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The banking system consists of Bank Negara Malaysia (Central Bank of Malaysia), banking institutions (commercial banks, finance companies, merchant banks and Islamic banks) and a miscellaneous group (discount houses and representative offices of foreign banks). The banking system is the largest component of the financial system, accounting for about 67% of the total assets of the economic climate.
Lender Negara Malaysia (BNM)
Standard bank Negara Malaysia (the Central Lender of Malaysia) was established on 26 January 1959, under the Central Standard bank of Malaya Ordinance 1958. The objectives of BNM are as follows:
To issue currency and keep reserves to safeguard the value of the currency;
To act as a banker and financial adviser to the Government;
To promote monetary stability and a sound financial structure; and
To influence the credit situation to the advantage of Malaysia.
The objectives of BNM, in essence, encapsulate the importance of promoting economic growth with price stability and maintaining monetary and financial stability. The introduction of the Banking and Financial Institutions Act 1989 (BAFIA) on 1 October 1989 extended BNM’s powers for the supervision and regulation of financial institutions and deposit-taking institutions who are also engaged in the provision of finance and credit.
Commercial Banks
The commercial banks are the largest and most significant providers of funds in the bank operating system. The main functions of commercial banks are to provide:
Retail banking services such as the acceptance of deposit, granting of loans and advances, and financial guarantees;
Trade financing facilities such as letters of credit, discounting of trade bills, shipping warranties, trust receipts and Banker’s Acceptances;
Treasury services;
Cross border payment services; and
Custody services such as safe deposits and share custody.
Commercial banks are also authorized to deal in foreign exchange and will be the only finance institutions allowed to provide current account facilities.
Offshore banks
Offshore banking can only be carried on in Labuan by an offshore company or a foreign offshore company incorporated or registered for that sole and exclusive purpose, and by an office, branch or subsidiary of a licensed Malaysian bank. To apply for an offshore banking license, an application needs to be made to the Labuan Offshore Financial Services Authority (LOFSA) providing a guarantee and minimum capital funds of RM10 million. An annual fee of RM60,000 is payable to the Central Loan company no later than 15 January. Accounts have to be audited and filed with the Central Loan provider annually. However, secrecy of the financial statements and transactions of its customers is assured.
The outlook for offshore banks operating in Labuan will remain positive for 2005 and 2006, in view of the strong performance in 2004. The bank industry was part of the diverse products and services provided by the Malaysian Labuan Integrated Offshore Financial Centre (IOFC). The just offshore banking industry recorded a significant increase in unaudited pre-tax profit amounting to US$272.9 million in 2004 from US$166.8 million in 2003.
The higher profit was due to lower loan provisioning (specific provision and general provision by 34.3 percent to US$317.4 million in 2004 (2003:US$483.2 million), attributed mainly to high recoveries. The total number of offshore banks, including investment banking institutions, was 57 compared with 56 in 2003. The number of just offshore investment banks in the IOFC increased to 11 (2003 : nine) with the issuance of two new licences in 2004.
Islamic assets (including those of conventional offshore banks that offer Islamic financial windows) increased by 13.8 percent to US$678.7 million (2003:US$596.2 million).
Total debris continued to record an upward trend, increasing by 54.4 percent or US$107.2 million to US$304.1 million in 2004. Total financing facilities outstanding increased from US$338.4 million in 2003 to US$409.4 million in 2004 of which, 71.4 percent was extended to non-residents.
Islamic Banking
Labuan is presently attracting additional Islamic banking ventures to its jurisdiction.
There’s no doubt that Islamic banking is a very large question mark to Westerners and non-Muslims. It’s a new financial system that barely existed until recently, but is now picking up momentum. The budding industry has arisen from the financial constraints imposed upon those who are devout followers of Islam.
The Islamic religion prohibits interest payments. A prohibition against interest payments is effectively a prohibition against a predetermined claim on a productive surplus. Therefore traditional Western commercial bank is not accessible to those Muslims who wish to rigidly adhere to the ideals of their faith. Since interest of any kind is forbidden (and this holds true regardless of interest rates, or the purpose of the interest-bearing loan), Islamic businessmen have discovered a clever way around the ban.
Islam allows the owners of capital to share in a surplus as long as the surplus is uncertain. So Islamic banking institutions instead invest their money in trade and industry and talk about the profits with their depositors. Only the ratio of the profit-sharing is known in advance, not the rate of return itself. Therefore this is permitted under Islamic law. The result of this strategy is that Islamic banking institutions are equivalent to investment financial institutions rather than commercial banks and can be best understood on this basis.
These banks typically offer three broad categories of account: current, savings, and investment accounts. A current account gives no return to the depositor, since it is nothing more than a safekeeping arrangement between the depositors and the bank. Depositors may withdraw their money at any time, and the lender may use the depositors’ money.
A savings account is operated similarly, but the bank may pay the depositors a variable come back periodically, depending on its own profitability. Since this type of payment is not a condition for lending by the depositors to the bank, nor is it predetermined, it is considered lawful under Islamic rules. An investment account is a term deposit. It cannot be withdrawn before maturity. The profit-sharing percentage varies between banking institutions and is subject to supply and demand conditions enforced by marketplace. Islamic term deposits have typically produced real-world returns comparable to the rates offered by Western commercial banks.
Because of its investment orientation, Islamic banking is concerned about the viability of projects and their profitability, but not the size of their collateral. Good projects which could potentially be cut off from standard bank funding for insufficient security could be financed by Islamic banking institutions on a profit-sharing basis.
Therefore Islamic banks can function on the micro- or macro-investment basis, giving them the flexibility to catalyze numerous new businesses and stimulate financial development. Therefore, Labuan is making a strong bid to attract as much Islamic bank as possible. This new and growing industry has vast potential, since the majority of investors from Islamic countries still place their money in regular financial centers due to a lack of alternatives.
Offshore banks registered in Labuan:
AL-HIDAYAH INVESTMENT BANK (LABUAN) LTD
AMINTERNATIONAL (L) LTD.
AMMERCHANT Lender BERHAD
Standard bank ISLAM MALAYSIA BERHAD, LABUAN OFFSHORE BRANCH
Loan company MUAMALAT MALAYSIA BERHAD, LABUAN OFFSHORE BRANCH
Loan provider OF AMERICA NATIONAL ASSOCIATION, LABUAN BRANCH
BARCLAYS Bank or investment company PLC LABUAN BRANCH
BAYERISCHE LANDESBANK, LABUAN BRANCH
BNP PARIBAS LABUAN BRANCH
BUMIPUTRA-COMMERCE BANK (L) LIMITED
CALYON, LABUAN BRANCH
CAPITAL INVESTMENT Lender (LABUAN) LIMITED
CATHAY UNITED BANK
CIMB (L) LIMITED
CITIBANK MALAYSIA (L) LIMITED.
CITY CREDIT INVESTMENT Standard bank LIMITED
COMMERCIAL IBT LABUAN BRANCH
COMMERZBANK A.G., LABUAN BRANCH
CREDIT SUISSE FIRST BOSTON, LABUAN BRANCH
DANAHARTA MANAGERS (L) LIMITED
DBS BANK LIMITED, LABUAN BRANCH
DEUTSCHE Loan company AG, LABUAN BRANCH
DRESDNER Loan provider AG LABUAN BRANCH
ECM LIBRA INVESTMENT Bank or investment company LIMITED
ING BANK N.V. LABUAN BRANCH
J.P. MORGAN MALAYSIA LTD.
J.P. MORGAN CHASE BANK N.A.
KBC Lender N.V. LABUAN BRANCH
LLOYDS TSB Standard bank PLC
MIZUHO CORPORATE Loan company, LTD., LABUAN BRANCH
MACQUARIE BANK Small, LABUAN BRANCH
MAYBANK INTERNATIONAL (L) LTD.
MORGAN STANLEY LABUAN INVESTMENT Loan provider LIMITED
NATEXIS BANQUES POPULAIRES, LABUAN BRANCH
NATIONAL AUSTRALIA Bank or investment company LABUAN BRANCH
OSK INVESTMENT BANK (LABUAN) LIMITED
OVERSEA-CHINESE BANKING CORPORATION LIMITED LABUAN BRANCH
PUBLIC Lender (L) LTD.
RABOBANK NEDERLAND LABUAN BRANCH
RHB Standard bank (L) LTD.
ROYAL Loan company OF SCOTLAND NV (LABUAN BRANCH)
RUSD INVESTMENT Loan provider INC.
SCHRODERS MALAYSIA (L) BERHAD
SOCIETE GENERALE, LABUAN BRANCH
STANDARD CHARTERED Bank or investment company OFFSHORE LABUAN BRANCH
SUMITOMO MITSUI Bank CORPORATION
THE BANK OF EAST ASIA, LTD, LABUAN OFFSHORE BRANCH
THE LENDER OF NOVA SCOTIA LABUAN BRANCH
THE BANK OF TOKYO-MITSUBISHI, LTD., LABUAN BRANCH
THE HONGKONG & SHANGHAI BANKING CORPORATION LIMITED OFFSHORE Bank UNIT
THE ROYAL BANK OF SCOTLAND PLC
UBS AG LABUAN BRANCH
UFJ BANK Small, LABUAN BRANCH
UNITED OVERSEAS BANK
