A t present Takaful companies play a minimal role in Islamic capital markets. Such markets are in their infancy in the Gulf, where most Sukuk securities are held to maturity rather than traded, partly because there is a shortage of available Sukuk relative to the demand by Islamic banks and financial institutions for liquid Shariah compliant instruments. Furthermore, in the Gulf the Takaful industry itself has only just developed during the last five years, and most of the companies offering Takaful are small in comparison to conventional insurance companies. Malaysia has the most developed domestic market in Sukuk securities and these are extensively traded, especially the corporate Sukuk. Takaful companies are amongst those holding and trading ringgit denominated Sukuk, but in Malaysia Takaful companies remain small in terms of premium income and capitalization in comparison to conventional insurance companies. The potential role for Takaful companies in the development of Islamic capital markets is, however, enormous. Conventional insurance companies hold up to 50% of their assets in bonds because the fixed maturity date, certain capital value on maturity and predictable income stream make bonds the safest form of asset to offset against liabilities to those insured. Similarily as Takaful companies grow, they can be expected to have a comparable asset profile, with a high proportion of assets in the form of Sukuk securities that should encourage the growth of the market.
PROFESSOR RODNEY WILSON
T akaful and Islamic capital markets play different yet complementary roles in terms of the development of a sound Islamic financial system. In order to clarify the above statement, one should begin by illustrating the way in which the conventional system operates. It is well established that insurance companies, known as the “institutional investors,” substantially contribute in the development of any capital market, given that their investments are significant compared to other investors. However, this is not a one-way benefit system in favour of public companies or capital markets generally. As a matter of fact, insurance companies, by investing in the capital markets, are securing a constant income for their shareholders. Turning now to the Islamic system, it is incumbent on Takaful companies to ensure, on the one hand, long-term profits for both the company’s shareholders and the participants and, on the other hand, liquidity to cover all claims, through the development of a secure investment system which could be formed by diversifying the risk of loss. The latter objective is achieved by investing in a well-structured Islamic capital market comprising all classes of assets: equity, bond, derivatives and offshore markets. Moreover, the market should contain companies with different sizes and specializing in a huge variety of sectors. More importantly, the capital market should establish a Shariah Board which will impose a screening system with various qualitative and quantitative parameters based on Islamic principles. This screening system will determine which companies or debt securities issues are allowed to be listed. Hence, the existence of an Islamic capital market with the abovementioned requirements will constitute an incentive for Takaful companies to invest and, undoubtedly, contribute in the development of a liquid and efficient Islamic capital market. Therefore, one might contend that Takaful companies do not play a salient or core role in the development of a liquid Islamic capital market because they are committed to protecting certain internal interests (ie shareholders’ and participants’ interests). Yet, they could contribute by maintaining and developing such an Islamic market as long it satisfies the above requirements. Conversely, the existence of an Islamic capital market with a developed infrastructure, such as the Bursa Malaysia or, recently, the Gulf capital market, constitutes an essential investment target for any Takaful company seeking to satisfy its internal interests. SAMI MATRAJI LLM
I slamic capital markets have emerged as a natural progression of the growth of Islamic finance industry, playing a vital role in developing liquidity management mechanisms and offering a range of asset classes to invest in. Following the principle of supply creating its own demand, investable capital of the Takaful industry, like that of Islamic banking sector, has played a significant role in the development of the Islamic capital market. Sukuk, Shariah compliant equity products, and a variety of Islamic investment funds, are now representing a flourishing market to attract Islamic capital from all Islamic financial sectors, including Takaful. Though contributing greatly to the development of the Islamic capital market, the available asset classes are yet not as liquid and efficient when compared to the conventional capital market. The need is more pressing in case of Islamic investment funds and Sukuk. Hence, Takaful and other Islamic financial sectors need to press on the relevant industry players to come up with more innovative, liquid and efficient instruments. Most commonly used operational models of Islamic insurance rely on the concept of Takaful based on Mudarabah or Wakala. These two and other variants of Takaful models have a number of limitations. For example, in a conventional set up, insurance providers become owners of the premiums and are at liberty to invest in assets of their own choice. This is not the case for existing Takaful models, who cannot benefit from this principle of separation of ownership. Hence, there is a need to come up with alternative models for Islamic insurance. In short, the current role of Takaful in development of a liquid and efficient Islamic capital market is rather limited. Takaful may play a much larger role, however, if alternative models of Islamic insurance are considered and explored. ADNAN AZIZ Research Analyst Dar Al Istithmar London
L ike insurance, Takaful as custodian of participants’ funds has to strive for as high returns as possible on these funds without compromising on its safety and security. Hence, investment of these funds is one of the key functions of a Takaful operator. Obviously, investment must be in avenues that are Shariah compliant. In this respect, Takaful would certainly play a crucial role in the development of the Islamic capital markets. More importantly, if instruments developed by the market would be able to match the liability of these funds. Dato Mohd Fadzli Yusof Chief Executive Officer Takaful Malaysia
T akaful, as a system of Islamic insurance, is based on co-operation and mutual help for the good of the society at large. Although Takaful has been in the market for more than two decades, it has yet to make significant inroads. It should be noted that although the conventional insurance market is deeply entrenched in several Muslim countries, the percentage of the Muslim population that are insured is relatively low. Hence the market penetration level is very low, at less than 5% in many Muslim countries. In Malaysia, the level of market penetration of Takaful relative to the total population is only 3.8%, versus a market penetration for conventional insurance of 34.6%. Therefore, there is enormous potential to be tapped. The Takaful industry represents an important component in the overall Islamic financial system, given its role in the mobilization of long-term funds, provision of risk protection, development of the Islamic capital market, an important institutional investor as well as supporting the overall economic growth and development. As both the mobilizers of long-term funds and fund managers to the policy holders, Takaful operators’ ability to generate returns to fulfill the obligation to the policy holders depends very much on the range of financial instruments available in the market place. Demand from Takaful players, coupled with an enabling regulatory environment, speeds up the development of innovative Islamic structured products. The development of a comprehensive Islamic financial market in Malaysia that includes Islamic banking, Islamic money and capital markets has reinforced the development of the Takaful business. As of today, the Takaful industry in Malaysia has emerged as a fast growing industry within the insurance sector since its introduction in 1985. From total assets at a mere US$0.5 million in 1986, it has reached more than US$1.33 billion in 2004, constituting 5.1% of the total assets of the insurance sector. MS BALJEET KAUR GREWAL Chief Economist Asembankers Berhad
T he future of Islamic capital markets lies in distinguishing between investment on the one hand and credit on the other, ie between asset-based and deficit-based finance. The former is concerned with revenue sharing and new asset-based financing tools such as the “capital partnership,” as opposed to the inequitable limited liability company. A “capital partnership” is essentially Musharakah achieved within a new partnership-based corporate legal “wrapper.” The latter is concerned with the sharing of risk and essentially comprises a mutual guarantee of bilateral “trade” credit (ie “time to pay”) between a seller and a buyer. Such a “guarantee society or “clearing union” is essentially “Takaful” again within a partnership legal wrapper. There is no place for credit creation by banks, which are disintermediated. The role of banks changes to: CHRIS COOK Principal Partnerships Consulting LLP, London
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