Even as the love-hate relationship rages on between the man-in-the street and his conventional banking facility, Islamic finance has been gaining ground, garnering followers at a rapid pace.

Labuan International Business and Financial Centre (IBFC) has been at the forefront of the changing scene, the latest development being its new legislation on Islamic financial services that formally recognizes and supports the Islamic form alongside the conventional – a move that’s part of the jurisdiction’s proactive drive to expand the sector further.

That Labuan IBFC already has the critical mass to accelerate Islamic finance can be seen in the doubling up of Islamic private funds from US$1.4 billion in 2007 to US$2.8 billion in 2008; while in the same period, re-Takaful gross contributions increased by 48% to US$162 million.

One of the issues facing the sector has been that the Shariah principles applied in one territory may differ from another, and this is where Labuan IBFC has stolen a march by streamlining and clarifying the grey areas. On the 11th February 2010, a unified code under the title of Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA) was enacted as part of the new legislation comprising four new laws and four existing ones that had been radically amended. Among the amended Acts is one that renamed the regulator as Labuan Financial Services Authority or Labuan FSA.

Summary of LIFSSA
Over the decade or so when Islamic finance took root in the jurisdiction, the laws and guidelines governing the different activities had multiplied, requiring concomitant reading of the pertinent materials to get a comprehensive picture of what can or cannot be done, what Shariah principles applied and so on.

LIFSSA 2010 contains 12 sections of specific provisions such as the licensing and regulation of Islamic finance activities; recognition of the Islamic financial system alongside the conventional; and the role of Labuan FSA in ensuring the stability of both systems in Labuan.

For investors seeking advice on issues relating to Shariah-approved Islamic products and instruments, a formal body in the shape of the Shariah Supervisory Council has been provided for under the Act. The Shariah Supervisory Council has the power to give advice on any Shariah matter and issue a ruling on the Islamic law relating to business regulated or supervised by Labuan FSA.

The Act governs Islamic services and products in the jurisdiction including securities (such as Sukuk); Islamic mutual funds; Labuan Islamic banking; Labuan Takaful and re-Takaful activities, while new business products have been introduced, such as protected cell companies, private trust company, Labuan Islamic trusts, and Labuan Islamic foundations. In addition, limited partnerships, limited liability partnerships, and self-regulated organizations are also provided for.

The trust is a popular vehicle for wealth management, and the Labuan Special Trust has many features that should appeal to those concerned about succession planning. There is also the scope and variety of trusts — conventional or Islamic — offered by Labuan that invite careful appraisal by Malaysian high net worth individuals and families. Among the benefits available is the provision for settlors of trusts having certain reserved powers while the duration of a trust can be in perpetuity. Furthermore, a trust does not have to be registered with the regulator.

Alternatively, Malaysians can consider a foundation based on Shariah principles. A foundation has many features similar to a trust but there are also differences, such as it is civil law under which a foundation operates while a trust is a common law concept. A foundation is required to register with Labuan FSA.

Lifting restrictions
A far-reaching move is the lifting of restrictions on Malaysians to use Labuan, opening the jurisdiction for residents to enjoy its generous benefits. The new legislation permits a Labuan company to own a controlling interest in a domestic company; allows Malaysians to form a Labuan trust or a Labuan company to hold their international or Malaysian assets, provided the latter are approved by the regulator; and a Labuan company can deal freely with residents as long as they inform the regulator. In the case of non-resident settlors, they can inject Malaysian assets into a Labuan trust, too.

For companies, liberalization has come in the form of removal of the authorized share capital, the introduction of no par value shares, and the provision to amalgamate companies. In the case of Labuan insurance activities, there is no longer a need for a resident Labuan director, while a broker can now undertake financial planning activities.

For those involved in shipping, they can register a company to undertake shipping activities so long as the business is carried out in Labuan and outside of Malaysia.

Clearly, the stage is set for Labuan IBFC to move to the next level boosted by the new legislation whether the financial services are conducted under the conventional or Islamic system.