Welcome Speech by Mr. Nik Mohamed Din Bin Nik Musa, at the Unveiling Labuan as Asia’s Islamic Digital Asset Centre (IDAC) Forum – Pioneering New Asset Class
Unveiling Labuan as Asia’s Islamic Digital Asset Centre (IDAC) Forum
Pioneering New Asset Class

04th October 2022

Welcoming Remarks By

Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA

Esteemed Authority members & Shariah Supervisory Council Lab. FSA,
Respected audience and learned speakers, members of media,
Assalaamu’alaykum W.R.T. and good morning to all.

1. Alhamdulillah, praise be to Allah the Almighty for with His blessing and guidance, we are able to meet here today. Foremost, I would like to extend a warm welcome to all to this side-event forum organised by Labuan FSA held a day prior to the Global Islamic Finance Forum (or GIFF) 2022. This is the first time Labuan FSA is featuring Islamic finance in Labuan International Business and Financial Centre (IBFC) at GIFF which gives us the opportunity to place Labuan on the global financial map as a centre for Islamic finance business. I’m happy to see familiar faces at this event, many from faraway lands, and equally happy to see everyone in this beautiful Sasana hall---it gives us a good reason to brush the dust off the old suits, and dress up to meet old friends again and exchange thoughts at this event.

Ladies and Gentlemen,

2. The world has been greatly impacted over the past two years due to the onslaught of the pandemic. As quickly as the pandemic spread, the global economy was also quickly recovering, reaching growth levels again in 2021. However, the World Bank has recently downgraded global growth from 5.7 percent in 2021 to 2.9 percent in 2022 given the on-going conflicts and rising uncertainties. At the same time, digital adoption has been accelerated and prompted financial institutions to question the sustainability of existing business models. Emerging techno-preneurs into financial business space became a crucial disruptive force to challenge the status quo where conventional financial business used to hold dominance. Now, everywhere around us, you may find the trail of financial innovation in every new trend. It is obvious that financial services sector is relying more and more on digital technology to gain distinctive competitive edge.

3. The post-pandemic environment saw acceleration in Islamic finance growth. Islamic finance assets saw double-digit growth to USD3.4 trillion in 2020 and is projected to rise to almost USD5 trillion by 2025. While the global Muslim population continues to be one of the most significant drivers of growth in Islamic finance, there has also been an emergence of the millennial generation of socially-conscious investors. Unlike profit oriented conventional investors, this group seeks to invest into more responsible and moral finance solutions with reasonable returns. With the pandemic and associated economic dislocation, heightened social unrest and continued climate change, the need for action on ESG by governments and corporations has never been higher.

4. As the demand for sustainable investment is on the rise, the trend of investing in sustainable, environmentally friendly and socially conscious businesses is also making Islamic financial products becoming more appealing to non-Muslim investors. In recent years, the Islamic finance industry has witnessed the launch of several initiatives and the creation of innovative structures that were sustainability- and ESG-motivated. ESG Islamic bonds or sukuk issuances reached a record value of over USD5.3 billion in 2021, boosted by large sustainable issuances during the year. It is timely that the delivery of Islamic finance and ESG-related financial instruments are given a new lease of life by creating a new channel to reach the desired investors. This new investment asset class is brought about by the advent of Islamic fintech or the digital delivery of Islamic finance.

Ladies and Gentlemen,

5. 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. Started with only two Islamic banks in year 2000, the number grew to 19 Islamic banks including windows with a total Islamic banking asset in excess of USD1.9 billion as at June 2022. Similar trend is observed in the retakaful sector where the number of operators increased from 3 to 29 from year 2000 to June 2022, and the re-takaful contribution stood at USD59 million as of the first half of 2022.

6. Labuan IBFC licensed its first digital finance related entity in 2017 and since then, the jurisdiction has approved more than 90 digital financial service providers to carry on out digital financial business which include digital asset platforms, digital funds management, digital banks, digital token issuance, insuretech, robo advisory, digital wallet services and payment gateway. Islamic digital asset instruments have now arrived at the doorstep of global Islamic finance and Labuan is unveiled as the gateway for Islamic Digital Asset Centre or in short, IDAC, for Asia. Targeting primarily “out-out” business, Islamic digital asset, or what we call here as RAMZ, is an alternative to the conventional digital asset industry we see flourishing today. We wish to coin this Arabic term for token--RAMZ--to be the new brand name for digital asset as achieved by the term sukuk for Islamic bond in the Islamic capital market. The Islamic Digital Asset initiative is the commitment made by Labuan FSA embedded in the five-year Roadmap 2022-2026 to make Labuan IBFC as the digital gateway with Islamic finance capabilities for all types of global investors and players. It is envisaged that Labuan will play a significant role as a fund raising and investment hub in the global digital space, with a niche in ESG and Shariah compliant activities.

7. Labuan IBFC is underpinned by a comprehensive set of laws and regulations governing Islamic financial services under a separate Labuan Islamic financial services and securities Act, alongside the conventional counterpart. We have issued the Guidance Note on Issuance of Green, Social and Sustainability Sukuk, and will in the near future roll-out the relevant guidelines on digital assets and RAMZ as a testimony for the strengthening of the governance of the centre. In pursuit of Labuan’s aspiration as Asia’s Islamic Digital Asset Centre or IDAC, the Shariah Supervisory Council of Labuan FSA issued a pronouncement in February this year on the minimum compliance criteria for offering of Labuan Islamic digital-based solutions, in order to highlight the Shariah permissibility for such offerings.

8. Under IDAC, the availability of virtual listing using blockchain technology has enabled global investors who are looking for new asset classes including Shariah compliant investment products can now look to Labuan. Last month, we witnessed the launch of the first Labuan Islamic/ESG digital asset exchange, and possibly it was the world’s first of such exchange. This new exchange would enable corporates especially the small and medium-size enterprises or SMEs interested to raise fund cost effectively and tap the ESG and Islamic investors from South East Asia and Middle East, to name a few. SMEs for example can digitally securities or tokenise their assets or commodities such as gold, property real estate or even carbon credit, via securities token offering (STO) to back their fund raising exercise.

9. Tokenisation will digitally unitize or fractionalise assets in order to lower the barrier to investment in private markets by sharply reducing minimum lot sizes. According to a global consulting firm, the asset tokenisation market will grow 50 times from USD310 billion in this year, to over USD16 trillion by 2030, driven by demand from a wide range of investors for greater access to private markets. Moreover, blockchain and smart contracts help to simplify the structure of sukuk issuance at all its stages, including trading process and settlement period. Smart contracts determine how the token can be purchased, traded and sold in Shariah compliant fashion, and since they are blockchain based, the transactions are immutable, traceable and fully transparent.

10. The opportunities are endless. We can tokenize existing sukuk such as sukuk issuance by the sovereign and multilateral institutions in order to provide other alternatives for liquidity and at the same time expand the clientele of the sukuk issuances. The tokenised sukuk is similar to investment in sukuk where a digital token is created on a blockchain that supports smart contracts to represent interest in the underlying assets and the beneficial ownership. As tokenisation gains momentum in Labuan IBFC, there are interests shown by potential players to establish wakaf exchange and carbon credit exchange, the latter of which complements Malaysia’s commitment to attain net-zero carbon target.

11. I cannot end my remarks if I don’t say something about cyber risk and climate change that are also impacting the world today. As the world places greater emphasis and focus on sustainable finance, the outbreak of COVID-19 has sparked a chain reaction in the captive insurance industry. The World Economic Forum Global Risks Report 2021 has ranked climate change as the most likely and impactful threat to stability and cyber risk is considered as a top global risk for the insurance sector. Hence, Labuan is well positioned to create another niche market for itself as an insurance captive hub. Risk managers are currently looking for better alternatives and captive insurance to enable corporations with extensive risk portfolios to better bundle and diversify them, as well as have direct access to global insurance and reinsurance markets.

12. By self-insuring high-frequency, low-severity risks through a captive, a corporate can reduce transaction costs and focus risk transfer on lower-frequency, higher-severity risks for more efficient risk management. Among the initiatives in place, Labuan FSA is positioning itself as a takaful captives hub, a unique proposition not found in other parts of the world. Labuan IBFC is now home to 64 captives which include eight takaful captives and captive windows. Of the total of USD351 million worth of premiums underwritten by Labuan captive insurance in the first half of 2022, about 65 percent of these premiums are from international markets. Asia markets have contributed more than 55 percent of the premiums underwritten by Labuan captives.

Ladies and Gentlemen,

13. With that said, I believe that Labuan IBFC has much to offer to the global financial community amidst the current international financial landscape that is facing a myriad of challenges and countless uncertainties. I invite you to explore some of these opportunities and hope that you would gain some insights and interest in Labuan’s offerings from this morning’s session.

14. Once again, I wish to welcome everyone to this pre-GIFF event. I wish to thank the organising team for their relentless efforts and hardwork to make this a success. I wish you a fruitful and engaging session ahead. Thank you & wabillahitawfik walhidayah wassalam W.R.T.

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