The Banking Sector Key Performance Indicators and Its International

Integration: Case of Brunei

Abstract
The main objective of this research study is to observe whether banking sector in Brunei is
performing according to international standards particularly the analysis of Key Performance
Indicators (KPIs) recommended by IMF after the financial crisis in North America and
Europe. The paper reviews the performance of Bruneian banks in terms of profitability,
capital adequacy, non performing loans, liquidity and loans concentration. Furthermore,
estimates of real interest parity hypothesis are also provided by using real interest rate data of
sample Asian and some developed countries.

While reviewing the Brunei banking sector, it has been observed that banks have higher
liquidity and Non Performing Loans (NPL) ratio. Higher liquidity of banking sector has
implications for the effectiveness of monetary policy while higher NPL increases default risk
and can lead to financial crisis. . The ratio of domestic credit to Gross Domestic Product
(GDP) is the lowest in Brunei among Asian sample countries. The nominal deposit and
lending rates are almost fixed but period average of real deposit rates remained negative most
of the time indicating depositors’ welfare loss. The money supply (narrow money, M0) has
shown very volatile trends especially during Q4-2011 to Q1-2013 which needs further
explanation by Authoriti Monetari Brunei Darussalam (AMBD). The inflation remained
stable over all and found to be even less than core inflation in Singapore. Since Singapore
monetary policy is transmitted to Brunei due to common currency agreement, the paper
recommends formation of a joint monetary policy committee between AMBD and Monetary
Authority of Singapore (MAS).

The estimates suggest that real interest parity hypothesis holds between Brunei and her
trading partners. The real interest rates differentials are transitory and converge to non- zero
mean implying that Bruneian financial and goods markets are integrated with sample
countries with structural breaks around 2012-2013.

1
 The Banking Sector Key Performance Indicators and Its International
Integration: Case of Brunei

1. Introduction and back ground:

The major role of banking industry is to work as an intermediary between borrowers and
lenders. They tend to mobilize public and private (household and corporate) savings. The
capital accumulation through savings is further channelized in to productive investment
projects through the provision of credit to private investors. Furthermore, Banks facilitate
transactions and provide advisement on investment. Hence banks are the key performer of
financial sector. The regulator (central banks) ensures financial stability through the policy
tools and direct actions. After the financial crisis of Association of South East Asian Nations
(ASEAN), North America and Europe, the need for prudent regulation is further accentuated,
particularly pertaining to financial and monetary sectors.1

The post crisis regulation and monitoring of financial institutions like banks and non banks
financial institutions increased manifold. In this regard, some of the Key Performance
Indicators (KPIs) are monitored with increased interest like profitability, liquidity of banks,
capital adequacy, non performing loans, real interest rates, sectoral loans etc. In addition to
that, monetary statistics like money supply, inflation and policy rate are also monitored. It is
observed that higher liquidity of banks impede the effectiveness of monetary policy curtailing
the regulatory powers. 2 The higher Non Performing Loans (NPL) on the other hand can
diminish the credit supply due to over cautious behaviour of banks towards issuance of new
loans. Capital adequacy measures exposure to credit risk. The adverse ratio can lead to
default. On the other hand, a lower profitability of banks can lead the country to overall low
growth path.3

It is observed that Real Interest Parity Hypothesis (RIPH) has not been estimated for Brunei.
Brunei needs to know whether her real interest rates converge with major trading partners or
not? If that is the case Brunei financial and goods markets can be considered integrated with
1
http://www.voxeu.org/article/regulation-supervision-and-role-central-banks
2
Saxegard M (2006) “ Excess liquidity and effectiveness of monetary policy: evidence from Sub Saharan
Africa” IMF Working Paper WP/06/115
3
Navajas and Thegeya (2013) “ Financial Soundness Indicators and banking crisis” IMF WP/13/ 263
Laeven,L., and Valencia F. (2012) “ Systematic Banking Crisis: An update” IMF WP/12/163

2
other relevant economies and real interest rate shocks in those countries matter for Brunei.
The RIPH will provide the information on the convergence of these real rates. If the rates
converge, then real interest rate shocks are transitory and they die out over time. In the case
of non-convergence, the real interest rate shocks of major trading economies are persistent
and can influence the economy for longer periods. The RIPH has further implications for
financial and monetary sectors. This test has used real instead of nominal interest rates. The
study has used lending rates and Consumer Price Index (CPI) inflation data for the periods
January 2011 to December 2014. The sample countries include Brunei, Indonesia, Japan,
Korea, Malaysia, Philippine, Singapore, Thailand, United Kingdom (UK) and United States
of America (USA).

1.1 Objectives:

The objective of this study is to critically analyze KPIs i.e. liquidity of banks, assets quality,
non performing loans, real and nominal interest rates, and capital adequacy etc, of Bruneian
banking sector. The periodic review of KPIs contains valuable information for policy
advisors. The Brunei KPIs are further compared with Malaysia, Singapore, Japan, Australia
and Canada. These comparative indicators provide assessment of Brunei’s position for
ASEAN Banking Integration Framework (ABIF-2020). The study has also estimated real
interest parity hypothesis by measuring the stationarity of Real Interest Rates Differentials
(RIDs) of Brunei with major trading partners i.e. China, Indonesia, Japan, Korea, Malaysia,
Philippines, Singapore, Thailand, United Kingdom and USA. The time series statistics are
collected from local as well as international sources i.e. Authoriti Monetari Brunei
Darussalam (AMBD), Department for Economic Planning and Development (DEPD), World
Bank and International Monetary Fund (IMF). The study provides possible implications of
adverse indicators which are not up to regional and international standards.

The ABIF intends to introduce the concept of single market. The integration towards single
market requires cooperation in three dimensions i.e. equal access, equal treatment and equal
environment to banking industry in ASEAN region. In this regard, Brunei Darussalam,
Cambodia, Laos, Myanmar and Vietnam (BCLMV) are considered less developed and ABIF
seeks to involve uniform regulation, provision of financial infrastructure and enhancing

3
banking capabilities in the BCLMV. 4 Keeping in view the Brunei case, with less developed
financial sector, it is imperative to test RIPH; Whether Brunei Real Interest Rates
Differentials (RIDs) with major ASEAN and international trading partners converge (die out
quickly) or remain persistent? In this regard, the RIDs are measured for each country with
Brunei as the base country using lending rate and CPI inflation data for the period January
2011 to December 2014. In case, the RIPH holds for Brunei, the AMBD needs to monitor
changes in the macroeconomic conditions of those sample economies since their real interest
rates changes and monetary policy will be important determinant of real interest rates in
Brunei. The AMBD does not pursue market based monetary policy system which is
constrained due to currency convertibility arrangement with Singapore. The major
macroeconomic indicators to be monitored may include GDP growth, Inflation, policy and
retail interest rates, nominal and real exchange rates etc. Whether the currency convertibility
arrangement can still remain intact after ABIF-2020, requires a separate comprehensive
research study by AMBD.

2. Key Performance Indicators (KPIs) Analysis:

Brunei has four types of banks i.e. Domestic, Foreign, Islamic and Conventional. The IMF
2014 country report provides bank wise capital adequacy statistics. Though bank wise
statistics are not published by AMBD but they provide these statistics to IMF. 5 The
regulatory tier 1 capital to risk weighted assets6 value is 20%. As shown by the Graph-1, the
trend is stable around 20% which is above international standard of 8-10%. These estimates
demonstrate that Bruneian banks are very well diversified in terms of risk and their
performance is comparable with other ASEAN countries. The higher ratio, though good in
terms of risk diversification, can be partially attributed to excess liquidity. The Bank type
wise capital adequacy indicator illustrates that Islamic banks and domestic banks are more
risk diversified 23.6 and 22.1 respectively. The foreign and conventional banks’ ratio is
around 15%.

The Non Performing loans ratio (NPL, Graph-1) declined over time from 13.8% in 2011 to
5.7% in the fourth quarter of 2014. The NPL ratio of Brunei banks stood highest among the

4
ADB (2013) “The road to ASEAN financial integration” A combined study on assessing the financial
landscape and formulating milestones for monetary and financial integration in ASEAN. Mandaluyong City,
Philippines: ADB, 2013 and IMF (2015) WP/15/34 (ASEAN Financial Integration), February 2015
5
It is the measure of a bank's financial strength expressed by the ratio of its capital (net worth and subordinated debt) to its
risk-weighted credit exposure (loans).
6
Tier-I capital is also referred to as core capital. This includes equity capital and disclosed reserves

4
ASEAN countries. Despite small market and higher liquidity, 5.7% of NPL can be considered
enormous, though adequate as per international standards. It is however interesting to
mention that NPL ratio differs substantially among types of banks in Brunei (Table II-
Appendix). In terms of gross non- performing loans ratio Islamic banks and domestic banks
both have around 10% gross and 3% net ratio. Conversely, this gross ratio is lowest for
foreign banks (2.3%) and conventional banks (4.3%).

Graph 1: KPIs over time

25 NPL Tier1-K ROA ROE

20 20
19.8

15
13.8
13.3

10 10.6

5 5.6 5.7

1.3 1.4
0
2011-1 2011-2 2011-3 2011-4 2012-1 2012-2 2012-3 2012-4 2013-1 2013-2 2013-3 2013-4

Source: IMF (2014), NPL stands for Non Performing Loans, ROA Return on Assets, ROE returns on Equity and Tier1-K
Regulatory Tier 1 capital to risk-weighted assets, a measure of capital adequacy

The net ratio for foreign and conventional banks stood less than 1%. The returns on after tax
equity were measured at around 10.6%, (Table-1). The trend seems volatile with many
swings up ward and down ward. The range of returns to equity remained in between 5.6%
and 13.8%. The statistics differ marginally for various types of banks (Table II, appendix).
The returns on equity pertaining to conventional banks measured at 12.5%, foreign 12.3%,
domestic 11.9% and Islamic banks is 11.7%. It is worth to mention that Islamic banks have
highest gross as well as net NPL and lowest equity returns. Since Islamic finance is the
priority of sultanate for Wawasan 2035, the periodic monitoring of NPL is critical for the
future of banking system in Brunei. The sultanate has a priority to expand Islamic finance as
targeted in Wawasan 2035. The sales of Islamic products have decreased 75% in 2015 due to

5
a dive in oil prices. 7 The sultanate needs to review her priority in Islamic finance due to
plummeting of her sale internationally as well as higher NPL. (why would this be critical?
See also the report on the factors which affect Sharia funds in the Financial Times at
http://www.ft.com/intl/cms/s/0/33500cb8-c515-11e5-b3b1-7b2481276e45.html)

The Bruneian banks’ returns on equity (10.6%) 8 were less than Singapore (11.6%) and
Malaysia (16%), more than Japan (8.9) and far less than developed countries of Canada
(23.4) and Australia (23.5%) (It would be useful cite the source from which these returns on
equity data are taken. Also, please provide definition of ‘return on equity’, specifically, how
equity or capital is defined.). The average returns on assets stood at 1.4% in 2013 as per IMF
records. This measure of profit is higher in Brunei as compared to sample countries. Both of
these indicators, returns to assets and equity measure deposit takers’ (banks) efficiency in
using their capital. Brunei banks have performed above average on asset returns but in terms
of equity returns, Brunei banks have underperformed relatively as compared to Singapore,
Malaysia, Australia and Canada .

Table 1: KPIs: International Comparisons

Key Performance Indicators

Malaysia Singapore Japan Brunei Australia Canada
2014 Sep-13 Sep-13 Sep-13 2014-Q2 2014-Q3
Capital adequacy
Regulatory Tier 1 capital to risk-
weighted assets 12.9 13.5 12.5 20 10.5 11.9
Asset quality
Nonperforming loans to total
gross loans 1.8 1.1 2.1 5.7 1.2 0.4
Earnings and profitability
Return on assets 1.6 1 0.4 1.4 1.3 1.2
Return on equity 16.1 11.6 8.9 10.6 23.5 23.4
Liquidity
Liquid assets to total assets
(liquid asset ratio) 13.3 9.5 22 56.2 18.2 10.9
Liquid assets to short term
liabilities 41.4 10.2 41 113.1 42.2 44.8
(Source: http://elibrary-data.imf.org/)

7
http://www.ft.com/intl/cms/s/0/33500cb8-c515-11e5-b3b1-7b2481276e45.html)
8
The KPIs data is collected from IMF. Return on equity is defined as ration of net income to share holders’
equity

6
Table I (Appendix), provides World Bank statistics on NPL compiled for ASEAN individual
countries. It also includes average NPL of Europe, Central Asia and East Asia & Pacific. The
table reports a consistent decrease in Brunei’s NPL from 9.4 in 2009 to 5.4 in 2013. The
Brunei NPL stood highest in our sample. The ASEAN average was 1.37 in 2013. The Brunei
NPL is 4% higher than the regional average. Hong Kong has the lowest NPL at 0.6 followed
by Singapore at 0.9 in 2013. After Brunei, Philippine has the highest NPL at 2.4 followed by
Thailand at 2.3. Brunei must control the NPL ratio further in order to align with the ASEAN
region before 2020.

The ratio of liquid assets to total assets stood at more than 56% in Brunei while it remained
9.5% for Singapore. Higher liquidity in Brunei banking sector can be considered major
reason of relatively low equity returns.. The ratio for liquid assets to short term liabilities was
measured at 113 for Brunei, very high (Table-1). Singapore has the ratio at 10%, lowest in
the sample. Both of the measures show higher liquidity in the banking system. The higher
liquidity in the banking system has consequences pertaining to the effectiveness of monetary
policy. It impedes the regulatory role of central bank by reducing dependence on discount
rate.9 Presently, AMBD does not follow market based monetary policy for regulating banks
and other financial institutions. In this regard, the excess liquidity does not impede the
regulatory power of AMBD. But tackling excess liquidity can be a major future challenge
while moving towards more market based monetary policy.

2.1 Ratio of various saving deposit accounts:

The graph 2 plots the savings, time, demand and other deposits as a ratio of total deposits.
Hence each figure shows share of particular type of account in total deposit. The graphs
show that time deposits vary in between 40-55% of total deposits in Brunei. The ratio of
higher time deposits is followed by demand deposits, saving deposits and other deposits
respectively in terms of their share in total deposits. The almost 40% of deposits are Placed in
the category of time deposits that is another indicator of surplus with the depositors.

9
Discount rate is the rate at which central banks lends to banks to meet liquidity needs. Discount window is not
operative at AMBD, banks have already ample liquidity.

7
Graph-2: Ratios of various deposit accounts in total deposits

60.00 DD-
Ratio
50.00 Sav-
ratio
40.00 Other
-ratio
30.00 Time-
ratio
20.00

10.00

0.00
Aug

Aug

Aug

Aug
Apr

Apr

Apr

Apr
Dec

Dec

Dec
Feb

Feb

Feb

Feb
Oct

Oct

Oct
Jun

Jun

Jun

Jun
2011 2012 2013 2014

Source: AMBD; (Ratio of savings, time, (DD), demand and other in total deposits)

Since banks play the role of intermediary between depositors and savers, deposits and lending
rates both are important for economic agents. Let’s see first the savings rates offered to
depositors in Brunei and then analyze what Brunei financial market has offered to this
segment of the society.

2.2 Nominal and Real Interest rates:

The Graph-3 plots nominal rates of interests including Prime Lending Rate (PLR), Average
Deposit Rate (ADR) for 3, 6 and 12 months maturity. The PLR remained horizontally flat at
5.5 for all the periods between January 20011-September 2014. The deposit rates showed a
marginal increasing trend for higher maturity in relative terms i.e. the (ADR-12>ADR-
6>ADR-3). This trend may be useful for yield curve. Overall the rates show very small
changes and remained stable over time. Since the savings are in excess of Gross domestic
investment, market forces also favor low deposit rates. The study has also included real
interest rates (Table 2) in analysis since economic agents care about the affordability of
basket of goods and services in order to smooth consumption .

8
Graph-3: Average deposit and lending rates

5
ADR- 3
4
ADR-6
3 ADR-12
PLR
2

0
Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct
2011 2012 2013 2014

Source: ABMD Monthly Reports, Various Issues

Note: (PLR, ADR12, 6, 3 stands for Prime Lending rate, Average deposit rates for 12, 6 and 3 months respectively)

In order to calculate real interest rates, the monthly CPI inflation from DEPD has been used.
The Table 2 provides 2 basic statistics on real interest rates i.e. simple arithmetic mean and
coefficient of variation. In the estimation of real rates, CPI Year on Year (YOY) inflation has
been used. While adjusting for inflation, it is observed that the average real deposit rates
remained negative for 3, 6 and 12 months maturity in 2011. The average real deposit rates
remained -1.63, -1.52, and 1.27 for 3, 6 and 12 months deposit maturity. The variation in the
deposit series is estimated about 30%-40% which can be categorized as mild variation
annually. The Real Prime Lending Rate (RPLR) also reduced to around 3.5% from 5.5% per
annum. Theoretically, an inflationary trend benefits business class more than the fixed
income group or depositors. Their revenues (Price times Quantity Sold) increase and real cost
of capital (RPLR) decreases during inflationary periods. But the depositor’s purchasing
power erodes as a result of a fall in real income. The real challenge for policy makers is to
make an optimal policy which is in the benefit of both the competing groups. Financial
market structure should be such that no group should be better off making the other worse
off. Such a structure needs competition among financial institutions which ensures higher
productivity. Brunei has not implemented completion policy till date but has framed the law
as per commitment with ASEAN.10

In the year 2012 however, the 12 months deposit rate was calculated to be positive, though
small at 0.04. The 3 months and 6 months real deposit rates on average remained -0.22 and -
0.13 respectively. The RPLR also increased to 5.05% from 3.5% in 2011. The overall

10
The draft completion law can be found on DEPD website; www.depd.gov.bn

9
average deposit rates in 2012 remained less negative since the mean value increased. In the
year 2013, deposit rates on average improved. The 3 months real deposit rate increased from
-0.22 to -0.10 (still negative), the 6 and 12 months estimated to be 0.04 and 0.32 respectively.
The RPLR increased from 5.05 to 5.12. The figures in 2014 are based on 10 months data
from January 2014-October 2014. Since inflation remained very low (negative), the real
deposit rates are positive in 2014. The 3, 6 and 12 months deposits rates are 0.53, 0.68 and
0.98 respectively. The RPLR increased to 5.73.

Table 2: Real Interest rates: Descriptive Statistics

RADR- RADR- RADR-

RPLR
3 6 12
CV-2011 -0.31 -0.33 -0.40 0.14
SDEV-2011 0.50 0.51 0.51 0.49
Mean-2011 -1.63 -1.52 -1.27 3.48
CV-2012 -1.34 -2.35 7.59 0.06
SDEV-2012 0.29 0.29 0.29 0.30
Mean-2012 -0.22 -0.13 0.04 5.05
CV-2013 -4.05 9.95 1.22 0.08
SDEV-2013 0.40 0.39 0.38 0.41
Mean-2013 -0.10 0.04 0.32 5.12
CV-2014 0.64 0.50 0.34 0.06
SDEV-2014 0.34 0.34 0.34 0.34
Mean-2014 0.53 0.68 0.98 5.73
CV stands for Coefficient of Variation, SD standard Deviation, Mean is Arithmetic mean
RADR is Real Average Deposit rates, 3, 6 and 12 months period. RMPLR stands for Real Prime Lending Rate

Overall it can be said that inflation rate plays a vital role in the welfare of economic agents. It
can influence real interest rates. The real rates of deposits (3-6 months) remained negative in
2011-2012. The real rates turned out to be positive with improved nominal rates and low
inflation in 2014. Here is an important message for AMBD regarding the importance of real
interest rates. The data has shown negative savings rates for most of the years; it has adverse
consequences for the welfare of net savers or depositors. The purchasing power was
adversely affected pertaining to pensioners and other risk averse economic agents who rely
on time deposits for earnings.

2.3 Sectoral loans by banks:

The Graph 4 plots credit supply to various sectors of economy from year 2000 to September-
2012 i.e. the agriculture, construction, credit &finance, general commerce, manufacturing,
personal loans etc. The overall loans crossed $B 5.2 billion till September 2012. There is

10
some decelerating trend in the overall loans since 2009. The credit demand is considered to
be a healthy sign for economic growth being the mirror image of economic activity. Personal
loans made 60% of overall loans in September 2012 according to IMF statistics. This share
was as high as 74% in 2004 which alarmed the regulators (Ministry of Finance; MOF) due to
the higher probability of consumer default. The MOF set the 30% limit for personal loans by
2010. The banks had to alter their loans portfolio gradually. Furthermore MOF also placed a
ceiling on the credit upper limit for individuals. The credit must not exceed 12 salaries. The
maximum repayment period was fixed at 6 years. According to The Report Brunei
Darussalam (2013) 11 most of the banks considered those regulations unnecessary by the
regulator.

Transport sector loan is interesting case (Graph 4). It kept on increasing continuously from
2003 to 2007 when it reached around $B 1 billion and later on consistently decreased over
time and reached $B 254 Million. The construction sector loan has the same story. In order to
have consistent GDP growth, credit supply to private sector must grow continuously which is
not the case here.

General Commerce seems a potential sector where the amount of loan is gradually
approaching close to $B 1 billion. The figure stands at $B 0.74 Billion in September 2012
according to IMF data. The agriculture sector loans gradually declined from $ B47 million in
2000 to around $B20 million. The mortgage loans demand is on rise continuously, increasing
from $B 455 million in year 2000 to $B 1.4 billion in September 2012. The manufacturing
sector and credit & finance showed some performance in terms of loans demand. In the
scenario of excess liquidity, banks must vigilantly target potential clients, the sectors with
growth potential e.g. mortgage, general commerce, and manufacturing sectors. In fact, the
higher liquidity of banks and inconsistent sectoral credit demand is mainly due to small
private sector in Brunei as compared to large public sector whose dependence on credit is
almost negligible. Privatization of public sector enterprises, introducing competition policy
and market based reforms can bring the desired change required for pro growth strategy.

11
www.oxfordbusinessgroup.com

11
Graph-4: Sectoral loans portfolio of Brunei banks

7,000 Total loans

6,000 6,113 Agricultural

5819
5,171
5,000 Construction
4,525
4,198 4167 4078
4,000 Credit and
finance

3,194
3,000 General
commerce
2,519
2,000 Manufacturi
ng

1,000 1,070 Personal

717 732 745 loans
254
0 Professional
services

Transport

Source: AMBD annual data 2000-2011 along with first three quarters of 2012

2.4 Monetary Sector:

The Monetary sector is being regulated by Authority Monetary Brunei Darussalam (AMBD),
since 1st January 2011. AMBD Order, 2010, amongst other things, “provides for the
establishment of Autoriti Monetari Brunei Darussalam (AMBD), its Board and matters
connected to the objects, operation, administration, functions, powers and duties of AMBD
that includes relations between AMBD and the Government; relations between AMBD and
the banks and financial institutions; and consequential and related amendments to other
written laws that govern the activities supervised by AMBD.”

The Graph 5 plots growth rates of various definitions of money, M0 (Currency in

circulation), M1 (Narrow money) and M2 (Broad Money) pertaining to four years monthly
data from January 2011 to September 2014.

12
The money supply grew inconsistently over time. With the exception of some months, where
the growth has peaked around than 70% (November 2011), 90% (April 2012) and -40 %
(December, 2011), -30% (January 2013), the growth remained stable with either positive or
negative sign. The average growth remained positive with the exception of year 2013 and
2014 where M0 growth remained negative on average.

The growth of M1 and M2 remained positive on average. The growth of money supply is the
traditional tool of monetary policy. In order to explore the question of what explains inflation
in Brunei, the study has estimated simple correlation of money supply growth with inflation.
According to Monetarists 12 inflation is monetary phenomenon everywhere. In the case of
Brunei the correlation between various money supplies and CPI inflation is estimated to be
very small. It is 0.05, 0.1 and 0.2 for M0, M1 and M2 respectively in growth terms. The
Graphs-I-IV (refer appendix) plot CPI inflation and growth rates of various definitions of
money supply. It is apparent from graphs that the relationship is week since the correlation
between money supply growth and inflation is very low which may not be very surprising
since CPI index includes controlled items. The DEPD provides list of items kept under
control by government. The fuel and other utility prices are also controlled by sultanate.

Graph 5: Growth in Money Supply, M0, M1 and M2

100.00 Growth-M0
89.42
80.00 Growth-M1
68.38
growth-M2
60.00

40.00 36.05
20.00 20.08

0.00

-20.00

-40.96 -30.43
-40.00

-60.00

Source: AMBD

The study proposes the estimation of core (excluding food and energy basket) and non core
CPI (supply side factors like food and energy) inflation separately. In addition to that, study
recommends the estimation of CPI inflation excluding all the controlled items. The Monetary
12
http://www.britannica.com/EBchecked/topic/389146/monetarism

13
Authority of Singapore (MAS) provides Core Inflation measure based on exclusion
approach.13The cost of accommodation and private road transport were excluded from the
basket being most volatile supply side factors. The remaining index (Core CPI) is co-
integrated with the overall CPI and it also forecasts CPI very well.

Since Brunei imports variety of products, study proposes the Import price index to be
estimated separately in order to find imported inflation in Brunei. Since inflation plays key
role in determining expectations of economic agent for strategic decisions, it’s essential to
have an accurate measure. The imported inflation may also explain variations in the overall
inflation in Brunei.

The Graph 6 provides comparison of CPI inflation in Singapore and Brunei. Despite the fact
that Singapore inflation graph is Core CPI which excludes most volatile supply side factors,
the CPI inflation in Brunei remained less than that in Singapore for most of the periods.
Furthermore, some abnormal14 period of money growth (from November 2011-Fenruraury
2013) can be traced; the CPI inflation does not correspond to those abnormal movements
which imply that those abnormal movements were not caused by monetary factors.

The study recommends further investigation of the abnormal period of growth in the money
supply specially M0. It is surprising to find that M0 has shown growth till 90% peak and
simultaneously the CPI inflation was decreasing. The study has provided correlation
estimates which are low but even then, the lower correlation is not being transmitted to
inflation in this abnormal period. The study has further explored the data on currency
circulation provided by AMBD. There were abnormal movements in currency circulations
mostly due to abrupt injections and leakages of 10,000 notes (Graph-V in appendix )in the
system as indicated by large swings in growth of M0 data (Graph-5) and).

Annual Report (2011) of AMBD mentioned that higher growth of gross currency in
circulation was due to the compliance of banks with Asset Maintenance Requirement (AMR)
under Deposit Protection Order (DPO), 2010. The new order required currency circulation to
be backed by 100% external assets. The AMBD needs to explain these abnormal movements
further, especially in the 10,000 notes (Graph-V in appendix) whether they were real or
fictitious.

13
David et al. (2011) “ A Review of Core Inflation Measure for Singapore” MAS Staff Report No 51, August
2011
14
Abnormal movements mean higher or lower than average movement in the series.

14
Table 7 provides graphical representation of nominal effective exchange rates in Singapore
and Brunei Darussalam. The measurement of nominal effective exchange rates depends on
the trade weights pertaining to trading partners. The correlation between two exchange rates
estimated at around 0.78. Monetary Authority of Singapore (MAS) targets Singapore nominal
effectiveness exchange rate as a tool of monetary policy.

Graph 6: CPI inflation in Singapore and Brunei

4.0
3.5
SCPI
3.0
BCPI
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5

Note: SCPI is Singapore Core CPI inflation, BCPI is Brunei CPI (Headline)

Graph 7: Brunei and Singapore Nominal Effective Exchange rate

140.00
120.00
100.00
80.00
60.00 Brunei

40.00 Singapore
20.00
0.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

There is no such an arrangement of a common monetary policy committee between two

countries. Such a committee can review the fundamentals of the macroeconomic variables of
both countries before the monetary policy announcements. The study recommends
establishment of a combined monetary policy committee between Singapore and Brunei
Darussalam.

15
3. Measures of overall financial development:

The typical or traditional measure of financial development includes broad money to GDP
ratio and private sector credit to GDP ratio. The former ratio captures the degree of
monetization in the system where as the latter provides information on the provision of
private sector loan out of total income which is pro growth ratio. Both measures have some
short comings as well. The broad money to GDP ratio does not take in to account the degree
of banking intermediation. The private sector credit to GDP ratio on the other hand, includes
Non Performing Loans as well, hence ignores the quality of loans allocation. But these two
measures are widely used in the presence of limitations which is usually the case with other
quantitative variables as well.

Graph 8-Broad money to GDP ratio

400.00 352.70
350.00
300.00
247.79
250.00
186.32
200.00 150.91
143.79 134.54 134.48
150.00 106.39
88.40
100.00 70.28 69.74
41.06
50.00
0.00

Source: World Bank

In Brunei, the ratio of broad money to GDP stood at 70% in 2012 according to World Bank.
This ratio increased to 74% in 2013 and 78% in 2014 as per AMBD statistics. The ratio is
higher than Indonesia and Philippine but far lower than Thai Land, Malaysia, Hong Kong,
Korea and other developed countries like Australia, USA and UK. The East Asia and Pacific
countries average is 186% which is more than double as compared to the ratio in Brunei.

16
Table 3 provides information on domestic credit of banking industry as a ratio of GDP
pertaining to selected Asian economies. This ratio was lowest in the case of Brunei at 13% in
2012.15

The ratio has shown downward movement from the level of 38% in year 2000. The ratio is
far higher in other financially developed economies like 346% in Japan, more than 150% in
Australia and 200% in the case of Hong Kong in the year 2012.

Table 3: Domestic Credit provided by banks as % of GDP

Countries 2000 2005 2006 2007 2008 2009 2010 2011 2012
Brunei 38.6 10.4 16.5 18.8 9.3 32.2 25.1 8.1 13.0
Indonesia 60.7 46.2 41.7 40.6 36.8 37.0 36.4 38.6 42.6
Malaysia 138.4 117.7 114.6 109.4 110.8 131.1 127.4 128.7 133.8
Philippines 58.3 47.2 48.2 48.3 47.4 48.7 49.2 51.8 50.9
Singapore 77.9 62.1 62.5 69.4 76.7 88.0 82.4 91.6 99.5
Thailand 138.3 119.2 109.0 131.6 130.5 137.0 142.8 159.2 169.3
Viet Nam 35.1 71.2 75.4 96.2 94.5 123.0 135.8 120.8 ...
China, PR 119.7 134.3 133.5 127.8 120.8 145.1 146.3 145.4 155.1
Hong Kong 134.0 139.8 132.0 122.7 122.3 164.1 195.3 207.0 200.7
Korea, RO 74.7 133.4 147.2 153.6 170.8 170.2 162.9 165.3 168.7
Australia 93.2 113.5 118.4 146.9 159.7 151.5 154.8 152.5 154.4
Japan 304.7 315.4 306.2 296.9 300.1 326.8 324.7 337.5 346.1
Source: ADB

The ratio was 50% for Philippine and 40%for Indonesia. It was estimated to be 100% for
Singapore, 130% for Malaysia, 120% for Vietnam, and more than 150 in the case of China.
The smaller domestic credit to GDP ratio has been the result of excess liquidity with the
banking sector. More than 40% of GDP consists of oil and gas upstream sector activities. In
the low tax environment, oil companies have also surplus revenues which make their demand
for credit smaller. The AMBD Annual Report 2013 does not mention Oil and Gas (Mining
and Quarrying) sector while discussing Banking distribution of credit/financing (Table 7,
page 22).The operating revenues of Mining and Quarrying sector stood at 12,616,560.6 BND
in 2010 while total operating revenues from all economic activities were 29,238,827.8 BND
16
according to DEPD. The operating revenues of Mining and Quarrying sector remained
more than 43% of total operating revenues from all economic activities. The facts highlight

15
ADB Statistics
16
Final Report of the Economic Census of Business Enterprises, Brunei Darussalam 2011

17
that major economic activity (Mining and quarrying) stands out of domestic bank credit, the
single factor behind higher NPL and low domestic private sector credit to GDP ratio.

4. Financial Integration of Brunei with major countries

The degree of financial integration is vital to be known for macroeconomic models. The
macroeconomics models require to knowing the degree of openness or international
integration of the economy. The solutions are different for closed or open economies. The
flows of capital have become highly mobile. Regional trade agreements and economic blocks
have increased regional trade and cooperation. The present study intends to measure
financial integration of Brunei with major regional as well as international trading partners.
According to Real Interest Rate Parity Hypothesis (RIPH), the real interest rates among
countries will tend to equalize provided that the arbitrage forces are allowed to work freely in
the asset and good markets. According to Ferreira et al. (2007) only few studies have tested
RIPH through stationarity tests and the available literature on Real Interest Rates
Differentials (RIDs) does not provide a definite answer. The studies in the literature like
Meese and Rogoff, 1988), Edison& Paul, 1993), Obstfeld and Taylor, 2002) etc do not
provide unique answer whether RIPH holds or not? Mohsin and Rivers (2011) provided
evidence of stronger financial integration in the case of South Asian countries which
increased in the post liberalization period. The present study will measure RIDs of Brunei
with major ASEAN and international trading partners by providing further evidence of
stationarity. In case of the RIDs series is stationary it ensures that any small difference in the
RIDs series will die out and the series is mean reverting implying higher financial
integration.in ASEAN economies. Though there are other methodologies available, but the
RIDs measurement will be useful for (ABIF, 2020) since interest rate is the major tool for
banks.

The RIDs model can be derived with the help of Uncovered Interest Parity (UIRP) and
relative Purchasing Power Parity (PPP) conditions as explained by following equations:

= (1)

(2)

+ (3)

Using equation 1 and 2 the following equality can be derived

18
 (4)

And using equation 3 and 4, equation 5 can be derived.

)= (5)

Interest rate differential between domestic (Brunei) and foreign country

Inflation rate differential between domestic (Brunei) and foreign country

Expected change in exchange rates in the time t

Real Interest rate in domestic country (Brunei in our case)

) = Real Interest rate in foreign country, = Real Interest Rate Differential

between domestic (Brunei) and foreign country.

The main hypothesis is to test the stationarity of RIDs series by applying Unit Root tests. The
stationarity of RIDs series will imply convergence and evidence of integration.

The equation 5, may take the following stochastic process:

(6)

Equation 6 presents first order Auto Regressive process and can be tested through unit root
hypothesis. Equation 6 can be represented as a p-th order auto regressive augmented lag
model:

(7)

Where (8)

What are the possibilities of size and the sign of the parameter ? Its value and sign determine
convergence and financial integration hypothesis. 17 is the difference operator and
refers to one period lagged value of dependent variable.

Equation 7 represents Augmented Dickey Fuller test (augmented for number of lags) which
examines the negativity of the parameter based on the estimated t ratio from regression.

17
For detailed discussion please see Ferreira A.L.& Leon-Ledesma, A.M. (2007)

19
Dickey and Fuller (1979) provide detailed derivation of asymptotic distribution of the
statistic. There are some important limitations associated with the ADF test. First, there is the
low power problem particularly with small samples. In this case, there is higher probability of
the acceptance of null hypothesis which is non stationarity or a unit root (In future research
on this topic, the author could consider a longer time series to overcome the small sample
issue). Second, there is a possibility of a structural break in the data?

Graph-9 plots RIDs series for each country pair. The inspection of graph shows that series
seem stationary with trend in most of the cases. The RIDS series contain declining trend for
each country case except Japan where the graph has shown a positive trend. Country graphs
point out possibility of structural break which is not incorporated in the ordinary ADF unit
root test.

The study has provided Zivot Andrew (1992) unit root test with structural breaks. The Zivot
Andrew test provides three specification equations, with intercept, with trend and with
intercept and trend both. It uses full sample and tests multiple breaks by using different
dummy variables for each break point. The break date is selected on the basis of most
negative t statisitc from ADF tests This test is considered superior to those conducted on the
assumption of known structural break like Perron (1989).

Graph 9-Actual RIDS data

a. Brunei-USA b. Brunei-UK c. Brunei-Malaysia
RIDBML
RIDBUK
RIDBUS 5.5
9
11
5.0
10
8 4.5
9
4.0
7 8

3.5
7
6
3.0
6

5 5 2.5

4 2.0
4
I II III IV I II III IV I II III IV I II III IV
3 1.5
2011 2012 2013 2014 I II III IV I II III IV I II III IV I II III IV
I II III IV I II III IV I II III IV I II III IV
2011 2012 2013 2014 2011 2012 2013 2014

d. Brunei-Thailand e. Brunei-Phillipine f. Brunei-Singapore

RIDBTH RIDBPH
RIDBSG
3 6
7

2 5 6

5
1 4
4

3
0 3
2
-1 2
1

0
-2 1
-1

-3 0 -2
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014

g. Brunei-Korea h. Brunei-Japan i. Brunei-Indonesia

20
 RIDBK RIDBJ RIDBIN
4.5 9 3

4.0 8 2

3.5 1
7
3.0 0
6
2.5 -1
5
2.0 -2
4
1.5 -3

1.0 3 -4

0.5 2 -5
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014

j. Brunei-China

RIDBCH
6

-1
I II III IV I II III IV I II III IV I II III IV
2011 2012 2013 2014

Table 4 provides empirical results pertaining to all the specifications using two
methodologies. The first three columns provide estimates from traditional ADF test. The
RIDs of Brunei with China, Indonesia, Japan and Malaysia were not stationary at levels with
all the specifications. But they were found to be stationary at first difference.

Table-4: Unit Root Tests

Countries ADF-Test Zivot-Andrew
Intercept
RIDS None Intercept &Trend Intercept Trend Both Break
Brunei-
2012-M12
China# -1.4 -0.96 -1.8 -3.52 -3.5 -3.6
[0.51] [0.8] [0.7] [-0.22] [0.17] [0.02]**
Brunei- 2014-M 12,
Indonesia# -1.6 -2 -2.27 -3.05 -2.85 -3.91 M01 & M07,
[0.09] [0.27] [0.44] [0.01]* [0.03]** [0.003]**
Brunei- 2013-M09,
Japan# -0.15 -1.76 -2.4 -3.71 -2.77 -3.27 2014-M04
[0.6] [0.4] [0.36] [0.01]* [0.2] [0.002]**
Brunei- 2012-M02 &
Korea -0.98 -2.9 -3.7 -5.8 -5.11 -5.75 M08,
[0.3] [0.05]** [0.03]** [0.001]* [0.000]* [0.01]*
Brunei-
2013-M09
Malaysia# -1.69 -1.54 -3.8 -2.49 -2.66
[0.42] [0.8] [0.006]* [0.64] [0.5]
Brunei-
2013-M12
Philippine -1.02 -3.35 -4.9 -3.4
[0.3] [0.02]** [0.002]* [0.3]

21
Brunei-
2013-M03
Singapore -1.4 -0.87 -3.56 -4.55 -4.81 -4.79
[0.15] [0.78] [0.04]** [0.03]** [0.52] [0.03]**
Brunei-
2014-M05
Thailand -1.12 -1.91 -3.78 -4.18 -4.42
[0.23] [0.32] [0.02]** [0.06] [0.009]*
2013-M02,
Brunei-UK
-1.24 -0.03 -3.64 -4.02 -4.83 2011-M12
[0.19] [0.95] [0.03]** [0.04]** [0.03]**
Brunei- 2012-
USA -0.57 -2.43 -3.93 -4.83 -4.17 -4.74 M04&M10
[0.46] [0.13] [0.02]** [0.003]* [0.006]* [0.05]**

figures in bracket are probabilities, *, ** imply significance at 1 and 5 % respectively

# imply that RIDS series is stationary at first difference.
Note: Author's own estimation from E-Views-7.1

The interest differentials pertaining to Korea, Singapore, Thailand, Philippine, UK and USA
were estimated to be stationary at levels. In the case of Thailand, Singapore, Korea, USA and
UK the RIDs were stationary with intercept and a trend while it was stationary with intercept
for Philippine. The stationary with non zero mean imply country specific risk premium.

As a robustness check, the study provides estimates from Zivot Andrew (1992) method. This
test provides endogenous structural breaks. The test provides overwhelming evidence in the
favour of rejection of unit root hypothesis which implies stationarity of RIDs of sample
countries with Brunei. It also implies that real interest rate shocks are not persistent but die
out in the case of these sample countries. Most of the structural breaks are found around
2012-2013 which is after the incorporation of Authority Monetary Brunei Darussalam
(AMBD) in 2011.

The overall results provide evidence in the favour of financial market and goods market
integration of Brunei with the sample countries. The empirical evidence suggests that
structural breaks are important in the case of RIDs measurement for ASEAN economies.

5. Conclusion and Major Findings:

The study concludes that overall banking industry KPIs are in accordance with the
international and ASEAN standards but they need to fine tune some of the KPIs like excess
liquidity and NPL ratio as discussed below.

22
Brunei is earning handsome profits which are comparable with ASEAN measured in terms
of returns on assets. But Returns on equity were volatile and they were lower than sample
countries except Japan. The tier 1 capital to risk weighted asset ratio of 20% is above
international standards implying Brunei banks are working under maintained risk
environment. The study however indicates that this higher ratio is due to excess liquidity
since banks are unable to loan up to the optimal level.

The real deposit rates are found to be negative especially 3 and 6 months maturity in 2011
and 2012. The monitoring and reporting of real interest rates is hereby recommended. It is
vital to know accurate measures before making economic and business decision.

The non performing loans ratio can be considered satisfactory as per international standards
but the ratio stands highest in the ASEAN region. The recommendation is to bring it down
further so that the banking integration in 2020 within ASEAN is smoother for Brunei banks.

It is recommended to stabilise the growth of money supply due to its theoretical link with
inflation. The money supply remained very volatile during the four year 2011-2014 showing
the peaks of around 90% growth in M0 which is very high. The volatile swings in the growth
of money supply need further explanation from the AMBD since they cause inflation
according to economic theory. Islamic banks have highest Gross and Net NPL along with
lowest returns on equity as compared to other Bruneian banks.

The liquidity of Bruneian banks is highest not only in the ASEAN region, but also
internationally. It has repercussions for the effectiveness of monetary policy. The study
recommends development of sukuk market by increasing tenor to longer periods so the banks
could park excess liquidity. Since Singapore’s monetary policy is transmitted to Brunei due
to common currency agreement, the study further recommends formation of coordination
mechanism between monetary policy committee of AMBD and Monetary Authority of
Singapore (MAS) in order to enhance policy coordination.

The study also provides estimates of RIPH of Brunei with her major partner countries i.e.
China, Korea, Japan, Indonesia, Malaysia, Thailand, Philippine, Singapore, UK and USA.
The unit root tests by Andrew and Zivot (1992) provides evidence in favour of RIPH
indicating that RIDs converge to a non-zero mean implying country specific risk premium.
The Brunei financial and goods markets are found to be integrated with the major trading

23
partners. Most of the structural breaks are found around 2012-2013 which is after the
incorporation of Authority Monetary Brunei Darussalam (AMBD) in 2011.

Reference

Almekinders, G., Fukuda, S. & Zhou, J., 2015. ASEAN Financial Integartion , Washington
DC;USA: International Monetary Fund; IMF WP/15/34.

Asian Development Bank., 2013. The Road to ASEAN financial Integration. ISBN 978-92-
9092-706-8 ed. Manilla:Philippines

Asian Development Bank, 2014. Key Indicators for Asia and Pacific, Manilla: Asian
Development Bank; http://www.adb.org/publications/key-indicators-asia-and-pacific-2013

Authoriti Monetari Brunei Darussalam (AMBD), Various Issues. AMBD. [Online]

Available at: www.ambd.gov.bn/pages/monthly-statisitcal-bulletin
[Accessed 15 June 2015].

David et.al., 2011. A review of core inflation measure for Singapore, Singapore: Monetary
Authority Singapore.

Departmetn ofr Economic Planning and Development (DEPD)., Various Issues. Monthly CPI
Report. [Online]
Available at: http://www.depd.gov.bn
[Accessed 20 July 2015].

Dickey, D. a. W., 1979. Distribution of the estimates for autoregressive time series with a
unit root. Journal of the American Statisitcal Association, 74(366), pp. 427-431.

Edison, H. J. & Pauls, B., 1993. A Re-assessment of the relationship Between Real Exchage
Rates and Real Interest Rates:1974-1990. Journal of Monetary Economics, Volume 31, pp.
165-187.

Ferreira A. L. and Leon-Ledesma M. A., 2007. Does the real interest hypothesis hold?
evidence from developed and emerging markets. Journal of International Money and
Finance, pp. 364-382.

Laeven, L. & Valencia, F., 2012. Systematic Banking Crisis: An Update, Washington DC;
USA: International Monetary Fund; IMF Working Paper WP/12/163.

International Monetary (IMF), 2015. International Financial Statisitics (IFS). [Online]

Available at: data.imf.org/finddatareports.aspx
[Accessed 10 June 2015].

24
Meesse, R. & Rogoff, K., 1988. Was it real? The exchage rate- interest differentials relation
over the modern floating rate period. The Journal of Finance, Volume 43, pp. 933-948.

Mohsin H.M. and Rivers P., 2011. Financial Market Integration of South Asian Countries:
Panel data analysis. International Journal of Economics and Finance, 3(2).

Navajas, M. & Thegeya, A., 2013. Financial Soundness Indicators and Banking Crisis,
Washington DC;USA: International Monetary Fund; (IMF) WP/13/263.

Obstfeld, M. & Taylor, A. M., 2002. Globalization and Capital Markets, National Bureau of
Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138: National Bureau of
Economic Research (NBER) Working Paper No 8846.

Perron., P., 1989. The greta crash, the oil price shock and unit root hypothesis. Econometrica,
75(2), pp. 1361-1401.

Perron, P., 1997. Further evidence on breaking trend functions in macroeconomic variables.
Journal of Econometrics, 80(2), pp. 355-385.

Phillips, P. C., Perron, P. & Perron, 1988. Testing for a unit root in time series regression.
Biometrika, 72(2), pp. 335-346.

Saxegard, M., 2006. Exess liquidity and efefctiveness of monetary policy: Evidence fom Sub
Saharan Africa, Washington DC;USA;: International Monetary Fund ; IMF Working Paper
WP/06/115.

World Bank, 2015. World Development Indicators, Washington D;USA: World Bank; http://
data.worldbank.org/data-catalog/world-development-indicators.

Zivot, E. & Andrew, D., 1991. Further evidence of great crash, the oil price shock and unit
root hypothesis. Journal of Business and Economic statisitcs, Volume 10, pp. 251-270.

APPENDIX

Comparison of nominal and real- Deposit rates

Graph-1: 3Months-RDR Vs ADR (nominal)

25
 1.5
RADR-3(YOY)
1
0.5 ADR- 3 (YOY)
0

Dec
Oct

Oct
Dec

Oct
Dec

Oct
Jun

Jun

Jun

Jun
Feb

Feb

Feb

Feb
Apr

Aug

Apr

Aug

Apr

Aug

Apr

Aug
-0.5
-1 2011 2012 2013 2014
-1.5
-2
-2.5
-3

Graph-1a: 6 Months RDR Vs ADR

2.000 RADR-
1.500 6(YOY)
ADR- 6
1.000
0.500
0.000
July
May

May
July

May
July

May
July
Nov
Nov

Nov
2011-Jan

2012-Jan

2013-Jan

2014-Jan
Mar

Mar

Mar

Mar
Sep

Sep

Sep

Sep
-0.500
-1.000
-1.500
-2.000
-2.500

Graph- I: 12 Months RDR Vs ADR

RADR-12(YOY)

2.5 ADR- 12
2
1.5
1
0.5
0
Jun
Jun

Jun

Jun
Feb

Feb

Feb

Feb
Apr

Aug
Oct
Dec

Apr

Aug
Oct
Dec

Apr

Aug
Oct
Dec

Apr

Aug
Oct

-0.5
-1 2011 2012 2013 2014
-1.5
-2

Graph- II: M0 and Inflation Relationship

26
 100
Growth-M0
80 CPI-Inf(YOY)
60

40

20

0
July
May

May
July

May

May
Jan

Nov
Jan

Nov
Jan

Nov
Jan
Jul

Jul
Mar

Mar

Mar

Mar
Sep

Sep

Sep

Sep
-20

-40 2011 2012 2013 2014

-60

Graph- III: M1 and Inflation Relationship

40.000 CPI-Inf (YOY)

30.000 Growth-M1
20.000
10.000
0.000
Nov

Nov

Nov

May
May

May

May
Jul

Jul
July

July
Mar

Sep

Sep

Sep

Sep
Mar

Mar

Mar
Jan

Jan

Jan

Jan
-10.000
-20.000 2011 2012 2013 2014
-30.000
-40.000

Graph IV: M2 and CPI Inflation Relationship

10.000
CPI-Inf (YOY)
8.000
Growth-M2
6.000
4.000
2.000
0.000
Jan Mar May July Sep Nov Jan Mar May July Sep Nov Jan Mar May Jul Sep Nov Jan Mar May
-2.000
2011 2012 2013 2014
-4.000
-6.000
-8.000

Table No I: NPL, Comparison with ASEAN

27
Countries\Years 2009 2010 2011 2012 2013 2014
Brunei Darussalam 9.36 6.87 6.03 5.38 5.39
China 1.6 1.13 0.96 0.95 1.00 1.08
Hong Kong SAR, China 1.58 0.83 0.69 0.6 0.54 0.56
Indonesia 3.29 2.53 2.14 1.77 1.69 2.09
India 2.21 2.39 2.67 3.37 4.03 3.95
Japan 2.4 2.5 2.4 2.4 2.3 1.9
Korea Republic 0.58 0.59 0.48 0.59 0.57
Malaysia 3.63 3.35 2.68 2.02 1.85 1.78
Phillipine 3.49 3.38 2.56 2.22 2.44 2.43
Singapore 2.03 1.41 1.06 1.04 0.87 0.78
Thailand 5.3 3.9 2.9 2.4 2.31
East Asia & Pacific (all income levels) 2.03 2.13 2.06 1.75 1.37
Europe & Central Asia (developing
only) 6.70 9.43 9.86 9.81 11.58 11.33
Europe & Central Asia (all income
levels) 5.20 5.69 6.00 6.61 6.41 6.49
Source: World Bank

Table II: Financial Soundness Indicators

Domestic Foreign Islamic Conventional

All Banks
Banks Banks Banks Banks
Year-2012 (end of period)
Capital Adequacy

Regulatory capital to risk-weighted assets

18.5 21.6 13.8 23.3 14.1

Regulatory Tier 1 capital to risk-weighted assets

19.3 22.1 14.9 23.6 15.3
Asset quality
Gross nonperforming ratio 7 9.9 2.3 10.3 4.2
Net nonperforming ratio 1.8 2.4 0.9 2.9 0.9

Nonperforming loans net of provisions to capital

4.7 5.6 2.7 6 2.9
Profitability
Return on assets, before tax 1.3 1.8 0.9 1.9 1

28
 Return on equity, after tax 12 11.9 12.3 11.7 12.5
Interest margin to gross income 64.4 67.7 59 72.7 57.9

Liquidity
Liquid assets to total assets (liquid asset ratio) 64.3 50.8 76.2 52.9 70.8
Liquid assets to short-term liabilities (demand
and saving deposits).
136.9 135.2 138 135 137.8

Source: IMF (2014) Country Report No 14/191

Graph -V: Abnormal Movement: Total Notes Vs 10,000 Notes (Million Dollars)

2,500.0
Notes Total
2,000.0 Notes B$10,000

1,500.0

1,000.0

500.0

0.0
May
July

May
July

May
July

May
July
Nov

Nov
2013-Jan

Nov
2011-Jan

2012-Jan

2014-Jan
Mar

Mar

Mar

Mar
Sep

Sep

Sep

Sep

Graph VI: Growth of Notes

500.00
Total-N
400.00 397.75 10000-N

300.00 303.66

200.00 217.85

126.30
100.00 92.08
70.87
0.00

-100.00

-200.00

Source: AMBD

29
30