In the last decade Islamic finance has gained tremendous traction the world over as a viable alternative to conventional banking and finance. The recent global financial crisis has further enhanced its allure as it slowly but steadily begins to provide a real and practical alternative to the conventional financial system.

Likewise, there has been a strong surge in Islamic risk management products, with industry experts forecasting that the value of the global takaful industry could breach USD$15 billion by 2018.

Malaysia is in the enviable position of being on the cutting edge of this industry, having offered Islamic financial services since the early 1980s and making early inroads in the takaful market through the enactment of the Takaful Act in 1984.

Clearly, Malaysia’s leadership in Islamic financial services is undisputed, even as other financial centres clamour to offer Islamic finance and banking in the wake of the credit crunch.

In tandem, Labuan IBFC has benefitted from the growing take up in Islamic Finance. Coupled with its efficient domestic taxation structure, the extensive double taxation treaty network confirms Labuan IBFC’s niche as a well established international Islamic financial centre.

In 2009, as the world languished in a recession, the Islamic banking sector in Labuan IBFC saw an increase of 14.5%, generating total deposits of USD386.4 million for the year.

Although the growth in the Labuan Islamic capital market was modest, it was the increase in takaful and retakaful contributions which showed the highest growth of 44.2% year on year, amounting to USD$234.1 million.

As of end 2009, there were 5 fully fledged retakaful companies, 9 retakaful windows and 10 retakaful brokers on Labuan IBFC. A chart below shows the growth of the takaful and retakaful operations in Labuan IBFC for financial year 2009, and illustrates clearly a growing and dynamic market.

It is expected  with the recent enactment of Labuan Islamic Financial Services Act 2010 - the world’s first omnibus act covering all aspects of Islamic financial services, the takaful industry will receive a further boost as the provisions within the Act streamlines all aspects of takaful and retakaful operations.

In addition, this Act also clarifies and streamlines procedures and requirements for the establishment of all Islamic financial entities and products, for example it standardises requirements in areas such as the seed capital and business activities deemed permissible by the Shariah Supervisory Council, the highest body dictating Shariah compliance in Labuan IBFC.

Undoubtedly the level of growth experienced in the takaful market in Labuan IBFC can only be achieved via a close collaboration between the jurisdiction and the industry itself.

Labuan IBFC is cognisant of this fact and has been active in supporting the Labuan market with product innovation, encouraging market collaboration and the formation of the Global Takaful Group.

Chart1
Extracted from Labuan Financial Services Authority Annual Report 2009
Total gross contribution and number of takaful/retakaful companies for the year ending 2009.

Supporting the market place and its players

The Global Takaful Group

Realising the need for a formal platform for collaboration amongst takaful and retakaful operators, the Global Takaful Group (GTG) was formed in 2007 as the successor of the ASEAN Takaful Group, which was a much less formal regional grouping.

GTG is now an influential international group which currently numbers 35 takaful and retakaful operators from 13 countries, with more companies seeking to join in. The GTG Secretariat hopes to have over 100 members in the Group by the end of 2012 or possibly even sooner.

There are also plans to use its platform to form a Lloyds takaful syndicate which will be licensed in Labuan and have a marketing office in Kuala Lumpur.

Malaysia has always played a leading role in this group, with its first secretariat hosted at Takaful Malaysia’s offices in 1995. GTG now has a permanent secretariat at Labuan Reinsurance, a licensed takaful operator on the island.

Labuan IBFC has always believed that the GTG is an essential element towards the development of its takaful and retakaful market. It is our main objective to become a vehicle of cooperation among Takaful operators worldwide, providing for a larger and deeper global market place for takaful insurance and reinsurance.

The free flow of information exchange between members of the GTG either on a personal or professional basis is another important benefit provided to its members and the Labuan based Secretariat provides a constant flow of technical and market information.

GTG also assists its members in organising training sessions and the promotion of staff exchanges and attachment programmes.

Labuan IBFC’s takaful and retakaful gross premium income has grown by a stellar 40% per annum for each of the last three years, however, in order to maintain this level of growth, the jurisdiction recognises that innovative product development plays an integral part. Towards this Labuan IBFC recently introduced the world’s first Shariah Complaint captive.

World’s first Shariah compliant captives

We’ve seen robust growth in the captive insurance area in Labuan over the past few years. Large corporations, Malaysian and international alike, are beginning to reap the benefits of self insurance in our business friendly, low cost environment.

Captive insurance structures are used as an effective risk management and risk financing tool to manage risk whilst providing the ability to retain earnings by way of reinsuring the corporation’s risk. Obviously in the current leaner business environment, captives are fast becoming a popular risk management tool.

Currently, Labuan IBFC is the fastest growing captive insurance centre in Asia. The growth in this sector and our entrenched leadership in Islamic financial services seeded the concept of a Shariah compliant captive, launched in July this year.

Under the Guidelines, a Labuan Shariah compliant captive company operates in a similar way as a conventional pure captive structure but conducted in a Shariah compliant manner.

As with the conventional model, the Shariah captive is required to adopt a strategy to manage risk and curb loss but in a Shariah compliant manner.

The contract for the transfer of risks to the Labuan Shariah pure captive may be done with or without a fee and is based on wakalah principles. It is important to note that the contract is not purely a risk transfer as the captive owner still bears some of the investment and operational risk.

In the area of investment activities, the Labuan Shariah pure captive must ensure investments are in accordance with Shariah principles as approved by the company’s Shariah adviser or Labuan Financial Services Authority’s Shariah Supervisory Council.

In terms of the permitted business activities, the Labuan Shariah compliant pure captive may underwrite takaful business such as the general and family takaful business risks of their own Group.

It may also obtain Labuan retakaful coverage from any takaful or retakaful operators in or outside of Labuan, irrespective of whether they are licensed under the Labuan Islamic Financial Services and Securities Act (LIFSSA) 2010.

Finally, the Shariah Compliant Captive is allowed to deal with reinsurance of Malaysian risks and direct Malaysian risks for activities approved by Labuan FSA and/or Bank Negara Malaysia, but again strictly for its Group “in house” risks.

Currently there are 144 takaful and retakaful insurers throughout the world all of whom have an opportunity to offer this innovative structure to their respective market segments. With a minimal capital requirement of RM300, 000.00 (USD$ 97,000.00) per captive, we expect the take up of Shariah compliant captives to be significant.

Moving ahead

Abstract Labuan

Labuan IBFC has always been a pioneer of many fronts and the jurisdiction works closely with the market place to understand its needs and innovate accordingly.

One key initiative being rolled out by Labuan IBFC is the allowance for co location of Labuan entities in other parts of Malaysia including Kuala Lumpur. This basically means that certain Labuan licensed and registered entities are now allowed to be based in Kuala Lumpur and other parts of Malaysia in order to leverage on the offerings of first class infrastructure, facilities, human capital and professional services that are available in Malaysia.

In January 2010 it was announced that Labuan banks and investment banks are now allowed to establish their operations in Kuala Lumpur and other parts of Malaysia. This came on the back of a similar announcement in 2009 with regards to Labuan Holding Companies.

It is expected Labuan FSA will announce a similar allowance for all insurance and insurance related entities in 2011, and it is hoped this move will provide sufficient impetus to further grow Labuan IBFC’s takaful and retakaful industry.

With the facilities, infrastructure, legal and tax framework in place, it’s hard to deny the fact that Labuan IBFC is an attractive prospect for investors seeking to take part in the burgeoning global takaful market.

For more information please visit www.LabuanIBFC.my