An overhaul of Malaysia’s Islamic finance regulations is expected to increase take-up of sharia-compliant insurance (takaful) products, although the new rules could encourage smaller operators to join forces with more established rivals.
New legislation came into effect on June 30, along with parallel laws revamping the operations and regulation of the conventional financial sector. The new Islamic Financial Services Act (IFSA) replaces previous legislation enacted over the past 30 years, strengthening regulatory oversight and boosting industry transparency.
According to a statement from Bank Negara, the central bank, the new rules will provide “a comprehensive legal framework that is fully consistent with sharia in all aspects of regulation and supervision”.
Under the new act, religious advisers will be held legally accountable for financial products. They will also be subject to monetary penalties and could face imprisonment if found to be in breach of the laws.
In the takaful sector, the IFSA will require insurers to separate their life and non-life business lines. Firms that hold composite licences will need to divide their operations within five years.
The new rules are expected to help ensure the rights of takaful consumers, setting out disclosure requirements and mandating that insurers provide a minimum level of information to customers at each stage of the contract process.
“The IFSA will lead to greater consumer protection and subsequently greater confidence in takaful,” Mohamed Rafick, CEO of Munich RE Retakaful, told OBG in an interview in mid-July. “It will also hold takaful companies accountable for their pricing strategies by ensuring that risk funds are sustainable.”
The stringent pricing accountability could put pressure on smaller operators in the industry, Rafick added. They could also face challenges in meeting the new higher capital requirements that are specified by the IFSA.
While there are around a dozen takaful operators in the market, the sector is dominated by a few firms that, between them, account for about 90% of the estimated combined $6bn worth of assets held.
Some of the larger players have expressed interest in acquiring smaller outfits in the wake of the new regulations.
In July, Hassan Kamil, group managing director of Syarikat Takaful Malaysia, the second-largest Islamic insurer, told Reuters his company might be in the market to absorb smaller rivals. “If their portfolio is attractive, we could be buying up business,” he said.
However, analysts are confident that the new regulations will help the sector to expand.
Ahmad Rizlan Azman, CEO of Etiqa Takaful, said the improved regulatory environment, alongside growing public understanding of takaful products, would help the sector to develop into 2015 and beyond.
“Recent reports indicate that the Malaysian takaful industry is expected to grow by 20% per annum for the next two years as consumer acceptance grows and regulatory changes provide a stronger and more stable infrastructure for the shariah-compliant insurance industry,” he told a conference in Kuala Lumpur in late June.
However, the takaful sector still lacks the level of consumer acceptance required to underpin strong growth. Many products in the takaful range, as yet, have limited exposure in the Malaysian market. The penetration rate for life takaful stands at 13%, considerably lower than that of conventional life insurance, at 55%.
According to a recent survey commissioned by Swiss Re, about 30% of Muslims in Malaysia have a good understanding of takaful, while 16.5% hold policies. Though this is a far higher rate than in Indonesia, where only 5% of the population were found to be familiar with takaful and 1% choosing to hold the sharia-compliant product, the survey indicates that more work needs to be undertaken to boost penetration rates.
By tightening up the regulatory structure of its takaful segment, Malaysia will further bolster confidence in both the product and the broader Islamic financial sector and may well set the benchmark for other countries seeking to boost accountability and transparency in their own sharia-compliant markets.
KUALA LUMPUR: The strongest demand at a Malaysian Islamic bond sale in 17 months signals investors are returning to the world’s biggest sukuk market.
Borrowing costs on the government’s five-year local currency debt fell five basis points this month to 3.67% after reaching 3.72% on July 31, the highest level since May 2010, a central bank index shows.
Similar-maturity US Treasuries yield 1.38%, German bunds 0.7% and Japanese securities 0.29%.
Malaysian debt is still appealing even as speculation of reduced US stimulus curbs appetite for emerging-market assets, according to CIMB Group Holdings Bhd.
Investors bid for 2.92 times the RM4bil of syariah notes on offer at a July 19 auction, the highest demand for all government securities since February 2012.
“Malaysia’s sukuk still offer higher returns than those in developed markets,” Mohd Fadzil Mohamed, who helps oversee RM3.4bil as chief executive officer at Libra Invest Bhd, a unit ofECM Libra Financial Group Bhd, said in an Aug 2 interview.
“They will continue to attract local and foreign long-term institutional investors such as pension funds and insurance companies,” he said.
Malaysia’s five-year Islamic notes gained 10.4% in 2013, the Bank Negara gauge shows. The Bloomberg Global Developed Sovereign Bond Index has declined 4.5%, while securities in emerging markets dropped 7.3%, according to JP Morgan Chase & Co’s EMBI Global Index.
Overseas investors reduced holdings of Malaysian syariah-compliant notes, both corporate and sovereign, by 3.3% to US$5.8bil in June from an unprecedented US$6bil in May, central bank data showed last week. Ownership of all government securities fell 5% to US$66bil.
The Bloomberg-AIBIM Bursa Malaysia Sovereign syariah Index, which tracks the most-traded notes, advanced 0.1% to 111.014 on Tuesday and is up 0.7% this year.
Issuance of local-currency company sukuk isn’t sufficient to keep up with demand. Malaysia’s syariah-compliant banking assets climbed 6.3% to US$162bil in May from end-December, figures from Malaysia International Islamic Financial Centre showed on Aug 1. — Bloomberg
Sales dropped 63% to RM21.6bil in 2013 from a year earlier, after reaching an all-time high of RM95.8bil in 2012, data compiled by Bloomberg show.
Malaysia accounts for 60.4% of the US$245.3bil of Islamic bonds outstanding worldwide, Nik Mohamed Din Nik Musa, Kuala Lumpur-based director of MIFC’s promotions unit, told reporters Aug 1. Issuance in Malaysia totalled US$41.5bil in the first half, or 68% of the global total, he said.
“Foreign holdings of Malaysian government paper are at a comfortable level,” Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy chief executive officer of CIMB Islamic Bank Bhd, a unit of CIMB Group, said in an Aug 3 e-mail.
“Judging from the massive demand generated by the government’s sukuk issuance last week, I’m sure this attracted plenty of demand from foreigners as well.
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