26/10/2021 04:29 PM

By Jailani Hasan

LABUAN, Oct 26 -- The Labuan Financial Services Authority (Labuan FSA) is formulating its Five-Year Strategic Roadmap for 2022 to 2026, themed ‘Revitalising Business and Enhancing Sustainability of the Labuan International Business and Financial Centre (Labuan IBFC) as Asia’s Preferred Centre'.

Labuan FSA director-general Nik Mohamed Din Nik Musa said this was in line with the global development trend in embracing financial technology (fintech) and digitalisation.

“One of the strategic thrusts is to intensify the Islamic finance footing in the region, focusing on advancing innovative digital business solutions including incorporating the environmental, social and governance-related or ESG, as well as other Islamic finance agenda,” he said in his welcoming remarks at the IIFM-IILM Virtual Seminar on Global Benchmark Rate Reforms – Challenges and Solutions for Islamic Finance Industry, here today.

He said in 2020, Labuan FSA has issued the framework on digital banking wherein more than 60 digital financial services have been established in Labuan. 

“We have envisioned that the initiatives would further enhance Labuan as the preferred jurisdiction offering a wider range and quality digital-based solutions that are also Shariah-compliant,” he said.

Meanwhile, Nik Mohamed Din said as a mid-shore centre, the Labuan IBFC provides global investors and international businesses with well-regulated and supervised jurisdiction, along with certainty in a currency neutral operating environment. 

“Since the banks in Labuan are predominantly international banks, they are free and allowed to adopt any Risk-Free benchmark Rates (RFRs) that suit their clientele preferences and business propositions as long as they remain adherence to the international standards setting policies,” he said. 

Nonetheless, Nik Mohamed Din said the Inter-Bank Offered Rate (IBOR) transition would potentially impact the Labuan banks and financial institutions in the following ways:

(i) They might need to renegotiate their existing contractual agreement based on the rate used by their counterparts,

(ii) The different in fall back rates are only for short-term solutions and could increase liquidity risks, and 

(iii) Increasing in operational cost, particularly in information technology and back office costs.

He said the global financial markets have agreed to use alternative RFRs as they are more reflective of market conditions.  

Nik Mohamed Din said, in the case of Malaysia, the Shariah Advisory Council (SAC) of Bank Negara Malaysia has ruled that the use of the RFR as an alternative benchmark rate to the IBOR, or as a fallback benchmark replacement rate after the permanent cessation of IBOR, is permissible, based on the following justifications :

(i) The compounding methodology is merely an arithmetic method in determining the term rate which does not affect compliance of the transactions with Shariah requirements; and

(ii) Gharar (uncertainty) from the adoption of average RFR or backward-looking term rate at the point of payment is mitigated via proper determination and disclosure of the ceiling price and formula to derive the periodic payment amount to the customer at the inception of the contract.


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