LONDON--(BUSINESS WIRE / ME NewsWire)-- The development of Islamic finance in recent years has led to a surge in the number of shari'a compliant products being offered to investors and consumers. A key requirement for (re)takaful companies is the need to invest in shari'a compliant securities, meaning that they are not allowed to invest in traditional fixed income securities such as bonds, which are considered staple investments for insurance companies in mature markets.
In a new Best's Briefing, titled, "Sukuk Investment Opportunities Remain Limited for Middle East Takaful Operators," A.M. Best notes that the increase in shari'a compliant fixed income investment opportunities should, in theory, result in takaful operators de-risking their balance sheets and investing funds into sukuks. However, A.M. Best's analysis of the top five takaful companies in the Middle East (excluding Saudi Arabia) shows that takaful operators continue to have very limited levels of fixed income investment, with the majority of funds invested in cash and short-term deposits, equity and real estate assets.
"High levels of investment risk are not unique to takaful companies in the Middle East," said Salman Siddiqui, financial analyst. "The balance sheet compositions of takaful operators are in line with their conventional counterparts, which also have significant investment concentrations in equity and real estate assets. This is due to the underdeveloped fixed income markets in the region, and potentially higher attractive returns being achievable through investing in shares and property investments."
A.M. Best notes that this is further complicated by the simplicity of equity investments when compared with sukuk investments. Salman Siddiqui added: "In order to deploy capital into sukuks, asset managers at takaful companies need to spend time and resources understanding the structure and risk of each sukuk before investing. This would increase operating costs, which takaful companies can ill-afford given their smaller profiles and pressure on performance levels."
The development of Dubai as an Islamic finance hub may open up opportunities in the medium term and allow companies to de-risk their balance sheets. However, A.M. Best notes that there is still some way to go before adequate regulation and critical mass is achieved for investors and obligors to feel comfortable in participating in Dubai's Islamic capital markets.
To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=234621.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
*source: ME NewsWire
The release can be read online: http://me-newswire.net/news/14043/en
Contacts
A.M. Best Company, Inc.
Salman Siddiqui, +(44) 20 7397 0264
Financial Analyst
salman.siddiqui@ambest.com
Mahesh Mistry, +(44) 20 7397 0325
Director, Analytics
mahesh.mistry@ambest.com
Edem Kuenyehia, +(44) 20 7397 0280
Associate Director, Market
Development & Communications
edem.kuenyehia@ambest.com
Jim Peavy, +(1) 908 439 2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com
View this news release online at: http://www.businesswire.com/news/home/20150316006421/en
© Press Release 2015
