Labuan’s Three-tier Banking System, Islamic Banking

Labuan’s three-tier banking system is composed of Bank Negara Malaysia (Malaysian central bank), banks (commercial banks, financial corporations, merchant banks and Islamic banks) and miscellaneous group (discount houses and offices of international banks). Banking sector assets constitute to 67% of all assets of the Labuan financial system making banking a largest component of it.

The goals of Bank Negara Malaysia include promoting economic growth through price stability and maintaining monetary and financial stability. By Banking and Financial Institutions Act of 1989 spread Bank Negara Malaysia’s authority over regulation and supervision of domestic and offshore banking institutions and also other deposit-taking institutions engaged in providing loan and credit.

Commercial banking is the largest and most developed part of the banking system. Currently twenty four banks operate in Labuan out of which 13 are branches / subsidiaries of international banks incorporated locally. Commercial banks provide wide range of services:

• Retail banking including accepting deposits, extending loans and bank guarantees;
• Provision of letter of credit, banker’s acceptance and discounting of trade bills;
• Treasury services;
• Provision of safe deposits and custody services;

In Labuan offshore banking services can only be rendered by an offshore company registered in Labuan, or a foreign offshore company specially registered for this purpose, or by a branch/subsidiary of a licensed Malaysian bank.

For receiving offshore banking license applicants satisfying minimum capital requirement of RM 10 million should apply to Labuan Offshore Financial Services Authority (LOFSA) by providing appropriate guarantee. Annual fee of RM 60,000 is paid to the central bank by January 15 every year. In addition, a report on offshore bank accounts also has to be presented at the central bank each year. It must be mentioned that during this procedure bank secrecy is fully ensured.

Labuan offshore banking is only one of the services that Malaysian Labuan Integrated Offshore Financial Center offers among other diverse financial products. In 2004 there was large increase in pre-tax profit of offshore banking industry that increased from $166.8 million in 2003 to $272.9 million in 2004. Labuan offshore banking assets experienced impressive growth in 2005 and 2006 as well.

Number of offshore banks operating in Labuan offshore banking center in 2003 was 57 compared to 2003, when 56 operated in Labuan. Number of offshore investment banks also increased by two to eleven.

Islamic assets at offshore banks rose by 13.8% from $596.2 million in 2003 to $678.7 million in 2004 and have been steadily growing since then. Total deposits held at offshore banking institutions increased by 54.4% from $107.2 million to $338.4 million.

Tags: Offshore Bank Account