IFR Asia Malaysia Islamic finance report: takaful

IFR Asia Malaysia Islamic finance report: Takaful, September 2009

Takaful is probably the area of Islamic finance that has received the least attention in Malaysia, but its rate of growth has been impressive. The net contributions income to takaful operators was RM1.12 billion in 2004; by 2008 it had almost trebled to RM3.03 billion. Over the same period takaful fund assets doubled from RM5.03 billion to RM10.57 billion.

Today there are eight registered takaful operators in Malaysia, compared to four in 2004; the latest batch of financial liberalization in April allowed for two more family takaful licences (licences fall into two categories, family and general) to be granted in 2009 to “players that can offer significant value proposition to Malaysia to spur the development of the takaful industry and reinforce Malaysia’s position as an international Islamic financial hub,” according to Bank Negara Malaysia. Bids are due in at the end of October.

One institution that has watched this growth with interest is Syarikat Takaful Malaysia, which was incorporated in 1984 and listed in 1996 – the first of its kind. Its incorporation came about because of the recommendations of the Task Force on the Study for the Establishment of an Islamic Insurance Company in Malaysia set up by the government in 1981. This task force concluded that a takaful company based on the principle of al-Mudharabah – one of several models in Islamic finance allowing for an equal allocation of profits from an underlying fund – would be a viable venture. Today, it is majority owned by BIMB Holdings, which is also the majority shareholder in Bank Islam Malaysia, the first Islamic bank in the country.

Asked what Takaful Malaysia has seen over that period, Dato’ Mohamed Hassan Kamil, the group managing director, says: “The most significant development over that time is the growing interest of foreign parties in Islamic finance and the development of the comprehensive regulatory framework.” Indeed, the regulatory environment for takaful is as comprehensive in Malaysia as it is for mainstream banking or capital markets. But the potential for growth is perhaps greater still. “The level of penetration is still low – below 10% compared to conventional, where penetration is almost 50%,” he says. But “the industry will continue to attract a lot of interest and will grow faster than the conventional industry for the next five years.”

The growth of takaful is being closely watched by the country’s fund management industry. Takaful houses in Malaysia are obliged to conduct all of their investment in Shariah-compliant assets although, to the disappointment of foreign houses, they tend to do so domestically. “We invest only in Malaysia, mainly in Shariah bonds, property and Islamic money market instruments,” says Kamil. Still, it’s likely that as takaful operators become more international in their approach – it would not be a surprise to see them expand in Indonesia, for example – they will need to invest overseas too in order to match the diversity of their business mix with their funding.

A structural shift is taking place in the way takaful products are put together. Again, Takaful Malaysia is illustrative of the trend. In December it unveiled a series of products called MyMedicare, MySiswa, MyImpian and MySinar, a range of life, medical and health products using the Wakalah structure.

This was an interesting step since until then, it has used the Mudharabah model. All Takaful Malaysia’s general takaful products will continue to operate on that model, while all other new products will migrate to Wakalah.

What’s the difference? In Mudharabah, contributions are credited into a fund called the Participants’ Risk Fund. The surplus generated from that fund is then distributed evenly between the participants and the company.

In wakalah, all the contributions and the Wakalah fee are credited into the fund, with the fee covering commission and expenses allocated up front. Then the surplus generated from the fund is distributed at certificate termination. This is the more common approach in the Middle East, and has also been adopted by a number of other takaful operators in Malaysia.

“A mudharabah product is based on profit sharing to cover the acquisition expenses, including commissions,” says Kamil. “This model does not work for an agency type distribution model. Thus, we have switched to wakalah to enable payment of commissions to intermediaries. We believe the Wakalah model can work better for growing the retail business which is dependent on agents for distribution.” He believes agency and bancassurance are the two best methods of distribution for takaful in Malaysia.

A look at Bank Negara statistics shows why this structure is becoming more and more popular. While the number of employees in takaful operators has remained almost static between 2004 and 2008, the number of agents has quadrupled, from 14,370 in 2004 to 60,197 in 2008. Any model that allows payment of commissions to those agents is obviously going to become the norm.