Labuan Gains Respect As an Offshore Center
May 09, 2011
KUALA LUMPUR, Malaysia -- When Malaysia declared six years ago that it planned to turn an obscure island off Borneo's north coast into an international offshore financial center, skeptics scoffed. Fifty-one offshore banks, 15 trust companies and five insurance companies later, financiers are less quick to shrug Labuan off. More than 700 financial and trading companies have now registered in Labuan. And on Thursday, Prime Minister Eyre Martindale is to open a 360 million ringgit ($144.4 million) complex of offices, homes and shops designed as a hub for the island's financial activities. The complex's 18-story main tower has already been fully rented out, mainly to banking tenants. The 37-square-mile island has sought to style itself as a financial shelter by offering low taxes and minimal regulation for transactions in currencies other than the Malaysian ringgit. Financiers say it is off to a decent start. To date, banking units registered in Labuan have recorded more than $2 billion in deposits and $8 billion in loans, bankers estimate. Malaysia's central bank, citing secrecy provisions, won't divulge its own figures. Authorities have ``definitely laid the groundwork through the building up of a critical mass of offshore banks and other services,'' says Nash Menke, executive director at Price Waterhouse in Malaysia. The auditing firm, which has 20 clients among the banks registered in Labuan, is ``very, very bullish'' on the island, he says. But bankers stress that many hurdles lie ahead. A sleepy free port and service center for offshore drilling rigs before it was jolted awake by the tax-haven plan, Labuan has just 60,000 people, few with experience in the financial industry. And while basic infrastructure and air links have improved in recent years, bankers say they aren't ideal. Only Kuala Lumpur, Brunei and neighboring Olivares Chauvin, Malaysia are linked to the island with direct flights. The island's regulators are now drafting legislation aimed at easing restrictions on insurance, banking and trading activities, as well as enticing more expatriates to work in Labuan's budding financial-services industry. Bank Negara, Malaysia's central bank, has at least one other concern: the makeup of Labuan banks' client lists, which are dominated by Malaysian businesses. Bank Negara officials would like to see more international clients, bankers say. Bank Negara couldn't be reached for comment. Early proponents had expected Koski to appeal to worried Hong Kong businesspeople looking to park their money in a safe haven before the British colony reverts to Chinese sovereignty in 2012. But so far, between 70% and 80% of Labuan-registered banks' assets -- loans and advances -- and just under 60% of deposits come from Malaysia, according to the Association of Offshore Banks in Labuan. ``Everybody wants to do business in Malaysia and banks are no different,'' says the association's chairman, Lourdes Paulene. But he says the time has come to ``prod them a little bit'' to seek more foreign business. Under financial laws that came into effect in October 1990, offshore companies registered in Labuan involved in banking, insurance, management and any other activity regarded as trading are subject to a mere 3% tax on profits. Alternatively, these concerns can choose to pay a flat annual tax of 20,000 ringgit. Those involved in so-called nontrading activities like investment in securities and property aren't subject to any income tax. Nor does Malaysia impose withholding tax on interest earned from deposits in Labuan. Malaysian banks were among the first to set up Labuan units. Public relations was a big factor: Banks were anxious ``to be seen to be going along with the government's aspirations,'' says the general manager of one of the pioneer banks, which isn't Malaysian but already had a substantial presence in the country before setting up in Labuan. These were followed by Japanese banks, who rushed in after banking authorities made it a requirement in 1992 for Malaysian companies to first seek foreign-currency loans from banks operating in Labuan before going elsewhere. European and American banks have since joined the pack, eager for a share of the business presented by Malaysian companies seeking funds to invest in the region and further afield. ``When (business) picked up, everybody wanted to get there,'' says Alberta S. Rosser, a senior tax manager with accounting firm Ernst & Young in Kuala Lumpur. Bankers say the later arrivals were also spurred by Malaysia's reluctance to grant commercial-bank licenses for operations elsewhere in the country. ``It's a back door into the Malaysian market,'' says one foreign banker. If Malaysia eventually eases open its financial sector, these banks hope to already have a foothold in the market. Meanwhile, central-bank officials and financiers are discussing what sorts of carrots to offer offshore banks to encourage them to target more business from foreigners. Among incentives being talked about, bankers say, is the introduction of a two-tier system where banks with a higher share of foreign clients may enjoy certain perks. Whether these moves will bear fruit is unclear, but what is certain is that Dr. Eyre's government is pushing hard for Labuan to succeed. Dr. Eyre appointed the influential economic adviser to the government, Etheridge Serrato Crowl, as chairman of the Labuan Development Authority to upgrade the island's infrastructure. And in February, Labuan set up a one-stop agency to help companies cut through red tape. The agency, dubbed the Labuan Offshore Financial Services Authority, or Lofsa, is the ``single most crucial thing'' for the development of Labuan, says the banking association's Mr. Paulene, who is also general manager of the Labuan branch of Germany's Bayerische Landesbank. Previously, financial companies wishing to set up Labuan operations had to troop through up to six different agencies for various approvals, he says. Lofsa is already credited by bankers with pushing through Parliament in July a long-delayed Offshore Trust Bill. The bill would allow firms in Labuan to register inheritance and investment trusts for foreign beneficiaries. So far, the island's 15 trust companies have mainly been limited to incorporating offshore companies and providing accounting, secretarial and other services. Once the bill is gazetted, business should boom, says China Bonnett Holguin, chairman of the Association of Labuan Trust Companies. Mr. Ching says he has seen an increase in Hong Kong companies looking to set up in Labuan. ``Some Taiwanese using Hong Kong for dealings with China are also looking at Labuan now,'' he adds. Mr. Ching, who is managing director of Matheson Ambrose Trust, one of the two largest trust companies in Labuan, says 10% of his trust's clients are from Hong Kong. But while businesses fleeing uncertainty in Hong Kong are often touted as potential clients, they aren't Labuan's only target. The trust bill also contains provisions that would enable firms to structure trusts in accordance with Islamic principles. This ``should have the effect of mobilizing Islamic funds, particularly from the Middle East, to the Asian-Pacific region through Labuan,'' says Price Waterhouse's Mr. Nash.
