Dubai: Despite the challenges, the Islamic insurance sector in the UAE, as well as Kuwait, is likely to attract more following in the next few years.
Standard & Poor estimated that the two markets could deliver “relatively strong growth” in premiums in the coming years, as the economies of both countries continue to grow.
“The challenge for takaful insurers, as for any new insurer, is to attract and sustain a well-priced volume of stable business at a scale sufficient to cover their cost bases,” the report said.
According to Ernst & Young, there is still immense unrealised potential that the takaful sector can achieve. For one, the takaful market share can be expanded as the industry matures and establishes stronger distribution capabilities.
“The share of Islamic finance in the GCC and Malaysia is 25 per cent and 22 per cent, whereas takaful market share is 15 per cent and 10 per cent respectively. Takaful market has at least 10 per cent of the known Sharia inclined market that they have not yet tapped,” an Ernst & Young report said.
By focusing on underwriting capabilities, service standards and product offerings, coupled with establishing stronger market relationships, the takaful industry, which is still predominantly retail-driven, can also tap the corporate segment.
In an interview on the industry outlook and the role of Islamic banking in Malaysia, Al-Rajhi CEO Datuk Azrulnizam Abdul Aziz said the growth of the sector will bring job opportunities for Malaysians and will also raise Malaysia’s standard as an Islamic financial hub.
Azrulnizam pointed out that the recent crisis in the conventional banking sector was one of the reasons that spurred Islamic finance growth across the globe, turning it into a winning phenomenon that discarded greed in particular.
Q: What are the benefits for the public and the country with the fast paced growth of Islamic banking and finance in Malaysia?
A: The spillover effect from the economic growth in the Islamic finance sector will definitely benefit the Malaysian public at large, particularly in terms of employment opportunities and choice of Islamic finance products.
The financial sector is expected to provide employment of up to 275,400. The sector, which is the new engine for economic growth, saw strong performance in 2012 with higher profitability of over RM4 billion, assets reaching half a trillion ringgit.
Innovations and greater liberalisation of the Malaysian financial sector strengthened the international dimension of the Islamic banking system, offering possibilities for Malaysia to enter into inter-regional trade and cross border investments.
Q: Do you think Malaysia’s market situation will allow Islamic banks to beat conventional banks in the long run?
A: The recent global financial crisis in 2007 proved that there was a systematic failure of financial regulation, poor governance and most of all greed. At the back of the crisis, Islamic finance continues to prevail and grow stronger. Now we are seeing greater interest in Islamic finance, be it from the customer point of view, industry players as well as financial centres. The strengths in Islamic finance are derived from the Shariah principles, it is the main pillar that has contributed towards stability and resilience of Islamic finance.
Q: The International Gold market is crumbling, with gold prices tumbling rapidly. Is it time for the customers to put their money in the Al-Rajhi gold products and what do you think of the rapid fall in gold prices?
A: “Buy low, sell high” is the ideal investment philosophy for any Al-Rajhi customer to take advantage of the current dip in the gold price. It is recommended for any medium risk investor with a minimum five year horizon to invest in our physical gold regularly to benefit from the “Ringgit Cost Averaging” method.
Q: What differentiate Al- Rajhi’s products from other Islamic banks?
A: Al-Rajhi offers distinct and unique full Shariah-compliant products and services to the market. The recent introduction of Collateralised Commodity Murabahah-i (CCM-i) an instrument for Treasury in managing daily market transaction. We are the first Islamic financial institution to adopt such instrument, showing our penchant for innovative and pioneering product solutions.
Q: What is the latest milestone for Al-Rajhi since its inception in Malaysia?
A: Al-Rajhi has grown it footprint to 24 branches all over Malaysia, latest being a branch in Sg Petani, Kedah. Last year, we developed the CCM-i which is based on a Commodity Murabahah transaction and backed by a pledge mechanism, introduced as an alternative solution in addressing the urgent demand of Islamic banks in managing liquidity. It is a low credit-risk financial instrument for the Islamic interbank money market players, enabling Islamic banks to tap on liquidity by utilising their holdings of tradable sukuks and other acceptable Islamic securities as pledge for their liquidity requirements.
This year, we just launched new initiative which is called “Hijrah with Al-Rajhi” aimed at increasing customer base, liabilities and assets.
JPMorgan Chase & Co. is advising clients to buy Nakheel PJSC’s Islamic bonds after last month’s record slump as new projects boost the Dubai developer’s earnings, while government backing makes a default improbable.
State-run Nakheel’s 4.27 billion dirhams ($1.2 billion) of sukuk yielded 9.88 percent at 12:30 p.m. in Dubai, down seven basis points this month, after surging 179 basis points in June. That’s more than twice the average gain in yields on corporate Islamic debt tracked by HSBC/Nasdaq Dubai indexes. JPMorgan listed Nakheel in a July 4 research note as its “top overweight recommendation” among Dubai real-estate debt.
Nakheel will manage to pay or refinance as much as half of the $3 billion of debt due in 2016 as it generates at least $1 billion from new projects and land sales, JPMorgan said. Investors have demanded higher yields to hold Nakheel’s bonds since the company drove Dubai to the brink of default in 2009, prompting the government to extend a bailout.
“The government is quite unlikely to let Nakheel default on its bond obligations in 2016 after supporting the company under much more difficult circumstances,” JPMorgan analyst Zafar Nazim wrote in the note. “Nakheel has been a beneficiary of real-estate recovery in Dubai. We believe that new project launches and plot sales were not baked in the original restructuring plan that was agreed in 2010.”
Nakheel, known for building an island shaped like the frond of a palm tree and another like a world map off Dubai’s coast, has received at least $8 billion of cash from the government since announcing a standstill agreement with creditors in 2009, JPMorgan said.
The real estate industry in Dubai, one of seven sheikhdoms of the United Arab Emirates, has started recovering from a crash that sent prices plunging more than 65 percent. New projects such as the world’s biggest Ferris wheel, a new district with 100 hotels and the world’s largest mall were unveiled in the past year.
Sale prices for residential units have risen 28 percent from a trough in January 2011, according to an index tracked by Jones Lang LaSalle. Dubai’s economy grew 4.4 percent in 2012, the fastest pace in five years. Against this backdrop, JPMorgan also recommends Islamic debt of Emaar Properties PJSC (EMAAR), developer of the world’s tallest tower, and Jebel Ali Free Zone Authority FZE, which leases commercial real estate in Dubai.
The yield on Emaar’s 6.4 percent securities due in July 2019 has declined 25 basis points this month to 5.59 percent today, while Jafza’s 7 percent sukuk due a month earlier yielded 5.43 percent, down 30 basis points. The yield on HSBC/Nasdaq Dubai’s Corporate U.S. Dollar Sukuk Index advanced 73 basis points last month.
“Dubai was able to avert bond default in all of its government-related entities and its economy has recovered to pre-crisis levels,” JPMorgan said. “Nakheel has been a beneficiary of real-estate recovery in Dubai.”
Dubai’s credit risk returned this year to levels it hasn’t seen since late 2008 amid the global credit crisis, after state-linked companies paid or refinanced at least $3.75 billion since the start of 2012. Five-year credit default swaps, which protect investors against non-payment of debt, dropped 130 basis points in the past year to 220 on July 5, according to CMA. Middle East contracts fell 13 basis points, on average, to 302 in the period.
Still, property prices in Dubai are likely to ease “due to high levels of future supply, limited debt availability and more mature market regulations,” Alan Robertson, chief executive officer for the Middle East and North Africa at Jones Lang LaSalle, said by e-mail yesterday.
Investors dumping emerging-market assets sold debt of Dubai property companies last month amid an emerging-market rout triggered by Federal Reserve plans to trim its bond-buying program. Nakheel’s debt isn’t rated, while Emaar’s bonds non-investment grade at Moody’s Investors Service and Standard & Poor’s.
“Dubai’s real estate is still considered a risky sector,” said Montasser Khelifi, Dubai-based senior manager for global markets at Quantum Investment Bank Ltd. “When there’s turmoil in the bond market, investors sell the debt, even though new projects in Dubai are announced regularly these days.”
Nakheel’s business prospects are improving. The company said in May it sold 471 villas valued at almost 1.9 billion dirhams. The developer also expects to sign an agreement with banks to extend the maturity by eight years from 2015 on 8 billion dirhams of debt, a spokeswoman said last month.
Investing in Nakheel’s sukuk may be a risk worth taking, Khelifi said. “While its very possible Nakheel won’t have the money to repay the bonds, it’s good news that they’re seeking to refinance their debt,” he said.
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