Malaysia: Labuan FSA Annual Report 2016 - Resilience And Growth In A Challenging Global Environment

Last Updated: 22 May 2017
Article by Labuan IBFC Inc.

Labuan, 28 April 2017 – In 2016, the global economy grew at a moderate pace, with slower growth in most advanced and emerging economies. The uncertainties surrounding geopolitical events, the economic and monetary policies of the US and continued volatility of crude oil and commodity prices set the backdrop for a challenging operating environment. Despite the challenging environment, Labuan International Business and Financial Centre (IBFC) continued to register positive growth in its key business areas of banking, reinsurance and wealth management.

The IBFC remained resilient, with sustained financial stability and integrity. Importantly, investor confidence and business prospects remained strong.

Performance of Key Business Areas

Labuan is now home to more than 13,260 companies with diverse geographic origins. Its position as Asia's business and financial gateway is underlined by the composition of companies, with 70% of the establishments originating from within the region. Consistent with global trends, the growth of Labuan companies incorporated in the IBFC moderated to 6.3% in 2016 compared to 7.2% in 2015.

The Labuan banking sector continued to support financial intermediation in the region. This sector registered a steady growth of assets of 7.6% to USD51.0 billion in 2016. Total loans outstanding stood at USD31.8 billion with non-residents accounting for 62.4% of total loans. Borrowers from ASEAN countries made up the largest share, with total outstanding loans of USD22.8 billion. Transportation, storage and communications were the major business lines funded by Labuan banks, contributing about 18% of total loans. While the sector's profit before tax moderated to USD551.5 million, balance sheets remained healthy with further improvements in asset quality and adequate capital buffers.

The Labuan insurance industry recorded positive growth in 2016. Total insurance and reinsurance business registered an increase in gross premiums written of 3.3% to USD1.4 billion. In an environment of volatile oil prices, the insurers and reinsurers successfully shifted focus from engineering and marine classes that correlate to oil price developments towards other specialised lines. The IBFC recorded an increase in premium retention, reflecting the internal capacity of Labuan's insurance industry to underwrite more business, particularly business from non-residents which contributed 57.9% of total premiums. The year 2016 also recorded the highest underwriting margin since 2012 due to higher earned premiums written and lower claims during the year. Overall, the sector remained strong and sound, registering profit before tax that grew significantly by 52.4% to USD387.0 million and a margin of solvency of more than six times above the minimum regulatory requirement.

Wealth management solutions continued to be offered by Labuan IBFC to meet the needs of high-net-worth individuals in the Asia Pacific, a region of significant wealth creation over the last decade. In 2016, there was a 13.2% increase in the establishment of Labuan foundations to 188, of which 78.2% originated from the Asia Pacific region. These foundations were established for philanthropic purposes, private wealth preservation and estate planning.

The number of Labuan leasing companies stood at 383 in 2016. However, this sector was affected by the global trend of low oil prices. For the year under review, there was a 20% decline in new leasing companies compared to the previous year and total assets leased declined slightly by 2.3% to USD50.6 billion.

The Global Incentives for Trading programme continues to attract the establishment of Labuan international commodity trading companies (LITCs). The total number of LITCs grew by 16.2% to 50 companies. In 2016, more were established for the trading of base mineral and refined raw material instead of petroleum and petroleum-related products for which LITCs are typically established. Total income generated from trading and non-trading activities amounted to USD16.5 billion in 2016.

Policy Development to Strengthen Resilience and Investor Confidence

The Labuan Financial Services Authority (Labuan FSA) continued to strengthen its regulatory regime and institutional foundations. Such efforts included the introduction of regulatory policies to strengthen financial capacity, enhance disclosure and transparency levels, and promote effective corporate governance and sound market practices.

Labuan FSA strengthened the IBFC's emphasis on anti-money laundering and counter financing of terrorism (AML/CFT), in line with heightened global advocacy for improved transparency and stricter anti-money laundering regulations. A dedicated AML/CFT policy and supervision unit was formed to ensure greater vigilance in meeting global standards. At the national level, the Authority is actively involved in the refinement of the National Risk Assessment for AML/CFT. Investigation and enforcement practices are also continuously improved to safeguard market integrity. These efforts resulted in a 25.5% decline in the total number of non-compliance cases for the year.

Labuan FSA remains committed towards supporting global initiatives to promote financial stability, and strengthening the collective voice of the Pacific region in international affairs. There were continuous engagements with other regulatory bodies to enhance global and regional collaboration through exchange of information and supervisory cooperation. In 2016, four new Memoranda of Understanding were signed, namely with Isle of Man Financial Services Authority, Astana International Financial Centre, Bank Negara Malaysia and Sabah Economic Development and Investment Authority.

Moving Forward

Labuan IBFC will be strategically repositioned to strengthen its position as a destination for international business and finance. Labuan FSA will continue to enhance IBFC'slegal and regulatory framework to remain efficient and agile, with policies and regulations that promote strengthened resilience, and sustainable business growth and market innovation.

In responding to global forces of change and to stay ahead of the competition, a strategic review is currently being undertaken to ensure the sustainable development of the Island's economy. This review aims to build and deepen value propositions for investors and to expand Labuan's contribution to the Malaysian economy.

Financial Position of Labuan FSA Group

For the financial year ending 31 December 2016, Labuan FSA Group recorded an increase in operating revenue of RM59.9 million compared to RM56.1 million in 2015, while its total reserves also increased to RM67.5 million from RM64.3 million.

Labuan FSA Annual Report 2016 can be viewed here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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