Zamani Abdul Ghani: Significant trends surrounding the takaful industry
Opening address by Mr Zamani Abdul Ghani, Deputy Governor of the Central Bank of
Malaysia, at The 3rd International Convention on Takaful and Retakaful, Kuala Lumpur,
29 August 2007.
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Bismillahirrahmanirrahim,
Distinguished Speakers,
Ladies and Gentlemen.
Assalamualaikum w.r.t. and Good Morning.
I am indeed very pleased to be here this morning to welcome you to Kuala Lumpur .
Alhamdulillah, we have among us today distinguished market players, regulators, scholars as
well as participants from many parts of the world, including Brunei, Thailand, Indonesia,
Singapore, Bangladesh, Sudan, Nigeria, Pakistan, Kuwait, Egypt, UAE, Bahrain, Jordan,
Turkey and many others. On behalf of Bank Negara Malaysia, I wish to congratulate the
Islamic Banking and Finance Institute Malaysia (IBFIM) and the Malaysian Takaful
Association (MTA) for their efforts in organizing, for the third consecutive year, this
International Convention on Takaful and Retakaful. Let me at the outset reiterate the
importance of this Convention as a source of collaboration for ideas, sharing of knowledge
and exchange of experiences for the continuous development and improvement of the
takaful and retakaful industry.
In few days time, on 31st of August, Malaysia is celebrating the 50th National Day and
therefore, the organization of this 3rd Convention on Takaful and Retakaful is indeed very
special. The convention and independence celebration have similarities in their core values.
Both cherish the spirit of alliance, tolerance and togetherness. Both also share strong call for
"muhasabah" or reflection - to strategize for the future by reflecting on past experiences. My
address today will touch on these two aspects. I will share my observations on the significant
trends surrounding takaful industry in recent years as well as key focus areas for the industry
moving forward. Finally, I will highlight a couple of major initiatives undertaken by Malaysia to
further strengthen as well as expand the breadth and depth of the takaful and retakaful
industry.
High growth potential of global takaful market
As a starting point, allow me to share with you five major trends in global takaful industry
over the past few years. These trends have significant bearing on the development of this
industry moving forward.
First, the takaful and retakaful industry continued to show rapid growth momentum, and is
increasingly being recognized as one of the major components of the overall Islamic financial
system . Global takaful contributions amounted more than USD2 billion in 2005 and are
expected to reach USD7 billion by 2015. The past few years have seen growth rates of
around 20%, indicating high growth potential in years to come due especially to the present
very low rate of takaful market penetration. As for Malaysia, a commendable track record of
the takaful industry has been recorded since its inception more than two decades ago. For
the first half of this year, the total assets of the takaful funds stood at RM7.6 billion (as
equivalent to USD2.2 billion). This represents 6.3% of the entire takaful and insurance
industry funds assets and an increase of 11% as compared to the end of 2006. In terms of
net contributions, RM1.2 billion was recorded in the first half of the year, an increase of 36%
from the same period of last year.
Second, there is growing international consensus on the need to have a strategic direction
for an orderly development of the global Islamic finance industry. The ten-year blueprint on
the development of Islamic finance, a joint initiative by the Islamic Financial Services Board
and Islamic Development Bank, has laid down guidelines on the strategic steps to be taken
by several specific jurisdictions for this purpose. It is envisaged that with more orderly
development of Islamic financial services, including takaful, a more comprehensive Islamic
financial system will evolve in more jurisdictions. The number of takaful operators, which
currently stands at more than 100, is set to increase.
Third, dramatic growth of the global sukuk market can potentially become a key supporting
factor for the strong growth of takaful and retakaful industry. Sukuk is increasingly becoming
an important investment avenue for the takaful industry. Today, the global sukuk market,
denominated in international currencies, is estimated to have exceeded USD50 billion
[including domestic sukuk issuance]. Although the size of the market is modest by global
standards, the sukuk market is experiencing remarkable growth, increasing at an average
rate of growth of 40% per annum. Issuance of sukuk with longer tenure will match investment
and risk management needs of takaful industry with largely long term liability. This, in
particular, will greatly spur the growth potential of investment-linked products. I am sure you
will also be briefed on the development of the sukuk market in Malaysia later on.
Fourth, the increase in outsourcing and white labelling activities. Competitive elements and
strong demand for takaful require takaful players to constantly search for solution towards
greater efficiency and shorter time to market. There is strong potential for strong and
experienced takaful players to leverage on their competitive strengths to be an ally of other
players, especially from a new market, by becoming either outsourcing partner or white
labelling provider.
Fifth, as seen in international Islamic banking scene, there was growing participation of
major conventional global players in the takaful and retakaful industry. In Malaysia , the
strategy to encourage alliances and collaborative efforts between local and foreign players
has resulted in a positive outcome with the licensing of new takaful operators consisting of
joint ventures and consortia of local and foreign players which have registered early strong
performance. In addition, the other 100%-owned Malaysian takaful operators are now
actively looking for strategic partnership with foreign financial institutions so as to facilitate
their expansion abroad and exploit opportunities in untapped markets.
These five trends point to one direction - that the industry will continue to present high
growth potential with growing demand, increasing competition, supported by greater
sophistication and innovation of products and services. While the double digit growth is
commendable, the takaful industry is still small i.e. constituting 6.3% in terms of assets of the
insurance industry. The success of takaful in the future rests on the ability of the industry to
collectively position itself strategically to meet the needs of the economy and the ability to be
competitive and innovative.
Global takaful strategies
Let me now turn to t he strategies for the global takaful industry moving forward, which
essentially is the theme of the Convention. The key strategy is to amplify a simple, but yet a
powerful concept, which is the core concept of takaful itself, that is, collaboration. That is in
consonance with the Quranic verse from Surah Aali-Imran verse 103's quote: "And hold fast,
all together, by the rope which God (stretches out for you), and be not divided among
yourselves and remember with gratitude God's favour on
you..." end of quote. Allow me to
expound a few angles on this new collaborative framework.
The first area is talent development
A key challenge confronting the industry at present is the shortage of talent. Rapid
development of the takaful industry in recent years demands adequate supply of competent
human capital to drive innovation, to sustain competition and to raise the performance of the
takaful industry to greater heights. The takaful operators are constantly in search for high
level of expertise in all relevant areas in the management of takaful business including
technical, actuarial, distribution, underwriting, investment, Shariah as well as strong
leadership at the helm of a takaful operator. This talent war even persists in Malaysia where
medium and long term plans to develop adequate human capital are in place. It may not be
sustainable for the industry to rely on the current pool of intellectual capital in this rapidly
growing industry.
For this, concerted and collaborative efforts should be taken at the industry level involving all
stakeholders to develop structured human talent developmental programmes at all levels
which include the leaders, technical personnel as well as the regulators. The organization of
this Convention by IBFIM and MTA presents a model for such collaboration between takaful
stakeholders in promoting human talent development, not only for Malaysian takaful industry,
but also for the global takaful sector. The industry needs also to consider further proactive
approach to address this issue. For example, the industry may take a united stance to train a
specific number of new talent in key areas. For Malaysia alone, assuming that a good
candidate requires two years of training to be a well-rounded takaful practitioner, if each
operator is able to train 50 new talent at various levels in specific key areas, we will have at
least 2000 new talent in 2009. In fact, we should do better.
The second area relates to operational harmonization and global support system
To sustain the current pace of growth in this new industry, global takaful alliance is indeed
crucial. The takaful industry needs to present itself as a united front with a common voice in
operational and even Shariah matters. Although minor differences are needed to propel
innovation and creativity, major divergence in operational practices and Shariah application
would pose unnecessary confusion to the consumers at large.
For this, the transformation of an informal grouping of ASEAN Takaful Group or ATG into a
registered legal entity limited by guarantee called "Global Takaful Group" or GTG is indeed
timely. I am glad to note that the Annual Meeting of GTG was held yesterday in conjunction
with this Convention. I believe GTG will serve as the best platform to enhance greater mutual
co-operation and foster cooperation and interlinkages among the takaful operators globally. It
is a tangible vehicle of cooperation among takaful operators and provides a conduit for
exchange of information on all facets of takaful operations among the members. I understand
that currently there are more than 20 member companies of GTG and it is our hope to see
more takaful operators from all over the world to join this Group. I wish to urge all takaful
operators to leverage on this Group as an official platform for greater interaction and
collaboration, not only among the players, but also with other stakeholders such as the
regulators, Governments and the public at large.
It is also encouraging to note that rating agencies have come forward to formulate rating
methodology and review for takaful operators.
Third area relates to the need for joint effort to shape prudential rules for takaful.
For the formulation of prudential standards, the setting up of the IFSB remained one of the
landmark developments in this decade. Established in 2002, the IFSB's core role is to
promote prudent, transparent and robust development of the Islamic financial services
industry through the promulgation of international prudential standards that are consistent
with the principles of Shariah. The IFSB provides the platform for cooperation among the
regulators through meetings, conference and the setting-up of working groups that give
opportunity for the regulators to discuss and exchange information on issues confronting
Islamic finance. For takaful industry, two developments are relevant that are:
i. the issuance of Issues Paper jointly by IFSB and IAIS on the applicability of IAIS
core principles to takaful, and
ii. the formation of a working group to formulate corporate governance standard for
takaful industry.
In view that the formulation of the IFSB standards involves consultation with IFSB members,
I would like to call more takaful operators to be members of the IFSB so as to provide the
opportunity for the players to be part of the official consultation procedure for IFSB and to
make comments on draft IFSB standards. Given your vast experience in the area of takaful,
both domestically and globally, we believe that the industry players will provide valuable
contribution towards the formulation of the IFSB international takaful standards. Your
experience and inputs on issues are relevant to or have impact on the regulation and
supervision of the takaful industry.
Malaysia as takaful & retakaful hub
Let me now turn to the final part of my address by sharing Malaysia's latest initiatives to
strengthen its position as a takaful and retakaful centre.
I. MIFC initiatives
Malaysia aims at enhancing its inter-linkages with the global Islamic financial markets.
Among these are its continuous efforts to not only develop the financial infrastructure of the
takaful industry but to also implement measures and initiatives that will strengthen our
position as an international takaful and retakaful centre. Besides allowing up to 49% of
foreign equity participation in domestic takaful operators, the Malaysian Government has
also launched an initiative known as the Malaysia International Islamic Financial Centre or
MIFC. The MIFC initiatives are specifically undertaken by the collective efforts of the
country's financial and market regulators, including Bank Negara Malaysia , the Securities
Commission, the Labuan Offshore Financial Services Authority and Bursa Malaysia, together
with the participation of representatives of the banking, takaful and capital market sectors. It
is aimed at building greater intermediation linkages between East Asia, South Asia and the
Middle East which will, in turn, further expand inter-regional trade and cross border
investment flows.
As part of these initiatives, foreign financial institutions are allowed to establish International
Islamic Banks, International Takaful Operators, as well as International Currency Business
Units to undertake international currency business in Islamic finance with non-residents in
Malaysia or abroad through a locally incorporated entity or a branch. This entity is granted
attractive tax package in terms of a 10-year tax holiday. To date, ten financial institutions
have been granted approval to set up international currency business units, and one
institution has been granted approval to set up an International Islamic Bank. The strong
sukuk market in Malaysia that accounted for about two thirds of the global outstanding sukuk
issued in 2007 would further provide a conducive environment for the MIFC activities.
II. New retakaful framework
Malaysian Government has also focus ed its efforts towards widening and deepening the
retakaful sector in complementing the growth and expansion of the takaful industry. I wish to
announce and declare here that Bank Negara Malaysia is inviting strong and qualified
applicants to make Malaysia as their centre for retakaful activities. The application for
retakaful licenses are open to qualified local and foreign players. Besides fulfilling the need
for retakaful support of the takaful operators, the new retakaful licencees will assist in
reducing the industry's dependency on conventional reinsurance support. More importantly,
the licensing of new retakaful operators in Malaysia will also ensure that the technical
knowledge is made more readily available and enhanced in the market, particularly in takaful
and retakaful underwriting, as well as in promoting product development and innovation.
Under this initiative, qualified applicants will be allowed to conduct in both the Malaysia
Ringgit and international currencies retakaful business under the Takaful Act 1984. Flexibility
is accorded to the retakaful operators to conduct its retakaful business in Malaysia by way of
an incorporated entity or a branch. Foreign applicant is also welcome d to conduct retakaful
business in Malaysia through a joint-venture with Malaysian companies, subject to the merits
of each case. It is anticipated that this measure would serve as a catalyst in our efforts for
Malaysia to become the centre for takaful and retakaful business through the establishment
of a significant number of strong and reputable retakaful operators.
Ladies and gentlemen,
Let me conclude by saying that the future prospects of the takaful industry will be very much
depend on the combined efforts of all the relevant parties; the regulators, market participants
and the international community at large, to chart the strategic direction for the industry.
Collective effort is crucial in order to maximize the potential for the industry. Sharing common
vision and goal will be an important first step. I believe that our sincere efforts in realizing this
noble objective would InsyaAllah, God Almighty will shower us with His blessings, guidance
and assistance.
On that note, I wish you a successful and productive Convention.
Wabillahi taufik walhidayah. Assalamualaikum warah matullah hi wabarakatuh.