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Friday, 22 June 2007

Brunei's Islamic Banking Plans are Robust

Bandar Seri Begawan, 22 June 07 - What hit Mr Jaspal Singh Bindra, Regional CEO, South East and South Asia of Standard Chartered Bank, when he was recently in Brunei for a day was the diversity in terms of gender compared to the rest of SCB institutions..
"Around 75 or 80 per cent of our staff in Brunei is female, which is pleasantly different from the rest of our banks," he said. "Secondly, when you talk to the people, especially in the government, they are so aware of what's right and wrong rather than being in a state of denial or state of exaggerated performance."
The Bulletin spoke to him at length about Islamic banking and what SCB’s plans are in providing services.
What are your views on the overall banking practices in Brunei?
In just a few words, I would say it's still small. It's also lacking depth in terms of the participants where there are just a few local banks and foreign banks. I believe there is still room for both breadth and depth to be expanded. Overall, the pool is small because Brunei has a small population and has a small economy. However, it is huge for the size of its territory but small by global standards.
What are your views on Islamic banking?
Our institution is predominantly present in Asia, Middle East and Africa and we in our footprint cover almost the entire Islamic world, we have the whole of the Middle East, Pakistan and Bangladesh, which are the two big Muslim nations. We also have Indonesia, Malaysia, Brunei, parts of China and other areas in this region. Clearly, it is very relevant from our footprint and our customer franchise.
Secondly, it is at a stage of growth where the only way you can go is up, compared to conventional banking. It is in huge multiples compared to where conventional banking can go because conventional banking base is so big. For conventional banking to grow in high percentages is quite difficult other than the few economies like China, India, Vietnam which are having an unnatural kind of growth. Most of the markets are only going to grow in a very mature way.
Whereas in the Islamic banking we think there is going to be a boom. The thing that will fuel the boom, we believe, is the supply side, which is so robust. The amount of liquidity and liability that are coming into Islamic Banking are huge and is largely to do with the wealth creation. It is really finding the assets that conform to the Syariah law.
Compared to other countries, how are-we doing in the Islamic banking arena in that sense?
I think there are two ways to looking at it. There is an absolute progress kind of chart or report you can have and then there is comparative.
And I can say in absolute terms Brunei is doing very well. I think the government has got us thinking together on it. They have a plan and they've made it out quite well. They have been at it for some time now and they are planning to extend their laws of the bonds that they raise under the sukuk from few months to a year. Obviously, they are developing at the right stages.
But when you look at what other countries are doing like Dubai, Pakistan or Malaysia, they have just taken a huge leap forward through a combination of things but they are doing a much larger part of their business through incentives, creating other benefits and so on.
A point in case would be Malaysia. You can do Islamic banking under the conventional banking licence as long as you do it at an arm's length. In Brunei on the other hand, you can't. You have to have a separate licence for it, so that straightaway makes it a little bit of a barrier for people coming from overseas to do it here.
Having said that, full marks to them (Brunei) for progressing the way they have and what I have heard is that their plans are even more robust. I was fortunate to meet with the minister in Kyoto last month during a conference and he was absolutely determined to take Islamic banking to another league. So clearly there is huge amount of determination, planning and thinking behind it and we think (Brunei's) time will come though some others have moved ahead already.
Is it affecting SCB in any way?
Not really, because it is still small but if we don't sort of move with it because now we are getting a very clear signal that it's going to be a bigger thing in the future, that we would have the same conversation in a couple of years and if we are still where we are today then I can tell you that we will be thinking we are losing out. But hopefully we won't let that happen.
Islamic banking has a great potential in attracting foreign direct investment. Won't it put pressure on your bank's interest margins?
Well, it is difficult to say because Islamic by definition is going to be a fixed rate kind of instrument and fixed rate is only relevant at a point in time of contracting the transaction. It can't be the only reason for affecting interest rate because it is a periodic setting, unlike a daily fluctuation, which you have on floating rates.
Conventional banks in Malaysia and Singapore are feeling the heat more from Islamic banks because I think as interest rates are rising, people are preferring to go for a fixed rate rather than being exposed to floating. This is because conventional banks don't want to lend fixed anymore, as they don't want to take the pricing risk themselves. If they tie up fixed for you, the rising rate environment will end up maybe over the life of that transaction paying higher or at least reducing their margins.
Smart businessmen are finding a structure where they can conform to Syariah, like in Malaysia. Let me give you an example. More than 50 per cent of our (SCB's) assets in Malaysia are by Chinese businessmen and not by the Muslim population because they just have figured this out, if you can get it fixed and these people are desperate for land because they don't have any assets, so if we can conform our asset use to Syariah and get it approved, we can get this money at a reasonable rate and fixed as well.
So I think that is what's putting the pressure on conventional banks. They are saying, "Hey, this was typically our business and now it's going away. On the other hand we can't compete, we can't put fixed:"
Does SCB Brunei have any plans of providing Islamic banking services in the near future?
Right now we can offer it from across the border, there is no restriction on that as we are being told by the authorities here. But eventually, I think we will want to do it here.
The whole challenge on this is a trade off between the scale and timing because you can start very early and stay ready for it but then what you do is you invest capital and it takes a long time for capital to start generating any return. On the other hand if you don't do it for too long, then you've lost the initial set of prime clients and then you enter late when there is enough to generate returns to your capital but not customers to go to. They have their loyalty with some other people.
So I think, that's the trade of. But having said that, Tiew Siew Chuen, the CEO of SCB Brunei, is actively engaged with the government to see how we can get into this earlier than later. -- Courtesy of Borneo Bulletin

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