GCC gross takaful contribution seen reaching $8.9bn in 2014

GCC gross takaful contribution is estimated to reach around $8.9bn in 2014 from an estimated $7.9bn in 2013, according to EY’s latest report, ‘Global takaful insights 2014’.

The report forecasts a continued double-digit growth momentum in the global takaful market of approximately 14% from 2013 to 2016 and expects the industry to reach $20bn by 2017. This is against a backdrop of continued buoyancy in the estimated $2tn global Islamic finance markets.

The Gulf Co-operation Council (GCC) countries and Association of Southeast Asian Nations (Asean) markets are likely to maintain their current growth path in the next five years, subject to their economic growth.

The global takaful industry continues to gain market share across several high-value, rapid-growth markets, which still show significant untapped potential. Within the Gulf region, Saudi Arabia accounts for the majority of the total gross takaful contribution at 77%, followed by UAE, which accounts for 15%. The rest of the Gulf countries account for just 8% of gross takaful contributions, the report said.

Saudi Arabia will likely remain the core market of Islamic insurance business, commanding approximately half (48%) of the global contributions, while UAE, Qatar and more recently, Oman, continue to set the pace for the development of takaful products in the Middle East and West Asian markets.

Turkey and Oman are new entrants to the takaful industry, offering strong first mover advantage to takaful operators, whereas established takaful markets in Africa like Sudan, offer great prospects for efficient replication across new African markets endorsing Islamic finance.

Abid Shakeel, senior director, EY’s Global Islamic Banking Centre said, “The continued strong growth of the much larger Islamic banking sector will help sustain the progress of the takaful industry. The rapid-growth markets, particularly UAE, Malaysia and Indonesia, are key markets to watch as they improve on market practices, widen distribution channels and strengthen the regulatory front. The low insurance penetration rates, on average just 2%, across key Muslim rapid-growth markets signify a huge opportunity and growth potential for takaful products, particularly in the areas of family takaful and medical insurance.”

Given the strong underlying market opportunities, a competitive market environment and strategic regulatory reforms, it is vital that the takaful industry addresses key challenges to achieve a sustainable takaful ecosystem.

Among the GCC countries, competition, operational issues and the lack of qualified talent continue to be impediments. Profitability of takaful companies has been threatened not just by undifferentiated strategies but also by the lack of uniform regulations that will allow them to operate across different models. Undifferentiated business strategies mean most takaful operators are competing intensely and this is likely to squeeze out the under-performers.

With strong competition from conventional incumbents, takaful operators are likely to continue their struggle in the medium term, although some will look at alternative customer segments and explore merger options. In striving for scale and profitability, operators are looking at structural transformation around risk, pricing and cost efficiencies.

The industry needs to re-examine its strategies, operations and regulations in order to gear itself up for further growth and a sustainable ecosystem. Success needs to be measured in profit, not market share and those who continue to do what they’ve been doing in the past will struggle with profitability, the report said.

Sukuk issuance likely to rise over next few years: S&P

Corporate and infrastructure sukuk issuance is likely to rise over the next few years, despite the dip in issues over the past eight months compared to the same period of 2013, Standard & Poor’s Ratings Services has said in a report.

In its report “Why corporate and infrastructure sukuk issuance is declining, despite healthy prospects” S&P said issuance has trended downward this year in the Gulf Co-operation Council (GCC) region and Malaysia, dropping 33% and 7%, respectively.

By contrast, total sukuk issuance (including financial institutions and sovereigns) grew by 19% in the GCC and by 6% in Malaysia over the same period.

“We attribute the decline in corporate and infrastructure sukuk in large part to cheap and ample bank liquidity, which has made issuers less reliant on the capital markets,” said S&P’s credit analyst Karim Nassif. “The overall small pool of sukuk issuers, and seasonal factors such as the early Ramadan this year, have also played a role.

“We nevertheless believe corporate and infrastructure sukuk issuance will increase again over the next few years as companies’ refinancing needs grow and as entities establish themselves as sukuk issuers.”

The report says corporate and infrastructure issuance is likely to remain more volatile and difficult to predict than total sukuk issuance. It will likely remain largely a function of the specific needs of the corporate and infrastructure entities that comprise the pool of sukuk issuers in the GCC and Malaysia.

Continued high levels of bank liquidity and uncertainty among investors about compliance standards continue to hold back growth of the corporate and infrastructure sukuk market, the report said.

“The creation of local or regional institutional investment frameworks-for example, to enable pension or insurance funds to invest in sukuk-would go some way, we believe, toward creating a deeper and more liquid sukuk market,” Nassif added.

(Gulf Times / 09 September / 2014)

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Malaysia: SWIFT rulebook to enable STP in Islamic finance

Along with the Association of Islamic Banking Institutions Malaysia (AIBIM) and the Malaysian Islamic financial community, SWIFT is launching a new rulebook for the use of SWIFT MT messages for Islamic finance.

The rulebook will provide greater clarity around SWIFT MT message usage based on Islamic principles in order to enable straight-through processing (STP), improving efficiency as well as reducing risk and cost.

SWIFT MT will provide an efficient platform for exchanging Islamic finance messages and further promote the usage of message standards.

"Globally, the growing interest in Islamic finance as a viable alternative to conventional finance has heightened awareness of the need to adopt international standards to automate paper-based Islamic finance operations," says Kiyono Hasaka, standards specialist for Asia Pacific at SWIFT.

"With SWIFT's growing presence in Southeast Asia, we are well positioned to act as an enabler to bring the financial communities together, define market practice and automate Islamic finance processes using international messaging standards."

The SWIFT Asia Pacific team has been working in closely with the Malaysian Islamic financial community to develop STP-enabled financial messaging specific to the requirements of Islamic financial institutions since 2013.

Yusry Yusoff, executive director of AIBIM, said: "This initiative marks a significant development in furthering the level of efficiency for Islamic finance transactions particularly, in ensuring compliance to Shariah requirements."

The SWIFT Islamic Financial Rulebook will be available to the Message User Group by the end of 2014.

(Asset Servicing Times / 09 September 2014)

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Oman to float OMR200m sukuk issue by early next year

Muscat: Oman government has assigned a specialised institution to structure the country's first sovereign Islamic bond or sukuk issue, which may be floated by early next year, the country's central bank chief told Times of Oman. The Sultanate plans to raise OMR200 million by way of a sukuk issue.

"The government is studying issuing sukuk and have also invited some specialised institutions who are knowledgeable in structuring sukuk issues," Hamoud Sangour Al Zadjali, executive president of the Central Bank of Oman (CBO) said, on the sidelines of 'Technology Evolution and Banking Conference' organised by Bank Muscat here on Tuesday. 

He said the issue may be floated by early next year, if not by the end of the current year. "It (the issue proceeds) will be used for funding some of the projects," added the CBO chief.

Oman government earlier formed a working committee to issue sovereign sukuk, in a move to fund infrastructure projects in the near future. The committee members were from the Ministry of Finance, CBO and Capital Market Authority (CMA) and they are now discussing various aspects of raising funds by way of a sovereign sukuk, which is generally asset backed.

The purpose of the sukuk issue is to deepen the financial market in the Sultanate. In fact, it will enable the Islamic banking institutions and the windows to invest some of their excess liquidity in a secured instrument.

Al Madina Investment last year arranged the first corporate sukuk in the Sultanate for Tilal Development Company (TDC). This sukuk, with an issue size of OMR50 million, was based on the Ijarah structure.

(Times Of Oman / 09 September 2014)

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Pakistan takaful market to get a major impetus

Pakistan’s insurance sector is set for a boost in competition which could help spread the uptake of insurance after the industry regulator allowed conventional firms to offer Shariah-compliant products (takaful) earlier this year.

The regulator, the Securities and Exchange Commission of Pakistan (SECP), has now granted two takaful licences and has up to 10 applications currently being finalised, said Faraz Uddin Amjad, Joint Director of the SECP’s insurance division.

“In another one year we are expecting 20 to 25 new takaful window operators in the market. Competition will increase, but also the size of the market,” Amjad said on the sidelines of an industry conference.

Pakistan introduced new takaful rules in 2012, allowing the use of takaful windows, which enables insurers to offer Shariah-compliant and conventional products side by side, provided client money is segregated.

This prompted a legal challenge by the country’s five full-fledged takaful firms claiming the rules gave conventional insurers an unfair advantage, with the legal dispute finally being resolved in May of this year.  The regulator expects at least half of Pakistan’s 50 conventional insurers will eventually offer takaful products.

Takaful is seen as a bellwether of consumer appetite for Islamic finance products. It is based on the concept of mutuality: The takaful company oversees a pool of funds contributed by all policyholders, and from which claims are paid.

Pakistan’s conventional insurers have been barred from offering Islamic products since the first takaful rules were introduced in 2005, but regulators have been keen to increase overall insurance coverage in the country.

Insurance penetration, measured as total premiums to gross domestic product, has hovered at 0.7% of GDP for the last decade and now stands at 0.9% of GDP, Amjad said.

This ranks as the third-lowest level in Asia, against 4.1% of GDP for India, a report by Swiss Re said.  Takaful has contributed marginally, the sector represents about five per cent of the total insurance market, although this is expected to change in the coming year.

“At least in the first year (2015) it should go into double digits. On price and service I think it will have a lot of impact,” Amjad said.

United Insurance Company of Pakistan has said it plans to enter the takaful market. EFU Group, Pakistan’s largest insurer, plans takaful windows for both its life and general businesses.

Conventional insurers are bigger in size and have operated for longer, whereas takaful companies are on average five to six years old, but Shariah-compliant products can have greater appeal to consumers, Amjad said.

“The conventional ones have a bigger branch network, more outreach, more assets – because of that they would be able to provide the products to a larger part of the population.

“Individuals would, of course, care about price and service, but they would be more concerned about the religious ethos.”

The regulator sees greater opportunity in life insurance although commercial lines of business could also find appeal in rural markets where the demand for products like crop, agricultural, livestock insurance is increasing, said Amjad.

Such an increase in activity could face challenges, in particular a lack of experienced staff as well as the need for Islamic re-insurance products to help manage excess risk.

“The risk which I see is capacity risk, both at insurer level and the regulatory level, technical capacity, human capacity.”

Conventional insurers must allocate Rs50mn ($506,000) in capital to their window operations, a requirement that was not in the original rules introduced in 2012.

(Gulf Times / 04 September 2014)

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Goldman Sukuk Lures Mideast’s Top Fund Manager: Islamic Finance

Goldman Sachs Group Inc. (GS:US) will probably succeed in its latest attempt to sell sukuk as investors clamor for Islamic bonds, according to the manager of the Middle East and Africa’s best performing sukuk fund.

Buyers “have to look at different opportunities” with demand outpacing supply, according to Abdul Kadir Hussain, who oversees about $700 million as the chief executive officer of Mashreq Capital DIFC Ltd. Goldman Sachs will meet investors in the region this week before potentially selling a dollar-denominated, benchmark-sized issue through its unit JANY Sukuk Co., people with knowledge of the deal said last week.

The New York-based lender’s first foray into the Islamic capital markets three years ago ended without a sale amid criticism from scholars about the structure of its sukuk program and the use of funds raised. This time the planned security will be a Sukuk al Wakala, where one party entrusts another to act on its behalf.

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“We’ll definitely look at it,” Hussain said in a phone interview from Dubai yesterday. “The structure was an issue” last time and there were “a lot of other issuers in the market,” he said. “Now the market is a lot tighter and there is more capital.”

Investors bid for 10-times the 200 million pounds ($327 million) that the U.K. sold in its debut offering in June.

Best Funds

Mashreq’s Capital DA01 and Al-Islami Income Fund are the two best performing Islamic fixed-income funds in the Middle East and Africa this year among 19 tracked by Bloomberg. They’ve returned 7.7 percent and 6 percent respectively, compared with 5.6 percent for third placed Al Hilal Bank’s Global Sukuk Fund, the data show.

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“Like the U.K. issue, the Goldman Sachs deal is a broadening of the sukuk market issuer base, and like that issue this deal isn’t about the pricing or the valuation,” Hussain said. “It’s about the signal that it sends.”

Average global sukuk yields declined 64 basis points this year to 2.78 percent last week, according to an index from Deutsche Bank AG. That compares with a 61 basis-point decline to 5.08 percent in average yields for emerging-market corporate debt tracked by JPMorgan Chase & Co. indexes.

Remaining Shy

Goldman Sachs established a $2 billion program in 2011 based on a so-called commodity murabaha structure, or a cost plus mark-up transaction. The program, blessed by eight of the world’s top Islamic scholars, became entangled in a debate on whether it met Shariah-compliant guidelines because it didn’t ensure debt was traded at par, and it didn’t clarify how it planned to use the funds raised.

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This time Goldman Sachs along with Abu Dhabi Islamic Bank PJSC, National Bank of Abu Dhabi PJSC, Emirates NBD Capital Ltd. and NCB Capital will manage the new offering, the people said. It plans to meet investors in the Middle East for two days starting Sept. 10.

“If the investors conclude that Goldman Sachs is going to take this money into their books and use it to finance their conventional activities, then the investors are going to remain a little bit shy,” Harris Irfan, managing director at European Islamic Investment Bank, said by phone from London yesterday, noting the new structure has solved the par-value obstacle, but not issues with transparency. “I do hope they will be more transparent on the flow of money,” he said.

Main Critic

Still, the presence of ADIB on the deal is “very positive” as it was one of the main critics of Goldman Sachs’ earlier plans, Irfan said. The Shariah boards of ADIB and EIIB share one scholar, according to the lenders’ websites. ADIB’s outsourced public relations company didn’t answer e-mailed questions yesterday, and Sophie Ramsay, spokeswoman for Goldman Sachs in London, declined to comment by telephone.

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About $72 billion of sukuk have been sold globally in the year through yesterday, compared with $80 billion in the same period in 2013, according to data compiled by Bloomberg.

“Islamic finance is a growing market both in terms of issuers and investors,” Hussain said. “Goldman Sachs clearly has decided that they want to play a role in this market both as an issuer and I am sure also as an arranger and adviser.

(Bloomberg Business Week / 08 September 2014)

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Syariah funding draws green projects

Financial products based on renewable energy and sustainable agriculture are emerging in Islamic finance as asset managers seek a crossover opportunity between ethical and syariah-compliant investing.

Islamic finance follows religious principles which forbid involvement in activities such as gambling, tobacco and alcohol, but the industry has only recently begun to stress themes of wider social responsibility, such as protecting the environment.

Last week, Malaysia announced guidelines for issuance of socially responsible sukuk (Islamic bonds), aimed at helping firms raise money for projects ranging from renewable energy to affordable housing.

In April, the Dubai Supreme Council of Energy, a government planning body, and the World Bank signed an agreement to develop funding for the emirate’s green investment programme, including “green” Islamic bonds.

Dubai aims to derive 5% of its energy from sustainable sources and retrofit buildings to reduce energy consumption.

Meanwhile, firms in Britain, Canada and Hong Kong are offering sharia-compliant investments in sustainable farming ventures, which may attract money from Islamic investors in the Gulf and southeast Asia as well as from local investors.

The reasoning is that green investment products can tap a wider range of demand if they are made syariah-compliant to appeal to Muslims.

At the same time, non-Muslims who might normally shy away from Islamic investments – because of concerns about pricing, complexity and lack of familiarity – may embrace them if they are green.

It is not yet clear how much success these efforts will have. In past years, Islamic mutual funds made forays into the market for socially responsible investments, but those efforts have struggled, partly because of limited distribution channels.

Fund houses from the Gulf and southeast Asia sought to distribute some of their Islamic funds to European investors using UCITS, a “common passport” for investment products, but they have had only mixed success, and a high-volume business has not developed.

The new crossover products are not mutual funds but instruments tailored specifically to invest in a certain type of asset in a specific country or region.

They combine Islamic screens – lists of criteria for syariah compliance – with other practices required by sustainable investment firms.

In June, Ontario-based AGInvest Properties developed a syariah-compliant investment product providing ownership of Canadian farmland, supervised by Bahrain-based advisory firm Shariyah Review Bureau (SRB).

The venture would buy prime agricultural land which the firm would manage to ensure sustainability through soil preservation, crop rotation and selection of farm operators, said Robbie Duncan, Dubai-based vice president of AGInvest.

The company, which currently manages C$70 million (RM203.47 million) worth of agricultural land, has begun marketing its syariah-compliant product to investors in the Gulf.

A Saudi firm has expressed interest in setting up a similar fund with AGInvest as adviser, said Duncan, without naming the Saudi firm.

“We have found that three main trends have promoted this agri-business: the need for a stable ethical investment, an investment which promotes and aids the betterment of a community, and the need for food security.”

It is the third agriculture-based investment screened by SRB since December, said Yasser Dahlawi, SRB’s chief executive.

“There are only finite amounts of agricultural resources available to the Islamic investor community,” Dahlawi said.

British-based SCS Farmland is offering a syariah-compliant investment programme for Argentinian farmland, while Hong-Kong based Treedom Group is offering Islamic investors an agarwood venture.

Success for all of these ventures is by no means guaranteed, and it is too early to say whether this form of crossover investing will have more success than the Islamic mutual funds previously marketed in Europe.

One environmentally friendly, syariah-compliant investment project in Britain failed to go through earlier this year.

British-based Islamic financial advisory firm Simply Sharia planned to raise £3 million (RM15.74 million) by the end of June to build a solar energy plant, using tax relief from the government’s Enterprise Investment Scheme to create a wakala funding structure.

But the project was unable to reach its funding target by the deadline, partly because as a syariah-compliant structure it could not use leverage like conventional financial products, which limited the returns that could be offered. The project was too small to be financed with sukuk.

“There was a performance differential between conventional solar EIS products (target return £1.15 per pound invested) and the syariah-compliant product (target return of £1.10 per pound invested),” said Anas Hassan, managing director of business finance at Simply Sharia.

“This differential was mainly due to the high level of debt in the structure of the conventional product, whereas the syariah-compliant version was a pure equity play.

(The Rakyat Post / 02 September 2014)

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Gulf sovereigns continue to dominate dollar sukuk issuance

Dubai: Volumes of sovereign sukuk have increased significantly over the last three years as governments in Asia, the Gulf Cooperation Council (GCC), Europe and now Africa seek to tap increased demand for Sharia-compliant financial assets, however a large portion of these issuance is denominated in local currencies, according to Moody’s.

In the medium term, these international issuances will remain driven by sovereign and government-related issuers from the GCC countries because of their US dollar currency pegs.

Despite recent growth in cross-border sukuk issuance, most sovereign sukuk are issued in local currencies for domestic investors. Of the $105 billion (Dh385 billion) sovereign sukuk outstanding at July 2014, approximately $20 billion are foreign-currency, cross-border instruments of which are almost all denominated in US dollars.

“As global investors becoming increasingly at ease with Islamic instruments, we expect more issuance of cross-border instruments from other jurisdictions such as Indonesia, Malaysia and Turkey to tap this demand,” said Khalid Howladar, Moody’s Global Head for Islamic Finance.

Governments and government related entities (GREs) from the GCC region are expected to be a major supply source for sukuks this year.

According to Moody’s estimates global sukuk issuance this year will exceed the 2013 level to reach around $70 billion, with sovereign issuance increasing to around $30 billion this year. The share of sovereign sukuk in global sukuk markets is larger than in conventional bond markets. The amount of international debt securities reached close to $22.8 trillion in 2013, 7 per cent of which was issued by governments. In comparison, the amount of international sukuk outstanding at the same year-end 2013 was $65 billion, 29 per cent of which was issued by governments.

“The entrance of new issuers will support growth in sovereign sukuk, and increasing volumes — particularly from those of high credit quality governments — will help attract new investors to the sector and provide additional depth and liquidity to the sukuk markets,” said Christian De Guzman, a Moody’s Vice President and Senior Analyst.

In Saudi Arabia Quasi sovereign issuers drive strong domestic market growth. Corporations in Saudi Arabia issued a record 39.4 billion Saudi riyals ($10.5 billion) issuance of riyal-denominated (SAR) sukuk in 2013 following a sovereign-related benchmark sukuk issuance by the General Authority of Civil Aviation (GACA) in early 2012. This strong flow continued in 2014 with another $10.3 billion issued in January-July 2014.

“We expect the Saudi sukuk market to continue to grow, holding its place as the second largest sukuk market after Malaysia. The record issuance was driven by strong investor demand, strong demand from local banks deploying their excess liquidity, increased financing opportunities with respect to the country’s large-scale infrastructure projects and large quasi-sovereign benchmark issuances that have helped to set a yield curve in the country,” said Howladar.

Government-related borrowers

In the UAE, the governments of Dubai, Abu Dhabi and most recently Sharjah are active in the international sukuk market, driven by the US dollar currency peg, large financing needs and leverage appetite. However, given the state dominance of the economy, the majority of issuance has been from government-related borrowers. These issuers collectively lead international issuance globally with over $26.8 billion of sukuk outstanding and have attracted substantial global investor interest.

“While direct sovereign borrowing represents only $5.2 billion of the total, the proportion of sukuk versus conventional issuance is rising. And similar to other GCC sovereigns, this trend is likely to continue given the Dubai government’s explicit ambition to become the centre of the Islamic Economy” said Howladar.

In Qatar, the government has developed a sovereign sukuk yield curve by issuing large, long-term paper to support its Islamic finance policy goals and provide local Islamic banks with a liquid supply of Sharia compliant investments. Despite the small size of its domestic capital market, Qatar’s government is actively helping to deepen the sukuk portion of that market

Despite the relatively small size of its economy, Bahrain has a very deep, but fragmented base of around 24 Islamic financial institutions plus associated funds, takaful insurers, industry bodies and ancillary financial services that are commensurate with its pioneering hub status. While the country may be losing ground in recent years to its larger neighbours in terms of sukuk issuance and banking assets, the Central Bank of Bahrain (CBB, unrated) has indicated that it is focusing on a strong regulatory environment to support its status as key Islamic financial centre.

(Gulfnews.Com / 07 September 2014)

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