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: 18th February – 24th February 2017

The week brought in promising head starts and prospective outlooks as the end of the second month of 2017 draws closer. In a span of seven days, we witnessed Hong Kong dominating the sovereign Sukuk space; Malaysia taking up the corporate sector; more banks looking to a future in compliant products and services; regulators and authorities collaborating to increase global Islamic finance standards; and industrial moves and strategical reshuffles mostly from banks and insurance companies.

SOVEREIGN SUKUK
The government of Hong Kong extended its Sukuk curve with a US$1 billion 10-year tenor Reg S Sukuk facility; its previous two issuances were for five years. The paper, priced at 3.13%, was almost twice oversubscribed, with orders worth US$1.72 billion 
Saudi Arabia called for proposals from banks for its potential US dollar Sukuk, according to Reuters quoting unnamed sources. Citibank, HSBC and JPMorgan will be acting as the global coordinators. Bank of China, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, MUFG and NCB Capital are reported to be involved.

Oman mandated Alizz Islamic, Citibank, Dubai Islamic Bank, Gulf International Bank, HSBC, JPMorgan and Standard Chartered to manage a Sukuk sale worth approximately US$1.5 billion to US$2 billion, as reported by Global Capital.

NON-SOVEREIGN SUKUK
The corporate issuance space was dominated by Malaysia throughout the week. YTL Power International proposed a RM2.5 billion (US$561.04 million) Sukuk Murabahah facility to fund the equity contribution of a 1,320 MW coal-fired power plant in Indonesia and a 470 MW oil shale power plant in Jordan. 

IFN learned that the Malaysian Ministry of Finance is evaluating a Sukuk plan by Malaysia Debt Ventures (MDV). SapuraKencana Petroleum announced the signing of seven-year multicurrency financing facilities approximately worth US$1.5 billion with a range of Malaysian, regional and international banks, involving an issuance of approximately RM3.6 billion (US$806.78 million) of unrated Sukuk

Tanjung Bin Energy Issuer  passed a resolution to refinance a junior term financing facility during an extraordinary general meeting with Sukukholders of a Sukuk Murabahah program of up to RM4.5 billion (US$1.01 billion).

In the Gulf, Qatar Islamic Bank obtained approval from its ordinary general assembly to raise the limit of its perpetual additional Tier 1 Sukuk from QAR5 billion (US$1.37 billion) to QAR7.5 billion (US$2.06 billion), which also approved a recommendation to distribute a 47.5% cash dividend. 

Turkey’s Eximbank announced its plans to develop a credit rating system and Sukuk among others by the end of 2017, according to Anadolu Agency.

REPORTS
In its latest report, the IMF called for the Islamic banking industry to establish a policy framework and environment that promote financial stability. The global foundation also encouraged increased efforts to diversify the sovereign Sukuk markets.

The World Bank Group and the IDB announced the publication of a global report on Islamic finance subtitled ‘A Catalyst for Shared Prosperity?’ The report discusses trends in Islamic finance, identifies major obstacles in the industry and recommends policy interventions to boost the market. 

BANKING AND FINANCE
In Africa, The Popular Credit of Algeria Bank is planning to venture into Shariah compliant financing from 2018 onwards, according to its CEO as reported by local media.

In the Middle East, Warba Bank announced its plan to raise the allocated amount of the acquisition of financing portfolios from Al-Mulla International Financing from KWD30 million (US$97.99 million) to KWD50 million (US$163.32 million). Alizz Islamic has launched new Shariah compliant commercial financing products for salaried customers. Saudi-based Middle East Paper Company reached an agreement with Saudi British Bank to renew its Islamic credit facilities, according to a bourse filing. 

In Asia, Bank of Maldives Islamic established its first home construction and real estate financing facility, according to Dr Aishath Muneeza, IFN Correspondent and the chairperson of the Maldives Center for Islamic Finance. Pakistan’s Securities and Exchange Commission approved the prospectuses of two new Modarabas: Habib Metro and Orient Rental.

LEGAL FIRMS
Norton Rose Fulbright and Chadbourne & Parke confirmed that both firms will be merging in the second quarter of 2017. The firm will adopt Norton Rose Fulbright’s name after the merger.

COLLABORATIONS
The Dubai Financial Services Authority has inked an agreement with the European Securities and Markets Authority as an effort to share information and increase partnership in Dubai International Financial Center-based central counterparties’ compliance with the European Market Infrastructure Regulation’s conditions. 

Borse Dubai, the parent company of Dubai Financial Market, and NASDAQ signed a technology deal to boost the infrastructure of Dubai’s stock exchanges. Under the agreement, NASDAQ would be providing a new INET-powered, multi-asset trading technology engine called NASDAQ Matching Engine; a cash equities clearing module called NASDAQ Packaged Clearing; and enabling an in-memory-vetting model on the central securities depository solution under the new NASDAQ Financial Framework architecture. 

Audit regulators under the ASEAN Audit Regulators Group (AARG) comprising Malaysia’s Audit Oversight Board, Indonesia’s Finance Professions Supervisory Center, Singapore’s Accounting and Corporate Regulatory Authority and Thailand’s Securities and Exchange Commission; and the four largest audit firms in the region comprising Deloitte Touche Tohmatsu, EY, KPMG and PwC, agreed to work toward achieving a reduction of at least 25% in the number of listed companies’ audits with inspection findings. AARG also announced that the World Bank’s Center for Financial Reporting Reform is collaborating with experts from the East Asia Pacific region of the bank’s Global Governance Practice to secure funding and provide technical assistance to enhance audit oversight in the member nations. 

ASSET MANAGEMENT
KBW Investments launched Crestmount Capital which focuses its funding on Shariah compliant investments. The company also announced that Crestmount Fund I, its premier Shariah compliant real estate investment fund, achieved the full subscription of AED267 million (US$72.68 million).

QInvest exited from the St Edmund’s Terrace LP Fund, a Shariah compliant London residential real estate fund.  

TAKAFUL 
Zurich Takaful Malaysia launched Takaful SeniorGold, a Family Takaful plan, offering coverage to senior citizens. 

Bahrain Kuwait Insurance Company (BKIC) is set to purchase Bahrain Islamic Bank’s entire stake in Takaful International Co.

MOVES
Qatar Islamic Bank has appointed new board members and elected Sheikh Jassim Hamad Jassim Jaber Al Thani as the bank’s chairman and Abdullatif Abdulla Al Mahmoud as the vice-chairman; Bank Nizwa has elected acting CEO Khalid Al Kayed as its CEO; SHUAA Capital has appointed Hisham Al Rayes to replace Hamad Al Sagar who resigned from the board of directors; Dr Ghassan Abdulrahman has resigned from the board of Malath Cooperative Insurance and Reinsurance Company; Fitch Group has appointed Ian Linnell as the president of Fitch Ratings; and Slaughter and May, elected Dan Schaffer as its new partner in the firm’s Pensions and Employment Group.

Zurich Takaful launches product

MALAYSIA: Zurich Takaful Malaysia has launched a Family Takaful plan targeted at senior citizens, it announced in a statement. Known as Takaful SeniorGold, the scheme offers coverage to those in the 50-80 years age group. 

 

Al Rajhi Takaful wins government contract

SAUDI ARABIA: Al Rajhi Company for Cooperative Insurance has entered into an agreement with the Ministry of Education under which the Takaful operator will provide voluntary health insurance to the employees of the ministry. The coverage, according to a bourse filing, extends to family members of employees as well. 

Takaful Malaysia to increase awareness of cashback

MALAYSIA: Syarikat Takaful Malaysia, the first and only Islamic insurance company in Malaysia to reward a 15% cashback for no claims to General Takaful customers, has paid out up to RM209 million (US$46.37 million) in cashback since 2009. According to Bernama, the cashback would be processed 60 days after the expiry of the certificate, and the payment would be directly credited to customers’ registered bank accounts via the e-Payment facility.

 

Takaful International

BAHRAIN: Takaful International reported a total profit of BHD631,000 (US$1.66 million) in 2016, compared with a loss of BHD7.1 million (US$18.7 million) during the previous year, according to a bourse filing. General Takaful and Family Takaful funds achieved a surplus of BHD79,000 (US$208,000) and BHD149,000 (US$392,487) respectively, compared with a loss of BHD1.1 million (US$2.9 million) and a surplus of BHD142,000 (US$374,048) in 2015.

 

BKIC to purchase stake in Takaful International

BAHRAIN: Bahrain Kuwait Insurance Company (BKIC) has agreed to purchase Bahrain Islamic Bank’s entire stake in Takaful International Co after the two entities signed an MoU, according to a bourse filing.

Saudi braces for major Takaful ranking reshuffling as operators begin to turn a profit

Saudi Arabia’s insurance companies are finally making profits thanks to regulatory interventions, ending a protracted period of losses for many of the 33 cooperative operators caught in the fiercely competitive market — also the largest Takaful market in the world — where the value of insurance is still severely underappreciated by the vast majority. This, VINEETA TAN writes, has caused a major shakeup in rankings especially among the mid-tier segment.

Back into black
As many as 28 insurers realized stronger earnings in 2016, with nine swinging into the black, recovering from losses the year before; the market as a collective more than doubled its pre-Zakat profits to SAR2.5 billion (US$666.32 million) from SAR1 billion (US$266.53 million) in 2015, according to figures from AM Best. This is in stark contrast to previous years when almost half of the operators were deep in the red, and when the market behaved almost like a duopoly with two of the largest companies by gross premium revenue (Tawuniya and BUPA) controlling 123% of total market profits; 12 months later, their share contracted by almost half to 57% as other participants raised their earnings capabilities.

The tables have turned
While the top tier of Takaful league remains unchanged, the reverberations from the change in profitability profile have dramatically altered the rankings of insurers in the mid and lower tier (See Table 1). 

In the mid-tier segment for example, while Malath Cooperative and Al Rajhi Company for Cooperative Insurance maintain their dominance and even increasing their share of gross premiums by three percentage points to 45%, Salama Cooperative and Alinma Tokio Marine both surged eight places; while Al Sagr Cooperative and Amana Cooperative dropped 19 and 10 places respectively.

“At the same time, Medgulf, the third-largest insurer in the market lost ground as its internal restructuring and regulatory intervention has meant that the company was unable to write significant volumes of business for long periods,” explained AM Best, which expects the mid-tier to be rife with movements as operators recalibrate their strategies between active portfolio management and economies of scale.

Sustainable or not?
This turning of the tables is largely due to strict prudential measures by the Saudi Arabian Monetary Authority (SAMA) in 2014 to end the aggressive price wars between market players, compelling them to revise their risky underwriting strategies. While these new rules initially drained earnings, however they are finally bearing fruit, although the bull run may be short-lived.

With the regulator, SAMA, implementing actuarial reserving practices in 2014, and evidence of increased reserve prudency in 2015, many insurers have felt over-reserved as at year-end 2015,” explained AM Best. “As loss experience in 2016 has been substantially better than expected (driven mainly by improved premium rates), many insurers would have seen material levels of reserve releases during the year, augmenting their technical income.” Technical income was more than twice as high in 2016 at SAR1.7 billion (US$453.1 million) against SAR600 million (US$159.92 million) the year before.

It, however, remains to be seen if the Saudi Takaful market would be able to sustain its stellar 2016 performance, although current market conditions of weak oil prices and possible rise in operating expenses driven by a stronger focus on enhancing service quality (rather than undercutting prices to capture businesses), point to a likely moderation in premium growth. Things may have improved drastically, but the Saudi insurance market remains as competitive as ever.

Dubai Declaration on sustainable finance welcomes first and only fully-fledged Islamic financial institution

An Islamic insurer has become the first fully-fledged Islamic financial institution in the UAE and one of the very few in the world to officially pledge to make its measures for sustainability public, drive responsible financing activities and run its business in a sustainable manner. VINEETA TAN explores the significance of this development.

Noor Takaful is the latest to join a consortium of eight financial institutions in signing the Dubai Declaration of Financial Institutions in the UAE on Sustainable Finance (the Dubai Declaration), an initiative in support of the government’s commitment to the Paris Climate Agreement as well as UN Sustainable Development Goals (UN SDGs).

The other eight signatories are conventional financiers, either fully-fledged or have separate Islamic businesses, making Noor Takaful the only wholly-Shariah compliant signatory.

This development is significant because despite the Shariah finance industry aligning itself with the ethical and socially responsible finance brand, there is a severe lack of Islamic finance participation globally in committing to a set of sustainable finance requirements and measures. Agreeing to the Dubai Declaration or any other sustainable finance metrics such as the UNEP Finance Initiative or UN Global Compact generally means devoting resources to engage in responsible lending, integrate ESG criteria into financial products and investments, implement green initiatives to reduce carbon footprint as well as promote equality and diversity at the workplace among others.

Also crucial is that financial institutions are required to regularly compile and publish a sustainability/CSR report in accordance with international standards — something very rarely done in the Islamic finance community. So while Islamic financial institutions could be engaging in ethical and socially responsible businesses, the social impact of their activities would be difficult to gauge due to the lack of disclosure.

Apart from Noor Takaful, Bahrain’s Al Baraka Banking Group is the only fully-fledged Islamic bank to have signed a sustainability initiative — the UN Global Compact in 2016, which boasts over 800 participants from the financial sector. The Islamic Reporting Initiative, established in 2015 to guide companies to deliver on the UN SDGs through the creation of a CSR reporting framework based on Islamic principles and values, does not have a single Islamic bank on board as a member despite its membership exceeding 160.

Risk management in Islamic finance

Risk management is crucial for Islamic finance, particularly given the risk and return-sharing principle that governs the industry. While in theory offering lower risk exposure due to Islamic finance’s firm principles and basis in the real economy, Islamic transactions and institutions nevertheless face real and unique risks that require a robust and comprehensive management process. DANIAL IDRAKI gives an update on the latest events in the Shariah compliant risk management arena.

Regulations
The IFSB had in April 2016 issued a working paper titled ‘Strengthening the Financial Safety Net: The Role and Mechanisms of Shariah Compliant Deposit Insurance Schemes (SCDIS) (WP-06)’, which seeks to shed light on the principles and existing institutions through which deposit insurance schemes are provided on a Shariah compliant basis.

The IFSB and Shariah Research Academy for Islamic Finance (ISRA) had also issued a joint IFSB-ISRA Working Paper titled ‘Shariah Non-Compliance Risk in the Banking Sector: Impact on Capital Adequacy Framework of Islamic Banks (WP-05)’. The working paper endeavors to explore the appropriate approach for the application of a capital charge for Shariah non-compliance risk. 

Middle East
Earlier this month, Ibdar Bank appointed the Bahrain Institute of Banking and Finance to provide corporate governance training to its board of directors. The training, part of the Islamic wholesale bank’s Continued Development program, will focus on Shariah fundamentals and governance, risk management and strategy in Islamic financial institutions. The 15-hour executive course is aimed at ensuring the board members are well versed in the latest practices in Shariah and corporate governance, in order to meet the requirements of the Central Bank of Bahrain

In August last year, Moody’s Investors Service noted that the IDB’s credit profile is propped up by its strong shareholder support, robust capital base and prudent financial and risk management policies, and that the multilateral Islamic bank’s strong capital base is a result of multiple capital increases that place it in a generally favorable capital adequacy position when compared with other ‘Aaa’-rated multilateral development banks.
Dubai Financial Market launched the draft of its Shariah compliant ‘Standard on Hedging against Investment and Finance Risks’ in October 2016 and invited Islamic finance professionals to provide feedback, with the consultation period ending on the 10th November. 

Dubai Financial Services Authority (DFSA) announced in January this year that its regulatory framework for central counter parties has been recognized by the European Commission as equivalent to the EU’s regulatory framework. The recognition is based on DFSA’s work and practices in promoting financial stability through a reduction in systemic risk.

Africa
In Nigeria, the Islamic Corporation for the Development of the Private Sector will provide technical advisory and fundraising services to MFB Holdings, which plans to establish a new Islamic bank in Nigeria. It will include the areas of project management, Shariah governance and product development, treasury, accounting, risk management, human resources, information technology, marketing and legal support.

In March last year, Faisal Islamic Bank of Egypt launched a risk management department, following the Central Bank of Egypt (CBE)’s directive. The bank also created a micro, small and medium enterprises (MSMEs) department and began granting loans to MSMEs, in line with the new initiative by the CBE obliging banks to provide a minimum of 20% of their total loans portfolio to the SME sector within four years.

Asia
Indonesia’s parliament passed a law in March 2016 that made its biggest banks increase their capital to provide a buffer against any possible setbacks, with the aim of managing financial crises. The law establishes rigid, step-by-step protocols to handle a crisis and will direct the central bank to help with liquidity problems and help the deposits insurer to deal with bank insolvency. Fauzi Ichsan, CEO of the Indonesia Deposit Insurance Corp, was quoted as saying that under the new system, the required capital-adequacy ratio (CAR) may need to be raised to 20% for systemically important banks. The required CAR now starts at 8% of risk-weighted assets. 

In May last year, Bank Negara Malaysia (BNM) finalized for issuance the policy document on operational risk which is expected to be a point of reference for Malaysian financial institutions on BNM’s expectations on how to manage operational risk along with other risks. Specific guidelines include having dedicated subcommittees to assess operational risk at each business level, and ‘operational risk appetite’ statements which should include all major operational risks associated with the financial market activities that the institution is involved in.

The policy document is applicable to licensed banks, investment banks, Islamic banks, international Islamic banks, insurers, Takaful operators, international Takaful operators and prescribed development financial institutions pursuant to the Financial Services Act 2013, Islamic Financial Services Act 2013 and Development Financial Institutions Act 2002.

Over in Pakistan, the State Bank of Pakistan (SBP) had earlier this year issued the Prudential Regulations for infrastructure project financing. Taking into consideration the environmental impact of projects, the regulations have also set rules on technical, legal, cash flow-generating capacity, risk assessment and insurance aspects among others. The SBP encourages banks and development financial institutions to utilize Islamic finance for infrastructure projects.

France: Pockets of growth

With Brexit becoming a reality, many have noted that France could benefit from the UK leaving the EU including potentially capturing a larger chunk of Shariah real estate investments. But with the country on high alert from a string of terror attacks in the last couple of years, does Islamic finance still have a place in Europe’s largest Muslim market? VINEETA TAN casts an eye over the country’s Islamic finance landscape.

Regulatory environment
France does not have a dedicated legal framework for Islamic financial transactions; however, the French legal system is relatively Shariah-friendly as its contract law principles, particularly those in relation to contractual freedom, accommodate the essence of Islamic transactions.

Under former finance minister Christine Lagarde, several regulatory reforms were introduced to facilitate Islamic finance including on Sukuk, Murabahah, Ijarah and Istisnah, granting these instruments tax parity with conventional finance. For example, double stamp duty and capital gains tax on property were removed to encourage Sukuk issuance.

Banking and finance
Islamic banking and finance activities remain sporadic and minimal as compared to other European markets such as the UK and Luxembourg, although market participants note that they are steadily growing, driven by real estate financing. France (especially Paris and the French Riviera) remains an attractive real estate investment destination for Middle Eastern investors who also heavily invest in the UK and Germany. It is worth noting that most Shariah compliant real estate deals in France are mostly handled by foreign banks. 

French lenders such as BNP Paribas and Societe Generale (SocGen), while they have Islamic finance capabilities, are mostly active in overseas markets. In the context of France, fully-fledged Islamic banks are absent; however, there is one Islamic banking window operated by Chaabi Bank whose Shariah product suite includes an Islamic deposit account and a real estate product. 

Islamic financial services are nonetheless provided by other non-bank institutions, for example 570 AM that has been particularly active in the fintech sector. The asset manager in 2017, together with its Luxembourger partner EETHIQ Advisors, set up a four-year joint research program in partnership with the University of Luxembourg on blockchain technology for ethical and Islamic finance. IFN has also learned that 570 AM is working on expanding its Shariah compliant digital mortgage offering to other European countries and developing a personal Islamic finance management platform in collaboration with EETHIQ.

Takaful
While the French Islamic banking space lacks domestic participation, the Islamic insurance arena is fairly active, although the sector is dominated by Family Takaful. Solution providers include Swiss Life, FWU, VITIS Life, Noor Assur and SAAFI. There are also a number of Takaful brokers including DEEFI. The relatively vibrant Takaful market is facilitated by the fact that existing laws are compatible with the Takaful business model and that France is one of the world’s largest insurance markets with a penetration rate of almost 10% — almost five times more than that of the GCC, bolstered by the government’s efforts in making insurance compulsory. These coupled with France’s large Muslim population make Takaful a lucrative proposition. 

The Takaful market is growing: in 2016, Azurite Courtage made its mark in the space with its first Shariah compliant insurance product; NoorAssur, which began as a digital start-up in 2012, expanded its physical presence nationwide throughout 2016; while SAAFI took advantage of the AAOIFI Shariah standard on gold to launch an Islamic gold dinar savings plan. 

Ezzedine Ghlamallah, IFN’s Correspondent for the European Takaful and re-Takaful market as well as a director of SAAFI, estimated that if Islamic insurance were to capture merely 1.75% of the French insurance market, the country could become the world’s largest Takaful market after Saudi Arabia.

Sukuk
Despite publishing guidance on Sukuk issuance and removing double stamp duty for Sukuk sales, France has yet to originate a Sukuk transaction. SocGen came closed to issuing (albeit from Malaysia) when it proposed a RM1 billion (US$224.42 million) Sukuk facility in 2014. The facility however, which was rated ‘AAA(s)/Stable’ by RAM Ratings, was delayed and in May 2016 had its rating withdrawn suggesting that the deal is likely off the table.

Islamic funds
Latest figures from the European Central Bank (2013) indicate that there are six Shariah compliant funds in France with total assets under management of US$147.2 million, relatively evenly distributed between the money market (47%) and equity (53%).

Outlook
There are certainly pockets of growth for Islamic finance in France especially in the Takaful segment; France could even carve its position in the global Islamic finance landscape leveraging its insurance repertoire. Its favorable demographics (7.5% out of the 66 million-strong population, according to Pew Research) and growing US$6 billion Halal industry could swing open doors to great Islamic opportunities; however, rising anti-Muslim sentiments in the secular nation exacerbated by a string of extremist terror attacks in the past two years are likely to cast dark shadows over the country’s Islamic finance prospects.

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