Labuan: Offshore Business Sectors

On this Page:

- LABUAN INTRODUCTION
- LABUAN BANKING
- LABUAN TRUST MANAGEMENT
-LABUAN INSURANCELABUAN INVESTMENT FUND MANAGEMENT
- LABUAN FINANCIAL EXCHANGE

Labuan Introduction

Labuan was established as an international offshore financial centre in October 1990, but 2002 was probably the year in which the territory established itself irrevocably as a premier player.

The number of new offshore companies incorporated in Labuan IOFC increased from 486 in 2002 to 494 in 2003 and rose again in 2004 and 2005.

According to the LOFSA 2006 Annual Report, the number of offshore companies established in the jurisdiction had risen to more than 5,500 at that time.

The Labuan IOFC was also home in 2006 to over 300 financial institutions that provide a comprehensive range of financial services, both conventional and Islamic, including offshore banking, investment banking, insurance and insurance-related activities, investment holding, trust, fund management and leasing.

Fulfilling its early promise, the Labuan IOFC has developed into an active international centre for Islamic finance, regionally and worldwide, supported by an infrastructure that provides the foundation for the promotion of Islamic financial services. Part of this infrastructure is the Shariah Advisory Council, which advises LOFSA on issues relating to Shariah-approved financial instruments in Labuan IOFC. This has paved the way for a more efficient and effective introduction of innovative and new Islamic financial instruments.

LOFSA, the Labuan Offshore Financial Services Authority, was established in 1996 as a single regulatory agency or a one-stop agency for the offshore centre. Companies can make use of Malaysia's more than 60 double tax treaties, of which around 50 are in force, and the island has become the preferred conduit for FDI into a number of local countries including Korea and Malaysia itself.

The offshore companies established on Labuan in 2006 included 60 banks, 112 insurance companies, 68 leasing companies and 30 trust management companies. A stock exchange was established in 2000 - the Labuan Financial Exchange (see below for more detail on this). Fund management activities have been given a boost with the introduction of offshore securities legislation.

In April 2008, LOFSA released its 2007 Annual Report, highlighting the development and progress of the Labuan International Business and Financial Centre (IBFC) and the financial performance of LOFSA.

According to LOFSA, a strategic milestone was achieved in 2007, with the repositioning and rebranding of Labuan IOFC as Labuan International Business and Financial Centre (IBFC).

It observed that: "The new brand name of Labuan IBFC marks its greater focus and its continuous progress towards a vibrant and progressive international business and financial centre."

"Labuan IBFC has shown its agility to build new strengths, leveraging on its comparative advantages, to meet the emerging and more sophisticated demand in the region."

The report revealed that the Labuan IBFC continued to record double-digit growth in the number of new offshore companies, which totalled 6,297 in 2007.

The offshore banking industry reported an expansion in the loan assets, complemented by an improvement in the asset quality.

The total assets of offshore banks increased by 27.8% from USD21.1bn in 2006, to USD 27bn in 2007, and the offshore leasing business continued as one of the main offshore financial activities, to become one of the highest growing financial industry in Labuan IBFC in 2007.

Total new lease financing increased by 18.7%, resulting in a cumulative financing of USD14.1bn. This was boosted by strong activities in the oil and gas sectors, as well as increased shipping activities in the region.

The report went on to reveal that the offshore insurance industry continued to expand, particularly in the reinsurance business sector, which grew by 40.3% to USD919.2mn in 2007, of which 62.0% were non- Malaysian premiums, signalling its growing role as a reinsurance centre.

For the year 2007, Islamic-based assets in the Labuan IBFC continued to grow, to USD1.2bn, representing an increase of 36.9% as compared to 2006. There was strong interest from investors from the Middle-East seeking to invest in the Asian region.

The position of Malaysia as an International Islamic Financial Centre (MIFC) has further enhanced Labuan’s effort to promote Shariah compliant trusts and foundations, as these products complemented the Islamic financial products and services that were already available onshore.

The Labuan International Financial Exchange (LFX) also recorded four new listings, bringing the total number (as at 2007) to 31, with total market capitalisation of USD15.1bn.

Going forward, LOFSA identified several key strategic programmes to advance Labuan as an International Business and Financial Centre.

One such initiatives was to elevate Labuan IBFC‘s status to being the “gold standard for holding company jurisdiction”.

LOFSA also revealed that it was in the process of streamlining all aspects of the existing legal framework covering both conventional and Islamic businesses to create a more "facilitative, flexible and frictionless business environment".

Then the following month, LOFSA announced the establishment of Labuan IBFC Incorporated Sdn Bhd, (Labuan IBFC Inc).

The new entity, which is fully-owned by LOFSA, is responsible for promoting Labuan as an International Business and Financial Centre (IBFC).

The main function of the Labuan IBFC Inc is to drive market development, as well as to act as a facilitator for investors seeking to participate in Labuan IBFC. It will also undertake "targeted and focused interface with potential investors".

According to the Labuan IBFC Annual Report, released in May 2009, Labuan IBFC maintained positive growth in 2008 across all key business sectors, despite the more challenging global environment, and new measures were recorded to improve the flexibility and business-friendliness of its tax and legal framework, becoming effective in 2009 and beyond.

In 2008, company incorporation in the Labuan IBFC grew by 9.1% to 6,868 originating from a total of 85 countries, of which about 60% are from Asia Pacific region, mainly for investment holding purposes, special purpose vehicles, international financial activities and trading activities. The number is expected to increase further with the enhancement of its delivery process, reduction of annual fees from RM2,600 to RM1,500 and the upgrading of the online registration system and business approval process.

After 10% growth to more than 300 registered financial institutions, the scope of Labuan IBFC products and services now includes banking, investment banking, leasing, insurance and insurance-related, both conventional and Islamic, broken down as follows:

• Banking Institutions: 59
• Insurance Institutions: 140
• Leasing Entities: 121
• Trust Companies: 23

Six new banking licenses were issued in 2008. The soundness of the Labuan banking industry is reflected in the quality of assets, strong capitalisation and earnings growth - the gross non-performing loans ratio reduced from 2.0% to 1.9%, an average risk-weighted capital ratio and core capital ratio at 15.9% was mainatained with total assets increasing by 7.5% to USD29.0bn; earnings grew by 28.2%.

27 new leasing companies were approved in 2008. Leased assets grew by 22.9% to USD17.4 billion, underpinned by activities in oil and gas and aviation.

During the year, 16 new licensees were approved, comprising two insurers, two reinsurers, two captives, nine insurance brokers and one underwriting manager. The insurance sector in Labuan achieved a significant growth in 2008 recording gross premiums of more than USD1bn. The net claims to earned premium income ratio of the industry improved significantly to 56.5% from 72.9% in 2007.

Foreign representation in the insurance sector continued to increase from 66.5% in 2007 to 69.5% in 2008. Similarly, the non-resident insurance business remained to have a higher share of 57% in 2008. This reflects favourably the out-out business conducted through Labuan IBFC.

The insurance industry maintained an aggregate solvency surplus of USD627.7m and margin of solvency of five times above the minimum regulatory requirement.

Captive insurance, a recognised niche business, saw premiums increase by 47% to USD186.9m. There were 32 captives insurers in Labuan IBFC as the end of 2008.

Retakaful gross contributions increased by 48.2% to USD162.3m, driven by four full-fledged retakaful operators and nine retakaful windows.

Five new Islamic private funds were established in 2008, with an approved fund size of USD1.5bn increasing the total Islamic private funds to USD2.8bn or one-third of the total size of private funds in Labuan IBFC.

The Islamic banking sector, comprising 6 Islamic banks and 3 banks with Islamic windows, saw total deposits grow to USD337.3m from USD250m in 2007.

In order to enhance LOFSA’s regulatory function and corporate governance, a separate marketing entity, Labuan IBFC Incorporated Sdn Bhd was established to undertake more focused marketing activities for the Labuan IBFC.

Labuan companies can now elect to be taxed under the Income Tax Act 1967 or the Labuan Offshore Business Activity Tax Act 1990, to reinforce the business-friendliness and flexibility of Labuan IBFC.

As part of the strategy to further facilitate the use of Labuan as the platform for investment into Malaysia and the region, LOFSA has also simplified the procedures for Labuan companies to deal with residents and invest into a domestic company.

LOFSA is committed to maintaining Labuan IBFC as a preferred international business and financial centre of high integrity and repute and improving the facilitative environment.

Legislation for a new improved legal framework is expected to be tabled in the coming Parliament session. LOFSA will complete upgrading the on-line company registration system in 2009 improving its speed and user-friendliness.

With effect from 1 June 2009, Labuan holding companies will be accorded the extra flexibility to have a physical presence in Kuala Lumpur. Similarly, Labuan banking institutions and insurance companies that meet the predetermined criteria will also be allowed to have a physical presence onshore from 2010 and 2011, respectively.

This section of the lowtax site describes the most important types of offshore business activity carried out from Labuan.

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Labuan Banking

Offshore banking can only be carried on in Labuan by an offshore company or a foreign offshore company incorporated or registered for that sole and exclusive purpose, and by an office, branch or subsidiary of a licensed Malaysian bank.

To apply for an offshore banking licence, an application needs to be made to the Labuan Offshore Financial Services Authority (LOFSA) providing a guarantee and minimum capital funds of RM10 million. An annual fee of RM80,000 (at the time of writing) is payable to the Central Bank no later than 15 January. Accounts have to be audited and filed with the Central Bank annually.

An offshore bank may conduct a wide spectrum of financial activities, including the management of investment portfolios, accepting foreign currency deposits, borrowing or lending money to Malaysian residents, making loans to foreigners to purchase properties situated within Malaysia, granting loans to non-residents, securitisation, leasing, investment banking, Islamic banking and others.

In 1999, in response to problems caused by the Asian crisis in 1998, Labuan liberalised its entry criteria for offshore banks. Other changes included permitting offshore banks to trade in ringgit instruments in the secondary market which would allow them greater access to ringgit business as well as to promote money market operations in Labuan. They are also allowed to purchase ringgit instruments in the primary market using foreign currency.

In August 2009, Petronas issued a landmark dual-tranche USD4.5bn bond/sukuk, domiciled in Labuan and managed by Bank Negara Malaysia.

The Malaysian national oil company’s issue consists of a USD3bn 10-year fixed-interest USD bond and USD1.5bn five-year sukuk (sharia-compliant bonds). Foreign-currency issues out of the Labuan International Business and Financial Centre (LIBFC) have now been named “Emas”, in an attempt to provide added exposure for the LIBFC and Malaysia as a means of attracting funds.

It was announced that the Petronas issue was very successful, having generated interest from a wide investor base and being five times oversubscribed. The sukuk was sold mainly to investors in Asia and Europe, while the USD bond was also sold in the US. The issue is expected to be listed on the Labuan International Financial Exchange and the Bursa Malaysia, and also on the Luxembourg Stock Exchange.

It was hoped that the issue’s success would show that Malaysia could be utilized not only for the origination of domestic ringgit bonds and sukuk, but also for foreign-currency denominated bonds and sukuk. The issuance of sukuk is becoming of increasing importance worldwide.

The larger goals are now said to be to offer a wider range of services in the LIBFC through an amended Labuan Financial Services Authority Act, and to become an Islamic financial centre through a Labuan Islamic Financial Services and Securities Act. Both laws are currently before parliament.

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Labuan Trust Management

A trust company must be incorporated or registered under the Malaysian Companies Act before it can be licensed to carry on a trust business in Labuan. As the offices of the trust company are privy to confidential information, there are very strong secrecy provisions in the Labuan Trust Companies Act prohibiting disclosure of information unless requisitioned by a court.

A trust company is required (at the time of writing) to have a minimum authorised and paid up capital of RM500,000 and RM150,000 respectively, and to deposit RM100,000 with the Accountant-General as a security deposit. A nominal annual licence fee is payable.

A Labuan trust company may act as a trustee, agent, executor or administrator pursuant to its memorandum, and may provide share registration services, administer, manage or otherwise deal with property as an agent or trustee, maintain an office, agency or branch for another company, provide management and accounting services, directors, secretaries and registered offices of offshore companies, and incorporate and register offshore companies.

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Labuan Insurance

The Offshore Insurance Act 1990 provides the legislation for licensing and regulating persons carrying on offshore insurance businesses such as captive insurance, direct insurance, reinsurance and other insurance related activities such as underwriting, insurance management and insurance broking.

The offshore insurance business covers all type of insurance business other than domestic direct insurance except for the insurance of high net worth individuals.

The Government is determined to boost the captive insurance business. An amendment to the Act in April 1997 was made to lower the capital requirement for the setting up of captive insurance companies in Labuan from RM1m to RM300,000. Steps were also taken to allow domestic insurance brokers to establish offices in Labuan.

Offshore insurance business may be carried on in Labuan by an offshore company, a foreign offshore company and a branch of a licensed Malaysian insurer. The application for an offshore insurance licence is vetted by LOFSA and approved by the Minister of Finance.

An annual licence fee is payable on or before 15 January as follows:

There are minimum working funds and solvency requirements for offshore insurance business in Labuan. Rent-a-captives have been introduced into Labuan.

In July 2009, it emerged that the Labuan International Business and Financial Centre (IBFC) was developing guidelines on shariah-compliant captive insurance for completion in the next 6-9 months. Further Labuan initiatives included provision for protected cell companies and amendments to the 1996 Insurance Act to allow for marine and aviation captive insurance companies.

Speaking at an industry briefing in Kuala Lumpur at the time, Labuan IBFC chief executive officer Martin Crawford said guidelines on Islamic captive insurance are non-existent, as very few jurisdictions have a legal framework to accommodate Islamic finance with the necessary physical infrastructure. Crawford considers that Malaysia's shariah traditions and the comparatively low-cost nature of doing business in Labuan augur well.

The Labuan IBFC already had at that time 32 captive and four rent-a-captive companies in operation and was on course to register 40 captive insurance companies by the end of that year. This compares with 50 captives in the captive insurance market of Singapore.

Legislation for protected cell companies (PCC) has had its first reading in Parliament and could become effective in law by the first quarter of 2010. A PCC is structured with core capital, cellular capital, cellular assets and liabilities, and core assets and liabilities. The various businesses within each 'cell' are ring-fenced and insolvency of one cell should not affect the solvency of the whole entity or the performance of the other cells. For any contract the PCC discloses which cell is contracting or whether it is a 'core' contract. 'Cellular' or 'non-cellular' shares may be issued, depending on whether they represent an equity interest in a specific business cell or in the core assets. The entity keeps accounts showing the corresponding patrimonial divisions among the segregated cells and the core cell.

Under an exemption from subsection 140(1) of the Insurance Act, any marine and aviation risks, including goods in international transit, can now be handled by Labuan-based insurance companies, whereas before April 1, 2009, the risks had to be insured through a local onshore insurance company.

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Labuan Investment Fund Management

Under the Labuan Offshore Securities Industry Act 1998 the paid-up capital of a fund management company must be at least RM 2m or its equivalent.

The Labuan Offshore Securities Industry Regulations 1999 specified the procedure for registration of an investment fund, and the fees payable to LOFSA.

Presently, approved instruments of Islamic financing are given additional stamp duty exemption of 20%. That exemption was to expire on December 31, 2009, but was extended to December 31, 2015 as a result of the 2009 government budget.

The 2009 budget also extended and expanded tax incentives for the issuance of Islamic securities. Expenses incurred in such issuance approved by the Securities Commission are currently allowed as a deduction for income tax purposes.

Investment Management companies in Labuan, like all offshore companies, have access to Malaysia's range of double tax treaties; for details of their tax treatment generally, see Offshore Legal and Tax Regimes.

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Labuan Financial Exchange

The Labuan Offshore Securities Industry Act 1998 laid down a basis for the opening of a securities exchange and for the establishment and supervision of investment management companies. The full text of the Act can be found here.

Amendments in the Labuan Offshore Security Industries (Amendment) Act 2003 (LOSIA), which came into effect in May 2003, included several updated provisions relating to private funds and allowed fund managers to manage and administer foreign funds in Labuan.

The Labuan International Financial Exchange (LFX) was officially launched in October 2000. It is an offshore exchange wholly owned by the Kuala Lumpur Stock Exchange and trades in financial instruments such as equities, investment funds, debt instruments and insurance-related instruments. It is seen as one of the the key components in promoting Labuan as an offshore financial centre, and in particular as a prospective centre for Islamic finance.

Malaysia's capital controls do not affect LFX as dealings are carried out in US dollars.

LFX has no restrictions on the type of financial instruments and no pre-determined minimum quantity for listing. Also, there is no requirement for participants to have a physical presence in Labuan. Trading is done on its electronic bulletin board and trading agents place their interests to buy or sell on the board and conduct their own negotiations.

Labuan was spurred on to launch the LFX exchange by an announcement from neighbouring Brunei that it was setting up an international offshore financial centre of its own. However, it is in Islamic finance that Labuan is marking out its track. Malaysia's 2002 US$600 million Global Islamic Trust Certificates (Sukuk) was a world first. The five-year Sukuk maturing in 2007 listed on the Luxembourg Stock Exchange and Labuan International Financial Exchange (LFX) attracted wide participation from investors in Asia particularly in the Middle East, the United STates and Europe.

"Comparatively, our Sukuk Al-Ijarah Trust Certificates were very popular," said LFX's Datuk Noorazman El Aziz. "For the first time, we have 27 new accounts from Middle East investors. They are putting their money into the country for five years.

"Sukuk is our benchmark. After the launch, we had a lot of people asking us about it. It is essentially a good alternative to the Yankee or even Samurai bonds. We are talking about yields here and Sukuk offers it."

In Janaury 2010, the Malaysian stock exchange, Bursa Malaysia Berhad (BMB), and the Bahrain Financial Exchange (BFX) announced the signing of a memorandum of understanding (MOU) to develop a joint commercial agreement between the two exchanges to provide financial products to the Islamic market.

The MOU will involve a feasibility study to identify shariah-compliant products, including a commodity murabaha trading platform to satisfy short-term financing needs. It will lay the foundation for both exchanges to work jointly on increasing the awareness of investment and liquidity management opportunities in their respective Islamic markets using acceptable shariah solutions.

BMB's Chief Executive Officer, Dato' Yusli Mohamed Yusoff, who signed the MOU on behalf of the Malaysian exchange, which also owns the Labuan International Financial Exchange, said that "the collaboration with BFX is aimed at facilitating cross border development in the Islamic financial markets, widening market reach, exchanging technological expertise and building a sustainable business model for both exchanges."

"This is a major step towards consolidation in the Islamic finance world,” he added. “As both Exchanges come together on a single platform, this will add to the strength of this industry. This initiative will go a long way in addressing the issues of standardization, innovation and transparency, thus providing a new dimension to the Islamic finance market."

In addition, BFX board director, Arshad Khan, said: "This initiative is a major development for the Islamic finance market where the collaboration will seek to offer a wider risk management portfolio to global Islamic practitioners. By partnering with Bursa Malaysia we can ensure that the products offered are well defined, robust and fully shariah compliant.”

The signing ceremony was witnessed by Razif Abdul Kadir, Deputy Governor of the Bank Negara Malaysia; Nik Ramlah Nik Mahmud, Managing Director of Malaysia’s Securities Commission; and Abdul Rahman Al Baker, Executive Director, Financial Institutions Supervision, of the Central Bank of Bahrain.

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