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Labuan was declared an international offshore financial center (IOFC) in October 1990 to complement the activities of the domestic financial market in Kuala Lumpur and strengthen the contribution of financial services to the gross national product in Malaysia as well as develop the island and the areas within its vicinity. Combined with the flexible and favorable tax treatment and the low cost of setting up and operating in the IOFC, this framework has succeeded in attracting substantial numbers of international businesses to Labuan.
In recent years, Labuan IOFC has been the preferred center for fundraising activities based on Shariah principles and reTakaful businesses as more and more market players are becoming aware of the opportunities to be tapped there. While the IOFC’s regulatory framework is market driven, it is balanced by prudential requirements in line with accepted international regulatory practices and standards.
Labuan IOFC pursues a dual financial services system, where Islamic banking, capital market, insurance and fund management operate side-by-side with conventional business. Islamic financial services in Labuan IOFC include Islamic offshore banking and investment banking, reTakaful, fund management and capital market. Flexibility is given to the form to conduct Islamic financial business. Some are full-fledged Islamic banking institutions while others are conventional institutions that have Islamic windows or units. However, they are required to abide by the Directive on Islamic Financial Business in Labuan IOFC, issued by the Labuan Offshore Financial Services Authority (LOFSA) in October 2003.
Competitive Tax Environment
Labuan IOFC offers a competitive corporate tax rate of 3% of net profit, or RM20,000 (as opted every year), as well as a tax rebate on business zakat. There is no capital gains tax, stamp duty, death/inheritance tax or withholding tax on various types of payments. There is also no exchange or capital control in Labuan IOFC. The competitive tax environment in Labuan facilitates international business activities and international investment opportunities. With a range of double tax treaties between Malaysia and more than 50 countries, Labuan remains a popular domicile for Islamic finance transactions.
Platform for Investments Abroad
The favorable tax regime offers investors a good fundraising platform at competitive pricing in view of the overall low cost of doing business. In 2006, a total of US$3.4 billion non-securities capital was raised through Labuan companies. Another US$3.5 billion of debt securities were issued by corporations. The fundraising activities through the issuance of Shariah compliant financial instruments have also gained momentum. The business-friendly regulatory structure and preferential tax regime in Labuan facilitate the overseas investments of companies incorporated in Labuan. In fact, figures show there has been an increase in the number of such companies using Labuan IOFC as a platform for their investments abroad.
Center for Sukuk Issuance
To the financial institutions, the demand for quality and competitive pricing of financial instruments has further encouraged financial product innovation. This has given the institutions the impetus to design and structure their products to suit the requirements of sophisticated issuers in search of optimal returns for their capital. In this regard, Labuan IOFC offers the best environment to meet those needs.
Many companies have used Labuan IOFC as their platform to raise Shariah compliant funds, taking advantage of the federal territory’s business-friendly legislative and regulatory framework. Examples include several Sukuk issues by Malaysian companies (including government-linked companies) and Middle Eastern conglomerates.
In Labuan, the availability of a whole spectrum of financial intermediaries, professional service providers and other support services has aided the fundraising process. The cost of these support services is competitive relative to other financial centers in the region, making Labuan IOFC a strategic and attractive location for fundraising activities. As at July 2007, there were 57 offshore banks in Labuan including the top 20 international banks in the world that provide quality financial services. The industry is supported by the presence of trust companies that can provide administrative and trustee services.
Labuan International Financial Exchange
Financial instruments issued out of Labuan can be listed on the Labuan International Financial Exchange (LFX). The high number of Shariah compliant listings on LFX is proof that this web-based exchange can be the conduit to enhance the liquidity of Shariah compliant instruments. As at July 2007, there were 33 listed instruments — nine of them Shariah compliant — with a market capitalization of US$4.45 billion (July 2006: US$2.05 billion). This represented 30% of the total market capitalization of US$15.92 billion as at July 2007. The listings included US dollar-denominated non-callable, five-year Islamic subordinated Sukuk worth US$300 million by MBB Sukuk Inc, a wholly owned subsidiary of Malayan Banking, and the Exchangeable Trust Certificate worth US$850 million issued by Cherating Capital Ltd, a wholly owned subsidiary of Khazanah Nasional.
Another significant development in July 2007 was the listing of Sukuk Al-Ijarah issued by Saudi Arabia-based Dar Al-Arkan International Sukuk Company worth US$1 billion. This issue marked the first Saudi corporate Sukuk to list on LFX and also the largest in terms of value ever listed on the exchange.
Labuan Offshore Financial Services Authority (LOFSA) is a regulatory body set up to spearhead and coordinate efforts to promote and develop Labuan as an International Offshore Financial Center (IOFC).
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