Innovative Solutions in Islamic Wealth Management. 20 April 2016, Jakarta

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1 Innovative Solutions in Islamic Wealth Management 20 April 2016, Jakarta

3 WELCOME REMARKS Danial Mah Abdullah Deputy Director General, Labuan Financial Service Authority

4 INNOVATIVE SOLUTIONS IN ISLAMIC WEALTH MANAGEMENT by Aderi Adnan, Business Development Director ASEAN ROADSHOW 2016 JAKARTA 20 April 2016 Grand Hyatt Hotel, Jakarta

5 5 Where is Labuan? Off the coast of Sabah, East Malaysia Federal Territory About 100,000 population Common time zone with major cities Where business meets leisure

6 6 What is Labuan IBFC? International business and financial centre. A tax-efficient jurisdiction to facilitate business, trading, investments and etc, through financial services and legal structures. Well-balanced legal and regulatory framework. Our Vision To be Asia Pacific s leading midshore international business and financial centre Striking an ideal balance between client confidentiality and international best standards

7 7 Connecting Asia s Economies 70% of Labuan Companies are Asian-based (as at 2015)

25 Years and Growing 1990 1996 2000 2008 2009 Declared an international financial centre Official formation of the regulator, Labuan Financial Services Authority Formation of the Shariah Advisory

International Waqf Foundation First Japanese corporate sukuk OECD white list Co-location introduced Legislation revamp Home to ASEAN Infrastructure Fund managed by ADB GIFT Programme introduced

8 25 Years and Growing Declared an international financial centre Official formation of the regulator, Labuan Financial Services Authority Formation of the Shariah Advisory Council Renamed IBFC Blanket approval for Labuan companies to deal with residents Insurance gross premiums exceed USD1bil First global US dollar sukuk Labuan International Waqf Foundation First Japanese corporate sukuk OECD white list Co-location introduced Legislation revamp Home to ASEAN Infrastructure Fund managed by ADB GIFT Programme introduced Accepted by the Stock Exchange of Hong Kong Limited Listing committee Passed Phase I Peer Review of OECD Global Forum 10,000 companies Commercial disputes settlement by arbitration possible 130 foundations Over 200 trusts Captive takaful 8

Internationally Recognised Group of International Finance Centre Supervisors (GIFCS) Member since 1999 International Organisation of Securities

Insurance Supervisors (IAIS) Member since 1998 Islamic Financial Services Board (IFSB) Member since 1998 International Islamic Financial Market

9 Internationally Recognised Group of International Finance Centre Supervisors (GIFCS) Member since 1999 International Organisation of Securities Commissions (IOSCO) Member since 2003 Group of International Insurance Centre Supervisors (GIICS) Member since 1999 International Association of Insurance Supervisors (IAIS) Member since 1998 Islamic Financial Services Board (IFSB) Member since 1998 International Islamic Financial Market (IIFM) Member since 2002 Asia/Pacific Group on Money Laundering (APG) Member since 2000 Labuan IBFC adheres to OECD s International Standards and Best Practices 9

10 10 Comprehensive Legislation Labuan Financial Services and Securities Act 2010 Labuan Business Activity Tax Act 1990 Labuan Islamic Financial Services and Securities Act 2010 Labuan Financial Services Authority Act 1996 Labuan Foundations Act 2010 Labuan Trusts Act 1996 Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 Labuan Companies Act 1990

11 Labuan IBFC s Islamic Infrastructure Removed Points of Friction - Tax, Stamp Duty Labuan Islamic Financial Services & Securities Act Double Tax Treaties - More than 70 nations Shariah Supervisory

11 11 Labuan IBFC s Islamic Infrastructure Removed Points of Friction - Tax, Stamp Duty Labuan Islamic Financial Services & Securities Act Double Tax Treaties - More than 70 nations Shariah Supervisory Council One-Stop Regulator Labuan s Islamic Eco System Talent Pool Clear Laws & Arbitration Process Founding Membership of IFSB, IIFM Islamic Banks & Financial Institutions Service Providers - Lawyers - Accountants - Trust co.

efficiency via yearly election Tax certainty via statutory perpetuity Irrevocable election provided Non-Labuan Business

12 12 Unique: One Country, Two Tax Systems Labuan Business Activity Trading income taxed under Labuan Business Activity Tax Act 1990 Non-trading income, not taxable Investment income, not taxable 3% per annum or maximum of RM20,000 per annum Tax efficiency via yearly election Tax certainty via statutory perpetuity Irrevocable election provided Non-Labuan Business Activity Income taxed under Income Tax Act 1967 Tax rate at 25%* on Malaysian source income Applicable for all domestic trade (* YA 2015)

13 13 An Ecosystem of Solutions Services Banking Insurance risk management Corporate secretarial Legal Administrative activities Trusteeship Accounting Structures Holding company Trading company Protected cell companies Company limited by shares and guarantee Limited partnership Limited liability partnership Trusts Foundations Available in conventional and Shariah-compliant forms Marketing offices may be located in Kuala Lumpur or Iskandar Malaysia (north of Singapore)

14 Snapshot of Activities Companies (11,630) Banking (57) Insurance (209) Leasing (359) Trust Cos. (39) Investment Holding Trading Labuan Limited Partnerships & Limited Liability Partnerships Protected Cell Companies Wholesale Banking Investment Banking Loans/Deposit Guarantees Treasury Operations Wealth Management Trusts (more than 200) Foundations (130) Public Funds Private Funds Life/General Broking Underwriting Captives Re-Insurance Aviation Shipping Commodity Trading LITC under GIFT Programme (39) Heavy machinery Trustee Company Administration Services Corporate Secretarial Services Back Office Services Source: Statistics from Labuan FSA s Annual Report

15 15 Why Labuan IBFC? Business Purpose In the centre of Asia Member of ASEAN Established trade and investment location Developed legal infrastructure and support services Tax efficiency and flexibility Over 70 double taxation agreements Malaysia/Labuan: 18 th in the world for ease of doing business Substance Cost efficient Operational and commercial substance (adheres to international standards in regulation and exchange of information) Local expertise No minimum or maximum substance requirements, thus flexible to fit business needs Provision for co-located office in onshore Malaysia English-speaking talent

16 Innovative Solutions for Islamic Wealth Management 16

17 17 The Elements of Islamic Wealth Management Acquiring & Growing Wealth Distributing Wealth & Creating Legacy THE ELEMENTS OF ISLAMIC WEALTH MANAGEMENT Managing Risk & Preserving Wealth Economic & Society Development

18 18 The Philosophy of Wealth Management in Islam (i) Amana and Trust from God That wealth is an amana and trust from Allah, and hence must be acquired and spent as per His commands. (ii) Not to be Greedy That a Muslim should not be greedy in seeking wealth as he will be held responsible for any transgression or breach of the limits. Rather, he should be content with his share in the provisions of Allah and should make concerted efforts to discharge his responsibilities with regards to the same. (iii) Quality and Purity matter more than Quantity That quality and purity of wealth matter more than its quantity. With baraka (blessing from Allah), meager resources may enable one to achieve, due to piety in acquisition and spending of those funds, such great excellence and huge rewards that may not have been possible for him with huge resources that are not blessed in the eyes of Allah.

19 (i) Acquiring and Growing Wealth 19

20 20 Non Gharar (Uncertainty) Non Maysir (Speculation) Non Riba (Interest) Non Debt Perimeters for Shariah-Compliant Wealth Acquisition Trading is lawful, provided the minimum Shariah-compliant requirements such as the consent of the parties, their knowledge of the counter values, their capability to deliver the same, and payment of both or at least one of the counter values on the spot is ensured. Shariah prohibits excessive levels of uncertainty which convert a transaction into an act of speculation and gambling instead of a genuine financial transaction; such as when both the counter values are deferred or when someone sells an asset that he does not own. Shariah prohibits riba, which is primarily the interest paid against loans in lieu of the time for deferred payment. This is the cornerstone of Shariah teachings to stop exploitation and profiting without taking the relevant risk. Shariah principle specified that extending a loan to a person in need is an act of charity, which should be done at no cost to the borrower. Therefore, any premium charged on a loan is prohibited as it is a form of riba.

21 21 Shariah- Compliant Perimeters for Shariah-Compliant Wealth Acquisition (cont d) All financial contracts which do not fulfill one or more of the essential terms and conditions for Shariah compliance, or stipulate any terms that are in conflict with the nature of those contracts, have been declared void. Shariah also emphasises that these contracts should be balanced in terms of stipulating the rights and obligations of the contracting parties. Fairness Islam emphasises the right of people to equal opportunity and a level playing field when it comes to economic activities. Encourage Direct Transaction Islam encourages direct transactions between the producers and the consumers in a bid to ensure provision of the basic needs at affordable prices. That is why it has prohibited the intervention of intermediaries who do not add any value; rather they inflate the prices which have to be paid eventually either by the consumers or skimmed from the margins of the producers.

22 22 Shariah-Compliant Investment Funds Advantages: The Labuan Shariah-Compliant Investment Fund ( LSCIF ) and Labuan Holding Company can enjoy minimum tax under LBATA No withholding tax on distributions from LSCIF to Investors No withholding tax on dividends/ interest/ royalty payments from Labuan holding company to LSCIF Liberal exchange control environment in Labuan No restriction on 100% foreign ownership No stamp duties on instruments executed by Labuan holding company Access to benefits under Malaysia s DTAs Dividend distribution tax exempt in Labuan Investment income is tax exempt in Labuan Investors Labuan Shariah-Compliant Investment Fund Invest Labuan Holding Company Investments Distribution (no withholding tax) Dividend (no withholding tax) Dividend proceeds

23 (ii) Wealth Preservation 23

24 24 Trust vs Foundation Similarities Differences Both can be created in perpetuity. There are no capital requirements for both Trusts and Foundations. A Foundation is a registered legal entity (contractual relationship) but a Trust is not a legal entity (fiduciary relationship). Trusts are created in common law origins whereas Foundations in civil law countries. Both have beneficiaries. Similar to a Trust which has a trustee, a Foundation has a council and officers. Trustees have unlimited liability in respect of activities of the trust but Foundation s administrators/founder are not personally liable. Both state the objectives/purposes; a Trust in the form of a trust deed and a Foundation is governed by its Charter and Articles. A Trust has a Settlor who may have reserved powers and a Foundation has a Founder who has reserved rights over management. Registration of a Trust is optional but a Foundation is mandatory. Interest of the beneficiaries of a Trust is paramount but the founder carries more weight in a Foundation.

25 25 Labuan Islamic Trusts and Foundations for Wealth Preservation Opportunity to Offer Comprehensive Asset Protection Tools Labuan Islamic Trusts/Foundations Investment Trust/Foundation Waqf Purpose Trust Special Trust Beneficiaries Beneficiaries Beneficiaries Beneficiaries

26 26 Labuan Islamic Trusts and Foundations - Ability to Serve Multi-Location Families Labuan Islamic Trust Labuan Islamic Foundation Beneficiaries Beneficiaries Beneficiaries in Common Law locations Labuan Islamic Foundation Labuan Islamic Trust Beneficiaries in Civil Law locations Beneficiaries in Civil Law locations Beneficiaries in Common Law locations

Labuan Islamic Trusts and Foundations A Tax Efficient Vehicle Beneficiaries 0% 0% Tax neutrality Labuan Islamic Trust/ Foundations 0% 0% Labuan Holding Co Tax Savings Treaty

27 Labuan Islamic Trusts and Foundations A Tax Efficient Vehicle Beneficiaries 0% 0% Tax neutrality Labuan Islamic Trust/ Foundations 0% 0% Labuan Holding Co Tax Savings Treaty Benefits may include: Reduced WHT rates Capital gains tax exemption Foreign Investments Subject to Foreign Tax with treaty benefits where appropriate Dividends & WHT at treaty rates 27

28 28 Labuan Islamic Foundation Guidelines Established under Section 107 of the LIFSSA and all the provisions of the LFA shall apply to the Labuan Islamic foundation unless specifically provided. The object, purpose and activity of the Labuan Islamic foundation must be in compliance with Shariah principles. The officer of a Labuan Islamic foundation is required to appoint or consult a Shariah adviser to advise on matters relating to the operations of the Islamic foundation to ensure its compliance with Shariah principles. Governing The Labuan Legislation Islamic foundation must have a clearly executed legal transfer of ownership of the Labuan property(ies) Foundations from Act the 2010 founder to the foundation. Labuan Financial Services and Securities Act 2010 The endowment of property(ies) into the Labuan Islamic foundation can be done through hibah or Labuan Islamic Financial Services and Securities Act 2010 hadiah. Related Guidelines and Directives Guidelines on the Establishment of Labuan Foundation Including Islamic Foundation Guidelines on the Establishment of Labuan International Waqf Foundation

29 29 Shariah Resolution on Labuan Islamic Foundations (a) The endowment of assets by a founder into a LIF may be facilitated by way of hibah or hadiah. This endowment must be done during the founder s lifetime. (b) Where the endowment of the assets into the LIF satisfies the following conditions, Faraidh, upon the demise of the founder, is not applicable and relevant on the endowed assets in the LIF. (i) The endowment has been made immediately and irrevocably; (ii) The endowment has been made without any reserve power of the founder; (iii) The transfer of the ownership of the assets is absolute; and (iv) The transfer has been accepted by the LIF. (c) Paragraph (b) would still be applicable where the founder manages the assets and receives remuneration for such management in the LIF. (d) Where the founder is one of the beneficiaries in the LIF, Faraidh would be applicable and relevant on the portion of the assets that the founder is entitled to.

30 (iii) Distributing Wealth & Creating Legacy 30

31 31 Incorporating Waqf using Internationally Recognised Foundation Laws Waqf can be incorporated under the foundation structure Waqf has a legal personality similar to a foundation. Distinct advantages of incorporating Waqf using foundation laws Gives the founder (Waqif) a structure with legal certainty for the proper control and management of his Waqf in accordance with his wishes following Shariah principles on Waqf. Allows the Waqif the flexibility and exclusive control over how to structure and wisely manage his Waqf foundation, distribute its benefits and preserve the assets for a long term period. Labuan IBFC is the first international business and financial centre to create a Waqf using its foundation act.

32 32 Dealing with Waqf Assets IRREVOCABLE: This means that a Waqf is irrevocable once a founder declares his property as Waqf, and the heirs cannot change the status. PERPETUAL: Once the Waqf is created, it must be perpetual in order to ensure regular and continual support towards its beneficiaries and the society at large. INALIENABILITY of Waqf once it is created. No one can ever become the owner to alienate it and that Waqf property is thus in nature, like a frozen asset. It cannot be the subject of any sale, disposition, mortgage, gift, inheritance, or any alienation whatsoever.

33 33 Labuan International Waqf Foundation ( LIWF ) Hold and manage Waqf assets for identified beneficiaries based on Shariah principles on Waqf. Can be established for private Islamic wealth management, charitable purposes and to promote greater financial inclusion. Established under Section 107 of Labuan Islamic Financial Services and Securities Act All provisions of Labuan Foundations Act 2010 shall apply to LIWF unless otherwise provided. Endowment of property executed by way of Waqf. Waqf foundation act as Trustee (Nazir/Mutawalli) for jurisdictions with no Shariah governance. Waqf foundation shall have clearly executed legal transfer of ownership of property from founder to Waqf foundation. Duration can be perpetual or time-bound. Aims, operations and management of LIWF shall be in compliance with Shariah principles including the Shariah principles on Waqf.

34 LIWF can be Established for Different Waqf Models Waqf income

Self dedicated Waqf (Waqf Ala Nafs) Charitable Waqf (Waqf Khayri)

family members and charitable purpose Joint Waqf (Waqf Mushtarak )

to a charitable purpose when none of family members exist

34 34 LIWF can be Established for Different Waqf Models Waqf income retained by founder and goes to charitable purpose after his death Self dedicated Waqf (Waqf Ala Nafs) Charitable Waqf (Waqf Khayri) Waqf income for charitable purpose Waqf income shared between family members and charitable purpose Joint Waqf (Waqf Mushtarak ) Family Waqf (Waqf Ahli) Waqf income reserved for family and goes to a charitable purpose when none of family members exist Recipient of charitable purpose defined by founder and endorsed by Shariah Adviser

35 35 LIWF Structure LABUAN INTERNATIONAL WAQF FOUNDATION Governed by Shariah principles on Waqf Founder (Waqif) Endow assets through Waqf LIWF (acts as Trustee/ Nazir/Mutawalli) 1. Charter (Waqfiyyah) 2. Shariah Adviser 3. Supervisory person 4. Council 5. Officer 6. Secretary Distribution of income/ usufruct Beneficiaries Governance and management of Waqf foundation and assets 35

36 Waqf Models via LIWF Direct Cash Waqf Model Indirect Cash Waqf Model Waqf Mutual Fund Model Waqf Investment Deposit Model Waqf Captive Takaful Model Waqf Micro Finance Foundation Model 36

37 37 Direct Cash Waqf Model 1. Waqif/Founder 2. Mutawali/ Trustee 3. Beneficiaries Individuals Organisations Cash-Waqf endowment to LIWF Labuan International Waqf Foundation ( LIWF ) $$ $$ Distribute Waqf proceeds to Waqf beneficiaries (after deducting operating expenses in LIWF) Waqf Beneficiaries Institutions

38 38 Indirect Cash Waqf Model 1. Waqif/Founder 2. Mutawali/ Trustee 3. Beneficiaries Individuals Organisations Institutions Cash-Waqf endowment to LIWF $$ Labuan International Waqf Foundation ( LIWF ) $$ $$ 10% to defray operating expenses in LIWF 20% addition to LIWF s capital as a Self Finance Devise Invest Shariah-compliant investments Investment return $$ 70% distribution to Waqf beneficiaries Waqf Beneficiaries

39 39 Waqf Mutual Fund Model Investors (Waqif) 70% Distribution to Investors $$ Invest $$ Labuan Islamic Private Investment Fund/Asset Management Invest $$ $$ Investment Return Shariah-compliant Investments $$ 30% Distribution to Waqf Foundation Labuan International Waqf Foundation $$ Waqf Beneficiaries

40 40 Waqf Investment Deposit Model Depositors (Waqif) $$ LABUAN ISLAMIC BANK (Collect and Invest) 70% Distribution to Depositors $$ $$ $$ 30% Distribution to Waqf Foundation Cash Waqf Account (via Labuan International Waqf Foundation) $$ Waqf Beneficiaries

41 41 Waqf - Micro Finance Foundation Model CSR $$ IB Branch 1 Invest $$ Shariah-Compliant Investments ISLAMIC BANK (IB) (Nazir) CSR $$ Cash Waqf (via Labuan International Waqf Foundation) $$ Investment Return to LIWF CSR $$ IB Branch n $$ Financing Micro Finance Projects (after deducting operating expenses in LIWF) Beneficiaries for Micro Finance Projects (Qard Hassan)

42 42 Waqf Captive Takaful Model Parent Company $$ Operating Companies Takaful contributions Takaful cover Labuan Captive Takaful 70% Dividend distribution to Investors $$ 30% Dividend distribution to Waqf Foundation Cash Waqf Account (via Labuan International Waqf Foundation) $$ Waqf Beneficiaries

43 Labuan IBFC 43

44 44 For Enquiries Aderi Adnan

45 Panel Discussion Opportunity and Challenges: Islamic Wealth Management in Asia Moderator Aderi Adnan, Director, Business Development, Labuan IBFC Inc. Panelists Dr Aida Othman, Director, ZICOlaw Shariah Advisory Services Maikel Sajangbati, CEO & Founder, MaeSa Consulting Indonesia Shahizan Md. Noh, Senior Consultant & Subject Matter Expert (SME) in Islamic Wealth Management, IBFIM

Thank You This presentation should not be regarded as offering a

46 Thank You This presentation should not be regarded as offering a complete explanation of the matters referred to and is subject to changes in law. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Labuan IBFC cannot accept any responsibility for loss occasional to any person acting or refraining from action as a result of any material in this presentation.

LABUAN INTERNATIONAL BUSINESS AND FINANCIAL CENTRE

LABUAN INTERNATIONAL BUSINESS AND FINANCIAL CENTRE Labuan IBFC s Shariah-Compliant Products & Solutions 8 th May 2018 Aderi Adnan Director, Business Development, Labuan IBFC Inc. Where is Labuan? Off the