11 April 2017
Economic Shifts See LBFC Embrace Midshore Role and Sharia Finance
Labuan, Malaysia's only offshore financial hub, has transformed itself as it looks to take on a lead role across SE Asia.
Malaysia has always had big ambitions for Labuan, the country's only offshore financial hub, but its plans have shifted somewhat in line with Asia's changing investment climate. Located just off the northwest coast of Borneo – a territory Malaysia shares with Indonesia and Brunei – the Labuan International Business and Financial Center (LBFC) was established on this small island in October 1990.
At the time, Labuan was a key element in Malaysia's plans to develop its financial services sector into a market leader across Southeast Asia. Highlighting the appeal of the island facility, a spokesperson for the Labuan Financial Services Authority (LFSA) said: "The LBFC provides the ideal ASEAN entry point for Malaysian investors and businesses, allowing such companies to operate in a tax and currency-neutral environment.
"As well as providing access to Malaysia's 80-plus double taxation agreements, it also offers Asia's widest range of business and investment structures for cross-border transactions and international business dealings."
As of last year, more than 13,000 companies, 212 insurance specialists and 54 banks were operating out of Labuan. Of these, more than 70% were based in Asia.
Last year, following a shift in offshore investment structures, Labuan repositioned itself as a midshore business and financial centre. Plans are now in place for it to move away from simply offering broad-based financial services and, instead, focus on high-potential niche areas, such as leasing, captives, commodity trading and wealth management. In order to facilitate this re-positioning, the LFSA is reviewing its legal framework in line with international regulatory and supervisory policies, while also looking to deploy more technology-based regulatory reporting.
Addressing the need for these changes, Chris Clegg, Managing Director of M1 Malaysia, a Labuan-registered financial advisory firm, said: "Over the past few years, the LFSA has endeavoured to raise the level and police the qualifications of consultants in the region, a move intended to ensure they exceed or, at least, equal the standards of their counterparts in other ASEAN countries. This adherence to strict reporting sandards and transparency is necessary if Labuan is serious about being a respected regulator."
Assessing the significance of the LBFC's recent transformation, Muhammad bin Ibrahim, the Governor of the Central Bank of Malaysia, said: "Labuan was always intended to benefit from the overall growth and economic development of the region. Indeed, it is now a well-established centre for niche financial services, including aircraft, oil and gas leasing, reinsurance and captive insurance. While it was never intended that domestic business would be its focal point, almost half the insurance business here actually relates to Malaysian risks."
In addition to its expansion plans, Labuan's rebranding as a midshore centre is also tied in with its aspirations to capitalise on the growing Islamic-finance sector. Under the terms of its 2020 Economic Transformation Plan, the Malaysian government is committed to increasing Islamic financing's share of the total domestic financing sector from 29% in 2010 to 40% in 2020. Along the way, it hopes to see Labuan confirmed as the global hub for Islamic finance, a goal that it seems already well on the way to achieving.
As a sign of its success, Islamic Finance News (IFN), a UK-based specialist website, recently noted: "Malaysia, with its blend of common law and Sharia law, leads the world in Islamic finance ideas and products." Earlier this year, the site identified Labuan, the Cayman Islands, the British Virgin Islands, the Dubai International Finance Centre and Jersey as the key jurisdictions where Islamic financial institutions can seek Sharia-compliant solutions for their customers and their own internal capital requirements.
Labuan's midshore centre is also promoting Islamic wealth-management services, including waqf, a specialist land/property endowment product. In fact, Labuan claims to be the only international financial centre in Asia qualified to establish the foundations and special purpose trusts – including Islamic foundations – necessary for waqf implementation.
According to Ibrahim, Takaful, a form of Islamic insurance, including re-Takaful, is another key sector where Labuan is taking a lead. The sector is currently one of the fastest-growing risk-management markets in Asia.
Saudi Arabia is also said to be eying Labuan as a platform for its own financial services aspirations. In line with this, late last year it was announced that the island will play a complementary role as Saudi Arabia moves forward with its Vision 2030 initiative, a programme aimed at helping corporations and investors in the country expand into the Asian markets.
Geoff de Freitas, Special Correspondent, Labuan