Brunei's financial system is transitioning to one in which Islamic banking and takaful are the dominant forms of banking and insurance, said the Oxford Business Group (OBG), a global consultancy and research company.
According to the latest publication of OBG The Report: Brunei Darussalam 2014, the country's two Islamic banks, Perbadanan Tabung Amanah Islam Brunei (TAIB) and Bank Islam Brunei Darussalam (BIBD) had combined assets of $7.9 billion at the end of 2013, representing 41 per cent of total bank assets.
"That was up from 37 per cent in 2010 and demonstrate that Islamic banking is making a steady progress towards it's declared goal of a majority market share," OBG said.
OBG said consolidated Islamic banking assets, including that of BIBD's finance company subsidiary BIBD At-Tamvil, hit $8.3 billion. This is according to OBG calculations based on data from financial regulators and BIBD's annual report.
"That too is equal to 41 per cent of consolidated banking sector assets, including conventional finance companies," OBG said.
Takaful is already dominant in the general insurance sector, OBG said, noting that takaful had a 68 per cent share of the general insurance and takaful assets in March 2014. This is up from 62 per cent in March 2011.
The report said family takaful is small but catching up, with 18 per cent of total life insurance and family takaful assets in March 2014, up from 12 per cent in March 2011.
Total takaful assets came to some $444 million or 33 per cent of total insurance and takaful assets at the end of March 2014, said the report, citing figures from financial regulators.
Two takaful companies compete in the insurance market, Insurance Islam TAIB, a subsidiary of TAIB and Takaful Brunei.
Both have separate subsidiaries that compete in the general takaful market (Insurance Islam TAIB General and Takaful Brunei AM) and the takaful family market (Insurance Taib family takaful and Takaful Brunei Keluarga).
OBG said that Islamic banks are more aggressive than most of Brunei's conventional banks in putting their funds to work in the domestic economy.
While Islamic banks have not yet reached a majority of banking assets, they may already make up more than half of domestic loans said the report, though added that there was still limited data.
The strong focus on domestic lending is because the Islamic banks in Brunei are government linked institutions with mandate to support domestic business. The report said that most conventional banks in the Sultanate are foreign owned and take a more cautious approach to lending.
Another reason is that the largest Islamic bank, BIBD, handles most public employee payroll account and since 2010 banks have been forbidden from making consumer loans to people who do not receive their primary income into an account at the bank.
The OBG said Islamic banks also have a higher non-performing loan ratio, 9.7 per cent compared to the 4.1 per cent conventional banks, citing figures provided to the International Monetary Fund by financial regulators.
Despite this, OBG said that Islamic banks continue to be almost as profitable as conventional banks due to larger volume of high-earning loans. The report said that the average return on equity of Islamic banks was 9.2 per cent in the first nine months of 2013, compared to 10.9 per cent for conventional banks.
BIBD currently dominates the Islamic banking sector, accounting for about three-quarters of Islamic banking by assets said the report, citing OBG calculations from available data. OBG said TAIB is somewhat held back by its status as a trust fund, and because of this even government officials said that they would like to see at least one more Islamic bank enter the market. The OBG cited a consultant with AMBD's banks and specialised marked division saying that there is room for two or three more banks in the Islamic segment.