Brunei Update: Brunei Seeks to Expand its International Islamic Finance Sector

Crown Prince: Brunei Seeks to Expand its International Islamic Finance Sector

Since 2006, the Government of Brunei has maintained a continuous program for sukuk issuance with increasingly longer maturities, which make up most of the domestic bond market. Brunei is now preparing for long term government issuances according to Brunei’s financial sector blueprint. According to the Government of Brunei, with Muslims accounting for more than 20 percent of the world’s population, and the increasing awareness on Islamic finance, Brunei’s Islamic finance industry looks poised to continue its remarkable growth. Such global progress paired with Brunei’s strong Islamic philosophy would make it a favorable and potentially competitive market for the shariah-compliant industry. Brunei is also considering undertaking additional market operations for banking system liquidity-smoothing purposes to better anchor the short end of the yield curve. The full financial sector blueprint for 2016-2025 can be found here.

By comparison, Malaysia is currently the largest sukuk market in the world, with approximately 43 percent of total sovereign sukuk outstanding in 2016, and is actively pushing its sukuk market into innovative new fields. It structured the world’s first green sukuk in July, which was followed by a second issuance in October. Furthermore, Malaysia has improved foreign access and is working on basic market improvements. At the end of 2016, Bank Negara Malaysia expanded the Appointed Overseas Office (AOO) Framework to new transactions, including foreign exchange hedging for Ringgit assets, allowing non-resident traders and investors greater access to ringgit markets. In April 2016, they unveiled additional plans to improve bond market liquidity, ease hedging activities, and improve market information.

Another Muslim-majority ASEAN market, Indonesia, also plans to further leverage its large Muslim population by growing its own Islamic capital markets particularly to fund infrastructure projects in line with the Jokowi administration’s plan. Islamic financial products such as project financing and sukuk bonds, are essentially structured as asset-backed or asset-based and therefore are well-suited to serve as an additional source of Indonesia’s infrastructure financing.

Continued expansion of capital markets and the local investor base across ASEAN requires efforts from policymakers to improve financial literacy and create a more enabling retail investment environment that is safe and attractive enough to prevent sudden outflows like those that occurred during previous financial crises. Brunei’s political and macroeconomic stability is something that the sultanate can continue to leverage on in developing its potential.

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