Should Labuan be returned to Sabah?

Murray Hunter

Should Labuan be returned to Sabah?


Jan 29, 2026




Ampang MP Rodziah Ismail suggested during the Kings Reply Debate that another federal capital be developed in East Malaysia.

Such an idea was enacted back in 1984, when Labuan was handed over to the federal government to become a federal territory.

Labuan was part of Sabah until it was ceded to the federal government along with 6 other islands to the Federal Government. Labuan became a federal territory which was essentially run by the Ministry of Federal Territories. Labuan Corporation operates the municipal government, headed by a chairman who responsible for the administration and development of the island. It was a de-facto capital in east Malaysia. However, it was never used as such.

Labuan through oil and gas should be an integral part of Sabah.

Today, the Labuan economy is based upon oil and gas resources and an international offshore banking centre, that was initially aimed at competing against Hong Kong and Singapore. Labuan is a net exporter with the territory’s external trade now around MYR 12 billion. Labuan’s prime exports are oil and gas, flour, animal feed, sea products, and ceramic tiles. There are around 70 banks registered in Labuan. The territory was designated as an offshore financial centre in 1990. Labuan has duty free status.

However, Labuan is still very under-developed, even though it has been a federal territory since 1984. Key infrastructure has been neglected. Proposals to build a bridge from Labuan to the Sabah mainland have not gone anywhere. Even ferry facilities require more upgrading. Nothing was ever done to bring any of the federal government administration to Labuan. It was left to the Labuan Corporation to run.

Over the last few years there have been calls to return Labuan to Sabah. In November 2024, the Sabah Progressive Party (SAPP) publicly called for Labuan to be returned to Sabah due to the federal government’s neglect of the territory. Labuan has been associated in negotiations over Sabah’s 40% revenue rights under the MA63. Labuan UMNO leaders have opposed such suggestions.

Returning to Rodziah Ismail’s comments made during the King’s Reply Debate, Labuan has been a federal territory (de-facto capital) since 1984 and has been badly neglected. Perhaps its time to consider returning Labuan back to Sabah, which is one of Malaysia’s poorest states.

Labuan was annexed by a federal government with very strong centralist tendencies back in the Mahathir years. Its now time to take into consideration the move to reenergize autonomy in east Malaysia inline with the spirit of MA63.

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T'was Dato Harris who ambushed Tun (then a Dato) with the handing over of Labuan to the Federal government. Tun just graciously accepted the gift.