Special Address by Mr Nik Mohamed Din Nik Musa, Director-General of Labuan FSA at The Labuan Annual Industry Dinner 2023
"A Global Beacon: Toward A Sustainable, Inclusive And Progressive International Business And Financial Centre (IBFC)"

Special Address by 

Mr Nik Mohamed Din Nik Musa
Director-General of Labuan FSA

3 November 2023
Convention Hall, Financial Park

YBhg. Dato’ Chin Chee Kee, Chairman Assoc. of Labuan Trust Co. (ALTC),
Y Amat Bhg. Tun, Tan Sri, Dato’-Dato’, Chairmen of Labuan Associations,
Representatives from the industry,
Distinguished guests, Members of the media, Ladies and gentlemen,
Assalamualaikum Warahmatullahi Wabarakatuh and a very good evening,

1. It is an honour for me to be invited and deliver the keynote address at this much awaited event of the year for Labuan IBFC. I wish to thank and congratulate this year’s organiser -- the ALTC -- to resume the hosting of the Labuan Annual Dinner since the pandemic, traditionally organised since 1997, that had been held together with the Labuan lecture series. Originally we had wanted to celebrate this dinner with the honourable Prime Minister but due to his extremely busy schedule, we were recently informed he is only able to visit Labuan in December. Since postponing this dinner is not a viable option considering the financial burden on the industry, we will arrange an event in December. We understand that Labuan holds a special place in the Prime Minister’s heart especially when he was the Minister of Finance in the 1990s charged with overseeing the IBFC’s development. To the guests and captains of industry with us today, many of whom had flown in from Kuala Lumpur and afar, I extend my warm welcome to this charming island. Post-Covid has accentuated the value of physical presence as the saying goes “your presence is the most precious gift you can give to another human being”. So thank you for this gift from the bottom of our hearts.

2. Today, we see the global finance infrastructure is fraught with higher stability risks, presenting now an unsustainable financial system more than ever before. Financial stability risks have escalated due to higher inflation and interest rates we are witnessing currently and mounting geopolitical conflicts undermining the resilience of the international financial system. The US banking turmoil early this year that led to the colossal failure of several banks with exposure to crypto-currency is testament to the formidable challenges faced by regulators and authorities around the world. This is just the latest incidence of a string of banking crises that has hit the global banking system more rapidly over the last fifty years.

3. Altogether, there have been over a hundred banking crises since 1970, the major ones of which had been very costly and disruptive. In the current interconnected world, the impact of systemic banking crises has been damaging. In the past, economies have plummeted into deep recessions and experienced sharp increase in unemployment, current account deficits and public debts, and slowdown in outputs and foreign investments -- leading to an array of social issues. Some crises turned out to be contagious, rapidly spreading to other countries with no apparent vulnerabilities. A common saying has it that when one person sneezes, another catches cold. Nowadays when a large country has a crisis, the whole world catches a pandemic!

4. The insurance industry has had its fair share of challenges, of late that spans from cybersecurity risks and climate change to regulatory complexities and technology disruptions, all of which present a significant impact on financial and operational stability. With the challenges in rising geopolitical risks in the current integrated global financial landscape, needless to say, financial institutions need to hold adequate capital and liquidity buffers to withstand the current shocks unfolding before our very eyes.

5. Governments and regulators need to be vigilant to safeguard the resilience of the banking system in an environment of high inflation and slower growth. Close to home, our banking system is well-capitalised and resilient, having in place the necessary measures to withstand future shocks, learning from the crises over the last two decades. Malaysia's economy has shown positive results and resilience supported by growth in domestic-oriented activities, and is expected to show strong performance well into 2024 of 4 to 5% growth. Investments from the private and public sectors continue steadily, complemented by healthy levels of foreign investments.

Ladies and gentlemen,

6. Labuan IBFC has made great stride in recent years. It is one of the few key international financial centres in Asia Pacific and Labuan currently houses 890 licensed financial institutions and approved entities. Of this total, the major focuses are on the 72 banking, investment banking and digital banking business; 232 insurance, reinsurance and insurance-related companies including 66 captives; 43 commodity trading companies; 217 leasing companies; and 110 digital financial services providers. The Centre made a remarkable growth of over ten times in the number of financial players since the Government set up Labuan FSA as a one-stop regulator in 1996. Besides the licensed entities, there are about 4,000 other companies and investment holding companies representing more than a hundred countries.

7. However, the pandemic and global slowdown expedited business closures, causing adverse repercussions for the Centre. Our immediate actions were to resolve the issues and the quick measures taken had reduced the closure. Presently, we see a healthy growth of new incorporations, marking a gradual return to normalcy. At this juncture, we needed a fresh new focus to boost the Centre. Labuan IBFC needed to take on new challenges in today’s environment. As embedded in our IBFC 5-year Strategic Roadmap 2022-2026, Labuan FSA together with the industry, created the Islamic Digital Asset Centre or IDAC initiative that was unveiled in October last year to spur the development of digital-based Islamic finance as a niche for Labuan. This was crafted leveraging on the competitive edge that Malaysia has in both Islamic finance and financial technology space, potentially putting Labuan more prominently on the world map.

8. This begs the question: Is Islamic finance a useful niche for IBFC in achieving a more sustainable and inclusive centre? It is highly believed that Islamic finance can play a significant role in promoting greater financial stability. Considerations that prioritise justice and fairness, sustainability and inclusion have also become essential underpinnings of such a financial ecosystem. The over USD3 trillion industry has indeed emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system. A competitive and innovative form of intermediation, Islamic finance has the potential to help address the challenges of alleviating extreme poverty while boosting shared prosperity.

9. A core foundation of Islamic finance is the tenet that requires Islamic financial transactions to be supported by genuine productive economic activity. Islamic finance is also a financial regime that places emphasis on risk-sharing, thereby strengthening further the link of finance to the real economy. The concept of risk-sharing in finance is not new. While risk-transfer activities currently dominate the conventional financial systems, risk-sharing in the form of equity has long been a cornerstone of capital markets with vibrant stock exchanges. The development towards a more equity-based financial system where risk-sharing takes place reduces the over-reliance on debt funding, thus avoiding excessive debt and speculation and thus financial system fragility. In Islamic finance, this is further reinforced by Shariah principles that strongly discourage excessive debt given its detrimental effects on society.

10. By promoting international Islamic finance, this gives the opportunity for Labuan to play a role to embrace more risk sharing finance model on a larger scale. IDAC or Islamic Digital Asset Centre initiative can take on this challenge and we envisage IDAC can offer enormous potential in support of the risk-sharing model. The first focal point of IDAC is for Labuan to be a virtual fund raising and investment platform through a digital asset exchange. The exchange will facilitate the issuance, listing and trading of securities tokens that can be designed to be Shariah or ESG compliant, asset-backed and risk sharing depending on the underlying assets, and retail-based. SMEs for example, can participate in IDAC to raise fund through the securities token offering or STO by digitalising securities as defined in the law that are Shariah compliant to back the issuance of the Islamic digital token, or what we coined as RAMZ in Arabic.

11. This new asset class represented by the digital token is far-reaching and can be subscribed by anyone in the world, as they are democratised in small units for inclusivity. With STOs, the issuer is able to attract a wider investor base demanding for cost-effective and liquid investment that is also easy to exit by selling them through the exchange. Cost of funds will be lower than raising a bond or taking out a bank loan. Such asset-backed funding instrument, when employed for productive purpose, can not only be for purpose of equity risk sharing but also is more grounded -- hence, making it more stable and sustainable than debt funding.

12. I am delighted to share that two Shariah compliant securities tokens were listed on two Labuan exchanges in October, making them the first of such RAMZ products of its kind in the Islamic finance world ever to be innovated. Both retail-accessible, one is an ESG RAMZ backed by EV or electric vehicle assets and the other is an institutional tokenised sukuk backed by a sovereign-linked instrument. Labuan FSA is anticipating more digital issuances and listings especially after the issuance of the securities token offering or STO guidelines last month. We are moving towards charting the course for Labuan IBFC to be a well-known international financial centre with a niche in Islamic digital asset. This aligns seamlessly with the Madani Economy’s objective of positioning Malaysia as a global leader in Islamic finance and fostering a more inclusive, sustainable and innovative economy. It is also well positioned to serve as a funding hub for corporations and SMEs in the BIMB-EAGA region including Labuan.

13. The second focal point of IDAC is to build a complete digital ecosystem in Labuan, bringing together technology-driven solutions for fund raising and promoting other economic development in finance and non-finance sectors. The cornerstone is to build a blockchain hub, attracting blockchain systems, applications, servers and high-end networks to provide digital services to financial institutions, insurance companies, multinational corporations, and governments to adopt blockchain technology. As an added advantage, the Labuan blockchain hub can offer a Shariah compliant niche as the tech solution will adhere to Shariah principles, enabling the seamless integration of Shariah-compliant smart contracts and decentralized applications across the IDAC platform. The digital ecosystem will also be regulated by digital governance, market conduct and money laundering regulations to instill financial soundness and integrity.

14. The technology enables more open, inclusive, and secure business networks, shared operating models, more efficient processes, and cost savings, all of which proliferate its potential in a wide spectrum of industries. Currently, Labuan IBFC has started to offer the Shariah business solution comprising end-to-end Shariah compliant blockchain that spans from smart agreements that are based on Islamic principles till Artificial Intelligence that tracks and monitors the transaction to be Shariah adherence.

15. The third focal point is to develop Labuan as a social finance hub, attracting corporations and NGO entities to develop social finance activities such as pension funds, pilgrimage fund, waqaf fund and zakat fund to serve the diaspora of peoples and migrants desiring for such products. To enhance the socio-finance inclusion and wealth distribution, new entities can be set up in Labuan to emulate the successes of Malaysia and export these products out to the world through Labuan. For example, foundations and waqf-type foundations have already been in operation to undertake socio-economic and community development; environmental work; culture and sports; and other charity work in this region including for the overall development of the Labuan island. I also understand that the latest and future form of CSR avenue would be via “airdrops” or small tokens to be wirelessly sent by the Labuan digital asset issuers to wallets held by identified citizens of this region and beyond.

16. At this point, I wish to express our gratitude to the Government for announcing in the October Budget 2024 a full tax exemption for five years starting from the year of assessment 2024 for Labuan entities conducting Islamic finance activities such as digital banking, digital exchange, digital token issuer and social finance. I believe the tax incentive will go a long way towards accelerating and promoting Islamic finance activities in and through Labuan.

17. Besides the Islamic finance niche for Labuan, the Authority is dedicated to advancing captives insurance or self-insurance. The aim is to sustain our position as one of the leading captives hubs in Asia. Already Labuan has the second highest number of captives, including captives takaful, in Asia. This aspiration is well supported by global demands, resulting in a growing interest in captives insurance scheme as part of cost efficient risk management vehicle to cater for organisations with cross-border exposures. Among others, more organisations are using captives as innovative alternatives of risk transfer aside from conventional insurance purchase. In addition, we saw the increased interest in captive formations and greater use of existing captive insurers in 2022 which will likely continue in momentum throughout 2023, based on the Business Insurance Report.

18. Labuan captives have gained international recognition as the IBFC has been awarded Highly Commended Award for International Captive Domicile and Best International Captives Jurisdiction at the European Captives Award in Luxembourg organised by Captives Review in 2022 and 2021. This is based on the existence of modern regulations, innovative structures and rising number of new captives in the Centre. We would expect more new captives now that we have issued an omnibus guideline on captives in August so that the Centre can be more innovative in underwriting both current and emerging global risks.

Ladies and gentlemen,

19. Labuan has come a long way since 1990. The road ahead looks daunting and challenging. And with the changes in the current finance landscape and imminent new global tax environment, we must be ready to compete more on differentiating products, quality friendly business services, ample talent base, and a modern dual regulatory framework for both conventional and Islamic finance incorporating digital business as well, that provides certainty and protection for investors and businesses in line with international standards and best practices.

20. We are committed to contributing more to the nation and the Labuan island. It is said, “We will reap the fruits together later, from the seeds we sow together today”. With your participation, together we can make Labuan IBFC a global beacon, guiding us towards a future that is sustainable, inclusive and progressive. This is in line with the theme of this morning’s lecture “Catalysing Asia’s Sustainability via Labuan IBFC” with three prominent speakers. I sincerely hope you will enjoy your stay in peaceful Labuan and where you can hear the natural sound of ocean waves as you drive to work, rather than hearing the honking of cars rushing to office.

21. On that note, do your enjoy the dinner and thank you.

Mr Nik Mohamed Din Nik Musa
Director-General, Labuan FSA
Copyright © Labuan FSA 
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