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Monday, 14 February 2011

Takaful: The Cinderella of the Islamic finance industry


Takaful (Islamic mutual insurance), the Cinderella of the Islamic finance industry, received potentially a major boost with the entry at the end of January 2011 of US insurance giant AIG (American Insurance Group) into the Malaysian market through a RM100-million joint venture, AIA AFG Takaful Berhad, between its flagship Asian entity, American International Assurance Berhad (70 percent equity) and Alliance Bank Malaysia Berhad (30 percent equity), a member of the Alliance Financial Group Berhad of Malaysia.
In fact, two further international-local Takaful joint ventures are scheduled to come to enter the market in 2011 following the approval last year by Malaysian Finance Minister and Prime Minister Mohd Najib Abdul Razak of the four new joint-venture family Takaful licenses under the Takaful Act of 1984. This was part of Malaysia’s ongoing financial liberalization of its Islamic finance sector which was announced by Prime Minister Najib in April 2009.
These included AIA AFG Takaful Berhad; the joint venture between AMMB Holdings Berhad (70 percent) and Friends Provident Group PLC, UK (30 percent); one between ING Management Holdings (Malaysia) Sdn Bhd (60 percent), Public Bank Berhad (20 percent) and Public Islamic Bank Berhad (20 percent); and one between The Great Eastern Life Assurance Company Ltd. (70 percent) and Koperasi Angkatan Tentera Malaysia Berhad (30 percent).
This brings the number of Takaful operators in Malaysia to 12. The other Takaful operators include CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad and Takaful Ikhlas Sdn. Bhd. Further international interest in Malaysia’s Takaful market is the 35 percent equity stake being finalized by Japan’s Mitsui Sumitomo in Hong Leong Tokio Marine Takaful Berhad.
In addition, Malaysia also has four Retakaful Operators, namely, ACR Retakaful SEA Berhad, MNRB Retakaful Berhad, Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) and Swiss Reinsurance Company Ltd. (Swiss Re Retakaful); and one International Takaful Operator in AIA Takaful International Bhd. In addition, there is also strong presence of the Takaful industry in the Labuan International Business and Financial Centre, where there are 14 Retakaful operators incorporated.
“The launching of AIA AFG Takaful Bhd. is another important milestone in our strategy toward developing a progressive Takaful industry that is resilient and is better able to meet the increasingly challenging and competitive business environment,” explained Mohd Razif bin Abd Kadir, deputy governor of Bank Negara Malaysia, the central bank and Takaful regulator, at the launch of the company in Kuala Lumpur.
However milestones in the Takaful sector should to be put in perspective. Ernst & Young estimates Global Takaful contributions at a mere $5.3 billion in 2008, even though the year-on-year growth was 28 percent. However, the base relatively to the global insurance market is extremely low as such any increase looks impressive. The growth by end 2010 was projected to reach a mere $9 billion.
Bank Negara Malaysia estimates that the Takaful industry is expected to grow by up to 20 percent annually (compared to up to 40 percent for the Islamic banking industry) and is estimated to reach $14.4 billion by end 2010.
Malaysia has the single largest Takaful market in the world with an estimated 26 percent of global Takaful assets which according to Bank Negara Malaysia totaled RM12,445.4 million — and not the second largest as one FT publication maintains because for some curious reason it includes the Iranian insurance market which is not Shariah-compliant per se. Iranian insurance companies confirm that the insurance market in Iran is not Shariah-compliant per se. The same applies to the Iranian banking sector.
Bank Negara Malaysia’s Quarterly Bulletin for Q3 2010 stressed that the insurance and Takaful sector remained resilient, supported by strong capitalization and improved profitability with a capital adequacy ratio of 222.7 percent with excess capital of RM19.2 billion. What a pity the data for the insurance and Takaful sectors are co-mingled making it impossible to analyze which of the two was better performing on a quarterly basis.
Takaful Fund Assets, according to Bank Negara Malaysia, comprised only 8 percent of the total assets of the Malaysian insurance and Takaful industry in 2009 — up from 5.7 percent in 2005 and 7.5 percent in 2008.
Total Takaful Funds, however, have more than doubled in this same period from RM5,878.4 million in 2005 to RM10,569.4 in 2008 and RM12,445.4 million in 2009. Similarly, Takaful net contributions income increased from RM1,333.7 million in 2005 to RM3,025.1 million in 2008 to RM3,521.8 million in 2009.
Where Razif is spot on is the growing diversity of the sector-product offerings by Takaful operators have further broadened to cater to the differentiated needs of customers, with family Takaful products (equivalent to life insurance) now dominating the market with a share of 78 percent of net contribution, as compared to general Takaful products (equivalent to general insurance such as fire, car etc) that dominated a share of 63 percent back in 1984.
"Similarly, the Takaful industry,” explained Razif, “exhibits high potential, as demonstrated by its robust expansion with annual growth rate of total assets and contributions averaging between 20 percent and 26 percent over the period of 2004 to 2009.”
Robust expansion may be a slight exaggeration, but Bank Negara Malaysia is rightly confident of the “strong growth prospect for the Takaful sector, in view of the large untapped potential, where out of the 53.5 percent market penetration rate for both Takaful and insurance, the market penetration rate for Takaful was merely 10.9 percent in September 2010.” The untapped areas of business within the family Takaful industry, accounting for 50.3 percent of contributions in September 2010, says the central bank, are micro-Takaful, medical and retirement products.
The Malaysian government can help leverage this growth potential by giving the Takaful sector the same policy and structural support which it has given the banking and capital markets (Sukuk) sectors over the last three decades. This support could take the form of various initiatives including increasing the provision of Shariah-compliant retirement and pension products of both government employees (those who opt for such a scheme) and individuals in general; and the greater use of Takaful products by government-linked companies (GLCs) and the two sovereign wealth funds, Khazanah Nasional and 1 Malaysia Development Berhad (1MDB) in their business.
Malaysia has the most advanced Takaful industry regulatory and legal infrastructure in the world, the same as for its Islamic banking and capital markets architecture. Given its role in providing risk protection, the Takaful industry offers a suite of financial products and services that complement the existing range available for consumers. In recognizing its importance, stressed Deputy Governor Mohd Razif, “focus has been given in developing a dynamic and vibrant Takaful industry within our Islamic financial system. Where the industry is today has been an outcome of an accumulation of efforts in instituting a comprehensive Islamic financial landscape in Malaysia's financial system. A strong institutional infrastructure and effective legal, regulatory and Shariah governance framework are the underpinnings of our Islamic financial industry. In our pursuit to develop Islamic finance, the recent enhancement to the Central Banking Act has accorded formal recognition to the existence of Islamic finance as an arm of the dual financial system, thereby giving significance and due prominence to Islamic finance.”
Moving forward, the new Shariah Governance Framework, which became effective on Jan. 1, aims at enhancing “the role of the board, the Shariah Committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment” of Malaysian Islamic financial institutions including Takaful and Retakaful operators.
Bank Negara Malaysia recently also issued Guidelines on Takaful Operational Framework, which establishes principles governing the operational processes of Takaful business to ensure that business activities and innovations are within the Takaful operator's risk management capacity. “With effective discharge of Takaful operators' duties, the interests of Takaful stakeholders will be safeguarded as the guidelines place emphasis on sound management to ensure sustainability of Takaful operators,” added Razif.
AIA AFG Takaful Bhd., which has a paid-up capital of RM100 million, will concentrate on bancatakaful to further enhance the development of the family Takaful industry in Malaysia, including micro-Takaful, medical and retirement products.
(Mushtak Parker/Arab News)
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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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