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Brunei Spins The Web Of Islamic Banking

Basking in the glory of its natural resources, the small but rich Sultanate of Brunei is strategically located on the South China Sea, adjacent to important sea routes linking the Indian and Pacific Oceans. On the world map, Brunei is synonymous for its oil and gas resources, and boasts of structured regulatory and legislative policies that control the tropical coastal state. With a population of approximately 400,000, Brunei is home to beautiful Islamic architecture and is increasingly embracing the dynamics of Islamic finance. Rather than solely relying on the export of crude oil, the country is now diversifying and widening its economic base to include Islamic financial intermediaries, as a way of enhancing its economic progress.
Brunei’s economy
Brunei’s economy is largely controlled by its oil and gas resources which make up to two thirds of its national gross domestic
product (GDP). Of this, 98 per cent is exported, raking in 93 per cent of national revenue. In 2012, Brunei’s GDP was recorded to be worth USD1.6 billion (RM37 billion). On an average, the country produces approximately 167,000 barrels of oil a day, making it the fourth largest producer of oil in the region. Globally, Brunei ranks at ninth place as producer of liquefied natural gas (LNG), producing close to 895,000,000 cubic feet of LNG a day. A nation with strong values, Brunei’s wealth is distributed and shared amongst its people. The small Sultanate has the second largest Human Development Index (HDI) in the region after the Republic of Singapore. The HDI is a composite statistic that reflects life expectancy, education and income indices used to rank countries into four tiers of human development. The International Monetary Fund (IMF) places Brunei in fifth place globally, by GDP per capita, for purchasing power parity. In 2011, the IMF’s estimates placed the country as one of two countries (the other being Libya) with a public debt at zero per cent of the national GDP. Forbes ranks Brunei as fifth richest nation out of 182, due to its petroleum and natural gas fields.
Islamic banking in Brunei In Brunei
Islamic finance unfolded with the establishment of TabungAmanah Islam Brunei (TAIB) in 1991 under Perbadanan Tabung Amanah Islam Brunei Cap 163. TAIB went on to establish two companies namely Insurans Islam TAIB Sendirian Berhad, a takaful insurance set up and Darussalam Holdings Sendirian Berhad, a Haj or Umrah travel agent. Two years later, in 1993, the Islamic Bank of Brunei was formed, followed by the Islamic Development Bank of Brunei in 2000.

The rise of Islamic finance was rapidly rooting itself in Brunei, when in mid-July 2005, Bank Islam Brunei Darussalam (BIBD) was born from the consolidation of the Islamic Bank of Brunei. Since then, the vibrant strokes of Islamic banking were evident in this self-sustaining economic enclave covering banking, takaful, asset management, mutual funds and trust services. As a result of the merger, BIBD is now Brunei’s largest bank and a booming Islamic financial institution. BIBD’s assets currently stand in excess of B$6 billion, with a net profit after zakat and taxation of B$119 million. BIBD demonstrates a significant capacity to expand its business by way of its tier-1 capital of above B$1.03 billion and an adequacy ratio of 25.7 per cent.

Prior to 2011, there was no central bank in Brunei, and the functions and jurisdiction of the banking system fell under its Ministry of Finance via the Brunei Currency Board, the Department of Financial Services and the Brunei Investment Agency.Islamic banking principles, at that point of time, were essentially governed and supervised by the national Syariah Financial Supervisory Board that was established in 2006, with the role of enhancing Syariah governance and supervision whilst stimulating the industry’s growth. The board is entrusted with the duty of ascertaining that all Islamic products are in accordance with Syariah law before they are allowed to be distributed. This soon changed. On January 1, 2011, Autoriti Monetari Brunei Darussalam (AMBD) was established under the Autoriti Monetari Brunei Darussalam Order, 2010 that acts as the Central Bank of the wealthy nation. AMBD took on the role of a statutory body undertaking several core functions as well as formulating and implementing the country’s monetary policies, whilst regulating and supervising financial institutions and managing its currency. AMBD is a merger of four divisions previously under the Ministry of Finance, namely the Financial Institution Division, the Brunei Currency and Monetary Board, the Brunei International Financial Centre and part of the Research and International Division.

The web of polices and frameworks
With the advent of AMBD, the development of Islamic banking in the Sultanate is now seamlessly regulated with clear and innovative strategies, all under one roof. According to AMBD, in line with the country’s Islamic Monarchy philosophy, Islamic banking and finance has become one of the primary sectors of focus in the financial services industry. Similarly, AMBD shares that the Takaful industry has been able to penetrate the insurance market with a sizeable market share of 42 per cent in gross premiums and 20 per cent in assets, as at end 2010(this is a common form in corporate writing especially annual reports and financial announcements). In 2006, the government of Brunei Darussalam launched the short term Sukuk Al-Ijarah money market programme with key objectives of contributing to the early development of the capital market. In an effort to take the country’s Islamic banking to the next level, a special division was formed to undertake this auxiliary role. AMBD Development Division is aimed at providing a supporting role in developing Brunei’s Islamic financial hub to be on par with other global and regional peers. The division is the catalyst in the promotion and enhancement of financial market participation, contributing towards a sound and robust
financial and capital market environment.

Banking fuelling Brunei’s economy

In the Oxford Business Group’s Economic update published in early 2013, Brunei’s non-oil and gas sector is said to be gaining tremendous progress, paving the way for the government’s plans to target value-added production, in spite of the country’s bullish overall economic pace in 2012. The Department of Economic Planning and Development (JPKE) announced in December 2012 that GDP growth contracted to 1.6 per cent in 2012, down from 2.2 per cent the previous year. The slower growth was attributed to a drop in oil and gas output, as well as a fall in LNG production. The rise of the non-oil and gas sector by four per cent in 2012is said to be mainly driven by the expansion in government services, the wholesale and retail trade, business services and water transport. According to Brunei’s Department of Economic Planning and Development, the services sector (which includes banking) continued to grow by 3.8 per cent in 2012, after a rise of 3.7 per cent in 2011.

The services sector was recorded to add an estimated B$6 billion or 28.2 per cent to the GDP in 2012, an increase in contribution compared to 2011 which was valued at B$5.7 billion or 27.1 per cent. JPKE’s data reveals that the finance sector’s contribution to the country’s GDP rose to 2.8 per cent in 2012 from 2.7 per cent in 2011.

Moving forward
Javed Ahmad, Bank Islam Brunei Darussalam (BIBD) Former Managing Director, says that Syariah compliant banking in Brunei is set to reach between 55 per cent and 60 per cent from 40 per cent market share in the next five years. Javed shares with the Brunei Times, that the forecast, coupled with a more central role played by Islamic finance in Brunei’s economy, emphasises the need for standardised regulations for Islamic finance. “Having strengthened its operational base and regulatory framework, Brunei is now taking steps to address the shortage of trained industry professionals in the Islamic financial sector, by providing on-the-job training and with local universities offering bachelors, masters and doctorate degree programmes related to Islamic finance.” He is also confident that with more aggressive marketing, Brunei’s journey towards becoming an Islamic financial hub is possible in the next few years. Aside from that, BIBD is also charting its course beyond its borders as the representative for Brunei in the China-Asean Inter Bank Association, in an effort to foster close ties with other banks and financial institutions across the world. “As such, a bilateral cooperation framework agreement was signed with the China Development Bank, which focuses on areas such as the placement of funds, provision of credit facilities, international trade settlement and project-financing. This progress creates in-roads not only for BIBD, but also for Islamic finance into the regional and international financial sphere,” says Javed in BIBD’s annual report 2012.
In 2012 , BIBD was ranked 696th amongst the top 1,000 banks in the world by “The Banker”, by virtue of its Tier-1 capital strength, and 74th in terms of soundness for capital asset ratio. From a more radical perspective, there is also a certain degree of rumbling to do away with conventional banking and replace it with an Islamic banking system. Brunei Deputy State Mufti Pehin Orang Kaya Paduka Setia Raja DatoPaduka Seri Setia Hj Suhaili Hj Mohiddin was quoted in The Brunei Times in June this 2014  that he was mulling that idea. He notes that several Muslim nations have fully adopted the Islamic banking system and have done away with conventional banking practices in their respective countries. “In 1984, the National Bank of Sudan instructed all banks in the country to ban riba (usury) and change its banking practices to a syariah-compliant system,” he shares with the Brunei Times.

Rocky roads ahead
The Deputy State Mufti also points out several challenges that can be addressed for a more speedy development of Islamic banking in the country. He says that one of the main challenges is to find effective ways to encourage more Muslims to save their money at Islamic financial institutions, making these banks the preferred institutions to manage their finances, especially in avoiding interest rates charged
at conventional banks. Another challenge is to change the perception of Muslim communities who were inclined to think that there is little difference in how Islamic banks operate from conventional ones. He elaborates that a major difference is the concept of Maqashidasy-Syariah (goals or purposes in the context of Islamic banking), offered by Islamic banks, which serve to “alleviate the financial burdens of the public”. In the Borneo post, Javed displayed an optimistic picture of overall growth of Islamic banking in Brunei. It was reported that the Islamic banking segment strengthened its position within Brunei Darussalam’s financial services industry last year on the back of rising demand, leading to the launch of a new bank and major bond issuances . Having moved early to establish Syariah compliant services, the Sultanate is now well-placed to carve out a niche for itself as an international Islamic banking centre. While Brunei Darussalam is well-placed to tap into growing interests in Islamic financial services, observers have highlighted the need for the country to develop new Islamic banking products, if it is to maintain its position in the market.

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