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Middle EastAugust 1 2004

Banks battle for customers

Competition is heating up for a share of Brunei’s consumer finance market. Simon Montlake talks to local banks and foreign entrants about their strategies. Newcomers to Brunei might be surprised to find that its small but affluent population of 340,000 is serviced by no fewer than nine domestic and foreign banks. In a country roughly the size of the US state of Delaware, a branch is never too far away, with some staying open until 10pm on weekdays for late-night transactions.
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While some banks are focused on specialised niches, such as Citibank’s private banking unit, the majority are rolling up their sleeves and pitching for a share of the booming consumer finance market. This is where the competition gets toughest, particularly for selling personal loans and issuing credit cards, which have spread rapidly in recent years.

Like other east Asian economies, Brunei hit a rough patch in the late 1990s, as investments soured and credit risk rose. But in the last three years, low rates have driven an expansion in consumer loans. The latest data shows that outstanding personal loans reached Br$2.5bn ($1.5bn) by the third quarter of 2003, up from Br$2.2bn at the start of 2002.

Sector share

As well as seven regular commercial lenders, Brunei’s financial sector has two specialised Islamic banks that offer products that comply with Shariah principles. Both are state-owned and between them are estimated to hold around 30% of total retail deposits.

One of the more dynamic private lenders is Baiduri Bank, which is 15%-owned by France’s BNP Paribas. Founded in 1994 as a corporate bank, it has since moved into retail lending and built an impressive loan book, booking Br$5.5m in net profits for 2003.

Baiduri’s general manager, Pierre Imhof, says the battle for customers is set to get tougher in the next year or two. “I see that 2004-2005 will be very competitive between all banks, which are either trying to keep their share or capture more. For banks that try to be universal in Brunei, we are finding it extremely tough,” he says.

Baiduri was the first bank in Brunei to offer internet banking and has also been quick to set up its own card centre, after initially outsourcing. By some estimates, the card market has grown in the space of a few years to 90,000 cards, though there is no central agency to track issues or report bad debts. Indeed, Brunei has no central bank and supervision of the financial sector is the responsibility of the Ministry of Finance.

Foreign players

Brunei has played host to foreign banks for many years, with HSBC tracing its history back to 1947 when the then British-run sultanate began inviting foreign lenders into the territory. In the 1990s, after the collapse of a state-owned bank, new and stronger domestic lenders emerged, while regional players like Malaysia’s RHB and UOB of Singapore began taking a closer look at corporate lending in Brunei.

“We’ve seen a doubling of the size of the banking industry over the last decade, yet the pie has remained stable while people are pushing for a bigger share,” says Simon Williams, deputy CEO of HSBC in Brunei.

While competition has been heating up in the consumer finance sector, the total assets in the banking system have fluctuated in recent years. Data for 2003 shows a 9.7% rise in assets to Br$11.4bn from September 2002. But this is still below the peak in 2000, when corporate activity was stronger. Bankers say commercial loans have been repaid and demand for more credit from private contractors has been weak in recent years.

On the other hand, HSBC continues to benefit from its close association with Brunei Shell Petroleum Company, the main oil company in Brunei. This extends to the mostly Chinese-run traders that service the industry and have long-standing ties to HSBC. The bank reports that Brunei is a market with among the highest number of products sold per customer.

New financial body

For banks that find themselves overly liquid, Brunei presents something of a quandary, since it has no capital markets to speak of. The lack of an equity or bond market is also an impediment to persuading customers to diversify their holdings, since Brunei has had little exposure to such investing.

But as a first step towards a more sophisticated financial system, a new body is being created with responsibilities for currency issuance and monetary policy. The Brunei Currency and Monetary Board, unveiled in February by Sultan Hassanal Bolkiah, who is also Finance Minister, also has the power to issue treasury bills.

Bankers say the IMF has encouraged Brunei to consider developing a domestic bond market in order to help benchmark any future corporate paper. “A currency board is one of the building blocks to creating national capital markets. Also, the Ministry of Finance is being more prescriptive in terms of reporting what it wants from banks,” says Marcus Hurry, HSBC’s country manager for Brunei.

Checks on lending

One consequence of the boom in consumer finance has been a rash of lending that some bankers fear may be turning sour. Some state-owned lenders are seen as being too generous in extending personal loans at increasingly higher multiples of income. In recent months, officials at the Ministry of Finance have begun asking banks to take necessary steps to keep lending in check without hurting growth.

In its latest fiscal review, the Ministry warns that “the rapid growth in personal loans could lead to potential asset risk problems in the future and hence banks need to be vigilant”. Non-performing loans in the banking system stood at 13.4% in the third quarter of 2003, after peaking a year earlier.

Bankers say such concerns are justified and applaud government officials for taking a firm stance without coming down too hard on lenders. Brunei has traditionally taken a comparatively hands-off approach to its financial sector, with foreign banks expected to apply international standards to their own activities. It has also benefited from its currency arrangement with Singapore, which accepts the Brunei dollar at par.

Best of both worlds

Baiduri’s Mr Imhof says his bank straddles the line between domestic and foreign bank on account of its majority local ownership and the role of BNP Paribas as equity partner. He argues that such an arrangement gives it an edge over local banks and allows Baiduri to face off against foreign lenders like HSBC and Standard Chartered.

“We try to take advantage of the fact that we are an international bank with a local flavour. So as a local bank we say we belong to Brunei. We design our product for Brunei people. That’s where we have a competitive advantage. But we have a foreign shareholder and we are using international standards to organise the bank,” he says.

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