Malaysia: Islamic Finance To Be The Fulcrum Of Labuan's Inclusive Future

Introduction

At 1.7 billion people, the global Muslim population represents over 23 percent of the world population. With Islam being one of the fastest growing major religions in the world, the share of the global Muslim population is expected to increase 25 percent by 2030. 

With a complete suite of Islamic financial structures and solutions, effective regulatory standards, a facilitative business environment as well as a Shariah Supervisory Council (SSC), Labuan IBFC is well-positioned to cater to the needs of the global Islamic industry.

Underpinning these innovative structures is Labuan IBFC's comprehensive infrastructure with dedicated legislations, Shariah governance and fiscal incentives for Shariah-compliant financial transactions providing a facilitative and flexible framework for industry players.

Operating as an Islamic financial entity in Labuan IBFC, means that Shariah compliance is endorsed by the Labuan Financial Services Authority's SSC comprising leading global Shariah scholars and practitioners. Unlike other similar bodies in other jurisdictions, Labuan IBFC's SSC takes on a supervisory role, not merely advisory, and hence SSC rulings are able to be used as reference in the court of law.

With this infrastructure, Labuan IBFC has become an innovative bed for Islamic financial products. It is home to the world's first USD denominated exchangeable sukuk and reinforced Malaysia's position as the global leader in sukuk issuance.

2020 - A Review

This year started off with a series of unexpected events that would have profound impact to the international market and businesses. Global situations including economic uncertainty, trade war, depressed oil prices and the COVID-19 pandemic posed great challenges to the financial world.

With the growing scale of the COVID-19 pandemic and its social and economic impact, particularly on Labuan island, Labuan IBFC's financial services and intermediation community comprising Labuan Financial Services Authority, Association of Labuan Banks, Labuan International Insurance Association, Association of Labuan Trust, Labuan Investment Bank Group and Labuan Fintech Association, banded together to assist local authorities in relief efforts via the pooling of resources. The formation of the Labuan IBFC COVID-19 Fund focused on providing relief to frontliners, local hospitals, quarantine centres and those less fortunate in Labuan.

Labuan Financial Services Authority (Labuan FSA) also announced Temporary Regulatory Reliefs (TRRs) for Labuan entities to help cushion the impact and disruption to business operations caused by the coronavirus pandemic. The TRRs provided administrative and financial relief to Labuan entities during the COVID-19 crisis as well as facilitated uninterrupted business and market operations in Labuan IBFC.

Labuan FSA also took a facilitative approach in catering to the unique challenges caused by COVID-19 by allowing digital alternatives where possible, whilst ensuring regulatory standards were set both within the jurisdiction and that international requirements were not mitigated.

2021 - A Preview

Since the introduction of digital financial services (DFS) in 2018, there has been an influx of digital set-ups ranging from digital banking, insurtech to digital-based intermediaries in Labuan IBFC and this is expected to grow even more in the coming year. To date, there are fifty license holders in the digital space ranging from financial services such as digital banks, Insurtech and robo-advisory to digital intermediaries such as digital asset trading platforms, e-wallets, Security Token Offering (STO) issuances, etc. Labuan IBFC is also home to two digital securities exchanges.

Labuan IBFC recognises the huge potential of the Islamic fintech landscape, with Islamic green financing being an important service that helps financial institutions adjust their balance sheets and optimise their economic capital to meet Basel III Accord requirements. Armed with Shariah principles, values and goals, Islamic fintech is by nature financially inclusive and aims to promote economic well-being and creates socio-economic equitable distribution which is in line with the spirit of the United Nation's Sustainable Development Goals.

The ethos of a digital Labuan is that there are no "sandboxes" to better facilitate digital players and inclusion with the usage of existing licenses that apply digital solutions in their business processes. The jurisdiction also remains tax neutral and currency agnostic which can ease the setting up of a digital startup.

Conclusion

2020 marks 30 years of innovation, intermediation and inclusion for Labuan IBFC and Labuan's birth as an international wholesale trade, finance, risk and asset intermediation centre.

The business and financial landscape post COVID-19 is fraught with uncertainties and challenges. However, we firmly believe that the situation can be managed with the support of all stakeholders. Strategic thrusts have been put in place to chart Labuan IBFC's way forward including measures to enhance the role of the jurisdiction to intermediate regional businesses.

Indeed, as a midshore jurisdiction with a clear appreciation of the value of proportionality in regulation and a bespoke approach to market engagement, we strongly believe it is this philosophy that is a prerequisite during these times of change, and will serve us well moving forward.

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