Archive for Analysis

Variety is the spice of life in Islamic finance

April 26, 2008 at 10:34 pm · Filed under Analysis, Islamic Finance, Shariah ·Tagged

Variety is the spice of life in Islamic finance

Reuters
Published: April 26, 2008, 00:35

Despite growth rates at least twice as high as those recorded on global conventional financial markets, the Islamic financial industry remains fraught with diversity and heterogeneity, says Moody’s Investors Service in its special report entitled Islamic Banks and Sukuk: Growing Fast, but Still Fragmented.

Modern Islamic finance is a recent phenomenon. Only 30 years have passed since the first fully fledged Islamic financial institutions (IFIs) emerged, and the market for Sukuk (Islamic bonds) was virtually non-existent as recently as the beginning of this century.

Today, estimations tend to value the Islamic financial industry – which comprises about 300 Sharia-compliant banks, takaful (or Islamic mutual insurance) companies and mutual funds in line with the principles of Islamic finance – at more than $700 billion in terms of assets.

“The market for Sukuk alone, accounting for around $100 billion at year-end 2007, has exceeded the GDP of a country the size of Morocco,” says Anouar Hassoune, a Moody’s analyst and author of the report.

Moody’s notes that current excess liquidity prevailing in Gulf econ-omies since 11 September 2001 has fuelled both sustained demand for the products supplied by IFIs and the booming expansion of the market for Sukuk, while contributing to creating a very close link between Islamic banks and what remains to date a relatively illiquid compartment of the bond market. Nevertheless, the rating agency expects liquidity in the Sukuk market to improve gradually as the variety of Sukuk issuances widens.

Not only are volumes expected to exceed $150 billion by the end of the current decade, but the nature, geographic location and credit quality of future issuers are also expected to considerably evolve and diversify.

At this stage, the Islamic financial industry remains very much intermediated – or, in other words, more widely dominated by financial intermediaries capturing deposits to recycle them into on-balance-sheet asset portfolios than by disincarnated, de-territorialised and virtual capital markets.

Weakly co-ordinated

Moody’s notes that some 90 per cent of Sharia-compliant assets are concentrated on IFIs’ balance sheets and on those of conventional banks offering Islamic financial services and products through “Islamic windows”. Islamic finance is becoming increasingly “internationalised,” but essentially remains a collection of disseminated and still weakly co-ordinated local operations.

“A number of forces within the Islamic financial universe tend to contribute to its fragmentation. The core principles underlying Islamic financial products, although subject to vast consensus as to their formal content, remain differently interpreted and differently weighted in practice,” says Hassoune.

In Moody’s opinion, the lack of technical and contractual standardisation impedes the capacity of Islamic finance, as an alternative financing and investment model, to enhance its globalisation process, without necessarily forbidding its internationalisation.

Initiatives aiming at either introducing Islamic finance or strengthening its position are mushrooming across a wider range of countries, whether home to majority Muslim populations or not, but these remain country specific and weakly co-ordinated, despite the sustained endeavour of several cross-border organisations to bring some consistency to the concept.

“Building in prospective views is not an easy task in such a young industry. Nevertheless, we expect the Sukuk market to become more complex, more structured, larger, more diversified and more liquid as it evolves over time,” adds Hassoune.

Equally, IFIs are expected to explore new geographic horizons as well as new business lines, become more competitive and (paradoxically) contribute to the gradual emergence of a more disintermediated Islamic financial industry – one with a reduced presence of Islamic banks.

Source: http://www.gulfnews.com/business/Banking_and_Finance/10208467.html

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The UK’s Development as a Major Marketplace for Islamic Finance

April 23, 2008 at 3:41 pm · Filed under Analysis, Islamic Finance, Islamic Investment, Shariah, UK, United Kingdom ·Tagged , , ,

The UK’s Development as a Major Marketplace for Islamic Finance
Anouar Hassoune, Standard & Poor’s – Emmanuel Volland, Standard & Poor’s – 23 Jul 2007

The UK is set to become the first non-Muslim country to be a major financial centre of Islamic finance. This article looks at the conditions that have allowed Islamic finance to grow in the UK, and how it may move forward.

Competition is heating up among the world’s financial centres to attract Islamic issuers and investors. So far, Dubai, Kuala Lumpur, Bahrain and, to a lesser extent, Riyadh and Singapore, are all well placed to capture part of the booming Islamic finance industry. The latest entrant is London, the only financial centre actively involved in Sharia-compliant market intermediation that is not in a Muslim country. London, as a financial centre, has a number of competitive advantages compared with its emerging-market counterparts, including:

* Large size and international reach.
* Deep, efficient markets, where investors can switch from one asset class to another (including in and out of sukuk).
* Liquidity in the secondary market.
* Tremendous human resources and expertise (including research, analysis, operations, and structuring capabilities).

In addition, the legal environment is robust. The tax regime applicable to sukuk coupons will make them deductible – no longer viewing them as rental payments but equivalent to interest. Announced 21 March 2007, among other initiatives pertaining to Islamic finance, this sukuk-friendly amendment to tax law in the UK stands to make London more attractive for issuing and trading sukuk, although Dubai has been so far the most active trading centre for sukuk notes. The largest sukuk to date were those issued by Dubai-based Nakheel Group for US$3.52bn early in the first quarter of 2007. These notes were listed in both Dubai and London.

The overall size of the sukuk market worldwide is estimated at nearly US$70bn,including issuance from Malaysia, Pakistan and, of course, the Middle East. However, the bulk of sukuk are over-the-counter instruments. Listed sukuk account for only 20-25% of outstanding sukuk issued worldwide, that is, US$10-15bn so far. There are more sukuk listed in Dubai than anywhere else, but the secondary market is virtually non-existent. Second is London, where the secondary market for sukuk totalled less than US$5bn at 21 March 2007. Among listed sukuk, Standard & Poor’s Ratings Services rates close to US$6bn or roughly 50% of sukuk outstanding that is listed globally. New sukuk issuance is expected to accelerate, and could reach US$20-25bn in the next five years, according to the most reasonable forecasts.

We believe that the global Islamic financial industry will benefit from the UK’s development as an attractive marketplace for Sharia-compliant financing and investment instruments – on both the wholesale and retail side. We estimate that up to 300,000 retail customers in the UK would be ready customers for Sharia-compliant banking services. The establishment of these services in the UK would extend the reach of the Islamic financial model – so far still concentrated in a few countries in the Middle East and Muslim parts of Asia. As for wholesale banking, London has the capacity to become a hub for Sharia-compliant financial flows that seek recycling in Europe. For example, Islamic investment banks such as the Bahrain-based Arcapita Bank B.S.C. and Gulf Finance House, both have offices in London where vast amounts of liquidity from the Gulf meet attractive Sharia-compliant asset classes packaged in private equity, real estate, and infrastructure funds domiciled in the more mature and stable European economies.

The UK intends to become a key player in market intermediation for sukuk. Competition from western financial centres is low, as limited appetite for Islamic finance is coming from New York, more interested in facilitating the trading of Sharia-compliant stocks, especially through the Dow Jones Islamic Index and, more recently, through the newly created family of Standard & Poor’s Sharia indices. London, on the contrary, has a wider approach to Islamic finance, encompassing a broader range of financial instruments and asset classes. For example, the Financial Services Authority (FSA) has recently licensed the European Islamic Investment Bank, a wholesale financial institution created expressly to recycle the massive amounts of institutional and private liquidity in the Gulf into Sharia-compliant asset classes originated in mature, stable, and transparent western markets.

The FSA has taken on an Islamic retail strategy in keeping with its mission that aims for inclusion. This principle aims at combating financial exclusion, that is, the incapacity or unwillingness of households to access banking services because of distance, poverty or religion.

Some UK citizens do not actively deal with banks simply because banking in the UK is based on interest, called ‘riba’ in Arabic, considered unlawful according to Sharia, or Islamic law. To prevent Muslim customers being excluded from the banking market because of their beliefs, the FSA has given its green light to established conventional banks to offer Sharia-compliant services. Both HSBC, through its Amanah brand, and Lloyds TSB already offer Islamic banking services.

The FSA has also recently licensed a fully-fledged Islamic financial institution, the Islamic Bank of Britain, to serve the UK retail market with Sharia-compliant products. For Sharia-compliant services to become more comprehensive in the UK, the country needs to offer takaful (or Islamic mutual insurance). Licensing a takaful company or allowing conventional insurers to offer takaful products could be the next step in the UK’s strategy to further enhance its position as a leading Islamic financial centre.

The UK itself might be interested in issuing sukuk notes. Such issuance would be of high interest for investors who adhere to or favour Islamic finance. If the country did so, its issuance would be the second to carry an AAA rating, after sukuk issued by the Islamic Development Bank in 2005 for US$1bn. In addition, the UK would be the third sovereign outside the Middle East to issue Sharia-compliant paper, after Malaysia in 2002 through a US$600m structure called Malaysia Global Sukuk Inc. Japan has also expressed its intention to tap liquidity in the Gulf through the issuance of Sharia-compliant notes. The German State of Saxony-Anhalt has also issued sukuk, through a vehicle called Stichting Sachsen-Anhalt Trust for €100m in 2004.

http://www.gtnews.com/article/6846.cfm

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Insurance: Takaful gaining ground

April 23, 2008 at 2:40 pm · Filed under Analysis, Islamic Insurance, Mudharabah, Takaful ·Tagged ,

Insurance: Takaful gaining ground

Hussein Mahmoud traces the origins of Takaful insurance and looks at why it is one of the fastest growing parts of the market

Takaful originates from the Arabic word ‘Kafalah’, which means ‘guaranteeing each other’ or ‘joint guarantee’. The Takaful market started in Sudan in 1979 and then spread to Asia, with Malaysia being one of the most mature markets in the Islamic Asian region. The Takaful concept reached the Gulf regional market in 2002, and gained ground in 2005.

The principles of Takaful are similar to those that underpin mainstream mutual insurance, as the Takaful system is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants. In addition, however, a Takaful-branded product has to strictly follow the Muslim business norms of Islamic contracts for clients and Boards of Islamic Sharia scholars whose role is to vet business decisions.

Major international companies moving into the Takaful segment include AIG, Allianz, HSBC, Aviva, and Prudential. Further in 2008, the second largest Takaful company in the world, British Islamic Insurance Holding, is due to launch a UK base with the intention of raising more than $350m (£174m) of capital. As well as targeting the UK market, the company is also setting its sights on other European countries, especially France and Germany, the Gulf States and some Asian countries.

Why the demand?
Islamic banking institutions providing capital and Islamic financial instruments for asset management and investment have already developed successfully and there is now a strong demand, due to religious beliefs, for a Shariacompliant insurance product.

Takaful is one of the fastest-growing segments in insurance, with an average growth of 20% per annum. In 2006, worldwide Takaful contributions were estimated at around $3bn. Approximately 60% comes from general Takaful (general insurance) and 40% from family Takaful (life insurance and pensions).

According to Moody’s Global Credit Research service, total Takaful premiums were worth more than $2bn in 2005 and it is predicted that this will rise to $7bn by 2015.

In addition, consumer surveys have shown a high willingness for Muslims to switch their conventional savings, health and education plans to a Takaful product, given the same level of customer service, quality and profitability.

Defining a Takaful system
There are five elements that must co-exist to establish a proper framework for a Takaful system:

1. Ne’aa or utmost sincerity of intention — for knowingly following the guidance of, and adhering to the rule and purpose of, Takaful — co-operative risk sharing and mutual assistance.
2. Integration of Sharia principles — in particular, risk sharing under Ta’awuni principles, coincidence of ownership, participation in management by policyholders, avoidance of riba (an agreement in which the policyholder expects to receive a predetermined/ fixed amount that is greater than that invested), gambling (referred to as ‘qimar’ or ‘maisir’ in Arabic, which means any activity that involves an arrangement between two or more parties, each of whom undertakes the risk of a loss where a loss for one means a gain for the other), and al Gharar (activities that have elements of uncertainty, ambiguity or deception. In a commercial transaction, it refers to either the uncertainty of the goods or price of goods, or deceiving the buyer on the price of goods), and inclusion of the al Mudharabah (profitsharing arrangements) and/or al Wakalah (agents) principles for management practices.
3. Presence of moral value and ethics — whereby business is conducted openly in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealing.
4. No unlawful element — that contravenes Sharia and strict adherence to Islamic rules for commercial contract, namely:

  • Parties have legal capacity and are mentally fit n Insurable interest n Principle of indemnity prevails
  • Payment of premium is consideration (offer and acceptance)
  • Mutual consent, which includes voluntary purifi cation
  • Specific time period of policy and underlying agreement.

5. Appointment of a Sharia Advisory Council or Committee — to oversee the development and Islamic auditing of the Takaful operation and to make sure the investments are made in eligible areas that are allowed and approved by the Sharia board.

Two areas of business
Most Takaful products fall into two main areas.

General Takaful
General Takaful refers to schemes designed to meet the protection needs of individuals and corporate bodies in relation to material loss or damage resulting from a catastrophe or disaster infl icted upon properties, assets or belongings.

Participants (policyholders) pay their premiums (calculated by actuaries) into the Takaful fund as a Tabarru’ (donation). This will eliminate the elements of al Gharar and gambling. That is, the participant agrees to donate their contribution (premium) to the fund with a mission to help other participants covered under the various Takaful schemes when in distress. Therefore, it is the members who carry the risk and the Takaful operator is merely a custodian. Mudharabah, Musharakah and Wakalah models (see Takaful models box) can be implemented under this approach.

Family Takaful
The range of Takaful products offered falls into two categories: risk-type products that are provided for the protection of the participants; and investmenttype products with an element of risk. These products tend to be regular savings plans where a participant indicates his need to achieve a target lump sum by a specifi ed time in the future. Under this scheme the participants pay their premiums into the Takaful fund. A portion of the premium is allocated purely for saving and investment, and the balance goes as a Tabarru’ to build up reserves (claims reserves, unearned premium reserves and so on), to direct expenses, and to pay for Retakaful (reinsurance). Again, Mudharabah, Musharakah and Wakalah models can be implemented under this approach.

Beyond these two main areas, Takaful products are also available for health and pensions needs. It should be noted that Takaful insurance is not just for Muslims but also for non-Muslims, as it is seen by them as an ethical form of insurance.

Takaful models
» Mudharabah model (profit and loss sharing) This is a contract between capital providers with management, where any profi t is shared according to ratio or percentage agreed by both parties but any losses are borne entirely by the capital provider. In practice, participants provide capital to the Takaful operator.
» Musharakah model (joint venture) Both parties provide capital and/or management. Profi t is split either based on capital or upon negotiation, and any loss is distributed in proportion to capital contributions.
» Kafalah model (surety) A guarantor to become the surety in the event the debtor fails to honour his obligation. This type of contract can be used for the development of the Takaful scheme for bonds products.
» Wakalah model (agency) The principal appoints and authorises someone to act on his behalf. The authorisation could be either specific or general. The Wakeel (agent) could then charge a fee to the principal. This model is suitable for most Takaful products including products for corporate risks such as a ‘Rent-a-Captive’ concept.
» Ju’alah model (commission) Similar to the Wakalah contract except that the payment to the agent is measured on his output and performance. This contract could be used to develop distribution channels for Takaful. The most important element of a Takaful model is that there must be a subject matter of contract upon which contracting parties mutually agree by an ijab (proposal) and a qabul (acceptance).

Takaful structures
A Takaful operation in a non-Muslim country can be established in any one of the followings ways:
» A Takaful operator set up under the local Company’s Act with a distinct legal entity
» A Takaful window with any of the existing insurance companies
» A branch of any established Takaful company under a franchise agreement or other understanding
» Establishment of marketing facilities for Takaful products as part of an existing Takaful company with an agency agreement.

Hussein Mahmoud is a Senior Actuarial Analyst at ACE European Group

Source: http://www.the-actuary.org.uk/695085

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Takaful-Islamic insurance set for strong growth

April 15, 2008 at 11:19 pm · Filed under Analysis, Islamic Insurance, News, Retakaful, Takaful ·Tagged ,

Islamic insurance set for strong growth

Written by Adrie van der Luijt
Monday, 14 April 2008

Takaful growth has outpaced that in conventional insurance in most countries of the Middle East.

Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law.

Gulf cooperative countries (GCC) represented over 50 per cent of the value of global Takaful contributions of $2 billion in 2006.

Ernst & Young’s inaugural World Takaful Report 2008, launched at the Annual World Takaful Conference 2008, shows that 59 of the 133 Takaful operators worldwide are within the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The report also forecasts that accepted contributions globally would rise to more than $4.3 billion in 2010 and that the 20 per cent annual growth rate of the industry would be maintained for the foreseeable future.

General Takaful, which includes Property & Miscellaneous Accident Takaful, currently accounts for approximately 50 per cent of written business globally and in the region.

Key challenges and drivers

While current growth rates indicate a future Takaful industry of $10-15bn within the next ten years, there are critical factors that must be addressed to maintain this expansion.

Key challenges facing Takaful, as outlined by the report, include a fragmented and undercapitalised landscape, limited re-Takaful capacity, problematic asset management and lack of local solution offerings and local distribution channels.

The drivers of Takaful demand include high economic growth and increase in per capita GDP, a youthful demography, increasing awareness, a greater desire for shari’a compliant offerings and increasing asset based, shari’a compliant financing.

Noor Ur Rahman Abid, managing partner of audit and assurance business services at Ernst & Young Middle East, said that it is clear that there are significant growth opportunities for the Takaful industry, especially when the estimated global insurance premiums are as high as US$3.7 trillion.

Most Organisation of Islamic Conference (OIC) countries have underdeveloped insurance sectors. Premiums in the Middle East are at 1 per cent of nominal GDP compared to 8 per cent in North America.

In addition, high levels of market liquidity and with income levels rising in the region, should contribute to a future rise in the global Takaful industry.

Takaful used to underwrite risk

Despite significant challenges, the outlook for the Takaful industry has excited the Islamic finance world, according to Sameer Abdi, head of Ernst & Young’s Islamic finance services group.

He explains that assets held and financed by the Islamic financial services industry are increasingly motivated to use Takaful to underwrite risk.

Existing Takaful capacity is slowly replacing conventional insurance in the industry.

“The challenge for Takaful operators lies not only in tapping extrinsic demand but also in developing their capacity and expertise to provide a competitive alternative to conventional insurance,” Abdi concluded.

Source: http://www.dofonline.co.uk/economy/islamic-insurance-set-for-strong-growth2568.html

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Islamic reinsurance to grow double digits: Munich Re

April 9, 2008 at 1:00 am · Filed under Analysis, Retakaful, Takaful ·Tagged , ,

Islamic reinsurance to grow double digits: Munich Re
Sunday, April 06, 2008

KUALA LUMPUR: Global Islamic reinsurance premiums will keep growing at double digit rates in the coming years, driven by booming demand for ethical investments, Munich Re says.

The world’s second-biggest reinsurer said the global market for Islamic reinsurance, or retakaful, has been rising in the teens. It gave no figures for the size of the market but some industry data put it at about $1 billion.

Global premiums in Islamic insurance, or takaful, total about $2-3 billion now and are expected to reach $7.4 billion by 2015, according to industry figures.

The global credit crisis stemming from writedowns for complex debt backed by risky US mortgages would drive investors to take refuge in investments that comply with religious principles, said Ludger Arnoldussen, a Munich Re management board member.

“A general principle of Islamic investment and takaful is high ethical standards and if you look at some of the things that happened in the context of sub-prime, ethical is not the first word that would come to your mind,” Arnoldussen told Reuters.

“The takaful model and retakaful allow us to tap a customer base which right now is under-insured because of ethical reasons because they don’t find adequate offerings,” he said during a visit to launch Munich Re Retakaful’s office in the Malaysian capital.

Munich Re, which makes money by charging insurance company clients for covering part of their risks, declined to give more specific growth targets for the Islamic reinsurance market, saying much depended on expansion in large countries.

“The purchasing power of Muslims in Western countries can tip the scale perfectly,” said Munich Re Retakaful chief executive Ludwig Stiftl.

Islamic scholars frown on conventional insurance, saying the use of interest-bearing investments and the lack of certainty in the size of policy payments violate Islamic law principles.

Under Islamic insurance, members contribute to a pool of funds which is used to indemnify participants who suffer a loss.

The funds are invested according to the Shariah which shuns interest-bearing loans. Profits made are distributed among members.

The $750 billion Islamic finance industry is expected to grow by more than a fifth each year, as record energy prices fuel a surge in petrodollars in the Middle East.

Munich Re is keen to bring its Islamic reinsurance business to Indonesia, Pakistan, India and Gulf countries, said Arnoldussen.

But growth of the Islamic reinsurance industry is being hindered by a lack of skilled workers, Stiftl said. “The industry is growing faster than the expertise,” said Stiftl. “People need to be trained and the Shariah boards need to be broadened as well.”

Source: http://www.thenews.com.pk/daily_detail.asp?id=105143

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