Opportunities & Trends in Islamic Finance - Euromoney

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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
fast-growing web-based point of sale (POS) and online administrationsystems without having to incur the costs of integrating new systems orbuilding new interfaces.The expansion of white-labelling in the takaful industry has been supportedby the growth of call centres and mobile phone services, whichare helping to promote broader distribution and enhanced transparencyacross the sector, with many Islamic financial institutions havinginvested very substantially in the roll-out of 24/7 ‘virtual’ channels inrecent years.help to further build” the retakaful segment of the Islamic insuranceindustry.Another challenge that stands in the way of rapid growth in the takafulindustry arises from the interpretation of Sharia law. Although progress hasbeen made in the development of non-life savings-related products, there isstill a widespread belief across the Muslim world that life insurance is forbiddenunder Islamic law. Gradually, products are being developed that arebeing tailored in a way that is acceptable to Sharia experts, suggesting thatthe longer-term prospects for takaful life insurance products are promising.“Powerful economic growth and reform in the financial sector throughout theIslamic world is driving a conspicuous increase in the market for insurancepolicies arising from trends such as the surge in demand for Sharia-compliantmortgages”Although the distribution of takaful life and savings products throughbank channels is a relatively new phenomenon, a number of initiativesare already demonstrating that the advent of POS and online administrativesystems are supporting the sales process through branchnetworks. An example is the “Meethaq” Takaful and Savings Programmeunder which the Abu Dhabi Commercial Bank (ADCB) is offering investment-orientedlife takaful products to UAE residents in a joint venturewith the Dubai Islamic Insurance and Reinsurance Company and FWUGroup. For regular contributions starting at as little as AED500 ($136) amonth, ADCB’s customers can make their own choice from three Shariacompliantsavings strategies which – according to ADCB – allows saversto combine “a lifestyle savings plan with personal takaful protection forcomplete peace of mind”.Challenges to be overcomeWhile the general consensus is that the outlook for the global growthof takaful is bright, a number of challenges still need to be addressedif its potential is to be realized. For example, one growth area that hasyet to be developed is the market for pure retakaful solutions, or Islamicreinsurance, allowing for the immunization of originally insured risks.Progress has been made with, for example, the launch at the end of2005 of the Dubai-based Takaful Re, which is rated BBB by S&P andreported a net profit of $1.263 million in its first full year of operationsin 2006. Others that have entered the global retakaful sector recentlyinclude international companies such as Tokio Marine, Swiss Re, ConveriumMunich Re and Hanover Re.Nevertheless, more retakaful solutions would clearly make a very positivecontribution to the evolution of the global takaful industry. Asa recent report published by Fitch explains, “this kind of capital andpricing support is especially valuable in the case of takaful because suchbusinesses currently tend to be relatively small niche operations ands insome cases have expertise in Sharia compliance rather than in insuranceunderwriting and pricing”. Fitch says that it expects a developing retakafulsector “may well lead to greater takaful capacity which will, in turn,A further stumbling block to the development of the takaful sector hastraditionally been the fragmented regulatory environment for the industry.The Islamic Financial Services Board (IFSB) and the InternationalAssociation of Insurance Supervisors (IAIS) have addressed this issue bydrawing up a global, uniform set of regulations, which will enhance thetransparency and global marketability of takaful products.Continued internationalizationIn spite of these challenges, one very encouraging pointer to the futuregrowth of the market has been the commitment that a number of thelargest multinational insurance companies are now making to its development.AIG Takaful, a subsidiary of the world’s largest insurer, AmericanInsurance Group (AIG), was awarded a licence by the Central Bankof Bahrain in July 2006, and has focused largely on accident and health,motor, personal contents, property and casualty insurance. Europeanheavyweights such as Allianz and AXA are also becoming increasinglyactive in the market. Leading UK insurers have also underscored theirconfidence in the Malaysian market through the establishment of jointventures such as CIMB Aviva Takaful and Prudential BSN Takaful.For further information, please contactDr. Manfred J. Dirrheimer Sohail JafferChairman, FWU GroupPartner, FWU GroupBoschetsrieder Straße 67 4a Rue Albert BorschetteD-81379 Munich L-1246 LuxembourgTel: +49 (0) 89 7485880 Tel: +352 26197701Fax: +49 (0) 89 74858881 Fax: +352 26197801FWU GROUP • The potential of Bancatakaful15
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Opportunities & Trends in Islamic Finance - Euromoney

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