In accordance with the requirements of the Labuan Offshore Financial Services Authority Act 1996, LOFSA has submitted to the Ministry of Finance its annual accounts for the year ended 31 December 2000, which have been examined and certified by the Auditor-General. The financial statements are contained in the 2000 Annual Report of the Members of the Authority of LOFSA.

2.     It was ten years ago that the Malaysian Government launched Labuan as an IOFC in October 1990. It was considered important to develop both of the onshore and offshore financial sectors to provide full range of financial services given the more globalised, liberalised and increasingly integrated global economic and financial system in which we are operating. It was envisaged that Labuan as an International Offshore Financial Centre would play a key role in complementing the activities of domestic financial markets in Kuala Lumpur, and thereby strengthen the contribution of the financial services sector in Malaysia. Also important is the promotion of the overall development of Labuan. The establishment of the IOFC, accompanied by the significant infrastructure development has certainly raised the quality of life for the Labuan people. The financial activities of the Labuan as an International Offshore Financial Centre which is based mainly in foreign currencies, has added a complementing dimension to that of Kuala Lumpur, which is ringgit based. The development of the Labuan IOFC is a long-term agenda for the Government, not one for short-term gain.

5.     The operations of offshore institutions in Labuan IOFC continued to record another year of impressive growth as reflected by the significant increase in the number of offshore companies incorporated or registered with LOFSA. The measures instituted to weather the financial crisis had produced positive results on the progress of the Labuan IOFC.

6.     The number of offshore companies and foreign offshore companies incorporated and registered in Labuan had exceeded the projected number of companies. A total of 510 companies incorporated or registered in Labuan in 2000 compared with 396 companies incorporated or registered in 1999. The total number of companies incorporated or registered increased by 23% to 2,776 in 2000 (1999: 2,266). Of these, 2,721 were offshore and foreign offshore companies while the remaining 55 were other supporting companies.

7.     During 2000, the number of offshore companies that has either been voluntarily wound up, struck off from the register or ceased to operate declined from 325 to 142 companies. In most cases, the closure was a normal process in offshore entities as some of the companies were incorporated for specific purposes (better known as Special Purpose Vehicle Companies).

8.     As at 31 December 2000, the number of companies in operations, stood at 2,309. These include 60 offshore banks, 68 offshore insurance and insurance-related companies, 19 leasing companies, 8 fund managers and 20 trust companies.

9.     The pre-tax profit of industry increased by two fold to USD118.8 million in 2000 compared with a profit of USD57.0 million in 1999. The industry’s ratio of non-performing loans improved slightly to 11.7% (1999: 11.8%).

10.    The broad performance of offshore banks registered significant improvement. Return on assets improved to 0.6% compared with a return of 0.3% in 1999. While pre-tax profit per employee increased to USD228,900 in 2000 compared with USD106,300 in 1999. Average assets per bank increased marginally to USD325.1 million from USD323.2 million in 1999. However, total assets declined by 1.1% to USD19.5 billion (1999:USD19.7 billion). This was mainly due to reduction in loans and balances due from head office and branches outside Malaysia.

Sources and Uses of Funds

11.     The main source of funding for the offshore banking industry comprised borrowings from head office and branches amounting to USD9.9 billion (50.6% of total resources) followed by deposits of non-bank customers, USD4.8 billion (24.8% of the total resources). Another important source of funding was deposits and placements of banks and other financial institutions, totalling USD1.7 billion (8.7% of the total resources).

12.     Loans and advances were the main uses of fund amounting to USD11.4 billion or 58.6% (1999: 67.8%). The resource gap (loans less deposit) reduced to USD6.6 billion as a result of increased mobilisation of deposits for lending activities.

Deposits and Lending

13.     Total loans outstanding declined by USD1.9 billion (1999: USD1.8 billion). Loans outstanding of the Malaysian offshore banks contracted by USD0.8 billion or 28.0% to USD2.2 billion (1999: USD 3.1 billion). Its market share of the total loans of the industry was reduced further to 19.4% (1999: 23.0%). Loans by foreign offshore banks moderated by a lower amount of USD1.1 billion to USD9.2 billion (1999: USD10.3 billion), hence increasing its share of the industry’s outstanding loans (1999: 77.0%)

14.     The offshore insurance industry achieved commendable growth with 26 new licences (1999: 19) an increase of 40.6 % (1999: 47.5%). Favourable economic environment and greater awareness of Labuan were the two major factors contributing to this growth. The new licensees comprised five reinsurers, eight captives, eight insurance brokers, three underwriting managers and one each for general insurer and insurance manager. Sixty-seven licences (80.7%) were issued to non–residents while 12 (14.5%) were issued to Malaysians. Four (4.8%) other licences were jointly held by Malaysians and non-residents.

Assets

15.     Total assets of the offshore insurance entities in Labuan continued to record a strong growth of 40.9% (1999: 22.5%) to USD436.5 million. The increase was mainly due to the establishment of five large reinsurers.

Equity Participation

16.     The total capitalisation of the offshore insurance industry increased marginally by 6.3% (1999: 9.1%) to USD218.9 million (1999: USD206.1 million). The capitalisation growth was lower as majority of the new licensees comprised insurance-related businesses that required a lower capitalisation. Malaysian shareholding continued to form the bulk of the total capitalisation at 80.6% (1999: 82.4%) as compared with foreign shareholding of 19.4% (1999: 17.6%).

Premium Growth and Distribution

17.     The total gross premium increased by 75.1% (1999: 45.6%) or USD57.9 million, to USD135.2 million (1999: USD77.2 million). This was mainly due to the recovery of the regional economies and also the hardening of insurance premium globally. All sectors of the offshore insurance industry registered higher gross premiums. The engineering sector recorded a strong growth of 112.6%, fire sector at 55.5%, marine sector at 54.2%, and the motor sector at 30.2%. The fire sector continued to be the dominant business portfolio of general insurers at 40.1% (1999: 45.2%). The motor sector contributed 16.5% (1999: 22.2%).

18.     The overall net retention ratio (net premium to gross premium) increased significantly 80.9% (1999: 78.4%) reflecting the increased ability of the Labuan general insurers to retain more risk within the industry. The increase in the net retention ratio was particularly evident in the fire sector at 8.1 %. The net retention ratio of the motor sector remained the highest at 99.2% (1999: 99.7%) followed by the marine sector at 84.1% (1999: 84.5%).

19.     The industry’s net premiums (gross premiums less reinsurance ceded) achieved a strong growth of 80.8% (1999: 30.5%). The fire and engineering sectors experienced an increase of 74.5% and 73.9% respectively. The growth of the motor sector was lower by 29.6% (1999: 51.2%). The miscellaneous sector, which includes liability, aviation and property, increased significantly by 239.1%. In terms of distribution of business, fire insurance had the highest share of net premiums at 36.9% (1999: 38.2%), followed by motor 20.2% (1999: 28.2%) and marine 11.8 % (1999: 13.9%).

Insurance Broking

20.     Total premiums transacted by the offshore insurance brokers in Labuan continued to show strong growth of 62.0% (1999: 103.0%) to USD53.3 million (1999: USD32.9 million). The majority or 58.1% (1999: 35.8%) originated from life insurance business while the remaining 41.9% (1999: 64.2%) originated from general insurance business. The bulk of the life insurance premiums transacted by the offshore insurance brokers were from direct insurance placement and accounted for 99.7% of the total life insurance premiums of USD30.9 million. In terms of reinsurance cession, 62.5% of the insurance premiums mostly from general business was placed with overseas insurers and reinsurers. The remaining 37.5% was placed in Malaysia. For the general insurance premiums, direct premium placements increased to 28.8% (1999: 18.6%).

21.     Total earnings from brokerage fees grew by 35.7% (1999: 75.0%) to USD3.8 million (1999: USD2.8 million). Out of the total earnings from brokerage fee, 51.4% derived from placement of general insurance business, while the remaining 48.6% was from life insurance business.

22.     The offshore life insurance business is significantly smaller compared with the offshore general insurance business. Three companies were licensed to sell offshore life insurance products in Labuan, Two hundred and fifty-six policies of investment-linked insurance products amounting to a total sum assured of USD5.9 million were sold. In order to boost the industry, offshore life insurers are allowed to sell investment-linked insurance products and bancassurance products with offshore banks in Labuan.

23.     The aggregate operating income of the trust companies increased to RM15.7 million, a growth of 19.9% (1999: RM13.1 million). As a result, total profits before tax increased by 13.7% to RM6.7 million (1999: RM5.9 million).

25.     The offshore leasing business registered a substantial growth with an increase of 138% in the number of licensed offshore leasing companies. In addition, the total amount of leasing facilities transacted recorded an increase of 30.6% to USD1.45 billion (1999: USD800 million).

26.     LOFSA had made further improvements to the leasing guidelines to further enhance Labuan’s competitiveness in offshore leasing business. Among the significant changes were the removal of the RM2 million capital requirement and the abolishment of licence fees payable for the offshore companies undertaking pure" out-out" business. With the change, leasing companies are required to only maintain a level of capital that commensurate with its operations. The abolishment of the licence fees for "out-out" leasing is expected to encourage more offshore companies to conduct international leasing business, particularly with non-residents.

27.     Amendments were also made to the Offshore Banking Act 1990 to further stimulate the offshore leasing industry, by creating a specific provision for the conduct of other offshore financial business, including leasing.

28.     Acknowledging the immense demand gearing towards IT-based environment, LOFSA has made several amendments to the Offshore Companies Act 1990 (OCA) in line with the Government’s move towards a paperless administration for all government agencies. The online submission is expected to propel offshore industry into a new realm of efficiency and enhance the competitiveness of Labuan IOFC.

29.     The amendments to the OCA also addressed other consequential issues pertaining to electronic submission. These include the admissibility of documents filed electronically, the prescribed forms and the manner for the authentication or certification of documents that have been filed electronically. Consequential amendments were also made to the Offshore Companies Regulations 1990.

30.     Amendments were also made to the Offshore Banking Act 1990 to facilitate electronic funds transfer. The amendments now allow offshore players to operate electronic funds transfer services. Potential service providers are required to submit details of their propose systems to LOFSA for approval. This would help to ensure that only genuine and qualified players operate such activities and to maintain the integrity of the payment systems.

31.     Changes were made to the definition of the offshore banking business. Non-financial institutions are now able to conduct offshore leasing, factoring and credit token activities without being licensed as an offshore bank. Arising from this, there has been a significant growth in the offshore leasing business by 138% as at 31 December 2000.

32.     The E-Commerce Gateway (ECG) project that was launched on 23 November 2000 would enable LOFSA to gear up Labuan IOFC towards the challenges of the new economy. This financial portal allows access to information on products and services, including real time pricing, available in the IOFC. With this electronic infrastructure and the conducive business environment in Labuan, global e-commerce operators are encouraged to set up domicile in Labuan. In time, this portal will be developed into a full-fledged e-commerce site with a focus on Islamic products, bringing together a variety of third party providers of Islamic services. Other businesses and other financial service activities such as a clearing-house for financial payments, a marketplace for financial products and backroom operation activities will be encouraged.

33.     The ECG project was undertaken to capitalise on the capabilities of the Internet and the excellent telecommunications infrastructure available in Labuan. The system would facilitate communications between offshore players and their clients. It would allow easy and convenient access to information on Labuan IOFC. In addition, information on Labuan IOFC can be distributed globally almost instantaneously. When fully completed the system would enable routing or processing transactions and payments between businesses and their clients. Its implementation and operation would be totally driven by the private sector. Facilities such as advertising, e-marketing and payment transfers would be available on the website.

34.     The ECG can also be the means for submission of statutory documents and statistical information to LOFSA, reducing the flow and handling of physical documents as well as improving the speed of processing. With imminent globalisation and growing competition, Labuan IOFC needs to exploit these technologies. This project would enable LOFSA to gear up Labuan IOFC towards the challenges of the new economy.

35.     Due to its wide reach and multimedia capabilities, the ECG can also be used as a marketing tool. Information on products and services can be widely disseminated, and easily accessed by market players. However, like traditional forms of business, e-commerce needs to be appropriately regulated. In the case of Labuan, the legislation for such activity should neither be too restrictive nor be too liberal. There will be a balance between too much control, which would discourage businesses and the lack of control, which may allow unfavourable activities to be conducted.

36.     The strong Islamic banking, finance and takaful foundation already established in Malaysia provides a platform from which Labuan can be developed with a strategic focus on Islamic products and services. There is also a growing interest on Syariah-based financial services and products in the global financial market. As part of the overall plan to develop Labuan IOFC as a premier offshore centre in Islamic banking and finance, LOFSA established a Shariah Advisory Council (SAC). The SAC's main role is to advice the Authority on Shariah matters and the development of Islamic banking and finance in Labuan. The SAC would also review proposals for new transactions or products, submitted by any parties, whether they conform to the Shariah and to offer constructive and creative recommendations. The members of the SAC are experienced and well known practitioners with established credentials and FIQH scholars would be appointed to the SAC. The SAC would thus, well positioned to advise LOFSA and other Islamic financial institutions on Islamic banking and finance matters and provide assistance to establish a credible system for the conduct of financial business that conforms with the Shariah. The establishment of the SAC is vital as LOFSA embarks on a two-prong approach to provide Labuan IOFC the required competitive edge. The approach entails the creation of a wide range of offshore Islamic financial services and products and the development of a market through the International Islamic Financial Market.

37.     As part of the effort to develop the Islamic niche for the Labuan IOFC, the development of a global network of Islamic financial markets known as the International Islamic Financial Market (IIFM) to take advantage of the tremendous market opportunities in Islamic financing in the global financial markets made a major stride in 2000. The international group comprising the Islamic Development Bank, LOFSA, Bahrain Monetary Agency formed to implement the project had been joined by Bank Indonesia and Bank of Sudan. In addition, this project is supported by Saudi Arabia and Brunei. More countries are expected to join the strategic alliance to develop the market. LOFSA has been entrusted to spearhead developing the market and has adopted a fast track approach to ensure full implementation of the project by June 2001. The IIFM will spur the creation and trading of the financial instruments, enhance investment opportunities and generate spin-offs of other services and activities, such as custodial, brokerage, Islamic funds and treasury. Government and large conglomerates should explore using this viable alternative source of funding

38.     The viability of the IIFM is very much dependent on the availability of a large number of players, a wide range of Islamic financial instruments and liquidity in the market. In this regard the assistance and support of the governments, central banks, monetary authorities and multilateral institutions is very critical to encourage more players to join the IIFM as well as to issue instruments to kick-start the IIFM. A large pool of players is needed to ensure there are market makers and sufficient liquidity.

39.     The Labuan International Financial Exchange (LFX) was officially launched on 23 November 2000. It is a global exchange that provides listing and trading facilities for a wide range of financial and non-financial products (as well as Islamic products), including mutual funds, bonds, derivatives, insurance-linked products and intellectual properties. LFX has been established to complement various offshore financial services currently available in Labuan. There are abundant opportunities for offshore players in the LFX including to provide custodial, depository, clearing and trustee services.

40.     The establishment of the International Islamic Financial Market (IIFM) by 2001 in Labuan would be a significant and timely opportunity to match the surplus and requirement of funds among Islamic financial institutions. The LFX is ready to offer opportunities to enable greater flexibility in the mobilisation and application of Islamic funds. LFX can be a major exchange capitalising on its many advantages, and thus, offering unlimited opportunities to global investors and companies. In addition, being the only offshore exchange within this region, LFX would provide the impetus for Labuan to gain wider international recognition as an international offshore centre.

41.     In terms of financial performance of LOFSA’s, for the year ended 31 December 2000 LOFSA recorded an income of RM11.4 million (USD3.0 million) an increase of 16.3% from RM9.8 million (USD2.6 million) in the previous year, generating a surplus income of RM2.2 million (USD0.6 million). As in the previous years, the bulk of the income is from revenues collected from the incorporation of companies and the annual fees of the offshore players.

42.     LOFSA has drawn up a masterplan, which formed part of the overall financial sector masterplan for Malaysia. It is envisaged in the masterplan that the IOFC of the future is not only a centre that thrives on offshore financial services, but also one that is developed holistically to support the overall development of Labuan, and plays an effective role to the domestic financial market. The overall strategic plan calls for special focus directed to identify niche business and areas of comparative advantage. This include enhancing the Islamic banking and finance business as well as the banking and insurance sectors to make Labuan IOFC a significant regional financial hub. The promotion of Labuan as a meeting, conference and exhibition as well as tourism centre is also part of the overall development plan of Labuan IOFC. The measures recommended in the Labuan IOFC masterplan are made in three main areas, firstly promote and diversify further the financial players and activities in the IOFC, secondly promote the development of Islamic banking and retakaful business, thirdly develop and strengthen the capital market, e-commerce and ancillary activities. With the launching of International Islamic Financial Market, E-Commerce and Labuan International Financial Exchange and Labuan Masterplan, players’ capabilities to be innovative and efficient should be enhanced.