Labuan: The Development Of Islamic Finance

Strategic Roadmap 2022-2026

The Labuan IBFC five-year Strategic Roadmap 2022-2026 (Strategic Roadmap) was launched by the LFSA on 16 June 2022[i]. The Strategic Roadmap outlines the continued growth and building on the position of strength of Labuan IBFC.

LFSA was established on 15 February 1996 under the Labuan Financial Services Authority Act 1996. LFSA is the statutory body responsible for the development and administration of Labuan IBFC.

The key objectives of LFSA are to:

• Promote and develop Labuan as an international centre for business and financial services;
• Develop national objectives, policies and priorities for the orderly development and administration of international business and financial services in Labuan; and
• Act as the central regulatory, supervisory and enforcement authority of the international business and financial services industry in Labuan.

LFSA licenses and regulates licensed entities operating within Labuan IBFC to ensure all such entities remain in compliance with the Labuan laws and regulations and adhere to the international standards, which are adopted by the jurisdiction. LFSA develops regulatory policies to ensure orderly conduct of business and financial services in Labuan IBFC.

The Strategic Roadmap embodies strategic initiatives to expand target sectors which are critical to Labuan IBFC’s growth, namely, digital financial business, captives and Islamic finance as well as regulatory modernisation essential to ensure ongoing market stability, certainty and orderliness. It is envisioned that with the implementation of these initiatives, Labuan IBFC will evolve into a dynamic, sustainable international business hub of choice for Asia. These developments also are envisioned to further strengthen and expand Malaysia’s thought leadership in the Islamic finance market and FinTech space.

The Strategic Roadmap aims to transform Labuan IBFC into a dynamic and sustainable international mid-shore centre and to achieve the following key objectives:

• Maintain market stability, resilience and credibility;
• Stable and well-regulated market;
• Greater synergy between Labuan IBFC and the growth of Labuan island;
• Holistic contemporary product offerings; and
• Higher market relevancy.

In order to achieve the abovementioned aim and objectives, the Strategic Roadmap focuses on five strategic thrusts which are divided into three business streams and two regulatory streams.

The three strategic thrusts comprised in the business streams are as follows: 

• Thrust 1: Spurring market innovation and vibrancy;
• Thrust 2: Promoting market facilitation and visibility; and
• Thrust 3: Enhancing Labuan IBFC’s complementary roles to Malaysia. 

Additionally, the two strategic trusts comprised in the regulatory streams are as follows: 

• Thrust 4: Effecting relevant and proportionate regulations; and
• Thrust 5: Effecting pre-emptive supervision and enforcement. 

Among the initiatives and some of the enabling initiatives that have been identified to achieve Thrust 1 include promoting international Islamic finance. The aim is to attract new digital prospects in banking and other traditional financial sectors, service new sectors through takaful captives and Shariah-compliant tokenisation, institutionalise globally social finance via digitalisation such as Pension, Hajj, Waqf and Zakat; and complement the global Islamic infrastructure.

The LFSA is optimistic that there is a huge opportunity for Labuan’s Islamic financial sector to cater not only to the emerging Asian markets but also to reach a wider Muslim global market. Based on the Islamic Financial Services Board (IFSB) Stability Report 2022[ii], the worth of the global Islamic Financial Services Industry (IFSI) increased to an estimated US$3.06 trillion in 2021 (from US$2.75 trillion in 2020). The IFSI sustained its growth momentum with a growth rate of 11.3 per cent year-on-year based on significant improvement, especially in the Islamic banking and Islamic capital market segments in some key markets.

It was reported that LFSA’s director-general, Nik Mohamed Din Nik Musa said on the second day of the 24th Malaysian Finance Association International Conference 2022 in Labuan:

 “As Islamic or sustainable finance is on the rise and capitalising on Malaysia’s success in this area, it is envisaged that Labuan will play a significant role as a fundraising and investment hub in the global digital space, with a niche in environmental, social and governance (“ESG”) and shariah-compliant activities.”

The new players, namely digital assets and financial technology players are already interested in being part of this exciting emerging market.

It was also reported that besides Islamic digital assets and a captive hub as Labuan’s two emerging niches, other existing businesses that are growing well are leasing, Labuan international trading commodity companies and digital services providers.

First Islamic/ESG Digital Exchange In Labuan

In accordance with the commitment made by LFSA in the Labuan IBFC Strategic Roadmap 2022-2026, the Islamic Digital Asset Centre (IDAC) aims to attract more digital assets and FinTech players to Labuan. Additionally, the demand for sustainable finance has also increased over time. Labuan IBFC is envisioned to play a substantial role as a fund raising and investment hub in the global digital space, with a role in ESG and Shariah compliant activities.

Mr. Nik Mohamed Din Nik Musa, Director-General of Labuan FSA in his Welcome Address during the 24th Malaysian Finance Association International Conference 2022 in Labuan, said:

“Labuan’s role in Islamic finance is gaining in significance. Labuan IBFC has a comprehensive infrastructure that supports and accords certainty as well as integrity for Shariah-based structures. Leveraging on its dual financial system, Labuan IBFC’s shariah-compliant sectors have also showed its potential to expand and innovate”.

Labuan FSA has been proactive in developing new regulations that integrate Islamic finance, an ESG agenda and digital financial innovations, and the issuance of guidelines such as the Guidance Note on Issuance of Green, Social and Sustainability Sukuk. This is with the objective of creating a more dynamic and stronger ecosystem for Sukuk issuance. It is expected that in the future, Labuan FSA will continue to introduce relevant guidelines on digital assets, ESG and Islamic finance to further enhance the governance of the centre.

Apart from the above, the Shariah Supervisory Council of Labuan FSA has also issued a pronouncement on the minimum compliance criteria for offering of Labuan Islamic digital-based solutions, highlighting the Shariah permissibility for such offerings in the Labuan IBFC.

The IDAC plan is on track as Greenpro Capital Corp. launched the first Labuan Islamic/ESG Digital Exchange in September 2022. This is said to be the world’s first of such an exchange. Greenpro Capital Corp. was granted the licence to operate such an exchange by Malaysia's LFSA in April 2022. The launch was officiated by LFSA, International Shariah Research Academy (ISRA), ESG Global and SME Association of Malaysia.

According to global consulting firm BCG, the asset tokenisation market will grow 50 times from US$310 billion in this year, to US$16.1 trillion by 2030, driven by demand from a wide range of investors for greater access to private markets. Tokenisation and fractionalisation of assets lower barriers to investment in private markets by sharply reducing minimum lot sizes.

Conclusion

The Strategic Roadmap has identified two key organisational enablers, namely digitalising the organisation and nurturing internal talents and capabilities, to transform the LFSA as a future-proof, resilient and dynamic organisation. Based on the foundation and goal in the Strategic Roadmap, we can expect to see many new digital infrastructures to be established by the LFSA. This is anticipated to lead to the introduction of new products and improvement of existing products aimed at increasing the attractiveness of Labuan IBFC as the ideal and preferred centre for investment by business players from all over the world.

Footnotes:

[i]   Strategic Roadmap 2022-2026, https://www.labuanfsa.gov.my/

[ii]   Islamic Financial Services Industry Stability Report 2022, https://www.ifsb.org/

Mohamad Nazran Basirun
Partner specialising in: • Corporate and commercial • Mergers and acquisition • Projects • Privatisation and corporatisation