Shariah compliant insurance in Oman has had a slow start but development is expected to pick up following the introduction of dedicated regulations for Takaful in March 2016. Designed based on AAOIFI guidelines, the new law has been engineered with the intentional of providing market players with flexibilities. For example, all Shariah matters are to be decided by respective Shariah boards.
The framework is expected to provide much-needed clarity and guidance to operators in order to boost the market share of Takaful, which stands at 8.7% of total written premiums in the Sultanate; however, the Capital Market Authority (CMA) recognizes that there is still more room for improvement regulatory-wise on an international level.
“In the past two decades, the Takaful concept has grown in such a robust way thus making it difficult for standard-setting bodies such as the IFRS, AAOIFI and the IFSB which have to cope with that growth and yet be proactive at the same time,” said Ahmed Al Mamari, the director-general of the Directorate of Insurance Supervision at the CMA. Ahmed highlighted that there are a few areas that need to be reviewed as far as Takaful is concerned including: participant funds surplus, Wakalah fees, technical accounting issues and Qard Hasan, among others. “That would help us as regulatory bodies to come up with regulations that will reflect the real meaning of Takaful in local markets,” Ahmed shared.
At a global level, Takaful in the last decade has built a total premium base of US$18 billion and this is expected to grow to US$20-22 billion by 2020. The GCC is the largest contributor to the Takaful pot (US$8 billion including Saudi Arabia; US$2 billion without Saudi Arabia). With less than 10% of total written premiums in Oman commanded by Takaful businesses, there are huge opportunities for the segment to grow.
Ahmed, however, cautioned: “With the geopolitical conditions in the region and dramatic decrease in oil prices, we have to be very careful with our expectations.” The main challenge facing Takaful operators in the country according to Ahmed is profitability. “What we need is to have both a sustainable and profitable business more than one that is focussed on expansion and growth,” he opined.
Customer confidence is another contributing factor to the lack of Takaful product traction in Oman. “We have to admit that there are huge misconceptions surrounding the Takaful model in the region and we need to settle that issue,” said Ahmed. Data from EY shows that return on equity for GCC Takaful companies in 2015 stood at 0.4% against 14% in Malaysia. In comparison to Islamic banking, Takaful is mainly driven by private capital and unlike its banking cousin, Takaful did not have the head start required to prove its financial viability.
“We are still babies who should not be getting out of the protected environment of our cots. We still haven’t learned to walk,” commented Gautam Datta, CEO of Al Madina Takaful, who went on to say: “In that context, a lot of the issues we talk about today are part of the evolution and learning process as is the case with any industry growing from its concept to maturity. It isn’t about doomsday, but looking forward with a lot of hope and opportunities.”
Banking and finance
The hard truth about Islamic banking and finance in Oman is that despite the high expectation and optimism when Shariah banking was formally introduced into the Sultanate in 2012, actual measurable demand did not match expectations, to the surprise of many.
Following the hype for Shariah compliant facilities, Sharakah or the Fund for Development of Youth Projects in 2014 converted one of its products; however, once the solution was launched, take-up rate did not reach expectations. “We struggled initially in getting clients to sign up for Shariah compliant products,” shared Abdullah Al Jufaili, the manager of Sharakah, who attributed the slow subscription to the lack of proper understanding for Islamic financial instruments. However, that is beginning to change: “Alhamdulillah, it has begun to pick up. What we foresee based on the last six months, at least based on the number of enquiries and applications we have received; there has been an increase in [the] number of SMEs looking for Shariah compliant products.”
At a macro level, Oman still lacks many products, solutions that are available in other markets. “I believe we lack certain products to tap market needs and requirements,” said Lo’ai Bataineh, the chief investment officer of Oman Arab Bank. “We need to have a thorough analysis to identify where and what we are lacking.”
That being said however, Islamic bankers are perceived as being quite innovative when it comes to developing products. Mohamad Noranuar Sajari, Bank Nizwa’s senior manager of Shariah structuring, who views the industry in Oman as a green field with limited downside and unlimited upside in terms of opportunities, explained using the prohibition of commodity Murabahah in the country as an example: “By virtue of this prohibition, an innovation mindset has been inculcated in Islamic bankers.”
Apart from the comprehensive Islamic banking framework issued by the Central Bank of Oman, market players also expect the creation of the High Shariah Supervisory Authority (HSSA) to spur Islamic finance activities in Oman. “For players, we want two things: Shariah certainty and legal certainty,” said Noranuar. “The HSSA is a good development and will add value to the system by providing these certainties.”
Crowdfunding, a booming international phenomenon, was also discussed as a potential catalyst for advancing the Islamic finance proposition due to the common overlap of principles such as being community-based and profit-sharing, especially for SMEs; however, Oman still lacks the regulatory infrastructure to enable such peer-to-peer transactions. Without a proper regulatory system, the legitimacy of the capital raised and governance of investors and project managers among other things would be brought into question and could be a source of concern for the investment community at large.
“The regulations are not there so we cannot take it forward,” said Abdullah, who revealed that Sharakah had to turn away multiple regional crowdfunders due to the absence of regulatory certainty. “[The development] should come from the regulators before we can even think about being a part of a crowdfunding platform at a regional level.”
So what next for Oman? Bolstered by eager participants and supportive regulators, Islamic finance and banking is poised to continue its upward trajectory in this land of opportunities, but challenges remain. A main hurdle Omani players face, as do participants in other markets, is the lack of awareness and proper understanding of Islamic financial products.
“How is Islamic finance better than conventional finance?” is perhaps one of the most common questions asked, and how we approach the subject could, more likely than not, shape and contribute to the development of the industry.
“It isn’t about which system is better – it all boils down to what you need and what you’re looking for,” said Datta. “I will admit that there could be an element of ‘mis-selling’. As practitioners, we do have the tendency to fall into the trap of comparing ourselves with the conventional.” And this comparison could prove more disadvantageous than beneficial as misunderstandings could arise leading to customers to decide between Shariah and non-Shariah products based solely on cost, according to Ahmed.
The experts are of the view that Islamic banking and finance is complementary, not a competition, to the conventional system, serving the different needs of the community. “Based on my experience in banking over 25 years, and even though I’m in a conventional bank, I can say that Islamic banking has various financing solutions that are not provided by conventional banks,” said Lo’ai. “The beauty of Islamic banking is that it is a structured deal, customizable to meet specific needs of clients.”
And that is what Omani players, and beyond, will need to sell to the market.