Opportunities & Trends in Islamic Finance - Euromoney

The potential ofBancatakafulWith conventional insurance increasingly regarded as being incompatible with Sharia law, takafulis finding favour among Muslims across the globe and becoming an important product for banksseeking to provide for all their clients’ financial needsTakaful, or insurance based on the principle of mutual assistance, is oneof the most dynamic areas of the broader market for Islamic financialservices. As Moody’s noted in a recent report, “Takaful … has shown veryimpressive premium growth rates of about 20% in recent years. The firsttakaful company was established in 1979 and now there are over 250globally. Total takaful premiums exceeded $2 billion in 2005, and areexpected to reach $7.5 billion by 2105.”A more recent analysis published by Fitch puts the total global takafulcontributions at about $2.6 billion in 2006, which the agency describesas “very small compared with the world’s insurance sector as a whole”.However, Fitch adds that takaful’s “influence and importance extendswell beyond its current size, and there is substantial potential for growthboth in Muslim communities in the Middle East and Asia as well as insome more mature markets (eg, in France, Germany and the UK), whichhave significant Muslim minorities”.Among other ratings agencies, a bullish report on the prognosis for takafulin the Gulf Cooperation Council (GCC) countries published in April2007 by Standard & Poor’s (S&P) notes that the market in the Gulf aloneis growing at about 40% a year. That, says S&P, means the GCC market“has the potential to reach $4 billion at the current level of development(currently $170 million)”. Much of this growth in the GCC will be driven bychanges in legislative frameworks which have, for example, introducedcompulsory health insurance for expatriates in the UAE and mandatorythird-party motor insurance in Saudi Arabia.Globally, growth will be underpinned by a range of other key influences.Powerful economic growth and reform in the financial sector throughoutthe Islamic world is driving a conspicuous increase in the market forinsurance policies arising from trends such as the surge in demand forSharia-compliant mortgages. That surge is visible not just in marketssuch as Malaysia and in the Gulf, but also in some areas of westernEurope. Datamonitor has forecast that in the UK, for example, grossadvances in the Islamic mortgage market will shoot up from £164 millionin 2004 to almost £1.6 billion by 2009.Hand-in-hand with this skyrocketing demand, however, will be the increasinglywidespread recognition that conventional insurance is in conflictwith Sharia law for at least two key reasons. The first is that traditionalinsurance is perceived to be founded on principles associated with “gharar”(uncertainty or ambiguity), while the second is that the investment policiesof conventional insurance companies are based on fixed-interest productsproscribed because of their reliance on “riba” (interest).Bancatakafal definedHistorically, the growth of the takaful industry has been driven by thedistribution of products through a number of channels owned andmanaged by dedicated takaful companies. Today, however, the industryis gravitating increasingly towards bancatakaful – Islamic financialservices’ equivalent of bancassurance – and the distribution of familytakaful-linked investment plans. Bancatakaful is defined as the deliveryand distribution of a suitable range of tailored, bankable protectionand long-term savings and pension products designed to meet the lifecycleneeds of the individual customer base of a bank or other financialinstitution.The reasons underpinning that trend are easy to identify. Banks areincreasingly committed to meeting the overall financial planning needsof their customers on one hand, and generating stable, fee-based incomefor their own business on the other. Self-evidently, the capacity to tailorsuitably diversified risk/reward investment portfolios, select top quartileperforming funds from major international brands and control definedportfolio risk levels are all powerful drivers for the retail value proposition.That proposition can only be further strengthened by productcertification by an independent Sharia board of experts and ongoingmonitoring of the product’s compliance with Sharia law.White-labellingIt is equally self-evident, however, that the number of product providerswith the necessary expertise to provide this comprehensive service islimited. That is why one increasingly important driver of growth in themarket will be the evolution of white-labelling – the creation of productsby one company and their rebranding and distribution by another.There are a number of persuasive reasons why banks are likely to favourthe white-labelling option. Long-standing customers will inevitably feelmore comfortable with their banks’ own brand than with that of a newcomer,while banks themselves are able to use white-labelling to blendtheir own Islamic mutual funds with high-quality and top-performingthird party Sharia-compliant funds. Additionally, white-labelling meansthat all customer assets of the family takaful-linked investment businessremain within the bank’s custody, which may also gain the corporatebank account of the life insurance company supplying the product.Other advantages for banks in pursuing the white-labelling model arethat the life cycle nature of the product will allow them to enhance customerrelationships and therefore underpin client retention rates. Banksexploring white-labelling of takaful products will also gain access to the