Insurers agree with SECP to allow takaful windows

DUBAI: Pakistan's insurance firms have resolved a legal dispute with regulators which allows them to offer takaful, or Islamic insurance, a move expected to attract new players and boost competition in the sector.

Pakistan introduced new takaful rules in 2012, allowing the use of takaful windows, which enables insurers to offer sharia-compliant and conventional products side by side, provided client money is segregated.

This prompted a legal challenge by the country's five takaful firms claiming the rules gave conventional insurers an unfair advantage, leaving the industry in limbo.

This has now been cleared up after a mutual agreement was reached this month, Muhammad Kashif Siddiqee, Joint Director at the Securities and Exchange Commission of Pakistan (SECP), told Reuters by telephone.

Under the agreement, insurers will have to allocate 50 million rupees ($506,100) in capital to their window operations, from no capitalisation requirement in the original rules.

The takaful rules will be applicable after a three-month period and the regulator would also amend them to allow takaful firms to co-insure risks alongside conventional players, which the initial rules had forbidden.

Takaful is seen as a bellwether of consumer appetite for Islamic finance products. It is based on the concept of mutuality; the takaful company oversees a pool of funds contributed by all policy holders, but does not necessarily bear risk itself.

Takaful has operated without conventional competitors in Pakistan since the first rules were introduced in 2005, but regulators have been keen to increase insurance penetration.

Takaful's share of the total insurance market is estimated at less than 3 percent and the entry of conventional players would help boost this figure.

The regulator has now received five applications for takaful windows and expects as many as half of all conventional insurers to eventually apply for a licence, said Siddiqee.

The move comes at a time when authorities are stepping up efforts to develop Islamic finance, encouraging the industry to expand its operations in the world's second most populous Muslim nation. 

(Samaa / 23 May 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance yet to be fully tested

Dubai: Islamic finance weathered the global financial crisis better than conventional banking, but it was not completely immune and has yet to address potential risks, a report by a standard-setting body for the industry says.

Growing pressure on Islamic banks’ profitability, liquidity management, asset quality and capital adequacy were outlined by the Malaysia-based Islamic Financial Services Board (IFSB).

Islamic finance, which has its core markets in the Middle East and Southeast Asia, follows religious principles that ban interest and shun outright speculation.

As such, Islamic bank balance sheets were free from sub-prime loans and structured products that turned sour in 2007, triggering a chain of events that threatened to cause a global financial meltdown.

But the IFSB study, which relied on an analysis of data from 52 full-fledged Islamic banks, found that they were not fully insulated from the crisis.

“Economic slowdown, declining trends of commodity prices, and real estate crises that emanated from the financial crisis also affected Islamic banking performance,” the report said.

It estimated net profit margins of Islamic banks had recovered to 1.06 per cent by 2012, from a low of 0.87 per cent in 2009 but still below 2.9 per cent in 2007, before the global crisis.

Asset quality was also in the spotlight: non-performing loans peaked at 6.03 per cent in 2010, with banks in the UAE, Bahrain and Kuwait some of the worst-affected partly due to greater exposure to real estate.

This meant Islamic banks in those countries fared worse in terms of asset quality than their conventional peers.

Such exposure to real estate remains in the double-digits with no significant changes forecast, although the outlook for the Gulf’s real estate sector is now positive, the report said.

Limited fx deposits

Capitalisation levels have been a bright spot for Islamic banks, with levels consistently above those of conventional banks, although there is a catch.

“Islamic banks have generally maintained higher levels of regulatory capital, in part, due to an absence of well-functioning and healthy Islamic interbank money markets,” IFSB said.

While liquidity has been a perennial concern, the introduction last year of Sharia-compliant money market instruments by the International Islamic Liquidity Management Corp (IILM) has helped close this gap.

The IILM is now regularly issuing short-term Islamic paper since its three-month $490 million (Dh1.8 billion) debut last August, and it is expected to ramp up issuance, the report said.

A lack of foreign currency deposits is also limiting the industry’s ability to expand its customer base, with less than 10 per cent of Islamic bank deposits held in foreign currencies across all countries except in Turkey and the UAE.

Sukuk, or Islamic bonds, have been a bright spot for the industry but these are also exposed to risks of withdrawal from conventional investors, the report said.

Investors with no specific Sharia-compliant investment mandate could withdraw from sukuk in favour of higher-yielding conventional instruments and further research would be needed to evaluate those risks.

(Gulfnews.Com / 22 May 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com