IFR Asia Malaysia Islamic finance report: Labuan

IFR Asia Malaysia Islamic finance report: Labuan

Labuan is Malaysia’s offshore financial centre and, like everything else in Malaysian finance, has a clear Islamic dimension to it. Having an offshore jurisdiction with the necessary infrastructure to support Islamic finance is considered a key part of Malaysia’s MIFC offering.

“The best way to describe the MIFC is as a community,” says Martin Crawford, CEO of Labuan IBFC Incorporated, a company set up by Labuan Offshore Financial Services Authority, the local regulator, to market and promote Labuan as an international banking and finance centre. “It’s the group that links the relevant players together. Onshore, you have Bank Negara, the Securities Commission, Bursa Malaysia and the companies commissions who register fund management companies or banks or insurers for working in Islamic finance onshore. The offshore equivalent is LOFSA, which is like a one-stop-shop for all those other functions: it plays the role of central bank, insurance regulator, fund management regulator and banking regulator.” LOFSA is one of the four official members of MIFC. “We are very much a part of it.”

In practice, Labuan has had an additional function. “Generally Malaysia has tried to use Labuan as a bit of an incubator for new developments, and when they become proven they might bring them onshore,” says Crawford. “There’s been a lot of pioneering deals done through Labuan: the first corporate sukuk ever issued in the world was in Labuan, by Guthrie; the first sovereign sukuk was through Labuan; and recently the Petronas bonds [a US$4.5 billion combined issue of which US$1.5 billion was Islamic].”

The landmark sukuk issues have been what has given Labuan the greatest profile in Islamic finance, but it has other areas of strength too, most notably insurance. Overall Labuan has 140 insurance licences on issue, of which 13 are Islamic (four full-fledged retakaful operators and nine retakaful windows). When retakaful operators got together to form the Global Takaful Group in 2007, they based it in Labuan. Retakaful contributions through Labuan increased by 48.2% to US$162.3 million in 2008. “The size of the takaful operation is very considerable and is growing quite fast,” says Crawford. Additionally, there are five Islamic fund managers registered in Labuan, and the amount under management in Islamic private funds – US$2.8 billion – doubled in 2008. In banking, there are six Islamic banks and a further three windows, with US$337.3 million in deposits as at the end of 2008.

Still, the question has to be asked, as Malaysia becomes more and more accommodative to foreign participation onshore, why do people still need to bother with Labuan? “There are more reasons historically than there are now, because as you say some of the onshore environment has relaxed quite a lot,” Crawford says. “It used to be very hard to break into the onshore market. But there are still some reasons you’d go to Labuan and not onshore.” One is that the regulatory structure is more flexible in Labuan, where the rigour of Bank Negara and the Securities Commission is geared towards the protection of the domestic consumer; and the other is that Labuan still falls outside Malaysia’s foreign exchange controls. In fact, almost all of their controls have gone now but the ringgit does still not have complete convertibility, and if restrictions were ever to be imposed again, they would not affect Labuan. Additionally, Crawford feels that as more and more of the Islamic population in places like Indonesia, China, southern Thailand or even the Middle East build their savings, they are likely to want mutual funds domiciled offshore, ideally in regulated products.

Also, Labuan seeks to become a venue of choice for personal high net worth individuals: it is particularly well set up for the foundation or trust structure, and already one major Indonesian bank, Bank Muamalat, has signed a joint venture with a Labuan institution to build trust structures there for wealthy Indonesians.

This is one of several areas that will be bolstered by the passage of new legislation, the Labuan Islamic Financial Services and Securities Act, which had its first reading in parliament in July and will next be considered at the October session, which gives it a good chance of being gazetted by the end of 2010. In the main, this is an act that streamlines and conveniently puts all the Islamic regulatory framework into one act rather than the four that have some relevance today, but it also creates greater clarity around foundations. “Really it’s formalising what’s been in place with the guidelines issued over the years, with policy statements into one piece of legislation,” says Crawford. “It’s an opportunity for us to go out and talk to the world about what we’re doing. We’re still growing strongly.”