" class="no-js "lang="en-US"> EXCLUSIVE: "Pioneering a digital financial revolution" - Labuan International Business and Financial Centre in 'The Fintech Magazine'
Monday, May 20, 2024

EXCLUSIVE: “Pioneering a digital financial revolution” – Labuan International Business and Financial Centre in ‘The Fintech Magazine’

The Labuan International Business and Financial Centre (Labuan IBFC) was established by the Malaysian government in 1990. It is governed by a sole regulatory body, the Labuan Financial Services Authority (Labuan FSA), which comes under the oversight of Malaysia’s Ministry of Finance.

Concurrently, Labuan IBFC Incorporated Sdn Bhd (Labuan IBFC Inc.), a wholly-owned subsidiary of Labuan FSA, serves as the official promotional and marketing agency for the centre.

Situated strategically in the Asia Pacific region, Labuan IBFC is well-placed to leverage opportunities in one of the world’s fastest-growing regions, in accordance with its tagline of being Asia’s premier international financial hub.

Labuan IBFC provides a diverse array of business structures and investment solutions designed to streamline cross-border transactions and facilitate international business activities for global investors and enterprises. Key service sectors encompass banking, risk management, wealth management, activities in the capital markets, leasing, and commodity trading. These solutions are available in conventional, Shariah-compliant, and digital formats, offering flexibility and catering to a wide range of preferences and needs.

THE GO-TO HUB FOR FINTECHS

Establishing a company or obtaining financial activity licenses in Labuan IBFC offers several advantages, making it an attractive centre for businesses. These include:

  • a favourable tax regime, making it appealing for businesses seeking tax efficiency. Labuan IBFC boasts a clear and uncomplicated tax system that is applicable to Labuan entities engaged in Labuan business activities as per the Labuan Business Activity Tax Act 1990.
  • a transparent regulatory framework, ensuring stability and transparency for businesses operating in the jurisdiction. Labuan IBFC adheres to global standards and best practices in its regulatory and supervisory framework. This includes strict protocols related to anti-money laundering and terrorism financing activities where the regulator, Labuan FSA is a member of both the Asia/Pacific Group on Money Laundering (APG) as well the Financial Action Task Force (FATF).
  • currency and fiscal neutrality. Labuan IBFC allows transactions to be conducted in multiple currencies. This means businesses operating within the jurisdiction can deal in various currencies without restrictions. This flexibility in currency choice enables businesses to mitigate currency risk and facilitates international trade and investment. In the context of Labuan IBFC, fiscal neutrality means that the centre offers a simple and transparent tax regime for businesses seeking to optimise their tax liabilities legally.
  • robust support within the business community through established associations representing key industries in Labuan, including banking, risk management, digital financial services, and corporate services. These industry-specific associations play a pivotal role in fostering collaboration, sharing expertise, and collectively contribute to the growth and development of Labuan IBFC. The strong network of support from these associations enhances the overall business ecosystem, promoting synergies and ensuring a collaborative environment conducive to sustained success across diverse sectors.

SOLUTIONS-DRIVEN

Digital financial services (DFS) in Labuan IBFC encompass a wide array of financial offerings ranging from simple platforms for trading fiat and digital assets to more complex digital asset exchanges, as well as fundraising for blockchain-based tokenisation. Given that the centre has positioned itself as a hub for digital innovation since 2017, the DFS sector in Labuan IBFC has continuously experienced growth, with a total of 105 providers in 2023.

Labuan IBFC’s digital ecosystem comprises three main pillars:

  • Digital financial institutions – digital banks and insurtech providers
  • Digital service providers – digital asset issuance, digital asset trading platforms, digital asset management and digital securities dealers
  • Digital platforms – payment portals and digital securities exchanges

To ensure a good balance between business operations and market stability, the centre acknowledges the significance of safeguarding DFS operators from cyber threats and disruptions. In response to the escalating risks posed by increased digital and virtual transactions, the centre’s DFS sector is governed by Digital Governance Framework guidelines.

The framework outlines essential regulatory prerequisites for ensuring good governance and effective management of cyber risks. Additionally, the centre’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations have undergone further enhancement, incorporating electronic Know-Your-Customer procedures for DFS businesses to observe.

SHARIAH COMPLIANCE

Operational requirements for Labuan digital banks were somewhat relaxed last year, with these entities allowed to continue operating under a temporary regulatory relief framework. This initiative will enable Labuan digital banks to further develop their business models, enhance their customer experience and contribute to the overall financial ecosystem.

Some of the measures adopted include reducing the minimal capital requirement for Labuan digital banks from MYR 200 million to MYR 50 million (or its equivalent in any currency) as well as reducing the non-interest security deposit from MYR 5 million to MYR 2.5 million.

Further details pertaining to the circular can be found here.

As previously highlighted, Labuan IBFC not only provides conventional and digital financial products and services but also offers a range of Shariah-compliant options. This comprehensive approach is supported by extensive Islamic legislation and a dedicated Shariah Supervisory Council. With a robust infrastructure in place, Labuan IBFC aspires to position itself as a digitally conducive market with Islamic finance capabilities.

This entails offering international investors Shariah-compliant frameworks for DFS setups. To bolster its global standing in Islamic finance, Labuan IBFC plans to harness digital innovations and address Environmental, Social, and Governance (ESG) considerations.

“The Islamic Digital Asset Centre initiative serves as a unique avenue for the global community to engage in digital transactions while adhering to Islamic principles”

In line with these objectives, Labuan FSA recently announced full income tax exemption on Islamic financial structures for five years, starting from the year 2024.

Labuan FSA was recently honoured with the e-branding award for fintech Islamic financial services by The Brandlaureate Bestbrands. This recognition came several months after the regulatory body launched its Islamic Digital Asset Centre (IDAC) initiative. IDAC’s objective is to centralise and establish a secure space for all Islamic digital assets, in line with Shariah principles.

The initiative was conceived with the goal of attracting Islamic fintech investors and techno-preneurs to utilise Labuan IBFC as a strategic entry point into Asia.

IDAC offers a distinctive business proposition for investors, providing a Shariah-compliant platform for global transactions within the digital finance landscape. As an alternative to conventional digital finance, IDAC serves as a unique avenue for the global community to engage in digital transactions while adhering to Islamic principles. A publication on IDAC was released in Q4 2023, offering a detailed summary of the initiative for a broader audience, accessible here.

PRIMED FOR GROWTH

DFS providers in Labuan IBFC have also demonstrated remarkable achievements in recent years. These accomplishments include pioneering activities such as the listing of the first institutional tokenised sukuk, obtaining the first license for a Shariah-compliant ESG digital assets exchange, successful listings involving the digitisation and tokenisation of various assets as well as being recognised and awarded by the ESG Association of Malaysia for the establishment of a carbon credit tokenisation platform.

These groundbreaking initiatives highlight the innovation and success of DFS providers in the centre, contributing to the advancement and recognition of DFS within the global financial landscape.

Having operated for over three decades, Labuan IBFC has transformed into a robust and dynamic financial centre. Despite encountering numerous challenges and external uncertainties, Labuan IBFC remains as Asia’s premier international financial hub.

Post pandemic, Labuan IBFC unveiled its Strategic Roadmap 2022 – 2026, outlining crucial objectives. These include the transformation of the centre into a digital financial hub, the continued development of Labuan IBFC’s insurance sector, global promotion of its Islamic solutions, and the revitalisation of niche and emerging segments.

Labuan IBFC remains optimistic about business expansion in its DFS sector, given the immense growth in the digital space due to the unrivalled convenience of conducting digital transactions and payments. The centre is confident that its digital ecosystem provides a comprehensive toolbox that underlines Labuan IBFC’s position as the region’s digital gatekeeper.


 

This article was published in The Fintech Magazine Issue 31, Page 60-61

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