Developing Islamic finance

BANDAR SERI BEGAWAN - IN A policy move that would change the Islamic finance environment this year, Minister of Development Yang Berhormat Pehin Orang Kaya Indera Pahlawan Dato Seri Setia Hj Suyoi Hj Osman in his capacity as deputy chairman of the Autoriti Monetari Brunei Darussalam (AMBD) announced that the central bank will be looking to extend the sukuk tenure to have longer maturity dates and to create a secondary market in the near future.

The Sultanate has historically been issuing short-term sukuk with a maturity of 91 days. The latest, Series 97, was issued on November 14, 2013, and matures on February 13, 2014 at a rental rate of 0.15 per cent.

Sukuk Series 98 is one of the newer and longer tenure sukuk, which was issued on November 21, 2013, and is set to mature on August 21, 2014, with a rental rate of 0.19 per cent.

According to the AMBD website, the total of these two sukuk issuances amounted to $200 million, and the Brunei Government has since issued over $6.63 billion worth of short term Sukuk Al-Ijarah securities since its maiden offering on April 6, 2006.

In his opening speech at the recent 9th Annual Brunei Darussalam Roundtable, held at The Empire Hotel & Country Club, the minister said that these sukuk issuances are intended to establish a yield curve and provide investors an indication of future rates and economic activity.

He added that with ongoing efforts to develop Brunei’s capital market, the authorities remain conscious of the need to “educate and protect the public at large”. He also noted that much work has been done in this area in many countries, and that Brunei could learn from the experience of other jurisdictions, particularly in the design of a national financial literacy strategy. This, the minister said, would be one of the upcoming initiatives by the authorities.

In April this year, the AMBD inked a memorandum of understanding (MoU) with Bank Negara Malaysia (BNM) to “further strengthen cooperation in the financial sector” between Brunei and Malaysia. While the specifics of the MoU were not revealed, the press statement issued during that time stated that both central banks will be working together in the development of Islamic finance as one of the agenda.

It was in June this year, when the deputy state mufti mulled the idea of replacing conventional banking system with a fully Islamic banking system as a national policy for Brunei. Speaking at the 2013 Islamic Finance Conference held here, Pehin Orang Kaya Paduka Setia Raja Dato Paduka Seri Setia Ustaz Hj Awang Suhaili Hj Mohiddin said that several Muslim nations have fully adopted the Islamic banking system and did 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 to change banking practices to a Syariah-compliant system,” he said at the event. The deputy state mufti then raised the idea of introducing such policy in Brunei.

In the presentation he delivered at the conference, he said that although Islamic banking had achieved success globally and is competing with traditional financial institutions, there are challenges that remain to be addressed.

He pointed out that one of the main challenges was to find effective ways to encourage more Muslims to save their money at Islamic financial institutions, and make these banks the “preferred institutions” to manage their finances, especially in avoiding interest rates which are being charged at conventional banks.

Another challenge is to change the perception of Muslim communities who tend to think that there is little difference in how Islamic banks operate from conventional ones.

However, while Brunei is gearing to push for longer tenor sukuk, Islamic finance experts who have visited Brunei such as Mohammad Jalaluddin, president of Ansar Financial Group and vice chairman of the Islamic and Ansar Cooperative Housing Corporations, said that while Islamic bonds are good for raising funds for big infrastructure projects, not everyone has access to the amount of money that the investment requires.

“Islamic economies need to expand beyond sukuk issuances to broaden the industry and allow more people access to Islamic finance,” he said in an interview in November this year.

He explained that sukuk have various structures and different contracts that not everyone can understand. “Islamic funds are straightforward, where fund managers can say they are taking this money and investing in real estate for example, and whatever returns that come from it, will be shared by investors and everyone understands that,” he said.

Mohammad also said that Brunei is in “a good setting” right now, because the country is stable and there is good liquidity. He explained that there are only two issues that Brunei would have to deal with; Syariah-compliant, and Syariah-based products.

Mohammad explained that Syariah-compliant products are not purely Islamic finance instruments, whereas Syariah-based products are.

“It means that there are no exceptions or concessions made, and Brunei can do Syariah-based products such as takaful and so on,” he said. Mohammad said that the global Islamic finance community is also moving away from pure Islamic finance and going into Islamic wealth management, which Brunei can do due to its wealth.

The Brunei Times