An international port of call for Islamic finance and more
A rising international financial center in Asia Pacific
“Connected, convenient, cost-efficient” – these are perhaps not the first words that come to mind when one imagines the island of Borneo, but international businesses that come to the island of Labuan – situated just off the Malaysian territory of Sabah on Borneo’s west coast – find that the words indeed apply very nicely. Since its original launch as an offshore financial center (IFC) in 1990, Labuan has risen to prominence as a preferred destination for businesses and individuals to tap into leading-edge solutions across a spectrum of services ranging from banking to captive insurance, wealth management to Islamic finance, leasing to business registration and incorporation. In 2007, Labuan Offshore Financial Centre was repositioned and rebranded as Labuan International Business and Financial Centre (Labuan IBFC) to underscore a commitment to serve as a true international center of excellence in the provision of financial and business services important to global organizations doing business in the Asia Pacific Region. Supervision, regulation and oversight of these services fall under the jurisdiction of Labuan Offshore Financial Services Authority (LOFSA).
Challenging times require innovative solutions
The global financial market downturn has made its presence felt in Labuan as much as elsewhere. Labuan IBFC CEO Martin Crawford remarked: “These are indeed jittery times for the institutions that do business with us. Certainly compared with recent volumes of activity in high growth areas like banking and ‘sukuk’ (Islamic bonds), things have been a bit quieter recently; this is mostly due to the lack of liquidity in the market and people just deciding to delay. This is not the right time to get into the market.” Crawford adds, however, that for insurance companies the outlook is actually somewhat rosier. “Insurance companies tend to go through cycles of ‘hard’ markets and ‘soft’ markets,” notes Crawford, “and right now a number of the ones with whom we have spoken have a fairly bullish outlook and think insurance rates – governed by capacity – should firm up over the next couple years. We see this as an encouraging trend for the insurers and re-insurers in our center.”
A place where “real things” happen
One bright spot for Labuan in the midst of the downturn-related gloom and doom has to do with the fact that Labuan is substantively different, in a positive sense, from other centers that specialize in the provision of so-called “offshore” services like business and trust registration. For a number of years now, supranational organizations like the Financial Stability Forum (FSF), the Financial Action Task Force (FATF), and the International Monetary Fund (IMF) have undertaken extensive studies and efforts to identify centers that are more tax haven than IFC, where lax regulations and negligent oversight turn a blind eye to unsavory activities like money laundering or terrorist financing. Recently a number of established offshore centers have come into the crosshairs of regulators in the EU or United States (often in pursuit of politically-motivated explanations for domestic problems attributable to the financial crisis).
LOFSA, in its capacity as Labuan’s financial regulator, pays close attention to international developments in this area and one of its key performance indicators (KPIs) is to ensure that Labuan maintains standards and practices to prevent it from these negative associations. “We have never been on the FSF’s blacklist,” says Dato’ Azizan Abdul Rahman, director general of LOFSA. “Our financial transactions are all bank-to-bank (as opposed to between banks and individuals), and this effectively makes it difficult to contemplate money laundering-type activities.” He adds that LOFSA takes active measures to encourage transparency and information-sharing with other international regulators and agencies.
Labuan IBFC’s Crawford notes that he has seen a certain level of flow – for example in areas of the trust business – relating to global businesses choosing to relocate their international services to a location like Labuan with a more solid reputation and ability to demonstrate real value-added activity, and that this represents a potential opportunity to expand Labuan’s image and get on the radar screen beyond the Asia Pacific Region. “Labuan is a place where real things happen,” says Crawford, “not where things get hidden away from the gaze of regulators.” He adds that “there is a material difference between real tax planning – what we do in Labuan with tax treaties and the infrastructure of diligent regulation – and the tax avoidance game that goes on in some of these other jurisdictions, where the less said the better. That is what we mean by ‘real things’ and that is the message we want the rest of the world to see.” That requires taking proactive measures – the publicity circuit, lobbying and other activities that make for a very busy travel schedule for Crawford and his colleagues at Labuan IBFC.
An innovator in Islamic finance
Malaysia’s growth to a leadership position in Islamic finance lends itself well to this service being one of the prominent areas of expertise offered by Labuan IBFC. “Malaysia generally has a more pragmatic approach to Islamic finance,” observes Crawford, “and that has led to its leadership rankings across the spectrum of products from banking to sukuk, from “takaful” (insurance) to wealth management.” Crawford adds that Labuan “led the charge” in Malaysia’s rise to prominence in Islamic finance – with the first sukuk issuances, the first re-takaful operators and such. Labuan has been “a terrific incubator of Islamic finance activity for Malaysia, including serving as a sort of genesis for MIFC [Malaysia International Islamic Financial Center].” MIFC is a collaborative effort supported by Malaysia’s primary financial regulators: Bank Negara Malaysia (the central bank), the Securities Commission, Bursa Malaysia (the stock exchange) and LOFSA.
LOFSA Director General Dato’ Azizan notes that “Islamic finance is an integral part of Malaysia’s national agenda, and LOFSA is very much a part of that agenda.” Businesses and individuals engaging in Islamic financial services can choose between doing business through the domestic infrastructure (i.e. under the jurisdiction of Bank Negara, Bursa Malaysia, etc.) or via Labuan. “It is a natural choice,” comments Labuan IBFC’s Crawford. “If your business objective is to operate as a retail deposit-taking institution, then of course it makes sense to register in Kuala Lumpur (i.e. via the domestic infrastructure). If on the other hand you need to structure a complex sukuk with a leasing (“ijarah”) mechanism and obtain a particular tax treatment, then you probably want to come to Labuan.”
LOFSA’s Dato’ Azizan notes that Islamic finance is at an important stage of its development, having grown steadily for a number of years, to come into a more mainstream role in international finance. “In Islamic finance we always have to take into account, not only the business needs of our community but also the needs of Shariah compliance, and this can create challenges as we encounter a divergence of opinions about what makes for Shariah-compliant structures that are also business-friendly.” He notes that Islamic transactions in Labuan permit the use of Shariah opinions obtained from any valid jurisdiction either within or without Malaysia, and that the quest for convergence and harmonization of Shariah interpretations is an ongoing pursuit. “Our own Shariah Advisory Council [SAC] (under LOFSA’s auspices) is probably a bit more international in composition than is the central SAC in the onshore market,” adds Dato’ Azizan.
He adds that recent initiatives sponsored by Malaysian participants such as the Islamic Financial Services Board (IFSB) and International Shariah Research Academy for Islamic Finance (ISRA) will also help in this regard. And in Labuan, a new omnibus act for Islamic products is currently making its way through Parliament, which upon passage should help bring further clarity to the market.
As Islamic finance continues to meet the challenges of its growing pains, it will rely more than ever on the type of innovation and pragmatic decision-making that are the hallmark of the Labuan IBFC brand. No doubt there will be a number of new “firsts” to add to those that have helped pave the way to where the market is today.
