Islamic banks unfazed by new competition

Better products and innovation will separate the playersThe country’s existing Islamic banking players remain unfazed by the upcoming competition in the form of more licences to be issued for world-class Islamic banks and takaful operators.

CIMB Islamic Bank Bhd executive director and chief executive officer Badlisyah Abdul Ghani said the move would result in a greater variety of syariah-based financial services and products being offered to the public.

“This, of course, will bring about a more competitive range of products. The challenge for existing players is to continue to innovate and not lose ground here and look for expansion opportunities in the region,” he told StarBiz.

OCBC Al-Amin Bank Bhd director and chief executive officer Syed Abdull Aziz Syed Kechik said: “This development is healthy not only for customers but also for the country as efforts continue towards collaboration with the international financial community to collectively shape the Islamic finance industry.”

KFH Research Ltd said the players would have to further improve on products and services to retain market leadership.

“As competition increases, we also expect the local Islamic banks to aggressively grow their Islamic banking business within the region, if not globally,” it said.

The financial sector liberalisation plan includes the issuance of licences for seven banking and two takaful players from 2009 until 2011.

It also increases limits of foreign equity ownership to 70% from 49% for investment banks, Islamic banks, insurance companies and takaful operators.

The measures would also see the issuance of up to two new licences for Islamic banking with a minimum paid-up capital of US$1bil, as well as up to two new licences for family takaful.

Recently, the National Bank of Abu Dhabi, one of the United Arab Emirates’ biggest banks, was reported to be interested to operate in Malaysia.

Currently, there are about 17 Islamic banking institutions in Malaysia.

However, given that the global economy was still in recovery mode, KFH Research did not expect many foreign players to enter the local market this year.

“The prospect for Malaysia is bright, however, given its position as one of the most developed Islamic finance market,” it said.

The industry performed very well last year, with the market share of total banking assets and deposits surpassing 18% and on target to achieve 20% mark this year.

In its Financial Master Plan outlined in 2004, Bank Negara has targeted Islamic banking assets to carve a 20% market share of the banking industry by this year. The figure stood at about 19% in June last year.

As of November 2009, the total Islamic financing of RM115bil constituted 15.5% of the financing portfolio of the banking industry while net non-performing financing remained low at 2.4%.

Malaysia’s Islamic capital market reached RM803bil in August last year, representing 54% of Bursa Malaysia’s market capitalisation then.

Many are not aware that Malaysia has the largest Islamic equity market in the world with about 88% of all stocks listed on Bursa Malaysia deemed as syariah-compliant.

KFH Research said Islamic finance survived the crisis due to a number of key factors which were in line with syariah. This starts with the ban on interest where any pre-determined payment over and above the actual amount of principal was prohibited, as interest (or the intrinsic value of the money) is deemed unlawful by syariah.

“Second is the ban on uncertainty or speculation. However, risk taking is allowed when all the terms and conditions are clear and known to all parties.

“Also, the profit and loss-sharing principle is where parties to a financial transaction must share in the risks and rewards attached to it.

“Asset-backing principle also helps as each financial transaction must refer to a tangible and identifiable underlying asset,” said the research house.

According to CIMB Islamic Bank Bhd executive director and chief executive officer Badlisyah Abdul Ghani, Islamic finance survived the recent economic crisis because it never participated in the US subprime market.

“And there are two reasons for this – first, Islamic financial institutions were not sophisticated enough to participate in the market.

“Also, the objective of doing Islamic finance is for maximum profitability and social responsibility, which means we cannot take part in something that at the end of the day will negatively impact the society,” he said.

OCBC Al-Amin’s Syed Abdull Aziz said Islamic finance was cushioned from the initial effects of the financial crisis as the industry was prohibited from getting involved in transactions that give rise to “gharar” (uncertainty), such as subprime mortgage collateralised debt obligations.

source : thestaronline

Gauging the Global Takaful Market

takaful_microchipBy Bill Kenealy


What happens when you apply modern technology to an ancient practice? A new report from Boston-based Celent concludes that insurers and the vendors that supply them need to answer some fundamental questions before they can reap the rewards of the fast-growing market for takaful, a form of mutual insurance popular in the Muslim world.

According to the report, takaful, once a niche product sold largely by small local operators, is rapidly being embraced by multi-national financial services firms with sophisticated product differentiation and distribution capabilities.

The report, Policy Administration Systems for Takaful: A Global Solution Spectrum, was authored by Celent analysts Catherine Magg-Stacey and Ashley Evans, and examines the issues that are shaping the market worldwide. A lack of economies of scale and comparatively lower use of technology, means takaful companies are operating with inflated expense rations, according to the authors.

“Takaful companies, particularly in the Middle East, have shown higher expense ratios than their conventional counterparts,” the report states. “Over time, volumes will rise, and higher customer persistence is expected to offset the expense ratios to some extent. The

final key to managing the expense ratios lies in the use of technology.”

The report provides detailed profiles of the core systems available to takaful companies, especially policy administration systems.

“Policy administration systems are the beating technological heart of any insurance company and this is equally true for takaful companies,” it states. “Given the specificities of a takaful company, a critical element to a successful policy administration system is a flexible architecture. Fortunately, for those entering into this market, many of the modern policy administration systems offer this with user-friendly interfaces and tools allowing configuration of products, workflow, and reports.”

Yet, the report finds many barriers to widespread technological adoption in the takaful market, including a lack of standardization.

“In the short term, it is unlikely that national or international takaful standards will emerge,” the authors state. “Even though many industry players acknowledge the benefits to be gained by harmonization, the reconciliation of the varied approaches espoused by competing associations and standards boards will be a formidable challenge.”

Challenges notwithstanding, the rapid growth of the takaful marketplace will entice insurers and vendors alike to target it. Celent predicts the global takaful market will grow to $7.39 billion by 2015, with the greatest growth in the Middle East and Southeast Asia. “For the moment, the growing takaful market presents a niche opportunity, and the small number of vendors with takaful experience reflects this. However, the sustained double-digit increase in premium in this market will see a commensurate increase in takaful operators/windows in the next few years.”

Source: Celent