Banks Face New Challenge
By Sonia K.

Bandar Seri Begawan - As competition among established commercial banks intensifies particularly in view of the limited client base in the country, the entry of Islamic banking with its inherent benefits seems to have generated new perspectives to the industry.

"Due to economic growth, excess liquidity, market liberalisation and strong competitive forces, all banks whether conventional or Islamic are pressed to reduce interest and/or margins in order to achieve the expected return on performing assets and equity. In other words, all banks, Islamic as well as conventional, need to manage their assets and liabilities in order to achieve profitability objectives and at the same time be accountable to shareholders and regulators."

Sources at HSBC Brunei said, "HSBC welcomes the growth of Islamic Finance worldwide, and is a market leader in the field through our subsidiary HSBC Amanah.

In Brunei, HSBC supports the government's initiatives to develop this market, and looks forward to being a part of it. It has not been our experience that Islamic Banking materially affects margins, other than in the usual sense that margins are a competitive factor in all business.

"HSBC prides itself on the quality of its products and service, so we see no particular reason for margins to change in the near future. Entry into onshore Islamic banking is certainly an option, but any move in this direction would be subject to full consultation with the Brunei Ministry of Finance, our Head Office and our other regulators," the HSBC source added.

To query on prospects of margins of profits falling, Baiduri Bank sources replied: "To generate revenue, more emphasis will be placed on enhancing non-interest income, for example from the provision of banking services and wealth management.

"At the same time, in order to effectively manage operational cost, we expect banks to intensify efforts to divert counter transactions to electronic channels such as Internet banking, Automated Teller Machines (ATM) and Cash Deposit Machines. Again, the above would apply to all banks, both conventional and Islamic," Baiduri Bank source said.

Last week Malaysian media reported that competition has become more intense in terms of getting foreign investments for Islamic financing, as neighbouring countries of Malaysia that is Singapore and Brunei are also gearing up for further development of their Islamic capital markets.

The report also mentioned that local conventional banks in Malaysia are getting their margins squeezed and are compelled to devise survival strategies amid increasing competition from Islamic banks.

In Malaysia, some conventional banks are even encouraged to deal with the short-term impact of such competition and support the entry of new Islamic banking participants.

Besides that, commercial banks may have to devise survival mechanisms as more and more foreign players offering interest-free banking services that suit the Syariah practices of a largely Muslim population grabbing a share of the market. -- Courtesy of Borneo Bulletin

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