Oman takes another step towards takaful legislation

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Legislation regulating Oman’s sharia-compliant insurance market has moved a step closer to being finalised after the State Council approved a draft law that will help encourage new investment in the takaful (Islamic insurance) industry.

The State Council, Oman’s upper house, approved the draft Takaful Insurance Law in mid-February, which includes 58 classified subjects in eight chapters covering all aspects of the activity. The legislation, which was drafted by the sector regulator, the Capital Market’s Authority (CMA), is expected to add further impetus to the development of Oman’s Islamic financial sector, according to Salim Al Ghattami, chairman of the State Council Economic Committee.

Explaining the rationale behind the new law, Al Ghattami pointed to the wider economic benefits as the country looks to attract new investors. “Many nationals who follow Islamic regulations and provisions in their transactions are asking the government to regulate the insurance sector according to Islamic concepts,” he said in February, quoted by local media.  

The draft law sets out the regulatory code for takaful operators, including oversight and reporting requirements, product standards and liquidity levels. It requires takaful operators to be listed on the stock exchange and have a minimum capital of OR10m ($26m) – in line with the requirements for conventional insurers as part of a broader regulatory overhaul. The draft law also sets out the provision that only dedicated takaful firms may operate in the Omani market, preventing existing conventional underwriters from setting up Islamic insurance windows.

Challenges and opportunities

Although it is one of the newest entrants to the Islamic finance sector, Oman is likely to join other GCC member states in setting the pace for the development of takaful products, according to consultancy firm EY in its “Global Takaful Insights 2014” report, released in September.

Oman offers first-mover advantages to early entrants in the sharia-compliant insurance sector, the report noted, as continued double-digit growth is forecast for the global takaful industry, which will be worth over $20bn by 2017.

To ease the difficulty of identifying suitable investable assets for takaful operators, Oman’s Muscat Securities Market launched a sharia-compliant index for investors seeking Islamic equities. Last year, Oman saw its first takaful insurance companies enter the market. Al Madina Takaful converted itself from a conventional insurer to a takaful company in January 2014 while Takaful Oman Insurance, a start-up, launched in June.

Strong appetite

The potential for growth in the Omani market is high, both for takaful operators and conventional insurers. Penetration rates are estimated to be around 1.1%, according to a report by ratings agency Moody’s. The market has expanded with an annualised growth rate of over 14% between 2006 and 2013, largely attributed to compulsory motor coverage. According to the report, activity is dominated by a few leading firms, with the five main operators accounting for about 60% of all premiums.

But the issuance of takaful licenses and new capital requirements may encourage growth in new market segments said Moody’s. At the same time, amendments to regulations setting higher capital requirements across the insurance sector are also likely to produce consolidation among smaller conventional players according to the report.

Despite competition, takaful providers may find that they have a natural advantage over conventional insurers. Interest has been high in sharia-compliant products since Islamic banks were launched in 2012. According to some industry forecasts, Islamic financial assets could account for 10% of Oman’s total banking assets by 2018, more than double the 2014 level. A similar take up rate for takaful, underpinned by an already existing client base developed by the Islamic banking market, could drive solid expansion for sharia-compliant insurance in the coming years.

Appetite for Islamic financial products was underlined by the success of two takaful insurer IPOs at the end of 2013. The share offerings in Al Madina and Takaful Oman were both heavily oversubscribed, almost four times in the case of Al Madina and 5.5 times for Takaful Oman, raising between them nearly OM59m ($153m). The strong investor sentiment points to a likely buoyant consumer demand down the line. 

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