The year 2000 marked another significant chapter in the history of Labuan as it completed ten years of operations following the launch by the Malaysian Government of the International Offshore Financial Centre (IOFC) in Labuan in October 1990. During this period, the IOFC has evolved, matured and gained recognition in the offshore world. Labuan is recognised as one of the major offshore financial centres in the Asia-Pacific region. Labuan as an IOFC has also complemented the activities of the Malaysian domestic financial markets, and has enhanced the contribution of the financial services sector to the gross national product in Malaysia. Labuan IOFC is now well-positioned to advance further as it enters this new millennium.

The development of the Labuan IOFC is a long-term agenda for the Government, not one for short-term gain. The unwavering commitment and support of the Government together with the offshore players will ensure that Labuan IOFC continues to grow. In the initial years, the strategic focus of the IOFC was to attract critical mass of core and top-notch players to serve the needs of investors coming to invest in this region. Labuan has succeeded in this area. Offshore business activities conducted in Labuan such as banking, insurance, fund management and leasing have shown commendable progress over the years.

Nevertheless, the global business environment had become more challenging in the face of the rapid development in information technology, globalisation and consolidation in the financial industry as well as increasingly more competitive playing field. Operating under this environment, Labuan IOFC cannot be complacent and static. Labuan IOFC needs to be dynamic, innovative, and efficient to remain relevant. To survive in this crowded world, financial centres and its players need to be agile, adaptive and responsive to the many challenges. Ultimately, the financial centres that exhibit and practise these characteristics will stay at the forefront in this more challenging environment.

For the Labuan IOFC, the year 2000 had been an active and fruitful year. Labuan IOFC continued to record another year of commendable growth as reflected by the higher number of offshore companies being incorporated and registered, and the significant increase in the number of insurance and leasing companies. A total of 510 companies were registered or incorporated in the year 2000 compared with 396 in 1999. The profitability of the core industries in the IOFC also improved whereby the pre-tax profits of the banking and trust industries increased by 108% and 14% respectively. The number of insurance and insurance-related companies increased by 41% while, the leasing companies increased by 138%. All sectors in the offshore insurance industry also showed marked improvement in performance. The year 2000 also saw the launching of several initiatives including the E-Commerce Gateway and the Labuan International Financial Exchange. The regulatory framework of the Labuan IOFC was further enhanced during the year to ensure the operating conditions in the IOFC are not only more conducive but also at par with the best international regulatory practices.

As part of the effort to develop the Islamic niche for the Labuan IOFC, the development of a global network of Islamic financial markets known as the International Islamic Financial Market (IIFM) to take advantage of the tremendous market opportunities in Islamic financing in the global financial markets made a major stride in 2000. The international group comprising the Islamic Development Bank, LOFSA, Bahrain Monetary Agency formed to implement the project had been joined by Bank Indonesia and Bank of Sudan. In addition, this project is supported by Saudi Arabia and Brunei. More countries are expected to join the strategic alliance to develop the market. LOFSA has been entrusted to spearhead developing the market and has adopted a fast track approach to ensure full implementation of the project by October 2001. The IIFM will spur the creation and trading of financial instruments, enhance investment opportunities and generate spin-offs of other services and activities, such as custodial, brokerage, Islamic funds and treasury. Governments and large conglomerates should explore using this viable alternative source of funding.

Congruent to the promotion of Islamic banking and finance in Labuan, a Shariah Advisory Council was established within LOFSA to provide input for the development of Islamic banking, finance and takaful. The council comprises international representatives, scholars and practitioners with strong credentials and wide experience to ensure that it has the credibility and acceptance in the global financial community. Drawing from the successful experience of the domestic Islamic financial market, Labuan is well placed to play a leading role in global Islamic banking and finance. The presence of top financial players, including Islamic banks and takaful companies, in Labuan is another plus factor for the IOFC to undertake this leading role.

The offshore business activities in Labuan were further boosted with the launch of the Labuan International Financial Exchange (LFX) on 23 November 2000. The LFX, a global electronic exchange, provides listing and trading facilities for a wide range of financial and non-financial products, including Islamic financial instruments. Other offshore players can participate in the exchange business by providing custodial, depository, clearing and trustee services, in addition to being Licencee as listing sponsor or trading agent. The LFX has the potential to position itself in the global market to become a premier international offshore exchange. Given its international accessibility, the LFX could play a strategic role by offering its business platform as bourse for regional countries that do not have exchanges of their own. At the same time, LFX can be used as a window for Malaysians wishing to invest abroad. Labuan offshore players must capitalise on the opportunity generated by the establishment of the LFX.

Labuan IOFC has also leveraged the Internet to effectively and efficiently reach out to the global market place. Phase one of the E-Commerce Gateway project was launched in November 2000. It signified an important step towards ensuring that the IOFC is effectively connected by the Internet to the global market. The Labuan offshore service providers should take full advantage of the gateway to enable potential customers to have easy and efficient access to their products and services. The combination of this electronic infrastructure and Labuan’s conducive business environment should encourage more global e-commerce operators to set up domicile in Labuan. During the year 2000, the computerisation upgrade in the operations of LOFSA including the submission of information through an online system had progressed to test and parallel run stage. The upgrade is expected to go live in this year. The online submission is expected to improve efficiency in data collection and speed up the process of incorporating or registering offshore companies. To facilitate this, the Offshore Companies Act 1990 was amended to allow for electronic submission of documents.

In the year 2000, the scope and depth of several offshore activities were expanded through the review of legislation and policies. A balanced approach was adopted in the review process taking into account the need to maintain the prudential supervision standards of the Labuan IOFC. The Offshore Banking Act 1990 was amended to allow non-bank institutions to conduct leasing business and provide electronic fund transfer services. The revised guidelines on offshore leasing have made the business more attractive for offshore players. Several requirements relating to leasing business such as capital and the Licence fees were reviewed. Leasing companies are no longer required to maintain RM2 million paid-up capital, and those conducting pure "out-out" leasing transactions need not pay the Licence fees. A full review of the Labuan Offshore Securities Industry Act 1998, the Act that regulates the mutual fund industry and the LFX, was also undertaken in 2000, and its amendments should be effective during 2001.

Offshore centres are increasingly coming under greater international scrutiny that has called for higher standards of supervision and regulation. While Labuan’s supervisory and legal framework is in accordance with internationally accepted standards, LOFSA would continually assess and upgrade the framework to ensure it is on par with the latest international supervisory requirements. In this regard, the relevant supervisory structures within LOFSA had been enhanced, particularly the compliance function, to preserve Labuan IOFC as a reputable offshore centre conducive for quality players and genuine investors. In addition, Labuan IOFC’s image as a well regulated and clean centre would be further enhanced through additional measures against money laundering activities. The Government’s stringent policy of admitting only reputable and full-fledged players to Labuan IOFC has paid dividends. Labuan has not been developed as a tax haven, but as an offshore financial centre for investors and institutions to set up their operational base, take advantage of Labuan’s strategic location in the Asia Pacific region, employing its skilled and cost-effective resources, enjoy the stable political environment it offers and utilise Labuan’s modern and state-of-the-art facilities. It is being promoted as the centre for efficient financial planning.

As regards the business development in Labuan IOFC, the strategic plan calls for a substantial increase in the number of offshore companies as catalyst for further expansion of activities and increased employment. The incorporation or registration of various other types of offshore companies for the purpose of administrative and operational efficiency is being promoted in Labuan IOFC. To expand the activities of the existing trust companies, they are allowed to conduct the managed trust companies business. LOFSA will review the rules and regulations to facilitate this. Labuan service providers such as trust companies, legal and accounting firms are encouraged to enhance their capabilities and expertise to undertake more sophisticated and complex transactions.

The offshore insurance industry recorded another year of impressive growth with 26 new licences approved to conduct insurance and insurance-related activities. Labuan is being developed as centre for innovation of insurance products and services. It is also being developed as a centre for reinsurance business and captive insurance including rent-a-captive and. As the takaful and retakaful sector is still largely untapped, Labuan should capitalise on this emerging business.

In relation to the offshore banking industry, the role of the offshore banks has been expanded to further complement the domestic financial market. The consolidation and restructuring of the banking industry globally continued to impact the growth of the offshore banking. The number of offshore banks was reduced by one in the year 2000. As part of the initiatives to promote more banking activities, incentives were accorded to the offshore banks, such as the extension of the ringgit loan window to selective economic sectors of Malaysia, and the approval to invest in ringgit financial instruments.

After 10 years of commendable growth for the Labuan IOFC, it is timely to take stock. In this regard, LOFSA had drawn up a masterplan which formed part of the overall financial sector masterplan for Malaysia. The way forward is for the Government and the private sector to work in partnership to make Labuan IOFC a vibrant and active offshore centre, and create a robust financial and economic environment. It is envisaged in the plan that the IOFC of the future is not only a centre that thrives on offshore financial services, but also one that is developed holistically to support the overall development of the island, and that plays an effective complementary role to the domestic financial market. The strategic plan calls for special focus on niche business and areas of comparative advantage. Several areas had been earmarked for further development to make Labuan IOFC a significant regional financial hub, particularly in Islamic banking and finance. The promotion of Labuan as a meeting, incentives, conference and exhibition (MICE) centre was also part of the overall development plan. The measures recommended in the Labuan IOFC masterplan were made in three main areas, firstly promote and diversify further the financial players and activities in the IOFC, secondly promote the development of Islamic banking and retakaful business, thirdly develop and strengthen the capital market, e-commerce and ancillary activities.

The Government will continue to be responsive and adopt market driven, consultative and pro-active approach in developing the IOFC. A testament to this business consultative approach was the formation of the Labuan Consultative Tax and Business Committee that pooled the minds of experts, practitioners and regulators to generate ideas and strategies for the Labuan IOFC.

In terms of financial performance, for the year ended 31 December 2000 recorded an income of RM11.4 million (USD3.0 million). This represents an increase of 16.3% from RM9.8 million (USD2.6 million) in the previous year, generating a surplus income of RM2.2 million (USD0.6 million).

Finally, on behalf of Members of the Authority, I would like to thank the Government departments and agencies, the offshore banks, offshore insurance and insurance-related companies, trust companies, fund managers, leasing companies as well as all relevant professional service providers, offshore investors and other offshore players for their co-operation and contributions in making the year 2000 another year of success for the IOFC. I would also like to thank Dato’ Haji Muhammad Mohd Nor, Dato’ Balia Yusof Haji Wahi and Dr. Nik Ramlah Nik Mahmood, the Members of the Authority whose term was completed on 1 May 2000, 1 September 2000 and 15 October 2000 respectively, for their contributions during their services in LOFSA. At the same time, I would like to welcome the new Members of the Authority, Datuk Hj. Mohd Noor Moktar and Encik Ali Abdul Kadir. Last but not least, I would like to thank the staff of LOFSA for their dedicated services during the year and I am confident that the Members of the Authority can continue to depend on their committment and determination in carrying out the entrusted responsibilities for the benefit of Labuan IOFC and the country as a whole.

Zeti Akhtar Aziz

Chairman

23 March 2001