Getting ahead: The nascent takaful segment now benefits from a legal framework

As the last of the GCC countries to regulate Islamic finance activity, Oman held to a framework that made no distinction between sharia-compliant and conventional institutions for many years. All of that changed in 2011, when a royal decree permitted the establishment of standalone Islamic banks and windows, which in 2013 were provided with a comprehensive regulatory framework by the Central Bank of Oman. By 2014 a nascent takaful (Islamic insurance) industry had emerged, populated by two institutions Al Madina, a company founded in 2006 which converted all of its insurance business to takaful in January 2014; and Takaful Oman, a newcomer to the industry whose entry has proved the most disruptive to the wider insurance sector, as it has put intense efforts into building its client base.

That there is a demand for sharia-compliant financial products in Oman is in little doubt. In fact, the lack of Islamic products and services in the sultanate had led to liquidity outflows, which by 2013 resulted in an estimated $11bn being deposited in GCC Islamic banks domiciled in jurisdictions like the UAE and Bahrain, London-based monthly The Banker reported in 2013. The most salient question regarding the new takaful industry, then, was how efficiently it would be able to attract this hitherto untapped business.

Early Confidence

Investors have shown themselves to be optimistic regarding the future growth of the sharia-compliant insurance segment in Oman. The nation’s two takaful operators staged their initial public offerings (IPOs) in late 2013, and both were greeted with enthusiasm by subscribers. Al Madina’s offering was oversubscribed by almost four times, while Takaful Oman’s IPO was oversubscribed by 5.5 times, according to London-based International Finance Magazine (IFM). Between them they raised nearly OR59m ($153.2m). The performance of the two institutions to date has also been encouraging. According to a March 2016 IFM report, in 2014 the sultanate’s takaful segment accounted for 6% of gross direct premiums and 4% of total paid claims. Over the following year, gross direct premiums of takaful companies increased by 64% to reach OR38.77m ($100.7m), accounting for 9% of the total, according to the Insurance Market Index 2014-15 published by the sector regulator, the Capital Market Authority (CMA). This growth in premiums is fairly evenly divided between general takaful and family takaful lines, which represented 5% and 4% of gross direct premiums in 2015, respectively. Oman’s takaful industry may have grown more quickly had the regulatory environment that forms the platform of its expansion been established at an earlier stage of development, but 2015 and 2016 have seen important advances in this regard.

Regulatory Development

After some years of speculation, Oman’s Takaful Insurance Law was approved by the upper house of parliament, the State Council, in February 2015. However, the market was compelled to wait a little longer to see the law’s implementation. Oman’s new takaful framework was finally enacted by royal decree on March 6, 2016. The law is based on guidelines established by the Accounting and Auditing Organisation for Islamic Financial Institutions, a Bahrain-based body that has been setting accounting, sharia and governance standards for the global Islamic financial services industry since 1990. As expected, it lays out the fundamental conditions under which takaful operations may be carried out in the sultanate, starting with the simple precept that only dedicated takaful providers may offer sharia-compliant insurance products. This means that, unlike their equivalents in the banking sector, conventional insurers cannot tap the takaful market through Islamic windows, a decision illustrating the CMA’s desire to nurture the Islamic segment.

Other markets have found this protectionist stance the most straightforward way to enable Islamic financial industries to grow in sectors where competition from conventional domestic and international giants would otherwise suffocate new institutions at birth – most notably, Qatar’s 2011 surprise decision to terminate the activities of Islamic windows in its banking sector. Elsewhere in the law the CMA has sought to level the playing field shared by takaful operators and conventional institutions. Takaful providers are now expected to be publicly listed on the Muscat Securities Market by 2017, and hold minimum capital of OR10m ($26m). This brings the segment in line with regulations introduced in August 2014 for conventional insurers, which required them to list and raise their capital from OR5m ($13m) to OR10m ($26m). Beyond the headline issues, the law addresses areas like the maintenance of solvency margins, fund set-up and management, and the transfer of takaful business between firms – all of which establish a new level of operational clarity.

Greater Purview

As with the wider market, the CMA has been granted extensive powers in terms of licensing, control and oversight of takaful operators. Provided that the CMA deems the addition of a new takaful company to the market to be in the economic interests of the sultanate, licences can be granted for renewable periods of five years. The regulator has the power to withdraw these licences in cases where a takaful firm breaches its conditions, or suspend the issuance of new licences if it decides that the market is too saturated. The new framework also grants the regulator a range of powers to intervene where it finds that takaful providers are being operated in such a way as to pose a risk to consumers or other stakeholders. These include the ability to carry out administrative investigations, compel the company actuary or an independent actuary to report on the financial standing of the business, appoint a non-voting auditor to the board, or even dissolve the board where necessary and replace it with a committee to run the firm until a new board is formed. Oman’s takaful operators, therefore, are subject to remedial controls similar to those found in advanced insurance markets, such as the state-based regulatory framework in the US, which allows for a range of intervention options, from financial monitoring to complete takeover and dissolution of an insurance provider. Lastly, as to sharia oversight, the new law requires takaful operators to establish an in-house sharia committee with a minimum of three members, including a fiqh (Islamic jurisprudence) specialist in financial transactions and a takaful expert.

Looking Ahead

For takaful businesses, the enactment of the sultanate’s new Islamic insurance law has brought clarity regarding the framework within which they will raise capital and grow over the coming years, bringing to an end a period of regulatory uncertainty. Less tangible, but no less significant, is the effect the new law will have on consumer awareness and confidence in the sector, the raising of which stands to greatly benefit the sultanate’s two takaful providers. The profile of takaful will also benefit from the growth of the Islamic banking industry in the country, as sharia-compliant insurers sign memoranda of understanding with their banking counterparts, drawing in customers and business.

Challenges, of course, remain. Beyond the concerns of a cooling economy and increasing market competition, which they share with conventional insurers, takaful operators face a number of specific issues. Chief among these is the problem of investment opportunities. “We have adequate capital. The issue is how to utilise it. We do not have many Islamic instruments in which we can invest this capital,” Sayyida Rawan Ahmed Al Said, vice-chairman and CEO of Takaful Oman, told industry news site Salaam Gateway in February 2016. “As per the current laws, there are difficulties with regard to owning real estate,” she continued. “Companies are not allowed to own real estate for investment purposes unless they have been specifically established for real estate purposes. Regulations promulgated by the Ministry of Housing do not allow it as of now. Secondly, there are not many sukuk [Islamic bond] issuances where we can invest, and finally markets are not performing as expected by the investors.”

In this context, the successful issue of Oman’s first sovereign sukuk in October 2015 was a big development. It allowed the government to raise funding in order to cover its fiscal deficit while also providing sharia-compliant banks, insurance firms and funds with a badly needed instrument to manage liquidity more effectively. However, the regulator’s rejection of Bank Muscat’s proposed sukuk programme in the same year deprived the market of OR100m ($260m) per annum in sharia-compliant instruments. While the central bank’s decision was prudent, due to concerns the proceeds would increase banks’ personal loan portfolios, the programme’s cancellation shows that few options are available to takaful operators seeking to use their money to greatest advantage.