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Takaful - Sukuk: Building the ecosystem for a new asset class

HATIM TAHIR
By HATIM TAHIR
6 years ago
The takaful industry needs to boost the growth of sukuk as a vehicle for development and business expansion.Ard, Islam, Mal, Shariah , Sukuk , Takaful


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  1. 52 Middle East Insurance Review February 2018 Takaful – Sukuk Building the ecosystem for a new asset class The takaful industry needs to boost the growth of sukuk as a vehicle for development and business expansion. Dr Hatim ElTahir of Deloitte, Middle East, lists conducive conditions for widening the use of this asset class. Tak-Sukuk.indd 52 C ompared with total Islamic finance assets, takaful contributions represent a negligible share of less than 2% (Table 1). The takaful contributions of US$38 billion in 2015 were driven by three countries – Saudi Arabia, Iran and Malaysia – whose contributions together represent 85% of the total. Although takaful markets have not grown at the same rate as the sukuk (Islamic bonds) and Islamic banking markets, a number of emerging growth opportunities exists. One in particular seeks to leverage the interest from takaful operators in funding their business operations and expansions through tapping into the sukuk market. This solution involves long-tenure assets and acts as a means to manage the asset and liability requirements of takaful operators. There seems to be a clear variation of growth in takaful around the world. For instance, Malaysia is, by far, leading the wave of best practices legislation in the sector, and has developed innovative family and general takaful products. Unsurprisingly, it was also the pioneer in the issuance of takaful sukuk. Elsewhere, GCC countries, led by the largest economy, Saudi Arabia, are continuing to provide a more level playing field for both takaful and conventional insurers, and have introduced a number of new measures and regulations to adopt best international practices and build capacity in the insurance industry as a whole. It is vital, however, to build common knowledge goals and collaborative industry dialogues in key markets, engaging regulators, practitioners and professionals to develop regulatory frameworks, standards and best practices that will boost the growth, effectiveness and competitiveness of takaful sukuk. Governments and business associations in Malaysia, Indonesia and the GCC states remain unconditionally committed to growing the industry and have put forward rules and policies to help build ecosystems to contribute more effectively to regional and internal economic growth, and to drive positive economic and social impact amongst communities. Harmonising standards in practice areas will be key to driving this industry forward. State of play and challenges Generally, industry institutions, standard developers and policymakers in 1/2/2018 4:04:17 PM
  2. February 2018 53 Middle East Insurance Review Takaful – Sukuk Table 1: Islamic financial segments by sector 2015 a conducive regulatory environment that supports growth and efficiency of this asset class are as follows: US$ billion Country / region Banking assets Sukuk outstanding Islamic funds assets Takaful contributions Total Islamic finance assets Asia 228.73 205.88 21.67 9.48 465.75 GCC 749.34 101.18 24.50 17.54 892.55 MENA (ex GCC) 425.31 6.05 12.81 10.72 454.89 1.35 2.43 1.24 0.01 5.02 46.37 4.91 6.22 0 57.50 1,451.09 320.44 66.44 37.75 1,875.711 Sub-Saharan Africa Others Total the core markets of Asia, the Middle East and Europe are concentrating their efforts on developing prudential, coherent regulations and practices to sustain growth, as well as to provide frameworks for innovation and efficient Islamic financial services. Their aim is to develop good governance and business ethics practices such as those developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). However, a number of challenges still need to be addressed in order to boost the growth of sukuk. Some of these key challenges are reflected in the following questions: • How and what are the mechanisms and institutional set-ups to develop and improve the issuance and deployment of capital? • How can we build capacity and takaful insurance expertise in un- derwriting, product development and investment placements? • How can a strong and sound regulatory framework contribute to the asset class growth, competitiveness, economic growth and the ultimate growth of the takaful industry in general? • How can other investment/finance instruments work together with takaful sukuk and provide common economic value and impact on local economies and societies? • Where are the opportunities for collaboration between key industry stakeholders at all stages of the growth in takaful sukuk issuance? These important questions need to be answered if the takaful industry is to grow and make a healthy contribution to industry development and increase its share of Islamic finance industry assets in the future. Some of the most pressing challenges that need to be addressed in creating • Improving legislation around land registry and removal of double taxation; • Bankruptcy laws and investors’ rights laws; • Capital market regulations and listing requirements; • Shariah governance and compliance; • Financial reporting and disclosures; • Capital adequacy requirements; • Risk management and controls; • Capital market capabilities; and • Human capital development and training. Adopt risk-based approach As per recent industry reports and Deloitte research analysis, the takaful industry requires more innovative strategies in distribution, product and service offerings, and building marketing capabilities to compete more efficiently with conventional insurance services. A positive forward innovative strategy requires engaging industry regulators and practitioners in focused group discussions to better understand the needs for regulatory and practice improvement. Shariah scholars and product development experts need to ensure and adopt a risk-based approach in designing products and takaful solutions, allowing for the necessary changes/ modifications in different markets and cultures. Dr Hatim El Tahir is Director, Islamic Knowledge Finance Center, Deloitte, Middle East. (US$ million) Figure 1: Total takaful assets of key markets 16,000 14,000 14,206 12,000 10,502 10,000 8,000 7,324 6,000 4,000 2,072 2,000 Saudi Arabia Tak-Sukuk.indd 53 Iran Malaysia UAE 1,269 Indonesia 669 535 372 Bangladesh Qatar Bahrain 186 Kuwait 174 Pakistan 1/2/2018 4:04:29 PM