Brunei Darussalam: Islamic banking earmarked for further growth

Brunei Darussalam: Islamic banking earmarked for further growth

The Islamic banking seg­ment strengthened its position within Brunei Darussalam’s financial services industry last year on the back of rising demand that led to the launch of a new bank and major bond issuances.

Having moved early to estab­lish shariah-compliant services, the Sultanate is now well placed to carve out a niche for itself as an international Islamic bank­ing centre.

However, the industry will need to address a number of chal­lenges, led by a shortage of skilled workers, if it is to fully support the segment’s development.

In mid-October, Standard Chartered Bank Brunei (SCB) said it was mulling plans to intro­duce Islamic banking products this year to meet increased de­mand for sharia-compliant bank­ing services in the Sultanate.

SCB’s announcement followed the September launch of the Islamic Bank of Brunei, which replaced the International Bank of Brunei as the sole domesti­cally owned bank operating in the country.

The Tabung Amanah Islam Brunei was the first financial institution to offer savings and financing in accordance with Islamic principles when it was launched in 1991, followed two years later by the Islamic Bank of Brunei. They were joined in 2000 by the Islamic Development Bank of Brunei.

SCB’s chief executive officer, Lai Pei-Si, told reporters during a media luncheon held at Hua Ho Manggis Mall in October that launching an Islamic bank was a “logical step to take and logical step to consider because Brunei has an express need for Islamic banking products”.

He added that the bank would begin modestly by offering Is­lamic products, with hopes of bringing “much more compre­hensive Islamic solutions into the country”.

In April, the managing director of Bank Islam Brunei Darus­salam, Javed Ahmad, said the market share held by sharia-compliant banking was expected to increase to 60 per cent from its current levels of 40 per cent to 55 per cent over the next five years.

Speaking at a seminar on Islamic finance, Ahmad said Brunei Darussalam’s strengths, led by strong economic and politi­cal stability, good infrastructure and government support, meant it was well placed to build a reputation as an Islamic financial centre.

“With more aggressive mar­keting, Brunei Darussalam’s journey towards making itself an Islamic financial hub might become a possibility in the next few years,” he said.

A report prepared in December by global consultancy firm Ernst & Young said the worldwide value of Islamic banking would reach US$1.55 trillion in 2012 and US$1.8 trillion this year. Growth within the Muslim population of Middle East and North African countries and Asia, it added, were key driv­ers in the increasing demand for Islamic financial services.

The Sultanate is clearly ben­efitting from early participation in the Islamic banking segment, having launched its first Islamic bond, the Short Term Govern­ment Sukuk Al-Ijarah programme worth B$150 million (US$111 mil­lion) for a three-month certificate in April 2006. In November, the Autoriti Monetari Brunei Darus­salam (AMBD), which is acting as the central bank, announced the successful pricing of its 82nd is­suance of sukuk, or Islamic bond, which was worth B$100 million (US$122.5 million) at a rental rate of 0.16 per cent. The move followed a US$100 million, 90-day issuance that matures this month.

While Brunei Darussalam is well placed to tap into growing interest in Islamic financial services, observers have high­lighted the need for the Sultanate to develop new Islamic banking products if it is to maintain its position in the market.

“Understanding the theory of Maqasid al-Sharia (the objectives of Islamic law) and the defining characteristics of an Islamic bank could encourage the Islamic banking industry to improve and excel in their product innova­tion as well as financial inter­mediation that can be linked to economic growth,” Abdul Ghafar Ismail, a lecturer at the Research Centre for Islamic Economics and Finance, Universiti Kebangsaan Malaysia, said at a conference in May.

Industry experts believed the Sultanate was working to ad­dress these challenges, with a particular emphasis on improv­ing staff training after human resources was identified as a factor that could limit its success in the field.

“Having strengthened its op­erational base and regulatory framework, Brunei is now taking steps to address a shortage of trained industry professionals in the Islamic financial sector by providing on-the-job training and local universities offering bachelors, masters and doctorate degree programmes related to Islamic finance,” said Javed.

The Sultanate’s early entry into the Islamic financial serv­ices market has provided it with solid foundations to develop the industry.

Experts suggested the sector should now shift its focus to exporting that expertise and consolidating a global role in sharia-compliant banking.

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