REGULATORS INSPIRE Having reached USD1.91tln in the first half of 2014, the Islamic finance industry s assets are expected to surpass the USD2tln asset mark globally during 3Q14. Driving this growth have been proactive efforts by national regulatory bodies in providing a facilitative, and largely cohesive, global environment for the industry. As many as 70 countries, and more than 600 financial institutions, offer Shariah-compliant financial products; firmly establishing Islamic finance as an alternative financial system. 29 August 2014 1
Regulators instil fresh momentum as the global Islamic finance industry nears the USD2 tln mark The global Islamic finance industry s assets have reached an estimated USD1.91tln as at the first half of 2014 (1H14) 1. Positive asset growth averaging over 15% year-on-year (y-o-y) has been charted across all sectors of the Islamic finance industry 2. Driving this exceptional growth has been efforts by various national regulatory bodies that have not only provided a facilitative legal and regulatory environment but, at times, have taken a more proactive approach by promoting the Islamic financial system in their financial jurisdictions. In 2014 year-to-date (YTD), renewed national efforts have been witnessed in a number of developing and traditional Islamic finance markets across Asia, Africa and Europe. This insights report explores upon the Islamic financial industry s progress in the 1H14 along with snapshots on the various government-led efforts initiated for revitalising the growth of the Islamic financial sector in numerous markets. Global Islamic Finance Industry 1H2014: An Overview The global Islamic finance industry has continued its sustained double-digit asset growth, expanding by 17.9% y-o-y to reach USD1.91tln as at 1H14 3. Between 2009 and 2013, the industry s assets have expanded at an impressive compounded annual growth rate (CAGR) of 16.94% 4. Based on current momentum, it is expected that the Islamic finance industry will surpass the USD2tln asset mark during the third quarter of this year (3Q14). The industry s presence is no longer confined to its traditional markets and Islamic financial institutions are budding globally including in both Muslim and non- Muslim dominated jurisdictions. This alternative financial system, which was densely focused in a select few countries in the Gulf Cooperation Council (GCC) and Asia during the 1990s, has now expanded presence in as many as 70 countries with more than 600 financial institutions offering some type of Shariahcompliant financial products. Over the years, Islamic finance has notably served as a viable funding mechanism for various economic sectors including power and utilities, education, infrastructural development, telecommunications, transportation and other corporate sectors. The industry s solutions have been utilised by various types of institutions including sovereigns, corporates and other government-led entities. The sector s growth and expansion have notably been underpinned by the pro-active roles played by various regulatory bodies in providing a facilitative environment to the industry. Regulators have been instrumental in ensuring there are clarity on regulations; gradual harmonisation in industry standards; sound corporate governance principles as well as an accomodative legislative infrastructure. 1 2 ibid 3 ibid 4 ibid 1
Global Islamic Finance Assets Growth Trend (2009-1H14E) Source: Various, 2009 2011 2013 1H14E Global Islamic finance assets below USD1 tln. Sukuk market begins to attract issuers interest; annual new issuances volume below USD50 bln at this stage. Global Islamic financial sector expands by 40.8% (2009-2011) to reach almost USD1.35 tln in assets. Primary sukuk market issuances surpass USD85 bln this year. Global Islamic finance assets achieve post-financial crisis CAGR of 16.94% (2009-2013); assets amount to nearly USD1.8 tln. New sukuk issuances surpass USD100 bln. Global Islamic financial assets cross the USD1.9 tln mark; expected to surpass USD2 tln by 3Q14. New sukuk issuances expected to outperform 2013 s volume. These are critical for the sustainable and sound expansion of the Islamic finance industry while further boosting stakeholder confidence in this alternative financial system. Recognising these, national governments and regulatory bodies in many parts of the world have directed their efforts to spur the development of an integrated and generally cohesive global Islamic financial ecosystem. In 2014-to-date, the industry s geographical outreach and sectoral-penetration have continued expanding as various national authorities have initiated efforts to support the growth, development and expansion of the Islamic financial sector in their domestic markets. Regulatory efforts are being spearheaded in diverse regions including in Asia, Middle East, Europe and lately, in Sub-Saharan Africa. Aside from the existing markets, a number of new jurisdictions are in process of introducing Islamic financial services in their territories including in Asia (for example, the Philippines) and Africa (for example, Kenya). The Islamic finance industry itself which focused predominantly on offering Shariahcompliant banking services initially, is now a complete financial system of its own that includes capital market products and services such as Islamic securitised assets (sukuk), Islamic equities, Islamic investment funds, and also Islamic insurance services (takaful). Moving forward, based on current growth momentum, the industry is forecasted to peak as much as USD6.5tln in assets by the year 2020 5. 5 2
Global Islamic Banking Sector: Consolidating Further The global Islamic banking sector continues to account for the largest share of the Islamic finance industry worth an estimated USD1.53tln or 80% of the total industry s assets in 1H14 6. The sector s assets have expanded at a CAGR of 17.4% between 2008 and 2013. Over the last decade, Islamic banking has increasingly gained acceptance amongst market participants as rising awareness of Shariah-compliant propositions has prompted more countries and entities to join the global cohort of Islamic finance stakeholders. The sector is also set to gradually take the lead as the main banking sector in top Islamic finance jurisdictions such as Saudi Arabia (where it represents 52% of the domestic system s banking assets), 7 (26%) and Kuwait (45%) 8. Countries such as Bangladesh and Qatar also have tremendous potentials as Islamic finance is rapidly gaining market share in their respective domestic banking sectors (19% and 24% respectively). In 2014-to-date, numerous Islamic banking related developments have taken place across Top 10 Islamic Banking Jurisdictions Assets (LHS) and Market Share (RHS) (2013) Source: USD bln 300 250 200 150 100 50 0 Saudi Arabia Islamic banking assets UAE Kuwait Qatar Dosmestic system market share various countries which are expected to further consolidate the expansion of the Islamic banking industry. Some of these developments are as follows: Turkey Bahrain Indonesia Bangladesh Pakistan *DFIs assets are included for s Islamic banking share 60% 50% 40% 30% 20% 10% 0% Islamic Banking Developments in Selected Jurisdictions (2014 YTD) Azerbaijan India The International Bank of Azerbaijan (IBA), the country s biggest bank, is currently working with national authorities on drafting an Islamic Banking law. The state-owned financial institution has submitted an application to the Cabinet of Ministers on the proposal of the ministry to set up a working group that will prepare the Islamic Banking laws for the country. The work on the adoption of legislation for Islamic Banking in Azerbaijan is expected to begin in September, with a view to implementation in 2015. IBA is also looking to set up an Islamic Banking center across the region, in line with the request of Financial and Banking Council of CIS to promote Islamic Banking in the CIS countries. Driven by the interest of Russian banks in Islamic Banking, IBA will also prepare a package of proposals to be submitted to the Central Bank of Russia. Reserve Bank of India (RBI), the country s central bank, has begun a review of regulations on Islamic banking in India last month. The central bank is reported to have established an internal committee consisting of senior RBI officials. The call for a re-evaluation of Islamic banking regulations was initiated following RBI s introduction of differentiated banks in India, particularly payments banks and smaller banks, as a start. Supporters of Islamic banking are building a case for Shariah-compliant banking in the face of the reforms in India s banking sector. The new Islamic Financial Services Act 2013 in provides the legal foundation for the shift towards a contract-based regulatory framework that allows the development of regulation which reflects the specificities of the various types of Shariah contracts. In this regard, BNM is currently developing several Shariah standards for key Islamic contracts that set out the Shariah and operational requirements of a particular contract. The Shariah requirements provide the salient features and essential conditions of the Shariah contracts based on the resolutions of the Shariah Advisory Council of BNM, whilst the operational requirements specify the expectations for the operationalisation of the contracts with respect to the governance, structuring, risk management, business conduct and financial disclosures. The issuance of the Shariah standards will serve as guidance to the Islamic financial industry to enhance end-to-end compliance with Shariah and strengthen the integrity and sustainability of the Islamic financial institutions. The standard on Murabahah and concept papers for Musharakah and 6 7 Including assets of DFIs 8 3
(continued) Morocco Oman Pakistan Qatar Tajikistan Uganda Mudharabah have been issued to the industry in December last year. In June this year, concept papers for Ijarah and Istisna have been released for industry and public comments. The concept papers on Bai lnah, Tawaruq, Wadiah, Hibah, Wakalah and Kafalah are expected to be issued in the second half of 2014. In January this year, Morocco s government adopted a bill regulating Islamic banks and sukuk issues, paving the way for a final vote by the parliament of the North African kingdom later this year. Approval of the law will be the last step before establishing full-fledged Islamic banks in Morocco, be they subsidiaries of Moroccan banks or foreign rivals, a measure which may bring more Islamic investments into the country. Also, Morocco s central bank has started talks with a body of Islamic scholars on establishing a central Shariah board to oversee the country s fledgling Islamic finance industry. The Central Bank of Oman (CBO) is in the process of finalising initial works for issuing short-term Islamic finance instruments to help Islamic institutions to park their excess funds within the country. The apex bank is expected to float a tender seeking advisory service from consultancy agencies for choosing the type of instruments suitable for the market. A viable interbank market could boost the profitability of Oman s Islamic banks, which have so far mainly relied on Wakalah (agency) to manage their short-term funding needs. Further, Oman is planning to establish a national Shariah board, like some of its GCC neighbors, to regulate the Islamic banks and window operations of conventional banks. The Pakistani central bank, State Bank of Pakistan (SBP), has launched a five-year strategic plan for Islamic finance in February 2014 which targets an increase in the sector s share of banking system assets from around 10% as of December 2013 to 15% by 2018. More recently, this target has been revised to achieve a 20% share by December 2018. SBP had earlier issued new rules for the operation of Islamic banking windows in March this year, which allows conventional lenders to offer Islamic financial services, provided the client s money is segregated from the rest of the bank. The regulator is also finalising details on an Islamic liquidity framework, consisting of an Islamic interbank money market (IIMM) and a Mudarabah based placement facility run by the central bank, to be available in the next three to six months. Under the framework, banks would be required to settle their short-term liquidity needs through the IIMM, while surplus funds would be absorbed by set up by the central bank. The central bank will also adopt as many as three standards from the IFSB, including those on capital adequacy and the supervisory review process. Qatar s regulatory authorities announced the establishing of a deposit insurance framework, including a Shariahcompliant variation, as part of the strategic plan to modernise the country s financial sector by 2016. The scheme will be set up under the Qatar Central Bank law, creating a safety net to promote financial stability. The financial strategic plan also calls for the strengthening of regulation of Islamic finance institutions, with initiatives including enhancing licensing criteria for Islamic banks, tightening of standards for corporate governance and Shariah boards, as well as reporting on capital adequacy, solvency and liquidity and a framework for liquidation of Islamic banking institutions. The law on Islamic Banking Activity, approved in draft form by the Republic of Tajikistan s lower chamber of parliament (Majlisi Namoyandagon) in May, has come into force in the country. The law, which has been mooted by Tajikistan s government since 2012 with the aim of granting licenses to financial institutions operating on Shariah principles and regulating their activities, came into effect on the 5th August following its publication in the official government gazette. The legislation provides a foundation to facilitate Islamic banking activities in the country and relevant authorities will now be able to develop regulations and a legal framework for the setting up of standalone Islamic banks as well as Shariah-compliant windows. Earlier, a -based law firm had been appointed by the National Bank of Tajikistan (central bank) to draft this law. Uganda s cabinet of ministers has approved the introduction of Islamic finance in the republic in May this year. Subsequently, Uganda is expected to approve three laws within the Financial Institution Amendment Act to enable Islamic banking and finance. The government is working together with the Islamic Chamber of Commerce, Industry and Agriculture to introduce Islamic finance in the country. An Islamic Banking Bill 2014 will be forwarded to the parliament committee responsible who would then table it in the parliament for vote and passing of this bill into a law. Following this, Uganda will join its African counterparts such as Nigeria and Kenya in offering Islamic financial products in the region. Source: IFN, Reuters, Zawya, KFH Research Moving forward, the Islamic banking sector is forecasted to amount to almost USD1.7bln by the end of 2014 9. The impressive growth in assets is being throttled by the continuous regulatory progresses and developments taking place across various markets. These developments include in terms of regulation, supervision, standardisation, risk management, product innovation, and also talent and market development. Overall, Islamic banking is set to penetrate further in global markets, firmly establishing itself as an alternative financing mechanism. 9 4
Global Sukuk Market: Rapidly Surging Forward The global primary sukuk market has outperformed in the first six months of 2014 with new issuances amounting to USD66.2bln, 8.2% higher than the USD61.2bln volume in 1H2013. The volume in 2014 has been spurred by issuances in 2Q14 worth USD35.1bln, which is the second most performing quarter in terms of new sukuk issuances since 3Q12. On the other hand, the global sukuk outstanding market reached USD286.41bln as at 1H2014, a 6.3% expansion YTD from the USD269.4bln as at end-2013 and a 16.8% growth y-o-y since 1H2013. Between 2009 and 2013, the global sukuk outstanding has expanded at a CAGR of 21.6%, enabling it to be become the fastest growing sector in the Islamic finance industry 10. Despite economic uncertainties and other challenges afflicting the global financial system at the start of this year, issuers have overwhelmingly tapped the sukuk sector to raise liquidity. In recent years, a number of jurisdictions (including non-organisation of Islamic Cooperation countries) have debuted in the global sukuk market. In 2014-to-date, debut issuances were recorded in Maldives, Senegal and the United Kingdom (debut sovereign Global Sukuk Issuances Trend (2006-1H2014) Source: USD bln 140 120 100 80 60 40 20 0 2006 2007 2008 2009 sukuk). Instrumental to these efforts in enabling sukuk to serve as viable alternative financing tools for meeting global liquidity needs are regulatory efforts that provide a level-playing field to Islamic capital market instruments vis-à-vis bonds. In this regard, this year has been no exception and some of the regulatory developments in the sukuk sector are as follows: 2010 2011 2012 2013 66.2 1H2014 Selected Regulatory Developments in Sukuk (2014 YTD) Bahrain Kenya Kyrgyzstan The Central Bank of Bahrain (CBB) has introduced consolidated regulatory guidelines for issuing and listing of financial securities (including sukuk) in December 2013 to make the process more efficient. According to the CBB, the incorporation of an issuing agent or SPV should take no more than 48 hours from the time the documents are approved, whether for local or international issuance. The rules were also prepared in accordance with the GCC Unified Standards, which it is hoped might attract both domestic and regional issuers to come to the market. The Capital Markets Authority (CMA) of Kenya recently submitted a proposal in March for a separate regulatory framework for Islamic finance to the National Treasury. The purpose of the proposed framework is to further the development of the country s fledgling Islamic finance industry and increase the appeal of the Kenyan capital market to international investors by facilitating Islamic debt structures. CMA hopes that the separate regulatory framework would enable the Kenyan Islamic capital market sector to thrive while attracting investors from the Middle East and other nations where Islamic financial investments are rapidly gaining market share. On behalf of the Kyrgyz Republic, the State Service for Regulation and Supervision of Financial Markets has signed an agreement with legal firm Simmons & Simmons through which the latter will advise the government on its Islamic finance endeavours which include growing the domestic sukuk and takaful markets. The consultancy services will be funded by the Islamic Development Bank (IDB) through a technical assistance grant. 10 5
Malta Pakistan UAE The n Prime Minister had introduced the Socially Responsible Investments (SRI) Sukuk initiative in the n Annual Budget 2014 last year, which seeks to encourage sustainable and responsible investments. In this regard, the Securities Commission (SC) is currently in the process of finalising a framework for socially responsible sukuk and the framework is expected to be launched in the third quarter of 2014. Following this framework, is expected to take lead in spearheading issuances of socially responsible Islamic bonds which will further drive growth in the global sukuk industry. Malta recently expressed its hopes in sending a signal to the world that the republic is open to Shariahcompliant financial instruments and believes that a small sukuk issuance could be the impetus to begin such a narrative. The European island has in recent years demonstrated keen interest in attracting Shariah wealth by hosting discussions among industry players on how best to move Islamic finance within the country s financial regulatory framework as well as establishing Shariah-compliant finance as an area for potential joint ventures between businesses in Dubai and Malta. The country, led by FinanceMalta, is also set to publish a sector guide on Islamic finance in January next year. These efforts underline market reports that prime minister Dr Joseph Muscat is expected to make an official announcement on a Maltese sovereign sukuk issuance in the weeks to come. The State Bank of Pakistan is currently in the process of finalising details on a Shariah-compliant liquidity framework ahead of the country s proposed US Dollar sovereign sukuk issuance later this year. The current shortage of sovereign Shariah-compliant debt instruments has been highlighted as one of the industry s most pressing problems by industry participants, along with a lack of public awareness regarding the sector and the quality of regulatory support. Pakistani regulators are taking necessary steps to address these challenges and any remedies for liquidity management is likely to include sukuk instruments which will spur new sukuk issuances in the country. Dubai Financial Market (DFM), which is one of the United Arab Emirates main bourses, has officially published its comprehensive sukuk standard on 2nd April 2014 as part of its efforts to enhance regulatory clarity on these Islamic instruments while attracting a wider pool of issuers to the market. The DFM sukuk standard aims to clarify the legal structures of sukuk instruments while further providing clarity on the rights of sukuk holders and liabilities attached to special purpose vehicles (SPVs). DFM hopes that the new standards would be a point of reference for issuers and investors around the world, encouraging more issuance of sukuk rather than conventional bonds, and spurring development of new Shariah-compliant financial instruments. Source: IFN, IFIS, Zawya, KFH Research Moving forward, the overall tremendous performance of the global sukuk market in 1H2014 has reinforced expectations that the annual new issuances volume this year is likely to surpass last year s USD119.7bln volume 11. Supporting these expectations are the rapid expansions in the global sukuk market horizons. To date, at least 29 jurisdictions have tapped the sukuk market (excluding offshore domiciles) and more are expected to follow suit following United Kingdom s highly successful sovereign sukuk programme. In the near future, sovereign issuances are imminent from more non-oic countries including Luxembourg and Hong Kong. 11 6
Global Islamic Funds: Reaching New Heights As at 17 June 2014, the global Shariah-compliant asset management industry has reached a new high of USD75.1bln in assets under management (AuM), up 4.9% from end-2013 s USD71.6bln 12. The growth in the AuM stems from the ongoing capital allocations to Islamic products and as well as performance based gains. The number of Islamic funds globally increased to 1,069 with 20 new funds having been set up during the six months of 2014. The consistently top two domiciles by asset size for Islamic funds have been Saudi Arabia and these two jurisdictions are host to a total of 471 Islamic funds and account for over 60% of global Shariah-compliant AuM, as at 17 June 2014. European domiciles with pronounced ambitions in Islamic fund management have attracted a significant portion of Islamic AuM Luxembourg with 8% and Ireland with 4% - as at 17 June 2014. In 2014-to-date, some of the notable developments that have taken place in the Islamic funds market are as follows: Global Islamic Funds AuM (2008-17 June 2014) Source: USD bln 80 70 60 50 40 30 20 10 0 47.0 56.1 71.6 73.8 75.1 2008 2009 2010 AuM 2011 2012 2013 No. of funds 17-Mar-14 17-Mar-14 1200 1000 800 600 400 200 0 No. of funds Islamic Funds-related Developments in Selected Jurisdictions (2014 YTD) Egypt India Kenya With a view to attracting investments from the Gulf region, the Egyptian Islamic Finance Association (EIFA) has launched an Islamic index consisting of the 30 most liquid stocks on the Egyptian Stock Exchange (EGX) that have been screened for Shariah compliance. The index adheres to the Shariah Standard No. 21 of the AAOIFI which governs the trading of securities. The new index was compiled by the World Vest Base (WVB) which plans to build similar solutions for the rest of MENA and, first and foremost, in Libya and Tunisia. An Egyptian Shariah-compliant index will enable easier structuring of Islamic funds have exposures to the Egyptian financial markets. The Ministry of Minority Affairs in India has inaugurated the National Waqf Development Corporation with the aim of developing the country s Islamic endowments, or awqaf, and mobilising the assets of the country s large Muslim population. At present, it is estimated that India has 490,000 waqf properties generating an annual income of just INR1.63bln. The financial regulator in Kenya has proposed a separate regulatory framework for Islamic financial institutions operating within the country s capital market. The Capital Market Authority (CMA) has recently approved Kenya s second Shariah-compliant collective investment scheme, Genghis Capital, which joins FCB Capital. The CMA has also introduced rules permitting the creation of Islamic REIT funds. Kenya hopes a developed Islamic capital market could help it attract more investments from cash-rich Islamic funds in the Gulf and Southeast Asia. 12 KFH Research: Islamic Funds Review Q2-2014 7
Effective from June 2014, foreign firms have been allowed to assume complete ownership over unit trust management companies in. This permits foreign managers to market funds to retail investors; prior to the liberalisation, the distribution of foreign-owned funds was limited to n residents whose net worth exceeded MYR3mln (USD935,000). The government s move part of steps aimed at liberalising the financial sector has been welcomed by the industry. In another development, in March, listed its second tradable Shariah-compliant exchange traded fund (ETF), managed by i-vcap Management Sdn Bhd. This development is indicative of the increasing investor appetite for the new investment tool (which offers a low cost, passive approach to investing in a Shariah-compliant equity portfolio) in and larger Asia as a whole. Bursa currently has six listed ETFs, including i-vcap s MyETF-DJIM25 which was the first Islamic ETF in Asia. In November 2013, the Securities Commission introduced a new method of Shariah compliance screening for stocks, as a result of which 16 new firms were added to the list and 158 excluded. United Kingdom Asset management firm Arabesque has received regulatory approval to start operations with its valuebased investment strategies, which also combine religious and ethical principles the latest addition to Britain s Islamic finance sector. The London-headquartered firm now has in place a team of 18 staff, with additional offices in Frankfurt and New York. Arabesque is backed by an advisory board of ethical industry professionals, a rare feature among Islamic asset managers, as it seeks to build crossover appeal among both investor segments. The firm is backed by its own capital from and has commitments from several institutional investors Source: IFN, Reuters, KFHR The improved macroeconomic environment continues to support the recovery of global financial markets. However, this positive development comes together with some uncertainty for the global asset management industry that is currently undergoing a number of structural changes, initiated primarily by shifting investor preferences and increasing regulatory controls. Against this backdrop of mixed signals, Islamic fund managers are well-positioned to take advantage of the global economic recovery, while also capitalising on Islamic finance specific growth opportunities in both developed and emerging markets around the world. The sustained progress of Shariah-compliant capital market, banking and takaful sectors will continue to fuel the developments in the Islamic funds sector. 8
Global Takaful Sector: Sustaining Momentum Global gross takaful contributions are estimated to have amounted to USD21.5bln as at 1H14, representing a y-o-y growth of more than 15%. Saudi Arabia and remain the two largest takaful markets by gross contributions. Saudi Arabia generated an estimated USD6.4bln in gross takaful contributions at end-2013 while generated an estimated USD2.29bln in contributions 13. Takaful regulations over the years have been very instrumental role in shaping the growth trajectory of the global takaful industry. In recent times, some of the notable regulatory develops have been as follows: Global Gross Takaful Contributions Forecasts by Region (USD MLNS) Source: World Islamic Insurance Directory, EY, KFH Research 7229 6388 Saudi Arabia 2292 2720 1984 2311 GCC (ex-saudi) 2013E 1012 1296 Southeast Asia (ex-) 589 658 Africa 2014F 239 251 South Asia 216 343 Levant 8199 7153 Middle East (Non Arab) 19872 23007 Total Takaful Developments in Selected Jurisdictions (2013-2014YTD) Bahrain Brunei Kazakhstan Kenya Kyrgyzstan The Central Bank of Bahrain (CBB) will release a new regulatory framework for takaful this year (2014), in an overhaul of standards which the regulator hopes will attract new business in a sector it helped to pioneer. The new rules, developed after two years of consultations with the industry, will cover the operations and solvency of takaful firms. They are expected to increase takaful firms ability to distribute surpluses to policy holders and dividends to shareholders. Autoriti Monetari Brunei Darussalam (AMBD) announced last year that it would move to implement new guidelines for takaful and general insurance agents to instil good governance among agents and to also standardize the commission rates for certain classes of business. One of the aims of the introduction of the new takaful guidelines last year was to increase the penetration rate of takaful and insurance products in the market. In 2013, following amendments made in 2011 to the country s Islamic finance law of 2008, legislative changes to the law regarding Ijarah (or Islamic leasing) and takaful were put forward by a special committee of the National Bank of Kazakhstan (NBK), which is responsible for Islamic finance development, to the government. The legislation is currently awaiting approval by parliament, with the expectation that it will be ratified and adopted at some point this year. In March 2014, the Capital Markets Authority (CMA) of Kenya has put forward a proposal for a Shariah advisory council to be established and appointed by the minister of finance to oversee the Islamic banking, takaful and capital market industry in Kenya. New developments in the takaful sector are taking place in the market, with Kenya Re confirming that it will begin providing re-takaful products this year. The Kyrgyz Republic will be developing draft regulations in 2014 for the introduction and development of takaful and Islamic securities via a formal agreement signed by the State Service of Regulation and Supervision of Financial Market of Kyrgyz Republic and legal firm Simmons & Simmons. 13 9
Morocco Pakistan UK The n takaful industry is expected to witness notable changes in the following years as the IFSA 2013 s Section 16 (1) enforces separation of licences between the general and family takaful businesses. Section 286 of IFSA has further provides a time period of five years for existing composite takaful operators to separate the two businesses under different entities. This measure aims to achieve a stronger business focus in either family or general takaful for takaful operators. A framework that encourages greater operational efficiency and flexibility, and product innovation is currently being developed to better serve the needs of consumers and leading towards achieving a higher penetration rate of 75% by 2020. In April this year, the Moroccan Government published Draft Law No. 059-13 completing and modifying Law No. 17-99 on the Insurance Code. The proposed amendments in the draft law concern the following aspects: (1) review of some provisions in the Insurance Code (conventional insurance); (2) requirement of some insurance in the construction field; (3) establishment of a regulatory framework for takaful insurance. One of the notable provisions in the draft law concerning takaful includes the prohibition on insurance companies to offer both conventional and Islamic insurance products. Therefore, insurance companies are not allowed to launch takaful windows. This is likely to create opportunities for setting up new and full-fledged takaful institutions in the country. Based on an original regulatory amendment introduced in 2012, Pakistan, the largest Islamic financial market in South Asia, had allowed introduction of takaful windows by conventional insurance companies as a measure that was likely to spur the takaful market share in the country. However, a group of five existing takaful operators in Pakistan had earlier challenged this ruling in court citing such a measure would distort the Islamic insurance industry in Pakistan. Recently in April 2014, the group reached a ground breaking agreement out-of-court with the plaintiffs agreeing to withdraw their petition challenging the Takaful Rules 2012 while leaving the provision about window operations fully intact. As such, the biggest players of conventional insurance in Pakistan have announced to launch their Islamic window operations this year which is expected to result in tremendous expansion of the Islamic insurance segment in Pakistan, a country with a low insurance-to-gdp penetration rate of 0.7%. In March 2014, business insurance specialist QBE has formalised an agreement with Cobalt Underwriting which will see it provide capacity to Cobalt s takaful platform. Through the accord, Cobalt will be able to offer clients USD50mln of casualty capacity as well as increase its ability to underwrite property risks to USD425mln from USD300mln and construction risk to USD160mln from USD100mln. Source: IFN, IFIS, Zawya In summary, the global takaful industry is expected to continue growing at double digit growth rates over 15% in the year 2014 and the gross takaful contributions are forecasted to range between USD22bln and USD23bln as at end-december 2014 14. Growth in 2014 and beyond is expected to mainly stem from emerging regions such as Southeast Asia (ex- ) and the GCC (ex-saudi) where fast expanding markets, including Indonesia, the UAE and Qatar, are driving the Islamic financial sector to new growth trajectories. Furthermore, the entry of new jurisdictions like Oman and the expected entry of the Philippines are also bound to boost the gross takaful contributions in these regions. 14 10
Future Outlook: Tremendous Opportunities to Expand Further The global Islamic finance industry has tremendous opportunities to expand in various regions of the world including in traditionally dense markets of the GCC and Asia as well as in newer and niche regions of Africa and Europe. The fast expanding economic and financial relationships between the key Islamic finance hubs in the GCC and Asia with the markets in Europe and Africa are critical growth drivers of the Islamic financial sector. Islamic banking institutions have abundant opportunities to capitalise on these growing economic relationships by supporting the transactions with Shariah-compliant trade financing and investments/wealth management solutions. A number of sovereign, quasi-sovereign and corporates are increasingly tapping in the global pool of Shariah-compliant liquidity through sukuk instruments. To date, a total of 29 jurisdictions (OIC and non-oic alike) have tapped the sukuk market to raise funds in a Shariah-compliant manner (excluding offshore jurisdictions). The Islamic equity and funds market has firmly established itself in key global bourses and jurisdictions: the world s major financial index providers, such as Dow Jones, Standard & Poor s FTSE, all have Shariah compliant equity listings which have allowed the Shariah-compliant equity and funds market to blossom. In conclusion, the total value of global Islamic finance assets in 2014 is widely projected to surpass USD2tln during the third quarter of this year. The industry has firmly established itself as an alternative financial system and has also attracted a number of non-oic countries who are also increasingly looking towards developing their Islamic financial sectors. The efforts have been further boosted by the facilitative regulatory initiatives implemented by various national regulatory bodies in aid of Shariah-compliant financial structures. In addition, notable involvement of a number of international agencies and global multilateral bodies including the World Bank Group and the Asian Development Bank has further boosted momentum. Moving forward, ample opportunities are available for the Islamic finance sector to further gain traction in various international markets. 11
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