Bashar Al Natoor is Fitch Rating’s Global Head Islamic Finance. Mr Al Natoor is responsible for coordinating all Islamic Finance activities across Fitch’s Sovereign, Financial Institutions, Corporate, Structured Finance, Infrastructure and Insurance teams, bringing together dedicated analytical and industry expertise into a centralised and focused Islamic finance group.
Mr Al Natoor has more than 16 years’ experience in the Islamic Finance market. Since joining Fitch in 2007, he has overseen Fitch’s Sukuk criteria and Islamic Finance practices, undertaken research and written numerous published articles on Islamic Finance. Mr Al Natoor Joined Fitch as a director in the EMEA Corporates group based in Dubai. He was responsible for analysing EMEA issuers, with focus on Middle East and Turkish issuers in the construction, property and Telecommunication sectors. Prior to joining Fitch, Mr. Al Natoor spent seven years at the Islamic Development Bank (IDB) in key roles including Investment Officer in the Treasury Department, a Senior Credit Analyst in Risk Management and Senior Technical Assistant to the Vice President of Finance & Administration. Before working with IDB, Mr Al Natoor was a senior auditor for four years in Arthur Andersen.
Mr Al Natoor graduated with an MSc in banking and financial studies from the Arab Academy for Finance and Banking Science and a BS in finance and banking from Amman University. Bashar is also a Certified Bank Auditor (CBA), a Certified Risk Professional (CRP), a Chartered Market Analyst (FAD-CMA), and a Certified Risk Analyst (CRA).
TAKAFUL: AT A TIPPING POINT?
Islamic finance, which is systemically important in many jurisdictions including the Gulf Cooperation Council (GCC) and Malaysia, is now growing throughout the Middle East, Asia and Africa. Islamic finance has also expanded its global footprint to the United Kingdom, Luxembourg and Hong Kong in recent years largely through the issuance of sukuk.
One of the key pillars of Islamic finance is Takaful (Islamic insurance.) According to recent reports by Thomson Reuters, the Takaful sector accounted for $46 billion of global Islamic finance assets in 2017, up 4.5 per cent from 2016. More than 45 countries had Takaful operators or Takaful windows (which enable insurers to offer sharia-compliant and conventional products side by side,) in 2017, together totalling 324 entities (including windows). However, this is still just 2% of total assets of the global Islamic finance industry.
Takaful, which translates to “solidarity” in Arabic, means that a group of members agree to support one another cooperatively. In a Takaful agreement, the participants contribute a sum of money as a donation into a common fund, which will subsequently be used for mutual assistance of the members against specified losses or damages.
Takaful (and insurance) are at different stages of development, and practices differ from one country to another. For example, in Saudi Arabia, insurance is provided by insurance companies operating in accordance with the practice of cooperative insurance which states that the provisions of the articles of incorporation should not be inconsistent with the provisions of Sharia (Islamic rulings). Whereas in countries such as Malaysia and Pakistan, the Takaful model is instead the dominant Islamic insurance form.
Saudi Arabia’s cooperative insurance model is a Sharia-compliant structure where 10% of the net surplus of an insurer’s profit is returned to policyholders annually, by direct payment or reduction in the premiums for the following year. However, in contrast to Takaful, it does not include any provisions relating to Sharia-compliant investment requirements, Sharia-compliant boards or the segregation of Takaful funds from shareholder insurance funds. Still, most of the licensed Saudi Arabian insurers also offer Takaful products.
Returning to regional differences, another distinction between the GCC and Malaysia, , as an example is that in the GCC health and motor dominate the insurance market whereas in Malaysia domestic family Takaful accounts for 32% of the overall life market based on new business premiums in 1H18 (2017: 30%), and it is the dominant side of Takaful.
On the other hand, the Saudi Arabian cooperative insurance market is concentrated in health and motor, accounting for 52% and 31% of gross written premiums (GWP) in 2017, respectively (2016: 51% and 33%). Life insurance makes up only a small proportion of the Saudi Arabian insurance market. Its growth is constrained by relatively generous social security arrangements for locals and the ability of non-Saudi employees to buy life insurance products through other countries in the region.
In Malaysia, the Takaful segment is expected to benefit from the government’s push for affordable insurance and higher insurance penetration, particularly as Muslims dominate the country’s population. Greater adoption of technology – particularly in distribution – will be important for operators to capture the untapped population segments and younger consumers with greater cost-effectiveness.
Takaful companies face a wide variety of challenges, which vary from one country to another and also depend on their individual circumstances. Few of these challenges are common across many countries, but it is worth emphasising that these challenges come on top of the general insurance challenges already being faced in these countries. For Takaful, these include, but are not limited to, Sharia standardisation, developing regulatory and governance frameworks for Takaful, consumer awareness/attraction and retakaful (the Islamic alternative to the reinsurance industry) availability/capacity. On top of that they will face competition from conventional insurance companies (many of which are more established) and other Takaful companies.
However, Takaful could expand meaningfully to other parts of the world if it manages to find an appropriate way to cross over to non-Muslim markets. This could be achieved by finding commonalities between Takaful and other forms of insurance. For instance, friendly societies and other forms of cooperative or mutual insurance can act as vehicles that help propel Takaful into wider markets.
The UK in particular has carved out a pivotal role in growing its footprint in Islamic finance over the past several years. Friendly societies, cooperative, mutual and micro insurance could be a catalyst that helps provide Takaful with a meaningful push into non-Muslim markets. This will be worth watching closely, More can be found in Why Takaful May Have a Friend in the UK
In conclusion there is no one global Takaful market and its fragmentation, growth and performance will be linked to the maturity of individual markets and regulations, as well as the consumer insurance culture in countries with active Takaful.