Push for Islamic Finance needed in Brunei

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Arno Maierbrugger
By Arno Maierbrugger

Brunei, although it has a small banking market, is still somehow underestimating the potential of Islamic finance as incentives to set up Shariah banking facilities are probably still too inadequate.

Currently, Brunei has just one full-fledged Islamic bank, Bank Islam Brunei Darussalam, seven conventional banks and one Islamic trust fund. It is understood that Brunei’s financial market regulation does not allow conventional banks to operate Islamic windows, similar to the respective laws in Qatar and Jordan, for example, and lenders would have to set up separate entities to launch Islamic finance operations. For many, in this small market the investment might be too heavy, and thus the Islamic finance sector in Brunei remains much like a monopoly for now.

Basically, it is a regulatory decision based on the interpretation of Shariah law whether Islamic banking windows should be allowed or not. While it is not permitted in Qatar or Jordan, it works well in Malaysia, Oman, UAE, Pakistan and many other Muslim countries.

Experts say that Islamic windows are playing an equally-important role to promote the Islamic banking industry parallel with full-fledged Islamic banks in most parts of the world, and, most of all, they are doing well to attract customers from conventional banking to Shariah-compliant business, which Brunei might want for its citizens. Islamic windows and subsidiaries of Islamic lenders have to comply with the same rules and Shariah regulations, which are framed for full-fledged Islamic banks.

With an exclusivity of Shariah banks, there are also challenges such as a separate branding, leverage sales models and a separate banking network. For example, in Malaysia – the largest Islamic finance market in the world with about 25 per cent Islamic banking market share of the total retail business, two full-fledged Islamic lenders only have a five per cent share of the market while the rest of the 20 per cent are held by Islamic windows and subsidiaries of conventional banks.

Many proponents of Islamic banking also emphasise that the Islamic banking and finance system is not primarily the expression of a religion, but a way of “participation banking” which can be utilised by Muslim and non-Muslims alike to benefit from the many advantages of Islamic finance. An example for this is the thriving Islamic finance market in South Africa, where the Muslim population is less than two per cent, but the country boasts five Islamic banks, 13 Islamic funds and two takaful companies which are equally popular among Muslims and non-Muslims communities because of their services.

That said, and by energising its Islamic finance sector, Brunei could for example reach out to the nearby Philippine Muslim community, which, after all, counts for seven per cent of the country’s 100 million population. Being in dire need for infrastructure financing, there are enormous opportunities for the promotion of Islamic finance in the Philippines, especially in long-term financing through sukuk. Retail banking could be the next step. Brunei just needs to jump on the bandwagon.

This comment is part of Inside Investor’s weekly column series in Brunei’s leading newspaper Brunei Times and is published every Monday.

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Reading Time: 2 minutes

By Arno Maierbrugger

Brunei, although it has a small banking market, is still somehow underestimating the potential of Islamic finance as incentives to set up Shariah banking facilities are probably still too inadequate.

Reading Time: 2 minutes

Arno Maierbrugger
By Arno Maierbrugger

Brunei, although it has a small banking market, is still somehow underestimating the potential of Islamic finance as incentives to set up Shariah banking facilities are probably still too inadequate.

Currently, Brunei has just one full-fledged Islamic bank, Bank Islam Brunei Darussalam, seven conventional banks and one Islamic trust fund. It is understood that Brunei’s financial market regulation does not allow conventional banks to operate Islamic windows, similar to the respective laws in Qatar and Jordan, for example, and lenders would have to set up separate entities to launch Islamic finance operations. For many, in this small market the investment might be too heavy, and thus the Islamic finance sector in Brunei remains much like a monopoly for now.

Basically, it is a regulatory decision based on the interpretation of Shariah law whether Islamic banking windows should be allowed or not. While it is not permitted in Qatar or Jordan, it works well in Malaysia, Oman, UAE, Pakistan and many other Muslim countries.

Experts say that Islamic windows are playing an equally-important role to promote the Islamic banking industry parallel with full-fledged Islamic banks in most parts of the world, and, most of all, they are doing well to attract customers from conventional banking to Shariah-compliant business, which Brunei might want for its citizens. Islamic windows and subsidiaries of Islamic lenders have to comply with the same rules and Shariah regulations, which are framed for full-fledged Islamic banks.

With an exclusivity of Shariah banks, there are also challenges such as a separate branding, leverage sales models and a separate banking network. For example, in Malaysia – the largest Islamic finance market in the world with about 25 per cent Islamic banking market share of the total retail business, two full-fledged Islamic lenders only have a five per cent share of the market while the rest of the 20 per cent are held by Islamic windows and subsidiaries of conventional banks.

Many proponents of Islamic banking also emphasise that the Islamic banking and finance system is not primarily the expression of a religion, but a way of “participation banking” which can be utilised by Muslim and non-Muslims alike to benefit from the many advantages of Islamic finance. An example for this is the thriving Islamic finance market in South Africa, where the Muslim population is less than two per cent, but the country boasts five Islamic banks, 13 Islamic funds and two takaful companies which are equally popular among Muslims and non-Muslims communities because of their services.

That said, and by energising its Islamic finance sector, Brunei could for example reach out to the nearby Philippine Muslim community, which, after all, counts for seven per cent of the country’s 100 million population. Being in dire need for infrastructure financing, there are enormous opportunities for the promotion of Islamic finance in the Philippines, especially in long-term financing through sukuk. Retail banking could be the next step. Brunei just needs to jump on the bandwagon.

This comment is part of Inside Investor’s weekly column series in Brunei’s leading newspaper Brunei Times and is published every Monday.

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