the financial institutions in Brunei, so that they are on par with the best in the region," the ministry's statement said.
It seems that the government's faith in the banking system has been repaid. The latest IMF report on Brunei was positive in its praise for the country's banking system and its performance during the face of the international recession, saying that the domestic financial system has so far been resilient to the deterioration in global financial markets.
"Domestic banks remain well-capitalised, profitable, and liquid, with more than half of total deposits parked abroad," said the report, issued in mid-June. "Foreign banks also showed resilience given their substantial liquidity positions, low non-performing loans, prudent loan expansion, and contingent lines with parent banks."
The IMF also noted that the banking sector, along with the rest of the economy, had been shielded from the worst of the external shocks of global financial turmoil by the state's sound macroeconomic policies and the prudent management of Brunei Darussalam's oil and gas resources.
Following the meltdown in global financial markets sparked by the US subprime crisis, Brunei Darussalam also moved to reinforce its regulatory provisions for sharia-compliant banking, introducing the Islamic Banking Order 2008 in December.
The legislation not only set minimum paid-up capital levels for banks in the Islamic finance sector and bolstered regulatory requirements, but it also put in place exacting guidelines to ensure that banks offering Islamic products were fully compliant with the rules of sharia financial law.
The full provisions of the order, which Islamic financial product providers must comply with by the end of the year, are intended to offer greater security for customers and depositors of Islamic banks, as well as creating a more robust Islamic banking system, which will be regulated and be able to operate at the same level as conventional banks.
Just as importantly, the new regulations put Brunei Darussalam's Islamic banks on a similar footing with those in other countries, setting the stage for the Sultanate to achieve one of its objectives, that of becoming a leading sharia-compliant finance centre.
Brunei Darussalam has become an excellent market for more sharia-compliant product development, according to Tan Sri Dato Azman, the Sultanate's second finance minister.
"It is also well recognised that Islamic products offer excellent potential, therefore adding depth and breadth to the banking infrastructure in Brunei Darussalam," he said in late May while attending the launch of AmCapital, the Brunei subsidiary of Malaysian fund management and Islamic finance firm Ambank Group.
That breadth and depth comes through the diversity provided by a combination of local and foreign banks operating under conventional or Islamic rules is one of the industry's strengths, says Pierre Imhof, the general manager of Baiduri Bank.
This diversity, combined with the measures put in place by Brunei Darussalam regulators intended to further strengthen the banking system, mean that the Sultanate's banks are well positioned to be active in the local or international marketplace, he said.
"Brunei Darussalam remains a liquid market," Imhof told OBG. "The banks are keen to lend this liquidity in the domestic market; however, if the demand for good loans is not there, the banks may place part of their excess liquidity abroad."
At home or abroad, Brunei Darussalam's banking sector is expanding, finding itself in a position to assist the development of the Sultanate's economy and in turn benefit from it.