BUSINESS: Labuan, Malaysia's offshore center

By Salil Tripathi

july 1996

Island Dreams
Malaysia hopes the ride of offshore assets will begin to lap up on Labuan

Twilight hour on Labuan island off the coast of Borneo is a painter’s dream. Under a fading sun devoured by giant clouds, the occasional ferry charts a lonely course as it leaves Victoria Harbor for the green hills of Sabah. Houses on stilts dot the coast, sitting on their reflections.

The other side of the harbor offers a stark contrast. Rising incongruously out of this slumberous island is Labuan Financial Park, a glass-mirror tower and surrounding buildings that will be officially opened next month. This is Malaysia’s answer to Bermuda and the Cayman Islands a supermarket of offshore financial services.

Thanks to the vigorous backing of Prime Minister Mahathir Mohamad, Labuan’s offshore finance industry has a strong wind behind it. Says Howard Choo, general manager for Labuan of Singapore’s DBS Bank: Once the government sets its mind to something, its record speaks for itself Penang Bridge, a national car [the Proton], the North-South Highway, the tallest building in the world, an industrialized nation. It has done all it set out to do.

Since 1990, when the Malaysian government announced the Labuan scheme, 32 of the world’s biggest banks have joined a dozen lenders from Singapore and Malaysia in setting up shop on the island. Together, they have outstanding loans of about $6 billion, against deposits of $3 billion. And the island’s quiet, stable industry benefits from instability elsewhere in the region. Says one banker: During the China-Taiwan missile crisis, we believe over $200 million came to Labuan. Indeed, adds Betty Nah, general manager of Banque Nationale de Paris in Labuan: There is enough business to keep everyone happy.

Not that everyone is equally welcome. We are extremely vigilant, says Awang Adek, director general of the Labuan Offshore Financial Services Authority. Banks here do not handle cash, only telegraphic transfers. So if illicit money finds its way into Labuan, it could only be because its point of entry was somewhere else. We don’t want to turn Labuan into a notorious place.

A little notoriety, though, might enliven Labuan’s image among expatriate bankers. Life on the island glides to a halt at sundown, and some of the more demanding tastes go unsatisfied. This is a duty-free place, but they can’t even import good cigars, grumbles one banker pettily. Some stay in Kuala Lumpur and book their Labuan business through the small marketing offices they are officially allowed to maintain in the Malaysian capital.

Mohammed Zam Mohammed Zain, the chief executive of LDA Labuan (Holdings) Sdn. Bhd., the corporatized arm of the Labuan Development Authority, says: Some bankers are most reluctant to move here. It is a mere excuse because everything is here. Facilities include an international school and the Waterfront Financial Hotel, where many bankers are staying as they wait for their $270,000 condominiums to be completed.

Abmalek Abubakar, general manager of Maybank International (L) Ltd., a subsidiary of Malaysia’s biggest bank, is not one of the malcontents. In Kuala Lumpur he left for the office at 6:30 a.m. and did not return home until 8 p.m., allowing him little time with his family. But now I can have breakfast at home, pray, have a round of golf, be in my office at 9, and go home for lunch, he grins. I can’t complain.

While Maybank’s presence is real, nearly 700 companies registered as Labuan-based are paper entities acting as off-the-shelf tax shelters. That looks puny compared even with Mauritius, a tiny republic in the Indian Ocean that set up its offshore center two years after Labuan. Mauritius is notionally home to 8,000 companies, mainly because it has a trust law that shields the assets of wealthy individuals from inquisitive eyes.

Chin Chee Kee, managing director of Matheson Ambrose Trust Sdn. Bhd. in Labuan, says: Mauritius is an independent country by itself so it can move fast. Labuan is part of a bigger country so it must get approvals from the federal government. One foreign banker is less forgiving: Everything is postpone, postpone, postpone. This is the Malaysian way.

Then there is the shortage of labor. Labuan simply doesn’t have enough people. Local salaries have shot up. One banker received a faxed job application from an employee at a rival bank demanding double his current pay. Another banker was away on business in Kuching when a competitor stepped into his office and lured half of his staff away. Or so the story goes.

Despite its best efforts, Labuan also has failed to put itself on the international map. Malaysian Airline System and Royal Brunei Airways are the only international carriers that fly to the island. Moreover, the Netherlands and Australia have hurt Labuan’s raison d’tre by refusing to recognize it in their double-taxation treaties.

Labuan’s main disadvantage, however, is that it is a late entrant into a crowded sector. One foreign banker says: It is very difficult for Labuan to get a competitive advantage over established centers. Nor will neighbors such as Thailand or Singapore readily concede business to the Labuan upstart. Bangkok, for instance, is dangling offshore licenses to foreign banks, touting itself as the gateway to Indochina.

Even Labuan’s sternest critics would admit, however, that it has come a long way in a short time. In 1991, for instance, Nathaniel Savarimuthu of Malaysia’s Public Bank (L) Ltd. flew in, took one look at the wooden shed that passed for a passenger terminal and said to himself: My God, why did I pick Labuan? Today, as he surveys the harbor from his eighth-floor office in the financial park, he says: Obviously things have changed.

The Malaysian government has done more than offer tacit support to the Labuan project. Domestic companies are directed to raise their offshore borrowings there, drawing business away from Singapore, Hong Kong and Taipei. With Malaysian outward investment rising (see The Malaysian Wave, Asia, Inc., August 1995), Labuan is almost assured of reaching critical mass.

Foreign banks, prevented from lending in ringgit since the 1970s, are promised certain benefits if they open in Labuan. They can make low-interest, foreign-currency loans to Malaysian companies expanding overseas, and offer standby letters of credit to Malaysian firms seeking local finance. But this is not a backdoor, belated chance to cream off ringgit-denominated domestic business. Awang stresses: Labuan is not a window to Malaysia but Malaysia’s window to the world.

Some niches have already been established. Besuited Taiwanese, ever-anxious about China’s intentions, can be seen most days stepping out of Labuan’s sweltering heat and into the offshore branches of reputable banks. South Koreans form Labuan-registered companies that give them tax advantages when trading on the Seoul stock market.

Labuan officials, however, hanker after a thicker slice of the offshore cake. Former stockbroker Chua Ma Yu has drawn a master plan for a stock and futures exchange that would trade securities from all around the region, making Labuan the Luxembourg of Asia-Pacific. Some banks want to challenge Bahrain and London as the main centers of offshore Islamic banking. Maybank, for instance, is pioneering a $10 million Islamic offshore bond.

Other amenities are planned for the island, from a bird park to wider beaches. The airport will be upgraded to accommodate larger aircraft, and some planners even talk of a bridge linking Labuan with Sabah, a half-hour boat ride away. Says Hari Prasad Nayar, general manager of Labuan-based Bank of Commerce (L) Ltd.: Things will happen because the government is 200 percent behind Labuan.