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country report
Brunei Darussalam
Brunei Darussalam: Developments in
Islamic banking and Takaful
By Hajah Salma Haji Abdul Latiff
The year 2012 in Brunei can be perceived as a year where the
financial industry finally managed to fuse and strengthen its
banking operations to conform to the regulatory changes
introduced by the ministry of finance. The regulatory
requirements included the tightening of credits by
establishing ceilings for consumer spending in credit cards
and personal loans.
Since the establishment of the Autoriti Monetari Brunei
Darussalam (AMBD) in 2010, there have also been prudential
standards issued by the body for ensuring continuing stability in
the financial market in Brunei. The result has been productive,
as evident in the promotion of new banking products and the
development of enhanced technology, as well as a more stable
financial environment.
Likewise in the Islamic banking sector of the financial industry,
there is a conscious shift in direction from traditional retail
banking to corporate banking activities, marked by increasingly
active investments in local and international financial markets. In
addition we also noted changes in the Takaful industry in line with
regulatory requirements.
2012: A review
The introduction of the Banking Order of 2006 and the establishment
of the AMBD has shown marked improvement in the stability and
performance of the financial industry. The restrictions in loans and
credit cards imposed in recent years have forced Islamic banks to
move from their traditional domestic and consumer lending base to
new grounds for investments. In November 2011, Bank Islam Brunei
Darussalam (BIBD) signed a deal for a US$75 million Murabahah
financing facility with Turkiye Finans Katilim Bankasi. The fiveyear
facility is aimed to provide funding for small and mediumsized
enterprises (SMEs). Other than that, BIBD has arranged
transactions totalling more than BND2.5 billion (US$2.04 billion) as
mandated lead arranger in a structured syndicated Murabahah to
Turkish Islamic participation banks last year and raised a total of
US$300 million and acted as co-lead manager for the Republic of
Indonesia’s US$1 billion Sukuk issuance. Its focus is on carefully
selected OIC member countries and mainly on sovereign issues
and top industrial companies, which has assisted in placing the
surplus funds in less-risky investments. These financial strategies
implemented have been reported to show positive results.
The capping of the size of loans on credit cards and personal
loans was a direct response to control banks from excessive
lending towards home mortgages, car and personal loans; and to
prevent the outcome of excessive non-performing loans. As seen
in 2010, personal loans accounted for 64.6% of all loans issued
by both Islamic and conventional banks. To prevent personal
banking from dominating the loans portfolio, Islamic banks have
now introduced other Shariah compliant modes of lending with
lower risk profiles, such as the debit card, which is based on
Al-Wakalah and Ujr. This card is not only designed with better
security against fraud but more importantly it curbs excessive
spending since the amount of spending that can be utilized is
limited to the amount available in the respective accounts.
To deter financial risk and to boost the confidence of the
depositors, the government, under the Deposit Protection
Order 2010, requires banks to set aside funds as reserves.
The deposit protection scheme therefore protects depositors,
whether individuals or businesses, against loss of their deposits
in the unlikely event of a member institution failing to honour
the transaction. The deposit protection scheme in Brunei
Darussalam is administered by Brunei Darussalam Protection
Corporation (BDPC). Although this would require banks to set
aside cash reserves and pay premiums or fees to BDPC for
their administration of the fund, it provides muscle to ensure a
safe financial environment for consumers with deposits of up to
BN$50,000 (US$40,923).
The Takaful Order of 2008 has also made some changes where
there are different requirements for Takaful operators to carry
out Keluarga (Family Takaful) and Takaful Am (General Takaful).
Due to this, the local Takaful companies need to re-strategize
their business models since given the small local market size
and increasing operational costs, the profit margins will deplete
significantly. The apparent move would be for the Takaful
business to be less reliant on standard insurance products such
as the car insurance, which is their extant dominant sector, and
to venture into other opportunities, probably in special risk profile
products such as corporate industrial activities.
Brunei’s AMBD has also brought confidence to the financial
market as it vigilantly ensures the stability of the financial system
by fostering prudential standards and regulating and supervising
closely the financial institutions in the market-place. The tightening
of the consumer lending through the Personal Loan Capping and
Credit Card directives has affected the financial institutions with
marginal decline in operational profits, but generally this has
been welcomed by the public and banking institutions.
With a more robust and regulated financial structure and the
evident growth of a vibrant economy, the country has set the
premise for the establishment of a capital market which has been
a spoken many times in the past. This would be a beneficial move
consulting www.IslamicFinanceConsulting.com
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in diversifying the economy to be less reliant on oil and gas.
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Hajah Salma Latiff is the managing director at Crescent. She can
be contacted at salma.latiff@gmail.com.
February 2013 19