(AFP) The country's offshore financial centre of Labuan moved closer to becoming an Islamic business hub with the listing today of Islamic bonds on its Internet-based stock exchange.

Plantation-based group Guthrie Bhd listed RM570 million worth of Islamic bonds on the Labuan International Financial Exchange (LFX), the first primary listing for LFX since it was launched November 2000.

LFX, wholly-owned by the Kuala Lumpur Stock Exchange, was established as a "trailblazer" to trade dollar-denominated financial instruments and securities targeting Asia-Pacific and developing nations.

Malaysia hopes to use the web-based bourse to win greater international recognition for the Labuan offshore financial, set up in 1990.

The listing of the Guthrie bonds, based on Islamic principles which ban interest payments, will boost Labuan's portfolio and see it emerging as a leading offshore hub for Muslim countries, credit managers said.

Noorazman Abdul Aziz, director-general of the Labuan Offshore Financial Services Authority, said Labuan could tap "some 1.5 trillion dollars of Islamic funds" through Islamic facilities listed in the LFX.

"The potential for Labuan to carve out a niche is immense," he told reporters here.

More listings

Noorazman said the number of offshore companies in Labuan grew 30 percent year-on-year in 2001, with some 3,200 firms operating there including 52 banks and 100 insurance companies.

LFX general manager S Loganathan said he expected another five listings - both conventional and Islamic - on the exchange by the end of the year.

"We want to draw funds from the Middle East which are invested in London and Geneva," he added.

But some economists said Labuan still has a long way to go to catch-up with more mature offshore markets like Hong Kong and neighbouring Singapore.

Nizam Idris, regional economist with Singapore-based IDEAglobal, said there was potential for such Islamic facilities to tap billions of dollars stashed in the Middle East but it was unclear if it would spur Labuan's growth.

The Sept 11 terror attacks on the United States for which Osama bin Laden and his al Qaeda network were blamed had stigmatised Islamic products, he said.

This is the problem related to promoting Islamic funds now. I will not say the listing of an Islamic financial instrument on the LFX brings excitement to fund managers," Nizam told AFP .

"Whether it will boost Labuan or not, I am not sure. Labuan has not picked up. Labuan as an offshore financial centre has been underperforming."

Lacking infrastructure

A marketing and credit manager at a foreign bank with operations in Labuan said the offshore financial centre was still "way behind Singapore and Hong Kong".

The manager who requested anonymity said new infrastructure was lacking and flights from Kuala Lumpur were limited. Malaysia Airlines flies twice daily to the island.

"Labuan should also be promoted as a tourism attraction and Kuala Lumpur must jump start development on the island," he said.

Big firms with less credit risks, such as national oil company Petronas and power giant Tenaga Nasional Bhd, should seek to raise funds through the LFX to help promote Labuan, he added.

But Ramon Navaratnam, economist and corporate adviser to the Sunway Group, believed the Guthrie Islamic bond listing was a boon to Labuan to become a niche market to attract money from the Middle East.

"Labuan could emerge as a safe heaven for Arab and other funds which may not have faith in other instruments," he added.