According to the Labuan Offshore Authority's (Lofsa) annual report for 2000 released yesterday, the 60 offshore banks in Labuan, including nine domestic-owned ones, more than doubled their collective pre-tax profit to US$118.8 million (US$1 = RM3.80) for 2000.

The offshore banking industry on the island, which forms part of Malaysia but has a separate fiscal regime, had returned to the black in 1999 as Asia's economic crisis eased, registering a combined pre-tax profit of US$57 million in 1999, compared with a US$268.9 million loss the previous year.

The banks however reported a 14.5 per cent decline in total outstanding loans to US$11.43 billion in 2000, down from US$13.36 billion in 1999 and US$15.12bn in 1998. Bank Negara Malaysia governor, Datuk Dr Zeti Akhtar Aziz, who is also Lofsa's chairman, said the drop was due mainly to loan repayments: "Lofsa has diversified to other areas of activities... therefore, we do not see this as an erosion in business".

In 1999, in response to problems caused by the Asian crisis in 1998, Labuan liberalised its entry criteria for offshore banks. Other changes included permitting offshore banks to trade in ringgit instruments in the secondary market which would allow them greater access to ringgit business as well as to promote money market operations in Labuan. They are also allowed to purchase ringgit instruments in the primary market using foreign currency.

Mohd Razif Abdul Kadir, central bank assistant governor and Lofsa director-general, noted that offshore banks had corrected what had been seen as over-exposure to the region on the loans side, saying: "We do not expect loans growth. Our thrust at the moment is on investment banking activities," he said.

A few weeks ago Bank Negara launched its Financial Sector Masterplan, which included a chapter devoted to Labuan. The bank said that it recognised Labuan's major financial players as having been instrumental in the "shaping of an active and clean offshore centre", and that the focus now must be to build on their strength. The Plan places emphasis on the development of Islamic banking and on strengthening the capital market, e-commerce and ancillary activities.

Major world banks in Labuan include Standard Chartered Bank, Hongkong and Shanghai Banking Corp Ltd, Bank of Tokyo-Mistsubishi Ltd, Fuji Bank Ltd, BNP Paribas, Dresdner Bank AG and Deutsche Bank AG. Local players include Arab-Malaysian Merchant Bank Bhd, Public Bank Ltd, Maybank International Ltd, RHB Bank Ltd, Danaharta Managers Ltd, Bumiputra-Commerce Bank Ltd, Schroders Malaysia Bhd, Citibank Malaysia Ltd, AMMB International Ltd, Bank Islam Ltd and JP Morgan Malaysia Ltd.

The number of offshore banks has not changed much in the past three years. There are now 60 licensed banking institutions with 519 employees, compared with 62 banks with 569 employees in 1998. Zeti said that this was due to mergers among international banks. "We are targeting new players, especially in the Islamic banking arena," added Mohd Razif.

Lofsa itself had income of RM11.4 million for the year 2000, up 16.3 per cent from RM9.8 million the year before, said Zeti.

Apart from banks, the 2,500 offshore companies established on Labuan include 50 insurance companies and a number of trust management companies. A stock exchange was established in 2000. Labuan offshore companies can make use of Malaysia's good double tax treaty network, and as a result the island has become the preferred conduit for FDI into a number of local countries including Korea and Malaysia itself.