Islamic Finance: The rising star

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October 2005
People call the Islamic Finance phenomenon that is Islamic Finance recent, but it's only recent in terms of the numbers becoming apparent. And that's really because suddenly you have several channels people can use to invest in an Islamically correct way. Wendy Jackson reports on the surge in popularity of the Islamic Finance sector, globally, as well as in this region.

"When Citibank, the world's largest bank, announced that it was going to offer Islamic banking services back in the 1970's, it was time for the global financial community to take note of a financial niche that was to eventually take the world by storm," says Rob Graham, Product Manager, Datawatch Middle East. "After all a fifth of the world's population is Muslim (1.2 Billion) making it a viable and much needed financial service proposition, not just here in this region but all over the world."

He goes on, "The Islamic finance space has been growing in terms of products to a large extent because what was originally seen to be a perceived demand for these products is actually very much there. This is seen by the huge uptake rate of products that are offered by new distribution channels coming on to the market. For example, when some banks in the area started distributing Islamic financial products the uptake was really very big - raising billions of dollars in just a few years. Why shouldn't there be more distribution channels and why shouldn't it be easier for the consumer to access these products?"

If you look at what's been happening in the retail-finance sector alone, over the past few years you will have not failed to notice that Islamic Financial institutions in the Middle East have experienced huge growth and are appearing in the market with a more aggressive marketing strategy. In other words they are now very much competing with conventional modes of finance.

If you think about it logically, money from the Islamic world has been waiting for the day when a banks or financial institutions offer channels for investing in a Sharia'h compliant way. And, as banks and institutions have increased product scope, the money has started to show up. Most people would have held their money in Non Interest Bearing Accounts (NIB's), parking them in a traditional bank, not taking any interest and waiting until they had enough cash to buy cars, houses out right. But now that there is the choice of an Islamic bank and Islamic products that allow access to money that will finance purchases in a Sharia'h compliant way things are really taking off.

To summarise what has changed since the last time we looked in depth at the Islamic finance market in the UAE, I've tried to answer a variety of questions to reveal how the industry is progressing. Are customers happy with what's on offer? Are there still challenges to overcome? What's getting Islamic investors excited? And, of course, are there still more products and services to develop? Let's find out.

To market
Judging by the amount of Islamic Finance conferences that go on each year in the region - Dubai, Istanbul and Bahrain it seems there is plenty to discuss on the subject. I caught up with some of the UAE's leading Islamic institution heads to ask for their views on the industry.Sukuks

Interestingly, my first port of call was with Mohammed Al Hashimi, CEO, Amlak, who talked to me about the new buzzword in the Islamic world - Sukuk.

Sukuk is the hot topic in Islamic finance at the moment and, according to the likes of Al Hashimi, we will soon see the industry reach a value of some tens of billions of dollars as it's appeal reaches a global audience.

For many years, Islamic finance had missed investment opportunities for Muslims that offer a predictable return with low risk. As you know the majority of investment opportunities are based either on stock markets with high volatility or on real estate transactions. Hence, the investment opportunity for the Islamic investor has, until more recently, lacked the variety of instruments to create an efficient portfolio in line with portfolio theory and financial planning.

Enter Sukuk certificates, which meet the pressing need for a medium term investment to add to any Islamic portfolio.

By 2004, the Sukuk market had a volume of nearly US$7 billion, which will, according to industry experts multiply in the coming years to tens of billions of dollars. Already a number of world-class borrowers have used the new Islamic Sukuk market including Germany; the IMF Group; Emirates Airlines and Sovereign states like Qatar, UAE and Malaysia.

So, what exactly is a Sukuk? A Sukuk is a securitised asset and therefore belongs to the category of Asset Backed Securities (ABS). However, unlike conventional ABS structures, a Sukuk needs to have an underlying tangible asset transaction either in ownership or in a master lease. Making a securitisation of pure cash flow streams from credit portfolios such as those undertaken in the mortgage market, for example, cannot be structured in the same way.

A properly made Sukuk, therefore, limits the debt to the value of the underlying assets. And as a result, a solid investment policy of the borrower and the cycle of raising debts and running after them in hard times is handled in an ethical and socially more convenient way - a Sharia'h compliant way. Allowing the borrowers time to sort the situation out making it important for modern states as many of them borrow money to be repaid by future generations without worrying whether any assets cover the debt or not.

Participating at a panel discussion at the recently held Islamic Fund World Conference in Dubai, Mohammed Al Hashimi said that more Sukuks need to come to the market as there is significant liquidity particularly from institutional investors but a shortage of investment opportunities as compared to conventional products.

According to Al Hashimi, an increase in the number of Sukuks issued combined with competitive pricing and awareness is a must for the asset class to generate more interest among a wider section of the investors. "As a result investors adopt a sit and hold approach and the secondary market for Sukuks remains underdeveloped although there are opportunities for trading."

He explains that, "Sukuks as an asset class have been extremely successful in the last three years, but there is a lot more that needs to be done by the issuers and the Industry itself to increase investor awareness. The success our recently concluded US$200 million Amlak Sukuk now listed on the Dubai Financial Market was as a result of the strong demand from both UAE and GCC investors, and we will look to launch further Sukuks going forward to aid Amlak's expansion plans." he said.

He also emphasised the need for a strong regulatory framework to support the growth of the asset class. "We need to have a solid regulatory framework within which issuers of different types of Sukuks can operate. Although rules and regulations are still being created and updated, these need to be expedited," he noted.

Home finance
Our second stop is also outside of banking and to the home finance sector. An area which has seen tremendous growth, with both Amlak's and Tamweel's home finance products and services making a huge impact on the Islamic and home finance markets. You may recall from last month in our annual look at Home Finance that both companies are reporting extraordinarily strong figures and phenomenal growth due to both the UAE's emerging real estate market and the surge in popularity of Islamic finance products and services.

Tamweel CEO,Adel Al Shirawi, as part of Tamweel's participation at the recent Cityscape conference made a presentation titled 'Sharia'h-based Mortgages'. He outlined how the home finance market has grown over the last three years with the upsurge recorded in the Islamic mortgage products.

Highlighting this growth, Shirawi said: "Consumers are becoming more and more aware of home finance concepts. In 2003, just 30 per cent of customers were familiar with Islamic finance. Since then, this figure has nearly tripled to 82 per cent as of today."

He went on to stress the unique value of Islamic mortgages and advised on the key elements that consumers should be looking for. "Nearly 70 to 80 per cent of the total mortgage buyers are non-Muslims. Tamweel has managed to attract a significant share of this market through its personalised, Sharia'h compliant products and services that are designed to appeal to all customers, Muslim or not. Our growth over the period of time can be gauged from the fact that we now have 120 partners, 45 of which are developers and 75 real estate agents. These partnerships offer our customers a wider and more convenient range of property options."

He added that, "Tamweel has adopted a strategy that differentiates us from the competition through quality service and product innovation, which has helped us become the most admired home-finance provider in the region".

And in terms of product development Al Shirawi talked about Tamweel's Yusr product - the world's first Sharia'h-compliant Adjustable Repayment Mortgage finance - that allows customers to make lower monthly repayments in the initial years and amortise the difference over the remaining years of the repayment period.

He went on to say that, "Islamic banks and financial institutions are poised for rapid future growth as the pool of investors continues to grow. In the regional states, a "moneyed" middle-class has emerged -- to some extent as a result of the prevalent economic development. As privatisation is the new buzzword, several constituencies stand to gain. An observant Muslim populace will benefit from the availability of new investment and savings opportunities and Islamic banking organisations may benefit directly from the privatisation move. Non-Muslim investors will benefit from the availability of a broadened range of Islamic investment choices."

As for the major challenges still facing the Islamic Finance industry, he states, "The absence of interest in the Islamic Finance Industry may be considered as an endemic problem, which impairs liquidity. Most Islamic deposits are said to be short term, resulting in a mismatch with long term investments. The condition may be exacerbated by (a) an absence of a sufficient number of wealthy depositors, depositors' increasing earnings expectations, and (c) inability to borrow in inter-bank markets. I think that the overall increasing acceptability of the Islamic finance in western countries and the growing awareness of its products will help flourish the market and make the gap smaller. However, there's still a lot of work to be done."

Looking to the future, Al Shirawi also sees the potential in the Sukuk proposition. "The Islamic securities markets, "Sukuk" have become stronger in terms of the increased demand and acceptability of its traded equities. These markets are supported by distribution networks, which promote individual securities on the twin bases of investment return and Sharia'h compliance.

Islamic banks started to search for companies that do not use interest-bearing loans in order to establish equity funds. The greater availability of securities for investment for any desired holding period is likely to ease the previously mentioned liquidity problem of Islamic banks. Ultimately, one may hope for the realisation of the ideal of a Muslim common market, operated on Islamic principles." 

Retail Banking
The third area of investigation took me to a three-day conference on Islamic finance, organised by Dubai Islamic Bank. The conference was attended by prominent personalities in the Islamic finance sector and top bankers including Dr Abdullah bin Abdul Mohsin Al-Turki, General Secretary of Muslim World League, Chairman of Islamic Universities League and held under the patronage of H.H. Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance and Industry.

The event, which took place in cooperation with the Islamic Development Bank and Islamic Universities League, featured eight discussion sessions on the development of Islamic banks. I sought to answer the following questions:

What have been the major developments in the Islamic Finance Industry over the past couple of years?

Dr. Mohamed Khalfan bin Khirbash, UAE Minister of State for Finance and Industry and Chairman of Dubai Islamic Bank, delivered a speech stating, "Leaders in the Islamic banking industry are gathered to discuss, analyse, and contemplate about the future prospects and challenges facing the development of this dynamic and significant sector.

The value of Islamic issues in the Gulf States alone approached US$4 billion last year and these were invariably met with an enthusiastic response from both Islamic and non-Islamic financial institutions and banks. In fact, the contribution of non-Islamic institutions to such issues approached 60 per cent of the total. This proved Islamic finance not only offers an alternative to conventional finance, but also gives a wider range of investors the opportunity to participate."

He added that is was equally important that more jurisdictions are now "permitting Islamic finance. In a number of countries, institutions are converting from conventional practices to being Sharia'h-compliant."

What have Islamic Banks, Dubai Islamic Bank included, been doing to move the industry along?

Stressing on the role performed by the likes of Dubai Islamic Bank (DIB), Dr. Khirbash said that, "During the past 30 years, Islamic banks have developed across the world. Today, there are more than 280 Islamic banks in 48 countries with deposits approaching US$400 billion. Added to that, about 300 traditional banks have established Islamic subsidiaries or offered Islamic products."

And in terms of product development - are there many new products available? Are products constantly being updated, realigned, or are have there been brand new Sharia'h compliant products launched - both retail and corporate?

"In Asia, the Middle East and Europe more and more banks and their customers are turning to Islamic finance. The success of Islamic financial istitutions and banks extends beyond the Gulf region and to the international market. Terms such as 'Sukuk', 'Ijara', 'Musharaka', and 'Mudaraba' have become part of the language of finance the world over. Sukuks, in particular, have attracted large investor volumes, with subscriptions exceeding expected issuance even in big issues."

What are the major challenges still facing the Islamic Finance industry, if any? And how do you think they will be met?

Dr. Abdullah bin Abd Al Mohsen Al Turki, General Secretary of Muslim World League, Chairman of Islamic Universities League, highlighted the challenges facing the Islamic banking industry. "Currently, Islamic banks do not have a reference to depend on for identifying whether their operations comply with the Islamic finance principles. This is considered a major barrier hindering the development of Islamic banks. Islamic banks are also obliged to keep deposits in central banks, most of which operate on systems that do not comply with guidelines that Islamic banks follow."

He explained that Islamic banks also lack capital to keep pace with the latest developments taking place in the banking industry. "Supporting Islamic banks to overcome these challenges should be the responsibility of governments, organisations, thinkers, and businessmen. Islamic universities should also take part in backing the Islamic banking industry throughout establishing colleges and faculties specialised in Islamic banking and finance. Islamic universities should also cooperate with Islamic banks to establish training and research centres."

Dr. Al Turki concluded that Islamic banks should consider establishing a central bank or an international body to enhance coordination between them and invest in human capital development.

Finally, where does the potential within this fast growing industry lie? In what areas will the industry see expansion and development?

Recommendations following the event focused on the importance of initiating diverse financial solutions, which are aimed at preserving the nation's interests and money of Muslims.

Participants also asked Islamic Banks to establish savings funds and increase investment in development of local society, as well as supporting small and medium enterprises in the agricultural and industrial sectors. Recommendations also focused on supporting "Al Zakat Fund" and encouraging bank customers to deposit their "Zakat" in Islamic banks.

Establishing Islamic financial structures, launching investment funds based on "Al Waqf" principle, and allocating money to support establishment of research centres, hospitals, orphan homes, mosques, were also among the recommendations.

Participants called for enhancing the role of Fatwa boards in Islamic countries to discuss major issues pertaining to Islamic Finance and issue "Fatwa" covering various issues facing Islamic banks.

Recommendations also focused on strengthening relations between Islamic banks and central banks, and asked governments of Islamic countries to adopt a developed monitoring system aimed at enhancing crisis management.

Retail banking product development
Next, I decided to look at examples of product development in the market, which led me to Islamic banking pioneers, Abu Dhabi Islamic Bank (ADIB), a prime example of an institution that has increased market share locally through its adoption of innovative Islamic financing products in recent years against a backdrop of Islamic financing growing at an annual rate of 30 per cent in the UAE. According to the bank's Acting CEO, Abdul Aziz Al Mehairi, "Projections show that the Islamic financing in the country will increase as progressive Islamic legal principles are adopted in both the retail and corporate financial fields."

The bank has just relaunched its car loan product - Sahel - and intends to "further the bank's focus on Islamic retail banking products and activities that focus on individual needs."

Sahel offers improved services and features at rates that compete in the conventional market. The profit rate becomes 3.7 per cent, with a grace period of three months and no installments for the first six months. Plus, it provides the right to two postponements per year along with straightforward documentation.

ADIB was also the one of the first banks to come up with a Sharia'h compliant consolidation loan - Al Khair and an Islamic credit card.

Sharia'h compliant
You can't ignore third party businesses that are likely to be enhanced by the industry's awakening so my next trip was to meet up with Rob Graham, Product Manager, Datawatch Middle East who reveals what his company are doing to offer a product solution that enables due diligence on financial institutions claiming to be Islamic.

"Islamic banking is certainly on the media's radar," he says, "but how many people actually understand what it means? Even a brief study of its precepts will prove productive and those financial institutions with sufficient flare will now be constructing Sharia'h Law compliant investment vehicles to attract some of the funds available for deployment over the next period.

When doing so, they must be prepared to provide transparency in their undertakings, which will allow decision makers to feel confident in the financial instruments on display. This is where report mining and data transformation tools will come to the aid of such vendors, allowing clear proof of accuracy and reporting sufficient to pass any audit under Islamic banking codes.

Report mining tools allow non IT professionals to extract the information that they need to comply with Sharia'h Law directly from the data base or disparate data sources running within an institution.

There is no doubt that Islamic banking is here to stay and will grow substantially in the immediate future. Depend upon it. Those banking and investment institutions wishing to become part of this exciting new age of money usage will have to review their management of data and become truly compliant.

Report mining tools will help institutions by working symbiotically with their present systems and empower compliance and reporting professionals to ensure that their participation is not short lived. The future for those embracing this message is a truly exciting and lucrative one."

Islamic Insurance
And last but by no means least I headed to the the Islamic Insurance sector, which has to be where all the action has been over the past few months.

Starting with the fundamental and the main principals of Takaful
Takaful is a relatively new industry, although its origin can be traced back to Islamic practices 14 centuries ago. The development of Takaful in modern times was initially undertaken in the UAE and Sudan in 1979 and Malaysia in 1984. The culmination of this initial development was the 1985 Fiqh Academy ruling, declaring that insurance based on the application of cooperative principles was permissible.

Conventional insurance contains elements that are contradictory to Islamic principles. Takaful distinguishes itself from conventional insurance by being structured along mutual lines; although customers pay premiums, as in conventional insurance, under Takaful members contribute money to a common pool in which losses are divided and liabilities repaid according to the pooling system rules.

Takaful is based on the following principles; policyholders cooperate among themselves for their common good; losses are divided and liabilities spread according to the community pooling system; and it does not derive advantage at the cost of others.

Islamic insurance can be structured on a number of modes. These are Ta'awuni, Al Mudaraba, Al Wakala and Non-Profit. (Source Islamic Arab Insurance Co).

And what is Re-Takaful? Reinsurance is insurance for insurance companies. Islamic insurance companies are required to reinsure their risks on a re-Takaful basis. Due to the limited reinsurance capacity of re-Takaful operators, latitude has been granted by Sharia'h advisors to cede primary Takaful premiums to conventional reinsurers. Re-Takaful is a form of insurance whereby the Takaful operator pays an agreed premium from the Takaful fund to the re-Takaful operator and, in return, the re- Takaful operator provides security for the risk reinsured. (Source: Islamic Arab Insurance Co). Takaful and re-Takaful market trends

I wondered what the recent trends in the industry had been and what had been the major developments in the Islamic Insurance Industry over the past couple of years?

According to a paper from the Islamic Arab Insurance Company, "During the past 20 years, Takaful operations have been opening in Islamic countries as well as countries with large Muslim communities. Takaful has become one of the leading segments of the financial sector across the Asian, Arab and African regions with growth rates of 10 to 30 per cent over the last couple of years.

There are currently around 60 Takaful operations in 30 countries worldwide. From less than US$30 million in 1993, total direct Takaful premiums are estimated at approximately US$1.7 billion in 2003. Further development is needed in this relatively nascent industry, such as implementing a common regulatory framework, providing an adequate supply of quality financial instruments for which the Takaful funds can invest, establishing more competitive re-Takaful companies and increasing public awareness and education concerning Takaful.

The Arab countries provide around 63 per cent of the global Takaful business, followed by Malaysia with 27 per cent and other Asia Pacific countries (nine per cent), Europe and the USA contribute one per cent to Takaful revenues.

As for Re-Takaful, traditionally, due to the small number of re-Takaful companies and low capacity available in the market, Takaful companies have faced the problem of having to reinsure on a conventional basis, contrary to the customer's preference of seeking cover on Islamic principles. The Sharia'h scholars have allowed dispensation to Takaful operators to reinsure on conventional basis so long as there was no re-Takaful alternative available. Consequently, a number of conventional reinsurance companies in Islamic countries take on retrocession and a certain proportion of risk is placed with international reinsurance companies.

In 2001, re-Takaful premiums were estimated at just over US$0.5 billion. The retrocession from Takaful companies ranges from some 10 per cent in the Far East where Takaful companies have relatively smaller commercial risk, to the Middle East where up to 80 per cent of risk is reinsured on a conventional basis."

Sheikh Khaled Bin Zayed Al Nehayan, Chairman, Islamic Arab Insurance Company, adds, "Islamic Arab Insurance Company (IAIC) are the pioneers and founder of the Takaful Industry. Having established in 1979 as the first Takaful operator IAIC forms the major company in the largest Takaful network in the world having geographical representation across Middle East, Africa and the Far East."

I also dropped in on Rob King, General Manager, Assurance/Family Takaful of Bahrain based Solidarity and put the same question to him.

Rob King (RK): "Solidarity is an Islamic Insurance company that was created and then registered with the BMA in Bahrain just over three years ago. And really the whole philosophy objective for Solidarity was to develop, manufacture and deliver to the market place fully Sharia'h compliant Islamic products both in life and non-life insurance. My responsibility is for the life side of the business."

Huge potential
It seems the industry has huge potential. Back to the paper by the Islamic Arab Insurance Company. "The rapid population growth in the Middle East and African region is requiring substantial investments in infrastructure improvements. This will inevitably lead to an increase in demand for insurance protection and related services.

On the personal Insurance side, mainstream commercial insurance accounts for about 50 per cent of the business in the region. However, for the past 10 years, in all markets in the region, personal lines have been growing faster than commercial lines. The strongest area of growth is in the provision of personal insurance cover. Traditionally, health costs have been covered by the government but, as has been seen in Western Europe, health costs are rising more quickly than government budgets. For example, the introduction of compulsory health insurance for expatriates and motor third-party liability in Saudi Arabia is an important trend in the Gulf. In the UAE, health insurance will also be made compulsory for foreigners, providing considerable sources of revenue to insurance companies.

When it comes to life insurance, one of the main reasons for the low penetration of insurance in these countries is the under-development of life insurance. Although globally, life insurance is an important segment of insurance revenues, it continues to be a rarity in the region, mainly due to adequate state benefits in the GCC, poor income in other countries and lack of knowledge and reservations about insurance on religious grounds.

Therefore, the Takaful industry seems to hold the key to unlocking the potential where life insurance can actually be provided through Family Takaful/Takaful Ta'awuni. Many companies have been witnessing increased revenues from Family Takaful, health Takaful and education the extent where they are reducing their non-life portfolios as part of a strategy to boost the personal lines insurance business. The global Takaful market is expected to grow at between 15 and 20 per cent per year, making it one of the fastest expanding financial industries in the world.

Total worldwide direct Takaful premiums covering both non-Life and Life are expected to reach US$7.4 billion by 2015. Of this estimated amount, nearly US$2 billion in annual premiums would be written in GCC countries, US$3.1 billion written in Asia Pacific region and an additional US$2.6 billion in Europe, Turkey, China. India and the USA. Approximately, 52 per cent of the projected total annual Takaful premiums would be non-Life with an impressive gain Life/Family Takaful up to US$4.9 billion.

Malaysia and Indonesia will continue to be at the forefront of the Takaful business with over US$1.4 billion in premiums. Among the Arab countries, Saudi Arabia is expected to generate close to US$900 million, followed by the UAE (US$480 million) and Egypt (US$467 million).

Sheikh Khaled Bin Zayed Al Nehayan explains, "First, the market continues to expand as the Takaful industry overcomes hurdles of regulatory framework, lack of awareness and education and development of capital markets. Compared to developed market the Middle East's share of the world insurance business was just 0.4 per cent in 2003. Total insurance business worldwide over this period was in excess of USD 3 trillion. Therefore, there lies a phenomenal opportunity of growth, which will unfold as the industry grows in sophistication and level of general awareness is increased.

The other untapped potential area for growth is the family Takaful (life insurance) and the industry is expected to witness lot of development in this area in the remainder of this decade and thereafter."

Bilal Mahmood, Abu Dhabi National Takaful Co P.S.C, states, "Although, the first Takaful Company was set up nearly 30 years ago, the Takaful industry is still in its infancy. A large portion of the current takaful market can be attributed to Saudi Arabia and Iran. The potential Takaful market exists in other countries where currently no Takaful operations exist. Obviously, the focus should be in those countries where Muslims make up the majority of the population and where legislation can be made conducive to the development and growth of Takaful.

In assessing the potential for Takaful business in those countries, the existence of significant conventional life and general insurance penetration, a large middle class population, high literacy rates and high GDP per capita may be taken as favorable indicators for potential life and general Takaful.

Insurance products
I was now interested to know where the development in Islamic insurance product has been? Bearing in mind the potential for growth and the sticky issue of re-Takaful.

Rob King gives us his insight, "For the first 18 months after Solidarity's registration product development was high on the agenda. It was a case of working very closely with prominent Sharia'h scholars. And we put together a Sharia'h board for Solidarity that took a cross section of both geographical and Muslim sects. So we have Shiite, Sunni, with representatives from Saudi Arabia, Qatar, UAE, Bahrain etc, which obviously when prior to bringing the product to market one of the critical things for us to get is full Sharia'h approval.

Our first phase in relation to product launch was to enter the market with savings and accumulation products.

We did a tremendous amount of market research because one of the things we were not going to do was to create and develop products and force them on the market and then wonder why nobody purchased them or why there was no need for them.

We therefore spent a lot of time over the first 18 months getting market research done, feedback from the Middle East population.

This gave us a blueprint for the kind of products/needs that we had to provide solutions for.

We entered the market with five or six savings and accumulation regular premium products. Including the traditional marriage, education, and retirement range, but also from the religious perspective we launched insurance for the annual pilgrimage to Mecca.

This was followed very closely by the development and launching into the market of a single premium range of products, giving us the opportunity to test the products for how acceptable it was to our target market, the competitiveness of the product and also to help educate the market on Takaful, which primarily in the life side is a reasonably new concept for the Middle East.

And the results gave us evidence that we had marketed a product that was transparent, it was user friendly, easy to understand, and at the same time competitively price. Obviously for the client this is fundamental."

Sheikh Khaled Bin Zayed Al Nehayan says Islamic Arab Insurance Co, has along with its subsidiaries "always been proactive and committed to research and development and have successfully introduced Mudaraba and Hybrid models in Takaful."

Surely, the re-Takaful issue must be a major challenge still facing the Islamic Insurance industry. I wonder what else the industry needed to tackle?

Rob King taook great pride in telling MONEYworks that Solidarity actually runs its on re-Takaful solution on the side making its product 100 per cent Sharia'h compliant but also believes education is the key to bringing success to this potential boom market. He believes Solidarity has now developed "a traditional range of funds that have gained approval from our Sharia'h board with acceptance from the regulator. And then we entered our third phase, which has launched over the past few months - Takaful.

Takaful, of course, is the philosophy of pooling economic resources to help those who are less fortunate. It is based on the principles of compensation and sharing responsibilities towards a society such that a good life is provided, and dignity is reserved for all individuals, families, and society in general.

This was perhaps our biggest challenge to date. I think it's fair to say that the general perception within the Islamic world to any form of insurance is that it's Haram and this had to be overcome.

So we started to build the products with a protection element working on a day by day basis with our Sharia'h board because it was felt prudent that if were fully aware of what our thoughts were/are and how we are looking to construct and price the product the management of the Takaful pool, is totally different to the traditional method of protection products methodology and structure.

But what makes us unique is, I know, is that there are other companies that provide an Islamic protection product and like many insurance companies they retain an element of the risk themselves. The remainder is reinsured. And reinsured through traditional methods. The moment that happens, of course, the product becomes Haram.

Because of our culture and our commitment to the Islamic population we felt that the only way for us to be different and truly Islamic from the product front to the back end was to look for and create an environment where our reinsurance was also re Takaful.

We have worked very closely with one of the world's largest AAA re insurance organisations and they are working with us to create a re Takaful insurance product.

This is not only fantastic news for Solidarity but also for the Takaful industry in general.

Therefore clients who are taking up the opportunity, having the choice of protecting their family through these protection products have the comfort that the whole product is in line with Islamic principles and recognise the products are Islamic through and through.

From a business perspective that is our USP, but having said that we would expect other companies to follow suit. But we hope to be the company who has set the benchmarks and high standards."

However, we also need to educate. There is a huge need to educate the market place on the concepts we are putting forward. This not only to the Muslim population themselves but also to regulators. Regulators of Takaful businesses on the life side are few and far between. And, as I say, we are expanding into countries and are working very closely with regulators because it's a new concept to them also.

That's also an exciting position to be in - where we can not only deliver this concept into the Middle East, but also help to educate."

Governments can help
Bilal Mahmood, Abu Dhabi National Takaful Co. P.S.C, states, "Major challenges faced by the Islamic Insurance Industry are positive government support and absence of separate body of legislation for Takaful operators. Besides a favorable regulatory environment, a sufficiently deep capital market for Sharia'h compliant investment instruments is also an impediment in the success and growth of the Takaful market.

There should a body of legislation for Takaful operators, which should provide investment guidelines for Takaful operators."

Education is key
Sheikh Khaled Bin Zayed Al Nehayan reminds us that the Takaful Industry, in comparison to other financial services industries, is relatively young and still faces many challenges. Which, he explains, "can be categorised in the following areas:

Regulatory Framework: Compared to Islamic Banking, the Takaful industry is lagging by almost a decade. Regulations still need to catch up with demand for Takaful Products. Supervisory regimes vary widely and the Sharia'h Boards across different countries are at odds over the acceptability of various instruments. There is an immediate requirement for standardisation of Takaful terminology, the development of a generally acceptable form of family Takaful and a widely acceptable mechanism to determine profits (or surplus) distributable to participants and shareholders. Regulators across Muslim countries have been catching up and though there has been considerable development on this front in Saudi Arabia, Bahrain, Qatar, UAE and Malaysia yet lot of work is still to be done.

Level of Capitalisation: Despite a general increase in the Takaful industry in terms of players in different markets (there are around 60 takaful operators in 30 countries) yet the market remains fragmented characterised by small and weakly capitalised players. The level of capitalisation for Takaful & Re-Takaful operators need to augmented to enable them to accept higher volumes of premiums or undertake great level of exposure.

Level of Awareness & Education: The market characteristics of the Arab Region are strikingly different from other regions. There has not been any existing insurance culture in many Islamic countries and the situation gets further complicated when added to it a lack of knowledge on the principles of Takaful by the general public and a general skepticism on its permissibility. Though a challenge in itself, this makes a great potential for the Takaful Industry in particular.

Capital Markets: Since Takaful operators can only invest the premiums in Sharia'h compliant investment instruments there are, at present, very limited options to generate high returns from Sharia'h compliant investment instruments. Therefore, it is of utmost importance that Sharia'h compliant investment products are created to provide necessary breadth in the available investment options for the Takaful operators and to overcome the competitive disadvantage with the conventional insurers."

Untapped potential
The growth in the Islamic financial space is two-fold. It has become synonymous with the fact that the industry is offering products and services that allow people to invest in an Islamic way. And, the more products that become available and the more ways the Scholars find to enable Muslims to invest in accordance with Sharia'h law, provides the means to secure continued growth in the industry.

© UAE MONEYworks 2005