A conference on the future and expansion of takaful, called Takaful
Rendezvous 2011, took place in Malaysia under the banner of Kuala Lumpur
Islamic Finance Forum (KLIFF) from October 4 to 6. Although the
industry has come far in a short period of time, more needs to be done.
Much like the $640-billion (Dh2.35 trillion) halal industry, takaful
needs to rise and address some of the challenges on size, representative
industry body, and perception. (source)
The known challenges in the takaful are well documented: human
capital development, regulations, distribution channels, Sharia
structures, governance and transparency, investment options, retakaful,
and so on. Thus, at one level, takaful is encountering similar issues to
Islamic finance and banking but has matured less.
Three takeaways
Today, we have, at last count, more than 177
takaful operators, predominantly in the GCC region and Malaysia. Yet
this represents only single digit percentage penetration in all Muslim
countries except Malaysia. The existing scenario implies three possible
takeaways:
1. Muslims (in OIC countries) have yet to buy in into the takaful
story on a larger scale, because existing ways and means addresses their
needs. Their children and community/mosque act as de-facto ‘takaful
operators'. The attitude may be: what they have is Sharia compliant and
it works for their particular needs in the jurisdictions they reside.
2. The education and awareness of what takaful is, how it is
compliant, and how it benefits them is a time-drawn process. It requires
patient commitment and ongoing resources from the operators. The
initial ‘returns' can be classified as awareness and institutional brand
building, i.e., the ‘good-will' foundation for financial returns.
3. Takaful, much like the halal industry, has not ‘linked' well with
the Islamic finance story, although both are very much a part of the
latter. When takaful premiums are less than $10 billion and most
operators are small in size, it needs to be a holistic and integrated
part of the anchor story of Islamic finance.
One simple acid test is news coverage: How many takaful stories
appear in the western media compared to Islamic finance? How many
meaningful stories on takaful in Muslim country media vis-à-vis Islamic
finance and halal industry?
Mega operator
Today, the conversation in Islamic finance is about an Islamic mega
bank to offset small paid-up capital with size, to have a larger balance
sheet to better compete with Islamic subsidiaries and home-country
conventional banks, and to have impact on investing and financing.
However, today's takaful conversation is often times on micro-takaful,
much like micro-finance, to serve the under-served.
Some Muslim countries are Islamically over-banked and over-takaful
compared to population size, resulting in margin-reducing (destructive)
competition. If an Islamic bank or takaful operator, compared to
conventional counter-parts, declares bankruptcy, it may actually result
in a confidence crisis and systemic risk for the embryonic Islamic
finance industry. Thus, the unique situation of ‘too small to fail' risk
exists in the Islamic finance.
For example, witness the selected western media ‘frenzy' when
Kuwait's Investment Dar, defaulted on its sukuk obligation or the United
States' East Cameron gas sukuk went into bankruptcy.
The conversation in the takaful industry must also include
establishing a mega takaful operator, either via consolidation or
licence, as the status quo may not be conducive to for industry's growth
and development. To offset fears of uncompetitive behaviour of larger
size Islamic banks and takaful operators, there are regulations plus
option of reaching out to the Sharia board, via the Sharia liaison
officer or department, of such institutions for ‘anti-competitive'
behaviour.
Industry body
Who is the spokesperson for the takaful industry? We have exposure to
issues in takaful by industry bodies such as Islamic Financial Services
Board (IFSB), and Accounting & Auditing Organisation of Islamic
Financial Insititutions (AAOIFI), but a dedicated industry body is the
need of the hour. The push back in certain quarters has been that it is
premature to have an industry body. The same response was also
articulated pre-1991 when AAOIFI was established.
The first order of business is the location of the proposed takaful
industry body: the UAE or Qatar over Bahrain and Malaysia. To date, we
do not have an Islamic industry body in either the UAE or Qatar, hence,
an opportunity for these countries to contribute as important
stakeholders in Islamic finance. Information about Islamic finance
should not just be available in Bahrain and Malaysia, the two leading
hubs of Islamic industry.
Global ‘go-to' point
The second and more important function of a proposed takaful industry
body is what should be the role and responsibilities? It will address
the well known issues, but something more is required. We need a global
‘go-to' point and clearing base of information for takaful to avoid
continued fragmentation and move towards standardisation.
Thus, takaful's time has come to move towards 2.0, with stronger
links to Islamic finance, where less may be better and a dedicated
industry body explaining the DNA of takaful.
The writer is Global Head, Islamic Finance & OIC Countries.
Opinion expressed here is the writer's own and does not reflect that of
his own organisation and that of Gulf News.
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