National Payment System

The National Payment and Settlement System (PSS) was a landmark project for BDCB, as one of the objectives of BDCB was to assist in the establishment of an efficient payment system in Brunei Darussalam. The PSS project aimed to modernise the domestic payment infrastructure and improve the payment landscape, particularly by reducing interbank settlement risk and increasing financial efficiencies through the introduction of a Real-Time Gross Settlement (RTGS) system.

It took 5 years to complete the implementation of three important interbank payment systems — namely the RTGS system, the Automated Clearing House (ACH) system, and the Central Securities Depository (CSD) system.

• RTGS is used for making urgent and large value payments to an individual in another bank.
• ACH is used for making non-urgent payments below B$100,000.
• CSD provides electronic registration and records of debt securities, such as Brunei Government Sukuk and BDCB I-Bills.

The RTGS system is the heart of a modern national payment system. As a systemically important payment system, it must be reliable, robust and resilient even during market crises and must never become the source of one. At the time of its introduction in 2014, Brunei Darussalam's RTGS system was the first in ASEAN to be fully compatible with ISO20022, an international messaging standard for financial institutions.

RTGS Flow:

How do Interbank Payments Work?

Interbank payment system includes transfers processed through the Real-Time Gross Settlement (RTGS) system or Automated Clearing House (ACH) operated by BDCB.

Have you thought about how the transfers across banks work? For example, Ahmad who has a bank account with Bank A would like to pay Siti, whose bank account is with Bank B. Ahmad will instruct Bank A to transfer B$100,000 to Siti's account with Bank B.

• Bank A will then use the interbank system to transfer the funds to Bank B to pay Siti. Since this is a high value transaction that is urgent, they would use RTGS.
• Following this, Siti will receive the B$100,000 transfer in her account.

This simple example shows how interbank payments work. The cash and interbank payment systems are essential; to provide safe, secure and efficient payment systems even in a crisis.

During the COVID-19 pandemic in 2020 and 2021, BDCB ensured that the interbank payment systems were able to handle the increased demand for digital payments. Separately, BDCB took the additional precaution of quarantining and sanitising bank notes received from the banks before they were reissued to the public to ensure the public would not be exposed to the potenia; risk of COVID-19 spread through contaminated banknotes.

Our efforts to modernise our payments systems over the years have enabled households and businesses to perform digital payments during the pandemic. Nevertheless, there is a need to continue to accelerate this agenda as there has been a growing trend in the use of online payments over the years.

BDCB's Digital Payment Roadmap 2019 - 2025, released in June 2019, sets out our goals towards developing the digital payment ecosystem in Brunei Darussalam. Our vision is to transform the country into a Digital Payment Nation with an interoperable and market-driven digital payment ecosystem, changing the way customers pay for goods and services, the way businesses and merchants manage their business operations and how the government collects and makes payment. BDCB will continue to work with its key partners in delivering this objective.

Credit Bureau

One of BDCB's earliest project was the setting up of the Credit Bureau in 2012. It aimed to assist the financial institutions in determining a borrower's credit-worthiness by collecting factual credit information, such as credit cards, cars, home, personal and education financing, from its data providers and presenting them in the form of a credit report. This transformed the previous guesswork approach of identifying a borrower's risk into an approach that utilises a system built on data, leading to an improvement in the overall risk management of banks and finance companies.

Data Providers of the Credit Bureau s have expanded from licensed banks, finance companies and Islamic trust funds to include utility and telecom data providers.

Since its inception in 2012, the Credit Bureau has introduced other services:

Collateral Registry

In 2016, Brunei Darussalam became the first ASEAN country to introduce a Collateral Registry aimed at improving the ease of getting credit in the country. It was built upon the Secured Transaction Order, 2016 which provides a framework to facilitate MSME's (micro, small and medium enterprises) access to credit by lowering the risk of credit, and making it cheaper and more efficient to grant credit.

The Collateral Registry is a system that centralises all registration charges of movable properties secured against loans into one national collateral registry to enhance transparency of interests in these collaterals. The system allows individuals or businesses to register their personal assets (other than land and building and the like) which can then be used as collateral for banks and finance companies. The Collateral Registry, available 24 hours a day and 7 days a week, provides not only convenience to its users but is aimed towards reducing the information gap in the market and securing the rights of creditors. This method of financing helps to stimulate economic activity and growth in the economy through better access to credit.

In recognition of this momentous development, the World Bank ranked Brunei Darussalam number one in terms of “Getting Credit” in their Ease of Doing Business report in 2019.

Robust Legal and Regulatory Framework

A robust legal and regulatory framework allows BDCB to work effectively. BDCB is responsible for administering a total of 26 legislations and regulations. In the 10 years of establishment, BDCB has introduced 112 notices and 57 guidelines. BDCB benchmarks itself against internationally agreed standards and best practices. After the global financial crisis, it was recognised that regulators should intensify efforts to ensure risks in the financial system are better understood, monitored and mitigated accordingly. Therefore, the requirements issued by BDCB are focused on the management of the various types of risks that could threaten the soundness and operations of a financial institution.

At the same time, BDCB does not aim to prevent the failure of any financial institution. Rather we focus on reducing the risk and impact of a failure. Therefore, we are working on ensuring our regulatory framework is able to allow financial businesses to enter, operate and exit the market in a safe and orderly manner, that would not jeopardise public confidence and the overall financial stability.

Licensing

BDCB grants licences and supervises the financial institutions. This means BDCB imposes requirements not only during the initial application stage, but also on an ongoing basis. Applicants must satisfy a set of criteria which includes:

• Competency. This is whether they have the technical competence, knowledge and financial experience to carry out the business.
• Capital. This is whether they have enough money to operate the business.
• Integrity. This is whether the owners or the directors or employees in key positions are honest and do not have any record of wrong-doing
• Good track record. This is particularly important for foreign financial institutions which are established and interested to set up in Brunei Darussalam.

Only financial institutions that can meet our licensing requirements as well as, in some cases, bring economic benefit to Brunei Darussalam are granted a licence. These are the criteria we use to identify which players can operate in our country that would bring value for the benefit of households and businesses, as well as the country's financial stability.

BDCB can also take action against an individual or business which offers financial services without a licence from BDCB. If the activity falls under BDCB's legislations, then BDCB will work with the relevant agencies to deal with those individuals or businesses, where offering financial services without a licence can result in a fine, imprisonment or both. BDCB will also alert the public through the alert list published and updated regularly on our website.

If the activity does not fall under BDCB's purview but is deemed as suspicious and/or unethical, in a manner likely to be detrimental to the public interest and may have a negative financial implication to conduct illegal activity, the entity may also be included in the BDCB alert list.

Supervision

Supervision can be thought of as the day-to-day enforcement of BDCB's laws and requirements as we ensure that licensed financial institutions continue to comply and meet BDCB's requirements.

Since 2016, BDCB has employed a phased risk-based supervision approach by sectors. This approach allows supervisors to channel their limited resources to financial institutions that require the most attention based on the financial institutions' risk profiles.

Our regulatory framework sets out BDCB's expectations and requirements on how financial institutions should manage risks, such as liquidity risk, money laundering risk, technology risk or other categories. As part of consumer protection, BDCB is to ensure that licensees can meet their financial obligations to their customers on day-to-day basis.

Monitoring financial ratios and data is the unglamorous side of supervision. But the consequences of failing to keep an eye on them can be catastrophic. Therefore, our supervisors conduct regular surveillance for significant risks and are regularly assessing whether any risks arising are addressed adequately, and we gauge how risk is mitigated by financial institutions' internal systems and lines of defence. In this way, we are able to know the overall risk profile of the financial institution and know how much of our supervisory resources to allocate.

When we discover breaches of our laws or requirements, we can take a number of supervisory actions. Where a compound fine may not be effective, we also consider other remedial actions such as:

• Restriction of licence
• Suspension of new business
• Capital injection
• Removal of director or management that is deemed unfit

Surveillance

BDCB looks at both the health of individual financial institutions at the micro level, and also the system-wide perspective at the macro-level, to understand the interconnectedness of the financial players across industries. To do this, BDCB collects a lot of information from the financial institutions gained from the submission of reports through Centralised Statistical System (CSS) and IFIS as part of BDCB's Supervisory Technology (SupTech) tools.

Outcome of 10 Years' Work in Pursuing Financial Stability

Over the last 10 years, we have seen financially stronger and better-run financial institutions as our regulatory and supervisory efforts further intensified. In particular, we can see that the risk-based approach has driven financial institutions to strengthen their capital levels and governance practices, and also be able to manage their risks better.

In the area of governance, BDCB has seen many positive changes, such as:

• A clearer distinction between the role and responsibilities of the board of directors and senior management.
• The establishment of board committees and independent control functions.
• Notably, increased disclosures on these matters that provide the public and investors information that the company is being run well - which you can find on the financial institutions' website or annual reports.

In the area of risk management, we have instilled more accountability by placing the responsibility on financial institutions to manage their own risks according to our expectations. Through our dialogue and close interaction, we are able to see that financial institutions have a better understanding of their different risks and are managing them more effectively. Financial institutions are now able to better assess credit risks of a good or bad borrower, based on reliable information and data from our Credit Bureau. We are also able to pick up on any red flags earlier, particularly with respect to capital adequacy and liquidity and work with financial institutions to ensure that these risks are addressed quickly, so that a small problem does not escalate into something bigger that may affect the financial system.

Another way we have seen great improvement is the resilience of financial institutions, not just from a financial standpoint, but also their operational resilience. BDCB had introduced stress-testing to certain sectors to see how they would be affected by external financial shocks. The COVID-19 pandemic in 2020 and 2021 acted like a “litmus test” on our framework and to the industry, where it was concluded that financial institutions remain resilient and essential financial services have continued to be provided, especially during the height of the COVID-19 outbreak in Brunei Darussalam in 2021.

As financial institutions become more responsible for their own risks, BDCB has also emphasised the need to be held accountable for the products and services they offer. This means enhancing the market conduct of financial institutions through a few initiatives such as

• The setting up of complaints handling functions in financial institutions and requiring them to take responsibility for addressing customer complaints more seriously. We have seen that the number of complaints to BDCB and financial institutions have declined in the last 3 years.
• Raising professionalism and competency of staff.
• Increasing transparency of products and services being offered.

On the consumer empowerment front, we have also been focusing on increasing the general public's financial literacy level. This is to ensure the public are able to make well-informed financial decisions and know their rights and obligations accordingly.