Takaful

English: Islamic insurance

Definition: Based on the principle of mutual assistance, Takaful provides mutual protection of assets and property and offers joint risk-sharing in the event of a loss by one of the participants. Takaful is similar to mutual insurance in that members are the insurers as well as the insured.

Conventional insurance is prohibited in Islam because its dealings contain several haram elements, such as gharar and riba.

IFN weekly market roundup: 14th – 20th January 2017

The week has seen a flurry of activities in the Islamic finance world with sovereign Sukuk finding solid grounds and their corporate counterparts promising potential for 2017. The industry is taking regulations seriously with new and revamped legislation underway. Institutions and firms are announcing their fiscal results for 2016, with an analysis of last year and expectations for the new year. Europe brings in good news in the fintech sector as Fitch announces Takaful prospects for two Southeast Asian Islamic powerhouses.

SOVEREIGN SUKUK
From Asia, the government of Indonesia auctioned sovereign Sukuk (SPN-S 11072017 and four project-based Sukuk series), with an indicative target of IDR6 trillion (US$449.4 million) on the 24th January. Brunei issued its 141st series of short-term Sukuk Ijarah for BN$100 million (US$69.77 million). Maturing on the 13th April 2017, the 91-day facility was priced at 0.63%.

Qatar’s central bank sold QAR8 billion (US$2.2 billion)-worth of Sukuk on the 16th January. The  while the Central Bank of Bahrain’s monthly Sukuk Salam Islamic securities has been 100% fully subscribed. 
In Africa, Egypt made headlines this week. The country could be issuing a US dollar Sukuk facility in 2017, after the investor meetings for its conventional bond that are scheduled to end on the 23rd January.

NON-SOVEREIGN SUKUK
The week saw potential Sukuk announcements for 2017 with Bahrain’s Nogaholding engaging banks for either an Islamic or conventional facility, reported Reuters; and Saudi’s Jabal Omar looking into the Sukuk market this year, according to its CEO, Yasser Al Sharif in an interview with Bloomberg. 

From Southeast Asia, Fitch Ratings said that Malaysian firms continue to be the most active corporate Sukuk issuers. Fitch expects Sukuk issuance to maintain growth momentum in 2017 and in turn bring in more Sukuk alongside conventional bonds to the market. Sunway Treasury Sukuk of Malaysia has issued RM100 million (US$22.43 million)-worth of Islamic commercial papers on the 19th January 2017. 

The Investment Corporation of Dubai is preparing to launch its US$700 million US dollar Sukuk by next week, after a five-day roadshow in Asia, the Middle East and Europe, according to GlobalCapital. 

In Bahrain, the bourse has listed a six-month Sukuk Ijarah facility worth BHD26 million (US$68.47 million) and three other treasury bills, amounting to BHD201 million (US$529.34 million), according to a statement. 

REGULATIONS
The Chartered Institute of Islamic Finance Professionals issued the CIIF Code of Ethics and CIIF Standards of Professional Conduct which set out principles on par with other codes of ethics by its peers, both foreign and local.

Over in the Middle East, the government of Azerbaijan signed a grant agreement with the IDB for the provision of technical assistance in drafting an Islamic financing legislative base, according to Trend. Iran’s Banking Reform Bill, a law outlining reforms in the country’s banking sector, will reportedly be finalized in the parliament’s spring session.

BANKING & FINANCE
The National Transmission and Despatch Company of Pakistan secured Islamic and conventional financing facilities worth PKR18 billion (US$171.43 million) to finance the installation of a 250 km 500 kV transmission line from Thar Desert to Matiari district, according to The News. The country’s quarterly housing finance review by the central bank also reported that Islamic banks led in terms of home financings compared to conventional banks in the third quarter of 2016. The total amount of financings by Islamic banks was PKR25.8 billion (US$245.94 million) during the period.

Abu Dhabi Islamic Bank has introduced its first Islamic equity investment structured note of 2017 to aid investors’ exposure to undervalued blue chip companies from a range of sectors. 

The International Center for Education in Islamic Finance has signed an MoU with the International Federation of Red Cross and Red Crescent Societies to research financial instruments to increase humanitarian initiatives, including the development of Sukuk social impact bonds, Waqf and Zakat endowment funds among others. 

NEW ENTITIES
Herbert Smith Freehills announced that it has received a Qualified Foreign Law Firm license from Bar Council Malaysia. Its new Malaysian office will open in May 2017.

ASSET MANAGEMENT
In Malaysia, the takeup of the Employees Provident Fund’s Simpanan Shariah reached RM59.03 billion (US$13.22 billion) of the initial RM100 billion (US$22.43 billion). The fund also allocated RM50 billion (US$11.22 billion) as further injection for Simpanan Shariah 2018.

Securities & Investment Company entered into a strategic partnership with Trucial Investment Partners for the Shariah compliant SICO Trucial US Real Estate Income Fund estimated to be worth US$50 million, possibly launching in the second quarter of 2017. 

FINTECH
EETHIQ Advisors from Luxembourg and the French asset manager 570 AM are partnering on two fintech initiatives, EETHIQ founder and managing director Rachid Ouaich told IFN. The first project is to increase 570 AM’s Shariah compliant digital mortgage offering to European countries other than France; while the second is to create a personal finance management platform with the capability to link to banking accounts that would incorporate Shariah compliant financial products and automated Zakat calculations.

TAKAFUL
Fitch Ratings opined that Takaful products demand is low in Indonesia caused by a lack of awareness and a robust Islamic finance system. As for Malaysia, the country’s Takaful industry continues to achieve higher growth than the conventional sector, contributed by a firm presence and consumer awareness.

Agrobank, a Shariah compliant institution, established Agro Nurani, the country’s first Takaful coverage for persons with disabilities. The scheme offers benefits including cash allowance for disabilities caused by accidents. 

MOVES 
Norashikin Mohd Kassim has left CIMB-Principal Islamic Asset Management (CIMB-Principal IAM) to join an Islamic bank; Chief Investment Officer Mohd Fadzil Mohamed has stepped up as acting CEO.

Dubai International Financial Center Authority welcomed its new CFO, Yazan Mohamad Nasser. Yazan was previously the CFO for Emaar Malls with 30 years of experience in finance and audit. 

Optimistic outlook on Indonesian Takaful segment

INDONESIA: Life Takaful continues to command the lion’s share of Indonesia’s Islamic insurance market, accounting for 78% of the industry at the end of October 2016, according to Fitch. The rating agency noted in a report that the five-year compound annual growth rate for life Takaful and General Takaful stood at 31% and 24% respectively in 2015, outpacing the conventional segment. In the first 10 months of 2016, General Takaful contributions reached IDR2.2 trillion (US$164.78 million) while life Takaful contributions stood at IDR7.7 trillion (US$576.73 million).

Fitch views the country’s Financial Services Master Plan positively for the growth of the Islamic insurance industry as it assists the segment to be more aligned with conventional peers.

Positive rating watch for SGT

BAHRAIN: Solidarity General Takaful (SGT)’s ‘B++’ financial strength ratings and ‘bbb’ long-term issuer credit ratings have been placed under review with positive implications by AM Best following the acquisition of Al Ahlia Insurance Company (AAIC) by SGT’s parent group, Solidarity Group Holding (SGH) in December 2016. The group’s Jordanian subsidiary First Insurance Group has also been placed under a similar review. The Takaful group plans to convert AAIC’s operations and license from conventional to Takaful.

Egypt to boost Takaful and Karama

EGYPT: The Egyptian government has put forward a plan which includes increasing the coverage of its Takaful and Karama programs and other social safety net projects such as the distribution of free school meals. These measures are proposed alongside hikes in taxes through the implementation of value-added tax, fuel subsidy cuts and controlling the public sector wage bill, according to an online press briefing by the IMF.

Aljazira Takaful Taawuni Company

SAUDI ARABIA: Aljazira Takaful Taawuni Company achieved a 46.76% growth in net profit before Zakat to reach SAR25.92 million (US$6.91 million) in 2016 from SAR17.66 million (US$4.71 million) it posted in the previous year, while its net profit before Zakat for the fourth quarter of 2016 also rose 42.55% year-on-year to reach SAR7.53 million (US$2.01 million) from SAR5.29 million (US$1.41 million) in the corresponding quarter of 2015, according to a bourse filing.

 

Tawuniya to provide insurance to Saudia staff

SAUDI ARABIA: Tawuniya, which offers Takaful services, will be providing health insurance services to employees and family members of Saudi Arabian Airlines (Saudia), according to a bourse filing. The health insurance, valid for a year starting from the 1st March 2017, is expected to contribute more than 5% of Tawuniya’s total premiums for the 2016 fiscal year and is expected to have an impact on the insurance provider’s financial results for 2017.

EIBFS announces CIBF

UAE: The Emirates Institute for Banking and Financial Studies (EIBFS) has launched a new professional certification program, the Certificate in Islamic Banking and Finance (CIBF). The course is designed in partnership with the Islamic Banking and Finance Institute Malaysia and aims to develop qualified personnel with in-depth knowledge of Islamic banking products, services, the Islamic financial market and Takaful operations. Catering to those studying while working, the program has eight modules with evening classes held three days a week for three hours a day and includes lectures, case studies, class work, exercises, progress assessment and a final exam.

Malaysian Islamic insurers bearing brunt of new regulatory regime

MALAYSIA: Malaysian Takaful operators can expect a profit margin compression this year as the market readjusts itself under a stricter regulatory regime.

“As Takaful operators realign their strategic focus and gradually retain more risks, we expect some bottom-line volatility in the short term,” according to Bashar Al Natoor, the global head of Islamic finance at Fitch Ratings. “They will also have to digest new regulatory guidelines and optimize their approach toward delivering operating results on a risk-adjusted basis.”

Malaysia, one of the largest Islamic insurance markets globally by gross contributions, managed to grow its Family Takaful business by 9.8% and General Takaful premiums by 5.8% over the first six months of 2016 – significantly outpacing the expansion of the conventional segment which clocked in a growth rate of 8.2% for life insurance and 2.6% in general insurance. It must be noted, however, that the Takaful industry starts from a lower base – the Islamic segment is still a minority in the overall insurance landscape with a 30% market share of the total life segment and 12% in the general insurance sector.

Islamic operators are, however, at risk of losing their market share due to new regulatory requirements outlined by the Islamic Finance Services Act 2013 (IFSA 2013) which also called for the separation of Family and General Takaful businesses under separate licenses among others. Segregating their business lines would increase operational costs and remove the economies of scale enjoyed by Takaful companies, potentially compelling operators to either consolidate or dissolve one business line over the other.

“Smaller-scale operators who cannot justify the additional regulatory-related costs are the most likely to engage in M&A activities,” noted Fitch. There are currently 15 Takaful companies in Malaysia, including four re-Takaful players.

The effects of the regulatory pressure (and stiff market competition) are already materializing. HSBC is considering selling its Takaful unit – conventional insurer Allianz Malaysia is in the running to acquire full ownership of HSBC Amanah Takaful; MAA Takaful was bought over by Zurich in June 2016; while Hong Leong Financial Group has also been on the lookout to offload its majority stake in its Takaful business, although negotiations with interested parties last year were unsuccessful.

It may be a tough few years ahead leading up to the full implementation of IFSA 2013; however, the regulator (Bank Negara Malaysia) is firmly supporting the industry with more effective regulations including a draft on the microTakaful segment to assist operators capture the untapped rural market.

“Government-driven initiatives to improve the regulatory framework and boost the sector's attractiveness will continue to cement Malaysia's position as one of the leading global centers for Islamic finance and Takaful,” opined the rating agency.

Takaful operators pioneering in Oman

Takaful insurance is often seen as one of the major global developments in the sphere of finance and banking. It opens doors to insurance-savvy customers who require insurance but are skeptical about its concept due to religious beliefs. With the advent of Islamic finance and banking as well as Takaful, AJAY SRIVASTAVA opines that customers can now ‘choose’ what they feel is best for them without having to compromise on their beliefs. 

Takaful was launched in Oman in 2014, when Takaful policies were issued with the objective of attracting people who may have shied away from financial protection products for religious reasons. With a second Takaful operator following soon, the sector has had an impressive start. According to estimates, Takaful constitutes about 8-9% of direct insurance premium in Oman and 5-6% of total paid claims. Oman’s launch into the Takaful world almost coincided with the fall in global oil prices and the consequent economic slowdown witnessed in recent times. The growth of Islamic finance therefore is all the more impressive.

The introduction of Takaful in the Sultanate is also unique in some sense. In most markets, Takaful has been a greenfield venture so it had to go through the pains of a start-up whereas in Oman it was the unique experience of converting existing conventional insurance companies into fully-fledged Takaful operations. Therefore, developing market share, a distribution platform and customer experience were leveraged on existing market share – a reason why Takaful has been able to grow its share of the market so quickly. A Takaful operator’s ability to get people’s trust through affordable pricing and superior customer service is one of the other key contributors to the growth of Takaful in the Sultanate.

Creating awareness among the public on the importance of Shariah compliant insurance protection via partnerships among large Islamic banks is significant. With Takaful operators collaborating with local Islamic banks to promote Islamic finance as a whole, a paradigm shift is happening in the local insurance market. Such initiatives act as a catalyst in spreading awareness about Takaful rapidly across the country.

Takaful, however, is still a relatively new concept in Oman where there is a huge opportunity for insurance penetration. The awareness is low and customers are bound to ask pertinent questions: What is Takaful? How much do I have to pay? Will there be a surplus and will I get a share in it? Takaful operators risk building expectations without clearly informing about the caveats. There is a danger of creating perceptions of false promises. Claims will be paid, documents will be issued and services will be provided but unless there is an emphasis on the Takaful brand value, a Takaful operator and its product would look, feel and be like conventional insurance.

The Takaful brand value is about protecting communities. The operators need to work on the theme of social consciousness which is inclusive in nature and based on equity, justice, cooperation and fair play. Takaful is built on the concept of cooperation within a community of people who bring their money together to help each other. For the Takaful industry to grow in Oman and elsewhere, it is important that the holder of the Takaful policy gets a sense of community belonging.

There are some challenges on the technical side for Takaful growth. An important element is the gestation period of five to six years for an insurance company to break even. During this time, investment returns from the share capital covers any operational deficit for a conventional company. However, in the absence of share capital in the policyholders’ fund under the Takaful model, the policyholders’ fund is deprived of the advantage of a sizeable investment income to its account. This, very often, could mean the early onset of Qard Hasan requirements than would normally be the case.

The Takaful law was promulgated in Oman in 2015 and the regulations are expected soon. The regulator in Oman has played a pivotal role in the development of Takaful and it is expected that the regulations will address some of these vital issues which will provide further impetus to growth.

In Oman, the growth of Takaful is driven by those who are increasingly finding it to be the optimum solution for financial security and wellbeing. This is just the start and with regulations setting in and new products and services made available by Takaful operators, an increased insurance penetration in Oman will eventually lead to an overall increase in the Takaful market share.

Ajay Srivastava is COO of Al Madina Takaful. He can be contacted at ajay.srivastava@almadinatakaful.com

Trade matters

We know the story: economic growth has slowed down, global demand has weakened and markets remain volatile; but how have these affected international (Islamic) trade? We find out in this week’s cover story.

Reports from the IFN Editorial Team explore latest developments in blockchain technology for Islamic financial institutions; Turkey’s Shariah banking landscape; and the feasibility of a mandatory Islamic finance component for the Halal industry among others. We also analyze the markets of the UK and Ireland and pension funds in our in-house analytical pieces as well as take a closer look at the IDB’s most recent dollar Sukuk issuance in our case study.

It is a bumper issue this week with updates from our global correspondents and special reports by Franklin Templeton Investments on the international Sukuk market this year as well as an insightful piece on contracts from the International Institute of Advanced Islamic Studies. This week’s features are contributed by Amana Canada Holdings, UK-based Minarah MultiConsulting and Al Madina Takaful.

As usual, we wish our readers an insightful and informative read.

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