By Marjan Muhammad and Salma Sairally

In view of the economic downturn, high net worth investors (HNWIs) are looking for efficient and secure jurisdictions for investing their wealth. The competition for attracting this wealth is fierce, particularly in the Islamic finance arena, as more and more countries are developing their Islamic capital markets as a key strategy for attracting foreign investments. A number of jurisdictions seek to leverage on their reputation of being efficient offshore financial centers (OFCs) to equally offer Shari’ah-compliant products. These OFCs are generally small nation states or jurisdictions, which have been separated from the main state by geography and/or by legislation, where international financial transactions take place with minimum restrictions. They include jurisdictions such as Cayman Islands, Jersey, Guernsey, Luxembourg, Bermuda and Labuan International Business and Financial Centre (Labuan IBFC), which seek to attract Islamic financial businesses by offering the following benefits: low taxes, political stability, business-friendly laws and regulations, low administrative and operating costs, good infrastructural development, and confidentiality. Working in close collaboration with the Malaysia International Islamic Financial Centre (MIFC) to promote Islamic financial services, Labuan IBFC in turn leverages on Malaysia’s existing value propositions and pioneering achievements in Islamic finance to be a competitive OFC in Islamic finance.

Labuan IBFC

Labuan was first launched as an International Offshore Financial Centre (IOFC) in October 1990. On 28 January 2008 it was rebranded as Labuan IBFC as an exercise of repositioning into an integrated business and financial centre which offers a wide-range of products and services including Islamic finance.

The Labuan IBFC adheres to international best practices through its membership in various international organisations such as the International Organisation of Securities Commissions (IOSCO), Islamic Financial Services Board (IFSB), Asia Offshore Association and Asia-Pacific Group on Anti-Money Laundering, among others. These memberships ensure stringent screening measures being adopted by Labuan IBFC such that only the most reputable individuals are accepted to do business in the jurisdiction, while it maintains client confidentiality. It also keeps the jurisdiction away from criticisms usually associated with offshore transactions such as tax evasion, money laundering and terrorism financing. Labuan IBFC has in fact passed the 1^st  phase of the OECD Global Forum Review Assessment on Transparency and Exchange of Information for Tax Purposes. Moreover, Labuan IBFC applies the Financial Action Task Force (FATF) 40+9 anti-money laundering rules and procedures. The Labuan Financial Services Authority (FSA) also adopts the United Nation Security Council Sanction Resolution (UNSCR) under which it suspended the license of First East Export Bank (FEE Bank) when the bank was listed in the sanctioned list of the UNSCR.

The Labuan IBFC identified five (5) niche areas for future growth, namely: holding companies; Islamic finance; insurance and captive insurance; fund management; and private wealth management. In this respect, it offers international corporations and high net worth investors a wide range of business opportunities through such vehicles like protected cell companies, foundations, trust administration, business registration, leasing, banking, insurance, wealth management, and listing of financial instruments via Labuan International Financial Exchange (LFX). Besides its conventional offerings and services, Labuan IBFC also offers Islamic financial products such as Islamic banking, Islamic capital markets, takaful, retakaful, Islamic funds, waqf and Islamic trusts administration.

To date, Labuan IBFC has more than 7,400 holding companies including 60 banks, 32 captive insurance entities, 150 other insurance and reinsurance entities, and 41 captive insurance which hold business addresses in Labuan.

Growth of Labuan Islamic Financial Services

The development of Islamic financial services is growing at Labuan IBFC. According to Labuan Financial Services Authority (FSA) Financial Report 2011, as at 31 December 2011, total Islamic assets in the banking sector reached USD 1.49 billion, representing an increase of 14.6% as compared to USD 1.3 billion in 2010. For the takaful and retakaful sector, there were 5 full-fledged takaful and retakaful operators and 12 reinsurance companies with retakaful windows doing business in Labuan IBFC at the end of 2011. This sector showed double-digit growth, with gross contributions improving significantly by 54% to USD 459.5 million in 2011 (compared to USD 297.3 million in 2010).

Throughout year 2011, Labuan IBFC witnessed a steady growth in Islamic capital market (ICM) transactions. As at end 2011, there were 11 ICM instruments listed on the LFX (compared to 9 in 2010). There were several sukuk being issued, particularly the USD 2 billion trust certificates issued by Wakala Global Sukuk Berhad and China Remnimbi-Denominated Trust Certificates of CNY 0.5 billion issued by Danga Capital Berhad. The market share of Islamic private funds against total private funds was 27.1% in 2011.

The Labuan Islamic Financial Services and Securities Act 2010

To further strengthen the growth of Islamic financial services, the Labuan Islamic Financial Services and Securities Act (LIFSSA) 2010 was enacted as the new legislative framework to govern Labuan IBFC. LIFSSA has streamlined and consolidated all Islamic finance related issues in the jurisdiction under one piece of legislation. With its introduction, more Islamic products using set-up vehicles such as Islamic trusts, Islamic foundations, Protected Cell Companies, Limited Partnership and Limited Liability Partnerships can also be provided from the jurisdiction. The legislation also introduced changes to the Shari’ah governing system in Labuan by establishing the Shari’ah Supervisory Council (SSC) to ascertain the Islamic law relating to any businesses regulated by the Labuan FSA. The enhancement of the Shari’ah governance framework through the SSC sets Labuan apart from other offshore jurisdictions which generally requires the establishment of the Shari’ah Committee at the level of the product provider (e.g. the investment fund) rather than at the regulator level.

Labuan IBFC: A Competitive Global Market Player

Labuan IBFC has to compete with OFCs such as Jersey, Guernsey and Cayman Islands which are ranked among the top 3 most competitive global OFCs by the Global Financial Centre Index 2012. Nonetheless, Labuan IBFC has become a popular centre in the South East Asian region, particularly in Islamic finance, given the leading position of Malaysia in the Islamic financial industry. Its attractiveness to Islamic financial businesses from other jurisdictions is also growing due to its strategic location close to giant economies such as China and India which represent potential markets for sukuk and Islamic private funds. Overall, Labuan IBFC has placed high emphasis on building up both the soft and hard infrastructure necessary to provide investors with a safe haven to harbour their investments. These factors can only make Labuan IBFC emerge as an increasingly competitive global centre in Islamic finance.