Enter takaful: Islamic products can expand both the market and the consumer base

As part of Oman’s entrance into the world of Islamic finance, Islamic insurance, or takaful, is also on course to make its debut in 2012-13. This may have important effects on the wider insurance market, while also increasing choice for Omani consumers.


 In May 2011 Sultan Qaboos bin Said al Said issued a royal decree that paved the way for the introduction of Islamic finance. Several facets of the decree have been implemented in a phased manner, with the first wave consisting of Islamic banking, followed by takaful and then sukuk, or Islamic bonds. Islamic banking has already come a long way, with the Central Bank of Oman’s (CBO) issuance of Circular BM 1081 allowing conventional banks to open Islamic windows. In early 2012 the CBO granted provisionary licences to two new Islamic banks – Bank Nizwa and Al Izz International Bank. Both began preparations for launch as the CBO continued to hammer out a new regulatory framework and make the necessary amendments to the Banking Law. At the same time, all major conventional banks have adjusted to the shift by preparing to open Islamic windows. In October 2012 the CBO announced that it had finalised a new framework governing Islamic banking, and that amendments to the Banking Law were still under way. The second step in paving the way for Islamic finance has been the introduction of takaful. The insurance sector comes under the remit of the Capital Markets Authority (CMA), which, like the CBO, has been at work developing new draft regulations for takaful.

New Draft

The drafting process is being done in consultation with sector experts, players and outside consultants. ”We discussed many issues with professionals while formulating the law,” Mohammed Taki Al Jamalani, vice-president of insurance operations regulation at the CMA, told OBG. “We created a committee with external consultants and took on their advice.” This approach has allowed the regulators and legislators to address several important issues. The first was whether, like Islamic banking, takaful regulations should allow conventional insurance companies to open Islamic windows. Initially, the CMA was inclined to allow this set up, but as the consultative process went on, the argument that only separate entities should be allowed to operate gained ground. This was partly because the experts considered that starting out with exclusively sharia-compliant insurers would be beneficial in the long run, as separating entities later on would prove difficult. Additionally, there were concerns that insurers might not be able to insulate their Islamic business from their conventional operations as effectively as the banks, increasing the risk of comingling, with implications for sharia compliance.

The regulations were further examined by the CMA and UK-based law firm Clifford Chance to evaluate how takaful firms would be listed on the Muscat Securities Market (MSM), from the legal and sharia-compliance standpoints. The results were then composed into a draft law that was sent out for public consultation in mid-September 2012. The consultation period was open for three weeks, with the CMA using its website to make the process as public as possible.


Initial reactions to the draft were mixed. While there was little dispute over a requirement that takaful companies list on the MSM within five years of launch, the minimum capital requirement for entering the market, set at OR10m ($26.1m), was more controversial for its potential to crowd out smaller market players. Given that this capital would have to be invested in sharia-compliant instruments, insurers also argued that it would be difficult to place their capital within the sultanate – at least until the introduction of sukuk.

Defenders of the limit say that this level is necessary to ensure that only strong, well-capitalised players enter the market. With many seeing the insurance sector as already overcrowded, only a limited number of takaful players would likely find room to compete, with these needing to be well-resourced to survive the competition. The discussion also played into the debate over whether or not to allow separate Islamic windows at conventional insurance establishments, with many insurance players, including the Oman Insurance Association (OIA), arguing in favour of the stipulation, but with a lower capital requirement necessary for a window operation. This would allow insurers to test out future market conditions without having to open a fully fledged separate firm. OIA’s chairman, Nassir bin Salim Al Busaidi, told Times of Oman in September 2012 that, in the long term, “if higher capital is required, we can start a separate company. All national companies can work together to open one takaful insurance company in the sultanate.” Nevertheless, the CMA maintains that takaful operations are quite different from conventional insurance, and thus could not be accommodated within one entity.


the final framework for the takaful law was still in the works at the time of print, it is clear that many see great opportunity for Islamic insurance in Oman. By October 2012 three companies had applied to the CMA for takaful licences, two of which had already been granted. In August 2011 Al Madina Insurance was approved in-principal to form a fully fledged takaful company. Al Madina announced it would be converting into an Islamic insurer, setting up a sharia board and would follow a popular hybrid model of Islamic insurance, using wakala for its takaful operations, and mudaraba for its investment side. In Islamic insurance, wakala is a model in which the takaful company acts as an agent for participants, earning a fee that can be either a share of surplus funds or investment profit, or a fixed amount decided in advance. Under mudaraba, a profit-sharing model is adopted, whereby the takaful company acts as an entrepreneur, using funds invested by the participants, with the profits shared. In both models, liability for losses is born by participants, although they are usually protected strict prudential requirements on the takaful company. The Oman National Investment Corporation (ONIC) has also received an in-principle approval by the CMA to launch a takaful company. ONIC has a 99% stake in the National Life and General Insurance Company, a 20% stake in Al Ahlia Insurance and 20% of the UAE’s International General Insurance In August 2012 ONIC was reportedly in negotiations with a major regional takaful firm and a number of other partners to launch a fully fledged takaful entity in Oman. In September 2012 the CEO of Oman United Insurance Company (OUIC), Ravi Shankar, announced that his company was also applying to enter the takaful market.

Market Estimates

The question thus remains as to how large the potential market for takaful will be. With insurance in Oman having a low overall penetration rate, and takaful typically taking around 20-25% of the market share in other GCC countries, it may be that only a few firms – especially if they must be solely Islamic, rather than windows – will come to dominate the segment. However, others see takaful as a way to expand the insurance sector overall. “Penetration of insurance is low here, but one way of reaching out is via takaful,” Sajith Kumar, senior vice-president and CEO of Marsh Oman told OBG. “It’s great the regulator has acted on this as it will touch a sector not yet mobilised.”

Wide Reach

The hope is that takaful will appeal to the more religiously conservative segment of the population that is generally uncomfortable with conventional insurance products and services. This could also spread insurance beyond urban centres and into the more conservative hinterlands. Some also see the likelihood of more insurers following Al Madina’s example and converting into completely to Islamic business, rather than setting up a new company with the OR10m ($26.1m) capital requirement.

Conventional insurers originally set up on a smaller capital base minimum, OR5m ($13m), although this may soon be raised (see overview). By converting, these firms can work around the higher capital requirement of the new law. This could lead to major growth in the sector in its first years. “We think many local insurers will go this way,” Shaher Abbas, director of sharia compliance and product development at Islamic Finance Advisory & Assurance Services, told OBG. “This will happen faster than elsewhere, faster than in banking.”


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