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Thursday, 28 June 2012

Oman plans Islamic finance rules before year-end

Legislation covering takaful (Islamic insurance) and sukuk (Islamic fixed income securities) is expected to be finalised by the end of the third quarter of the year, Capital Market Authority officials told Reuters.
Approval of the country's first takaful licence will follow soon afterwards, as three applications have already been received by the regulator, Ahmed Al Harrafi, takaful team leader at the CMA, said by telephone.
This complements efforts by the country's central bank to introduce a law that will supervise Islamic banks; the law is in its final stages of review, said Mohammed Al Abri, senior director at the CMA.
Last year, after insisting for years that its banking industry should be purely conventional, Oman reversed its stance and said it would introduce Islamic finance, partly to prevent outflows of funds to sharia-compliant institutions elsewhere in the Gulf.
But the introduction of the regulatory framework may not produce a rapid surge of activity. Many institutions are still grappling with the need to obtain product expertise, arrange oversight by boards of Islamic scholars, train staff and build computer systems.
"There is an expectations mismatch," Azmat Rafique, head of Islamic banking at Oman Arab Bank, told Reuters. "On the ground things haven't been finalised...and banks are still gathering teams and systems."
Last week newly formed Bank Nizwa, the country's first Islamic bank, failed at a shareholders meeting to appoint its board of directors, despite an initial public offer of shares that raised 60 million rials ($156 million) last month. This could potentially delay its schedule for launching products.
Also, banking competition will be stiff. Bank Nizwa obtained its banking licence last year along with Al Izz International Bank, another new Islamic institution; they will bring the total number of locally incorporated banks to nine.
Oman will thus have 19 commercial banks for a population of only about 2.8 million, with the three largest lenders initially accounting for about 60 percent of total banking assets, according to central bank data.
Competition will be increased by the fact that conventional banks will be allowed to use Islamic windows to offer sharia-compliant products through their existing branch networks. Bank Muscat, which has Oman's largest branch network of 130 offices, this week joined Bank Sohar and National Bank of Oman in saying it would deliver products this way.
Converting some existing conventional banks into Islamic banks could streamline the broad banking industry, but the central bank has not indicated whether this will be permitted, commercial bankers said. The industry may in any case not be advanced enough to handle such conversions, said Rafique.
Recent consolidation in the banking sector has been limited to a merger of HSBC's Omani business with Oman International Bank, the country's fifth largest lender, which obtained approval earlier this month.
Rafique predicted 10 percent of existing bank customers in Oman would eventually make the switch to Islamic banks, which would also attract a similar number of people who are currently outside the banking sector because of their religious belief in avoiding interest.
The takaful legislation, on the other hand, will not allow the use of Islamic windows but instead require stand-alone operations with paid-up capital of 10 million rials, Al Harrafi said.
But such capital requirements are difficult to justify in a sector eager to build scale, said Shyam Zankar, regional head at Bahrain-based Medgulf Allianz Takaful.
In addition, takaful companies will also have to be publicly floated on the country's stock exchange within five years of launch, Al Harrafi said, adding that this requirement might dampen the interest of at least one of the applicants.
Two firms have begun headhunting for senior positions in anticipation of entry into Oman's takaful market, said a Gulf-based chief executive of an insurance firm, who asked not to be named.
In the area of monitoring Islamic product standards, Oman is opting for the decentralised approach which prevails in the Gulf, rather than the centralised Malaysian model. This could facilitate early growth of the industry, by permitting a wider range of competing products, but perhaps limit broad interest in Islamic finance across the population because of the lack of a single, commonly accepted sharia board overseeing the industry.
The CMA, which became a member of the Malaysia-based Islamic Financial Services Board in March, considered creating a centralised sharia supervisory body but this option was not chosen, Al Harrafi said. An Islamic banking circular from Oman's central bank urged each bank to establish its own sharia board.
The standards of the Accounting and Auditing Organisation for Islamic Financial Institutions, a Bahrain-based industry body, will be used as guidelines in Oman, Rafique said, but will not be made compulsory. 

(Reuters / 27 June 2012)

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Islamic Bank of Thailand (IBank) sets sights on halal export loans

The Islamic Bank of Thailand (IBank) plans to increase its focus on halal food exports, with a target of 3 billion baht in loans for the industry this year, says bank president Dheerasak Suwannayos.
The target is a 50% increase from last year, he said. IBank expects to extend 20 billion baht in credit to all sectors this year.
Mr Dheerasak said of Asean's 601 million people, Muslims account for 260 million.
The planned market integration called the Asean Economic Community in 2015 will result in new business opportunities for the Thai halal food industry across the region, he said.
Other markets also offer strong potential in the sector. Mr Dheerasak said while the US has only 8 million Muslims, the value of its halal food market is quite large at an estimated US$12 billion per year.
The global market is estimated at 700 billion baht per year. Thai halal food exports are worth only 10 billion baht, out of total Thai food exports of some 70 billion baht.
Mr Dheerasak said in IBank's 10th year of operations it will increasingly focus on retail customers, particularly those unable to access formal financial services. Retail customers account for 62% of the bank's total credit portfolio, with small and medium-sized enterprises representing the rest.
The bank hopes its "Family Member" referral programme will help support its marketing initiatives, with current customers receiving commission fees based on new business volume generated from referrals.
Over the next several months, the bank also will introduce a new credit card, with a target of 40,000 cards issued by the end of the year.
In contrast to ordinary bank credit cards, the IBank card can be used to purchase goods and services while remaining in compliance with Islamic laws.
Mr Dheerasak said the bank plans to increase capital, now 12.5 billion baht, by another 1.5 billion in the third quarter to support new business growth. The additional capital is projected to be sufficient to support business growth for the next two years.

(Bangkok Post business / 28 June 2012)

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Nigeria: Challenges, Prospects of Takaful (Islamic Insurance)

The National Insurance Commission (NAICOM), recently announced its plan  to  release the guidelines on Takaful or Islamic Insurance by the end of next month. Nnamdi Duru writes on the peculiarities of this highly specialised branch of insurance practice and the benefits 
The insurance regulator, National Insurance Commission (NAICOM) said it would soon put in place the necessary framework for the take-off of takaful insurance, a platform for the protection of lives and properties based on risk sharing in line with the principles and practice of Islam as against risk transfer as in conventional insurance.

Confirming this, Commissioner for Insurance, Mr. Fola Daniel, said: “By July, our guidelines for takaful will be ready.  So,  anytime from August and September, we should have a platform to do takaful, we will be in a position to issue licences to people to do takaful insurance not as a window.  So before end of September, we should be in a position to issue out licenses for takaful.”
Speaking on takaful, the commissioner said: “Takaful is not a product, it is a concept.  It is not about religion really. It is about a way of sharing risks and not transferring risks.  Takaful is a kind of community risk sharing, it is fantastic, people will take it.  It does not matter whether they are Christians or Moslems.”
Contrary to the situation where a few operators get approval to sell a few takaful products, the commission is thinking of creating a separate platform for companies to do takaful insurance as it is practised in other markets and not as single product offerings.
About Takaful

Unlike conventional insurance, takaful complies with sharia principles of compensation and shared responsibilities in the community. It has been expanded to cover general risks, health and family (life) plans for Muslim communities.
Takaful is commonly referred to as Islamic insurance because of the similarities between the contract of kafalah (guarantee) and insurance.  It is founded on the principles of cooperation and separation between the funds and operations of shareholders, thus passing the ownership of the takaful insurance fund and operations to the policyholders.
Muslim faithful  believe that insurance should be based on principles of mutuality and cooperation and this means shared responsibility, joint indemnity, common interest and solidarity.
In takaful, the policyholders are joint investors with the insurer (takaful operator), who acts as manager for the policyholders. The policyholders share in the investment pool's profits as well as its losses. A positive return on policies is not legally guaranteed, because in Islam, any fixed profit guarantee is equivalent to paying interest.
How it Works

Policyholders or shareholders agree to guarantee each other and instead of paying premiums, they make contributions into a mutual pool, creating a takaful fund.
The amount of contribution that each participant makes is based on the type of cover they require and their personal circumstances. As in conventional insurance, the policy or takaful contract specifies the nature of the risk and period of cover.
The takaful fund is managed and administered on behalf of the participants by a takaful operator who charges an agreed fee to cover costs. These costs include the costs of sales, marketing, underwriting and claims’ management.
Claims made by policyholders are paid out of the takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the policyholders or shareholders of the fund and not the takaful operator and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.
Some of the peculiarities of takaful insurance are outlined below:
Contributory Premium
In conventional insurance, the customers pay premium in return for the insurance protection.  It is not so in takaful insurance.  In this case, policyholders make contributions equitable with the risks they are bringing into the pool.  This is different from the premium which is based on ratings calculated by underwriters in the case of conventional Insurance.
Investment of takaful funds is done in compliance with sharia law which prohibits gambling and profiteering and consumption of alcohol.  In addition, the funds should not be invested into economic activities that negate Islam and sharia,  including brewing alcohol, etc.
Profit/Loss Sharing
In takaful, policyholders are owners of the company and in that capacity they are entitled to share part of the profits or losses made by their company.  This is contrary to conventional insurance where policyholders are just customers who buy cover while shareholders share profit or loss as the case may be.
Claims in takaful are usually paid to those unfortunate policyholders/shareholders who suffer some insured losses within the period of cover.  They are compensated from the pool and reinstated accordingly. Claims experience is not disturbing as the volume is not such that would give any insurer sleepless nights but the problem lies in the frequency of usually small claims.

Retakaful or Reinsurance

Sharia principles apply to takaful as much as it applies to retakaful.  The reinsurance contract, for Islamic companies, must be contracted in conformity with the sharia.
There is need for strong and credible retakaful operators to assist the growth and expansion of takaful business globally.  The shortage of retakaful capacity and the lack of companies in the market currently present great challenge to operators.  The challenge is to have a large enough takaful market to justify retakaful business.
In response to this challenge, sharia scholars allow takaful operators to reinsure conventionally when no retakaful alternative is available, although retakaful is strongly preferred.
Takaful Risks
One of the greatest challenges that the takaful operators face worldwide is the rating system.  There is yet no scientific method or model for rating risks in takaful insurance.  In conventional insurance, there are standard rates for fire, motor, life and other lines of business prepared by actuaries. This is not available in takaful.
Also,  the high rate of default by beneficiaries of takaful and lack of efficient risk management tools to eliminate fraud and other risks are among the challenges.  There is also the  absence of an effective risk management tool which can effectively eliminate fraud and other risks in the system as well as  the absence of reinsurance capacity for takaful insurance.  In addition, there is   the absence of credit information in the market and moral hazards.
Speaking on the prospects of takaful insurance, the Assistant Managing Director of Underwriting-Sherikan Insurance and Reinsurance Company, Sudan, Mr. Omer Elfarowg Ahmed said the economy would benefit from the attendant accumulation of huge micro-finance fund and expansion of the micro-finance infrastructure.
The market regulator’s job, according to him, would be simplified when takaful market grows,  while legislations on takaful and insurance generally would improve significantly.
Takaful as well serves as a guarantee to credit providers just as policyholders benefit from loss prevention services put in place by service providers and share in the surpluses recorded at the end of the accounting period.
The system is also likely to reduce insurance costs and economic waste and help to alleviate poverty and increase the level of corporate social responsibility of the insurance industry.
Takaful operators have expanded the scope of coverage to livestock insurance, fire and burglary, motor, agricultural and other products.  They encouraged beneficiaries to form industrial unions and cooperative societies to be eligible to participate.
The operators have also encouraged the respective Central Banks in African countries to maintain up-to-date information on beneficiaries of takaful and micro-finance credit.
If the necessary platform is put in place and if would be operators do their home-work well, takaful may hold the aces to deepening insurance penetration in the country.
(This Dyas Online / 27 June 2012)

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