The General Council for Islamic Banks and Financial Institutions (CIBAFI) is an international non-profit organisation that was founded in 2001 by the Islamic Development Bank and a number of leading Islamic financial institutions.
It was set up at a time when the Islamic finance industry was looking very seriously at the need for oversight and regulation of the fast-growing sector – and Bahrain was the epicentre of this development, building on the work done by the Accounting and Auditing Organization for Islamic Financial Institutions that was established in Manama in 1991.
Adding to this important ecosystem, Bahrain also saw the establishment of the International Islamic Financial Market and the Liquidity Management Centre in 2002 and the Islamic International Rating Agency in 2005.
Focus on takaful
While CIBAFI’s remit is broad, takaful plays a central role in its work. We spoke to Dr Belatik to find out what the most significant developments in takaful have been during the last 12 months.
“The year 2020 has brought many challenges to the global financial industry as the COVID-19 pandemic had an unprecedented impact on all types of financial markets,” said Dr Belatik.
“The global takaful industry is no exception. The pandemic is posing considerable threats to its efficiency and stability. However, so far, the takaful industry has shown flexibility and strength in facing the pandemic. The economic impact of the pandemic on the takaful industry is severe but temporary, and it is expected that it will gradually recover in the short term.”
The pandemic affected the global takaful industry in three main ways, according to Dr Belatik, which he enumerates as:
- Direct significant impacts on solvency and profitability, primarily through losses on the asset side and increased claims in business lines like travel, event cancellation, pandemic/excess mortality on the liability side.
- By creating supply-chain and market disruption.
- Monetary effect on organisations and monetary markets.
In response to the pandemic, the takaful industry has started taking an interest in adopting technologies to promote takaful digitally.
“The insurance industry, in general, is usually slow to adapt to new technologies and changes,” said Dr Belatik. “This is due to the inherent structure of the business and heavy regulations. However, to mitigate the impact of the pandemic on the takaful industry, operators could find answers in technology-based solutions. One example is of tech-enabled peer-to-peer takaful platforms whereby companies can provide their services at a much lower cost while focusing on customer services and penetrating new areas. Potentially, the increased utilisation of digital applications in the takaful industry could be a growth driver in the long run.”
Other significant developments in the takaful industry can be seen in standardisation and regulations.
“Newly introduced standards are introduced to set out requirements to be applied by regulatory and supervisory authorities to takaful and retakaful undertakings,” said Dr Belatik.
“These standards aim to promote transparency and market discipline by providing sufficient disclosures both to the market and to actual or potential participants as well as highlighting regulatory and supervisory issues and challenges in takaful windows operations.
“Certainly, the ultimate goal of these standards is to protect the interests of participants, shareholders, investors, and other stakeholders, along with maintaining the stability of the takaful industry,” he said.
The year ahead
It is likely that 2021 will see further changes to the takaful landscape and Dr Belatik paints a realistic picture.
“Takaful companies will possibly face more financial and operational challenges almost in every jurisdiction,” he said.
“Amidst the COVID-19 pandemic and weaker economic growth, we can expect that the number of people covered under medical takaful will decline and that some businesses may negotiate for more basic products for their employees to cut operational costs. Companies that did not submit any takaful claims last year may want to negotiate to reduce their premiums in 2021,” Dr Belatik said.
In case of a prolonged pandemic, the industry may face further business interruptions and event cancellation that could create negative impact on its growth although takaful is less exposed in this area. “The economic impact of the pandemic will translate into higher prices of retakaful, in some insurance classes at least, and may affect the economics of the takaful industry,” said Dr Belatik.
“At the individual level, takaful operators may also see a cut in automobile, travel and medical policies as consumers are also expected to postpone purchases of new vehicles, travelling and other items due to travel restrictions, unemployment and economic instability. As a result, this will lead to lower premium volumes as well as a rise in competition, as firms struggle to increase their market share or even retain it,” he said.
Not all markets are the same
Some takaful markets are expected to see some growth in 2021 and beyond, following a series of recent merger announcements in Saudi Arabia and the UAE.
“In December 2020 Solidarity Saudi Takaful merged with Aljazira Takaful Taawuni and in June 2020 the UAE’s Dar Al Takaful and Noor Takaful merged,” said Dr Belatik.
“These mergers are expected to benefit companies through greater size, access to new revenue lines and other synergies. Similarly, in Indonesia, we might also expect mergers as the government tries to get windows to convert to fully-fledged takaful companies, some of which may then be too small to stand alone,” he said.
Nevertheless, the long-term growth opportunities in the industry are guaranteed. “Takaful companies will have to focus heavily on economic growth areas and innovation,” said Dr Belatik.
“Takaful companies are expected to continue focusing internally on structural and governance matters in addition to improving their overall infrastructure, especially digitisation. Moreover, customer-to-business is expected to increase and intermediaries will become less needed in the developing market due to online and digital platform which provide more informative data and option for clients to choose.
“Overall, the takaful industry may benefit from digital platforms and distribution networks and a greater emphasis on life and family takaful products to capture potential growth in different jurisdictions,” Dr Belatik said.
Takaful as risk mitigator
Takaful will also have a role to play in managing the ‘big risks’ that face the world today such as pandemics and cyber and natural catastrophes.
“The global community is facing a number of challenges, characterised by a fast-changing world, climate change, economic crises, pandemics and technology disruptions,” said Dr Belatik.
“Managing the associated risks will need global contributions from all the segments of society in order to ensure sustainability – contributions that come from solidarity and mutual assistance, which are considered as the principles underpinning the takaful industry.
“With its risk-sharing principle, takaful contributes to affording resources that can be used to cover unexpected future losses related to events such as cyber attacks and pandemics or natural catastrophes. With the growing use of technology from individuals and businesses, cyber security issues are increasing, resulting in an important demand for cyber coverage against cyber crimes from online fraudsters,” he said.
Takaful cyber cover
Protecting the online presence of a business and managing sensitive information against cyber attack are well-suited to takaful cover.
“However, this requires expertise and deep understanding of cyber risk in order for cyber takaful to grow and develop further,” said Dr Belatik. “For the case of pandemic and natural catastrophes, takaful companies will need to play a role in covering individuals as well as businesses, and due to the important risk associated with these events, the strength of the retakaful industry will determine the solvency of the takaful industry and the ability of takaful companies to ensure the covered customers,” he said.
Encouraging mutual cooperation will be important in combating such incidents and the current pandemic showed a number of examples and initiatives around the world to ease and mitigate the implications of the pandemic.
Dr Belatik said, “However, it is important to adopt a proactive approach that will help unlock the full potential of the takaful industry – creating special funds to counter any future events, creating microtakaful for low-income individuals, creating takaful products along the lines with remittances and other initiatives that derive from the spirit of cooperation.”
Can we expect to see the emergence of digital takaful players – the way we are seeing digital insurers emerge in the conventional industry?
“Technology is providing new impulses to the financial system in general including the Islamic financial system,” said Dr Belatik. “The takaful industry is also taking steps towards adopting the solutions and benefits that technology provides. Initiatives such as e-takaful, digital platforms for takaful contracts, digital combination of takaful and peer-to-peer are a few examples among many other initiatives that can be introduced.”
“It is just a matter of time before new takaful tech models emerge,” he said. “The use of technology in the takaful industry needs to be explored, studied and developed to provide suitable solutions for this industry – solutions that will contribute to its growth and development and also provide a better customer experience. By improving technology capabilities, using analytics and big data and increasing investment into R&D, the takaful industry can achieve client-centricity and product innovation resulting in operational efficiency,” said Dr Belatik. M