UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance




An Example For the World

In November 1989, the Malaysian government announced that the Federal Territory of Labuan would be given the status of an International Offshore Financial Center.  (IOFC)  Consequently, Labuan Offshore Financial Service Authority (LOFSA) was established on February 15, 1996 under the Labuan Offshore Financial Services Authority Act 1996.  LOFSA initiated its operations in March of 1996 and is the single regulatory authority of the financial services sector  in Labuan.

Labuan Offers the following non-exhaustive List of Services:

Islamic Financing

Islamic Insurance (Takaful)

Islamic Reinsurance (re-Takaful)

Islamic Trust

Islamic Investment Funds

Islamic Capital Market Instruments

Islamic Code of Conduct

The Islamic Code of Conduct is based on Shari’ah principles and is the origin and basis of Islamic banking/insurance and finance principles with a strong emphasis on Muamalat (social, financial, and economic affairs of personal relationships).  Under this principle, legislation should not contradict pre-ordained divine laws to meet the needs of society, lawmakers, or special privileged segments of business.  The Sharia’h Advisory Council (SAC) advises LOFSA on this subject.  Now, due to  innovative foresight and the creation of a solid legal framework through which to conduct business, Labuan is now at the forefront of Islamic Product Development and Islamic offshore as envisioned at the time of its inception.

Offshore Banking

Application for Offshore Banking License:

See S. 5(1)(2) of the Offshore Banking Act. (OBA)

  1. The minimum capital requirement is ten million Ringitt (S.11 of the OBA);
  2. Annual License Fee:  60,000 Ringitt (S.2 of the OBA).

Offshore banking has been defined in S. 2 of the OBA as ‘the business of receiving deposits on current account, deposit account, savings account, or any other account as may be specified by Bank Negara Malaysia, and the provision of credit facilities, in any currency other than Malaysian currency.  Accordingly, any person who accepts deposits and grants credit facilities in foreign currencies would be considered to be carrying on offshore banking business and would require a license to operate in Labuan.’

In Labuan,  it is possible for traditional offshore banks to offer Islamic products to customers with the assistance of management companies providing Sharia’h consultancy and advisory services in Islamic offshore instruments.  In fact,  the OBA was amended to allow merchant banks and Islamic banks to operate side-by-side in Labuan in 1997 as part of its’ strategy for growth.

Although Offshore Banks must follow duties as set out in the OBA, Labuan does provide banking secrecy and the expected amenities and advantages of an international offshore financial center.

Offshore Companies

In Labuan, offshore companies are incorporated under the Offshore Companies Act 1990 (OCA) under three categories:  (1) Banking Offshore Companies; (2) Insurance Offshore Companies; and (3) General Trading Offshore Companies.

For incorporation, three main documents need to be submitted:  (1) A copy of the Memorandum and Articles of the Proposed Offshore Company; (2) a Statutory Declaration by a Resident Director or Secretary; (3)  A Consent to Act as Director by every person named as a proposed director.

Trust Companies

Trust Companies can be formed under the Labuan Trust Companies Act 1990 (LTCA).  S.4(2) of the LTCA provides the following criteria for registration as a Trust Company:

  1. ‘Its authorized capital must be more than 500,000 Ringitt divided into shares of more than ten Ringitt each;
  2. At least half the amount of the nominal value of each share must remain unpaid and not liable to be called up except in the event of winding-up;
  3. It has a paid up capital of at least 150,000.00 Ringitt;
  4. It has deposited with the Accountant General Securities approved by the registrar to the value of 100,000.00 Ringitt;
  5. It is able to meet its obligations without taking into account the securities deposited with the Accountant General not taking into account its liability to its shareholders; and
  6. It has its head office or registered office in Labuan.  If its head office or registered office is not in Labuan, it must designate and notify the registrar in writing of: (a) its office in Labuan and (b) two of its officers as authorized agents of the trust company in Labuan.’

In addition, The Labuan Offshore Trusts Act (LOTA) 1996 provides for the creation and recognition of offshore trusts.

Offshore Limited Partnerships

The Labuan Offshore Limited Partnership Act 1997 (LOLPA) allows three different types of offshore limited partnership:

  1. An offshore professional partnership, which can only be formed by a professional who carries out the practice of accounting, actuarial science, engineering, or law.  The professional must have indemnity insurance cover for the prescribed amount through an insurer approved by LOFSA;
  2. An offshore project partnership, which is established solely for the purpose of undertaking the project or the business specified in the partnership agreement.  It must be specified in the partnership agreement that the partnership shall dissolve after the project is completed and all the partners must be body corporate;
  3. An offshore general limited partnership, which may be formed by any lawful person for any lawful purpose

There is almost no supervision or monitoring of the activities of Labuan offshore and trust companies.

The Labuan Offshore Securities Industry Act 1998 (LOSIA) amended by Labuan Offshore Security Industries Act 2003. (LOSIA)

LOSIA provides for the regulation of mutual funds in Labuan and for the establishment of an exchange.  LOSIA provides the legal infrastructure for setting up of offshore investment funds, the management of such funds and the provision of fund administration services.

Labuan International Financial Exchange (LFX)

The LFX was launched on November 23, 2000 and is a web based financial exchange that provides listing and trading facilities for a wide range of financial and non-financial products and Islamic products.  These include mutual funds, bonds, derivatives, insurance linked products and intellectual properties.

LFX is a wholly owned subsidiary of Kuala Lumpur Stock Exchange.  (KLSE)  The operating website of LFX is  It is possible to submit licensing and listing applications via this website.

LFX is governed by LOSIA and is targeted to reach out to investment funds, debt instruments, and conventional securities.  LFX also caters to wide range of products and instruments based on Sharia’h principles and there are very few other exchanges in the world which have committed themselves to promoting, listing, and trading Sharia’h based products.  It is the only offshore exchange within the South-East Asia/Pacific region.

*[Information based on ‘Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan]

Labuan Offshore Regulations

Types of Labuan Companies

Links About Labuan Offshore

Informational Link about Labuan

IMF Report on Regulation of Labuan Financial Sector

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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