The idea of a third party sukuk guarantee fund is still being
considered by the Islamic Corporation for the Insurance of Export
Credits and Investment (ICIEC), the standalone export credit agency of
the Islamic Development Bank (IDB) Group. However, according to Abdel
Rahman Taha, the chief executive officer of ICIEC, the corporation "has
initiated work internally to design a new sukuk policy which can be
offered as a means to enhance the credit structure and appeal of sukuk.
It is expected that this new policy will be able to provide the much
needed respite to the sukuk market." (source)
The 2007 ruling by the Shariah Advisory
Committee of the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) criticizing the guaranteeing of
principal and purchase undertaking by issuers relating to Musharaka and
Mudaraba Sukuk, has had a major impact on the global sukuk market. This
ruling coupled with the advent of financial crises, says ICIEC, put a
lot of pressure on the existing sukuk issues and also dried up the
supply side.
While it is now clear that in order for a sukuk to be
Shariah-compliant, explained Taha in an interview with Arab News, "it
will have to work out a structure without a guarantee from the sukuk
issuer/sponsor. This however, poses a unique challenge; having resolved
Shariah issues, how to enhance the credit structure to attract sukuk
investors. To address concerns of the sukuk market, ICIEC proposed in
2009 to structure a fund which would provide the necessary third party
guarantee thereby helping the sukuk market to regain its luster, more
importantly, in a Shariah-compliant manner. ICIEC is best placed to
launch and manage such a fund. ICIEC has a long and impressive history
managing credit Takaful and is the only Shariah provider of credit and
political risk insurance in the world."
In fact, bond/sukuk
insurance; cooperation in reinsurance and retakaful; new products such
as exchange risk insurance; and the role of central banks in supporting
export credit agencies (ECAs) are some of the proposed topics on the
agenda of the third annual meeting of the Aman Union, the association of
investment and export credit agencies in the Arab and Islamic World,
which will be held in Kuala Lumpur in 2012.
The prime movers
behind the Aman Union are the Jeddah-based, ICIEC and Dhaman (the Arab
Investment and Export Credit Guarantee Corporation). The union's aim is
to enhance cooperation among Arab and Islamic export credit
institutions; to encourage the development of investment and export
credit insurance industry in its member countries; and to offer
technical assistance to establish new agencies while also enhancing the
insurance capacity of existing agencies.
ICIEC maintains that it
stands ready to provide all kinds of support needed by its stakeholders.
In this regard, the corporation is working in parallel to develop new
products, to strengthen existing ones and to forge new
reinsurance/coinsurance alliances and convince the Central Banks (CBs)
in its member countries on the usefulness of credit and political risk
insurance services provided by the ECAs.
In this respect, ICIEC
conducted a number of seminars and has also met top central bank
officials in Saudi Arabia, Malaysia, Bahrain, UAE, Pakistan and Egypt as
part of the first phase of this initiative. In the next phase ICIEC
intends to meet more member country central banks. The major focus of
these meetings is to help the CBs to understand the ECA products; their
ability to transfer risk and their treatment under the Basel II regime.
Taha
believes that the CBs, once they understand the risk mitigating
features of export credit insurance and political risk insurance, would
allow its use by the commercial banks under their supervision. ICIEC has
received positive feedback on these efforts.
Cooperation in
reinsurance, according to Taha, is a strategic area of cooperation
between the Aman Union ECAs, where there is a strong potential for
cooperation. The major idea is to increase the reinsurance integration
between the members and perhaps establish a common reinsurance pool.
Exchange
risk insurance is a new product developed by the Export Guarantee Fund
of Iran (EGFI) to cover the risk of fluctuation of exchange rates, which
is not normally covered by ECAs. While exchange risk insurance is
rightly on the agenda, but given the sovereign debt crisis in the euro
zone and the fact that it is also plaguing many member countries of the
Aman Union and the IDB, surely there is also place for a new product -
sovereign debt risk insurance.
Taha agrees, especially in light of
the developments taking place in the global arena over the past couple
of years. "I am pleased to report that we have had the foresight to
identify the need for a product that addresses the issue of sovereign
debt.
We have a product called 'Non-honoring of sovereign
financial obligations (NHSFO)', which protects investors and financiers
against the risk of the sovereign host country not complying with the
demand to pay under an unconditional and irrevocable financial
guarantee. We launched this product a year and half ago and we have seen
a great deal of interest for it in the market. We have already issued
two policies, one direct insurance and one reinsurance, and are now
working on a number of other applications, including two that we expect
to issue in the coming several weeks."
According to the 2010
annual report of the Aman Union which was unveiled in Istanbul at the
union's second annual meeting in October 2011, the insured business of
member countries reached a mere $15.06 billion against $13.02 billion in
2009 generating $122.82 million of premium income against $72.91
million in 2009. Paid claims year on year increased from $22.88 million
to $23.88 million and recoveries fell from $69.4 million to $28.9
million.
This means that there is massive untapped underwriting
capacity in this sector running into hundreds of billions of dollars
which remain untapped because of the underdeveloped culture of export
credit and political risk Takaful or insurance.
The figures
released by the Aman Union in its 2010 annual report also reveal how
stark the challenge is for the member ECAs and for the export credit and
political risk insurance industry in the IDB member countries. Insured
business of $15 billion is paltry in the context of the total trade of
some $2.3 trillion of the OIC member countries. Similarly, it has to be
compared to the $1.4 trillion of credit insurance provided by the
International Association of Export Credit Insurers (Berne Union)
representing 10 per cent of the world trade.
However, the
expectations for 2011 are positive mainly for the top ECAs of the Aman
Union (like ICIEC and Turk Exim Bank) which expect a high growth in
business insured and premium. This, says ICIEC, will immediately reflect
positively on Aman Union performance globally.
These figures,
agrees Taha, "show that the credit insurance is still in its initial
stages in the Aman Union member ECAs. The major reasons are the lack of
credit insurance awareness. However, we have witnessed in the last few
years an increasing demand for credit insurance and special interest
from some countries of our region to create their own ECAs to promote
the national exports. These efforts in addition to the role of the Aman
Union will help to increase the awareness of the importance of credit
insurance."
There is also the question to what extent
Shariah-compliant export credit and political risk insurance is
established among the Aman Union member ECAS. As a dedicated provider of
Takaful products in this space, ICIEC may sometimes constrained in its
cooperation and entry into new markets given the lack of understanding
or legal and regulatory infrastructure to accommodate the specificities
of Shariah-compliant insurance products.
Taha maintains that while
the Aman Union member ECAs offer credit insurance through providing
either Shariah-compliant or conventional products, from a technical
point of view, there are not much differences between the two products.
"The differences between Shariah-compliant and conventional credit
insurance is related mainly to the relationship between the shareholders
in the company and the policyholders. The insurance operation is
managed by the Company on behalf of the policyholders," he adds.
The
Aman Union admitted several new members at its second annual meeting in
Istanbul. They include the Qatar Export Development Agency - Tasdeer
(Associate Member); African Trade Insurance Agency (Observer); Atradius
Reinsurance Ltd (Observer); Catlin (Observer) and Rime (Observer). This
brings the membership of the union to 17 full member ECAs, 2 associate
members and 8 observers.
In Istanbul there was much technical
discussion over credit insurance. However one of the major issues and
demand currently is for commercial risk insurance. In fact, there should
be a natural fit between Islamic finance and this type of risk
insurance. Taha confirms that the demand for commercial credit insurance
has certainly increased after the current financial crisis. "All of our
Aman Union ECAs members are actively covering this risk and the
majority have seen an increase in the demand for their services covering
commercial risk which includes risks related to the buyer financial
situation (insolvency, unwilling to pay, bankruptcy, etc)," he says.
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