Over a year after the sultanate of Oman introduced its Islamic finance framework and encompassing Takaful guidelines, the country has seen steady and encouraging growth in the industry with numerous firms entering the sector. ANTHONY COLEBY discusses its progress.
Takaful insurance, the mutual-based insurance tool founded on Islamic principles and most commonly using the Shariah compliant concepts of Wakalah (agency) and Mudarabah (partnership) as its contractual model, is as long-established in the Muslim world as Islamic finance itself. It looks to eliminate the three elements present in conventional (commercial) insurance that take the latter off-limits for observant Muslims: Gharar (lack of certainty), Maisir (gambling) and of course Riba (usury).
The sultanate of Oman implemented outline regulations for the marketing of Takaful products at the end of 2012, with those regulations stemming from the Omani Central Bank’s Islamic Banking Regulatory Framework, previously heralded by a Royal Decree of May 2011. It would have been difficult to conceive of an initiative to launch Islamic finance in the sultanate without including Takaful, since from inception the latter has been seen as an integral part of the former.
The Capital Market Authority of Oman (CMA) has been the regulator of the Omani insurance industry since 2004, when it took over this responsibility from the Ministry of Commerce & Industry as overseer of the Insurance Companies Law. All Takaful operators are under its aegis in turn. A new insurance law to govern the whole of the sultanate’s insurance industry is still on the drawing board.
As with its treatment of Islamic finance as a whole, the Omani government’s approach to the introduction of Takaful has been a conservative one compared to those of other Islamic finance centers: any operator of Takaful will have either to incorporate a separate dedicated entity or if pre-existing convert itself to operate the business; unlike the case with Islamic banking, it will not be possible to use segregated windows. Further, it is understood that the regulator is mulling a significant increase in the level of mandatory paid-in capital from the current OMR5 million (US$12.95 million); some sources suggest that this could double, depending on the nature of the business conducted. Balance sheet liquidity for the new entrants also receives attention, with foreign investments restricted to 25%, and fixed income to 10% of total investment assets.
And, reflective of a well-established means of protecting the public interest in other business sectors, a mandatory IPO is called for within a given period of establishment, most likely four or five years.
It is worth mentioning that, unlike mainstream Islamic finance within the sultanate (to the extent sanctioned and permitted by the new regulatory regime), the immediate demand for Takaful insurance will probably be highest among consumers or retail customers with the appropriate appetite for the new product. Conventional insurance products have been accepted among the business community here for a considerable period of time, for as long as Omani-based companies and enterprises have sought to do business on the international stage (and even before then). The use of insurance products as a means of financial protection in the consumer or retail sector is by comparison relatively new in the sultanate.
Notwithstanding that observation, the uptake of this opportunity among Oman’s 23 insurers has been significant, with Oman’s eighth-largest insurer, Al Madina Takaful, which took the conversion route, leading the way, followed swiftly by Takaful Oman Insurance and others. Nevertheless, some will point to the need for careful customer education on the attractions of Takaful products where Oman’s existing conventional insurance sector is already oversupplied. That said, the new permission for Takaful insurance business has been anticipated for some time, as much as five years, and there will thus have been plenty of time for intending participants to prepare.
And, as with Islamic banking, then there was always going to be the need to recruit both suitably qualified Islamic scholars but also competent and knowledgeable customer relationship staff to market and process the new products and services to end-users notwithstanding that the most religiously observant will naturally be attracted to a means of financial protection respectful of the widest tenets of Islam.
Anthony Coleby heads the corporate commercial department of Said Al Shahry Law Office (SASLO). He can be contacted at
[email protected]
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