Muhammad bin Ibrahim: Creating an inclusive, sustainable and
prosperous Labuan
Speech by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the Labuan Industry Annual Dinner 2017, Labuan, 27 October 2017.
* * *
It is a pleasure to speak at this dinner. Last year I spoke on the urgent need for Labuan
International Business and Financial Centre (IBFC) to reinvent itself to stay relevant - in other
words, for us to reinvent ourselves in order to survive in a new world reality.
In my remarks tonight, I will build on last year's theme and touch on three imperatives for change
in Labuan, namely:
1. First, to ensure the local community benefits from economic activity;
2. Second, to transform the economic structure to become one that is more diversified,
resilient and sustainable; and
3. Third, to rationalise and enhance tax incentives consistent with international best practices.
Ensuring the local community reaps the benefits of economic activity
Labuan has come a long way. After two and a half decades, it is now home to close to 14,000
companies, 54 banks, more than 200 insurance related entities, foundations and leasing
companies, respectively.
Nonetheless, the growth of the financial sector should have more spillover benefits to the local
community. Two facts illustrate this:
1. First, gains in income must be more evenly distributed across the local population. The top
1
20% earns more than 5 times the income of the bottom 40% household group . In addition,
we must improve the inequality in Labuan as measured by the Gini Index. It has to improve
to at least the national level. High inequality in income affects growth, productivity and
opportunities for social mobility; and
2. Second, the average unemployment rate at 5.1% in the recent years continues to be above
national average in Malaysia. While this might be cyclical because of the downturn in the
global oil and gas industry, we need a diversification strategy so that over reliance over
certain sectors is avoided.
Further, the workforce participation rate, especially among women, is markedly lower than the
2
national averag . Both reflect a worrying trend where the labour market is not tailored to meet the
needs of the local community.
This state of affairs is disappointing and cannot persist. It reveals that an improvement in the
current economic operating model is warranted. A new model must be designed that can benefit
the local community in a more meaningful manner. Without doubt, it is our collective duty, as an
industry whether as regulators or industry players, to advance the welfare of society through a
more inclusive economic development. The success or failure to achieve this will reflect on us all
as a collective.
In this respect, Bank Negara Malaysia is proud to offer undergraduate scholarships to two
deserving local students. This initiative to provide educational opportunities for deserving talents
is very much needed and it exemplifies how one can contribute in a tangible manner to the local
community. For the offshore industry in Labuan, which has benefitted significantly from Labuan
since its inception, it is time to give back.
There are various ways in which the industry can assist the local population, such as innovative
and creatively designed technical and industrial training that can assist in uplifting the job
prospects of local talents. For example, fit-for-work programmes that leverage on online courses
to complement industry supported training programmes and on-the-job training will improve the
job fit of the workforce. Needless to say, strong commitment by industry captains to grant similar
opportunities, apprenticeship and fit-for-work schemes will surely hasten the upskilling of the
locals. The industry ought to come together to devise a scheme that give opportunities to locals
to get good jobs.
As we move forward, we need to be more focused on the outcomes we want for Labuan. We
want a more balanced growth. A clear step forward is to formulate clear and measurable targets,
and to review them consistently. The primary performance indicators that should be applied must
cover aspects such as; contribution towards Malaysia's and Labuan's GDP, quality of job
creation, training and development for the local population, investment in infrastructure, access
to financing by local SMEs. We must ensure that the benefits we obtain outweigh the incentives
given by the government such as the revenues foregone from the notional tax incentives offered.
The old adage - "You can't manage what you don't measure" - captures the essence of this
idea.
Transforming the economic structure to become one that is more diversified, resilient
and sustainable
Over the past few decades, the finance and oil and gas sectors have been the main economic
contributors to the island's economy, representing more than half (51%) of the economy.
However, the decline of oil prices since 2015 have revealed the vulnerabilities of Labuan's
economy to the volatilities in the external environment. As observed, businesses across the
board declined by at least 40%, with significant repercussions on the livelihood of the local
community. The focus on only these two sectors has unwittingly elevated the concentration risk
on the island's economy and the associated employment.
A deeper assessment on the performance of the financial sector indicates that the intended
outcomes have not fully materialised. Comparing against other international financial centres,
there is still a significant gap in Labuan's achievement from its counterparts. A case in point is
the Mauritius International Financial Centre, which was established around the same time as the
IBFC in the 1990s. Based on available data, the contribution to GDP of the Mauritius financial
sector was 10.4% with an employment and tax revenue share of 4.5% and 6.5%, respectively.
Other financial centres which entered the foray much later, such as Shanghai, have moved even
3
further ahead in terms of tax revenue generated, as well as job creation. The 2017 Global
th rd
Financial Centres Index ranks Shanghai at 13 with Mauritius at the 73 position, while Labuan
is currently not even ranked in the Index. What this alludes to is that continuous reinvention of
financial offerings by our market players is necessary for the IBFC to build a niche and gain
international prominence.
Empirical evidence suggests long-term economic resilience can only be secured by adopting a
broad-based economic development strategy. In other words, Labuan needs to horizontally
diversify its economic base beyond financial services and oil and gas. Financial services might
be a driver, but it will not be the main one. Unquestionably, the way forward requires a refined
model that also gives equal weight, if not more, to inclusive and sustainable development of the
economy.
Another imperative for long term development is the issue of infrastructure. As with any other
island economy, Labuan's growth prospects are very much influenced by the availability of hard
and soft infrastructure which are critical enablers for better connectivity and livability. Connectivity
is also an important imperative. Frequency of flights to Labuan would attract talent and visitors to
the island. Labuan can also be positioned as the 'halfway point' between tourism in Sabah and
Sarawak. Travelling time can be potentially reduced with the Pan Borneo Highway and physical
connection between the island to mainland Sabah.
All in all, the effort to transform the economy through identifying new areas of economic potential
and fulfilling infrastructure needs is a difficult but not insurmountable task. We may refer to the
story of our country's development for inspiration. Within six decades, our economy moved from
being a commodity-dependent nation to one that is successfully transformed. We subsequently
elevated ourselves to where we are today, an economy that is open, diversified and competitive.
This is only possible because of continuous investments in infrastructure over many decades.
Rationalising tax incentives to be in line with international practices
On the global regulatory front, as we had witnessed, the unfolding of the global financial crisis
revealed the significant vulnerability of international financial markets to market dislocations. Calls
for greater regulatory harmonisation and the adoption of international best practices have
gathered speed, blurring the distinction between onshore and offshore regulatory requirements.
Offshore financial centres which remain mired in the old model and thinking are set to become
part of a sunset industry.
There have also been significant advancements with respect to international taxation practices.
Authorities are now more proactive in seeking to mitigate the distortionary effects of harmful tax
competition on the allocation of resources and its negative implications on national tax bases.
Malaysia, until early this year, has been an observer of the OECD's Inclusive Framework on
Base Erosion Profit Shifting (BEPS). Since January 2017, we have agreed to become a
participating member in the Inclusive Framework.
This will allow Malaysia to participate in the BEPS related work on equal footing with other OECD
and G20 countries. We will also be able to provide direct inputs to shape the content of the BEPS
related standards.
In addition to that, work has commenced on reviewing respective jurisdictions' preferential tax
4
regimes against the standards outlined, to combat harmful tax practices. The standar , which
forms one of the four BEPS minimum standards, will require authorities to step up on
transparency and substance rules for geographically-mobile activities, such as financial
services. It seeks, for one, to prohibit the shifting away of income into preferential tax regimes
where businesses have little or no economic activity. Such international developments will
directly influence IBFC's business model going forward.
The world that we live in, since the creation of offshore Labuan in the 1990s, has drastically
changed. What was relevant then is no more relevant now. We have no choice but to change
with it. It is an opportune time for us to review of the current tax framework for Labuan.
The purpose of this review is not only to ensure alignment with international best practices, but to
confirm the continued relevance of such incentives in catalysing new growth areas. Tax
incentives for businesses which have become irrelevant should be rationalised. The allocation of
any preferential tax treatment must be supported by clear value propositions that are
systematically measured across the qualifying period.
Businesses that enjoy tax incentives will be benchmarked against the performance indicators
that quantify economics and financial benefits. This is not meant to be onerous. It is a necessary
tool to ensure that the economy grows in an inclusive and sustainable way and the public policies
implemented bear the intended benefits. Specific to financial industry players, such preferential
treatment must be coupled with clear business strategy that integrates the desired expected
outcomes of contributing positively to the national and the local economy.
The intended outcome of the revised tax structure would enhance the economy of Labuan with
balanced development. The revised tax regime should also improve regulation, compliance and
prevent tax leakages.
There will be greater and closer cooperation between the authorities to address any regulatory
arbitrage. The enhancement is also consistent with our continued commitment in advocating
strong transparency and promoting greater fiscal sustainability. The review of tax incentives is
also to preserve the IBFC's reputation and competitiveness.
Conclusion
The outcome that we seek is for an inclusive, sustainable and prosperous Labuan. All must
benefit from the financial activities in Labuan. How we will get there is by design, by determination
and the courage to institute reform. Leonardo da Vinci once said "Knowing is not enough; we
must apply. Being willing is not enough, we must do".
It is not an option for us to remain where we are. We must embrace the new reality, change
course and design a new strategy for our industry. Or else we will perish. We are in this as a
community.
As I said last year, we need to swim, or we will sink, together.
Thank you.
1
RM15,328 vs RM3,654
2
Lower participation rate in Labuan (66.5%) vs national (67.7%). Among women this is even more stark (47.8%
in Labuan vs 54.3% at the national level).
3
Shanghai financial centre was incepted in 2009. Latest available data shows that the share of employment and
tax revenue collected was 5% and 9.6%, respectively.
4
Refers to the BEPS Action 5 - Countering Harmful Tax Practices More Effectively, Taking Into Account
Transparency and Substance