LONDON, 21 August 2006 — Another sign that the Islamic insurance (Takaful) sector has a steep learning curve in penetrating the insurance markets in the member countries of the Islamic Development Bank (IDB) and perhaps elsewhere, is the painfully slow progress Takaful is making in Malaysia, which by far has the most advanced insurance industry infrastructure of the Muslim countries.

According to Bank Negara Malaysia (the central bank’s) latest Takaful Annual Report 2005, the market penetration of Takaful increased by a mere 0.5 percent in 2005 compared to the previous year. In terms of premium income and total assets to GDP, the figures are even more woeful. Yes, total net combined family and general Takaful contribution income was up by 18.8 percent and total Takaful assets up by 16.9 percent, respectively, in 2005. But then the base is low. Market share of Takaful assets increased by a paltry 0.1 percent while market share of Takaful contributions by only 0.3 percent.

In fact, these figures should be of concern not only to Bank Negara Malaysia but also to the global Islamic banking, finance and Takaful industry. The sector, in recent years has been virtually defined by the spectacular growth of Islamic banking ostensibly driven by the high liquidity in the market especially the GCC countries and Malaysia due to the high prices of crude oil and gas.

Islamic bankers and Takaful operators and regulators in a way have been conniving to spin this supposedly growth phenomenon for narrow market and competition considerations, rather than looking at the quality, direction, regulation and sustainability of this growth.

The potential for Takaful is huge — in many respects much bigger than Islamic banking and finance.

However, the major psychological hurdles for Takaful market penetration remains the lack of players, the low capitalization of Takaful companies, the absence of an established Re-Takaful (reinsurance) market, lack of products, lack of market awareness, poor culture of consumer education, a misconceived religio-cultural distrust of and objection to insurance, and the mixed messages some of the Shariah advisories are giving, endorsing Takaful products in one breath and preaching against them in another breath.

The highlights of the Malaysian Takaful sector in 2005, nevertheless, speak for themselves:

• Market penetration of Takaful was 5.6 percent compared to 5.1 percent in 2004.

• Total Takaful assets up by 16.9 percent to RM5.87bn from RM5.02bn.

• The market share of Takaful assets of total insurance assets was 5.7 percent compared with 5.6 percent in 2004.

• The total Takaful net contribution income rose by 18.8 percent to RM1.33bn from RM1.12bn in 2004.

• The market share of Takaful contributions of total insurance contributions was 5.4 per cent compared with 5.1 percent in 2004.

• Four new Takaful licenses were issued to joint venture local and foreign operators including one to HSBC Amanah, the global Islamic finance division of the HSBC Group.

• Bank Negara Malaysia introduced a set of qualifying criteria for the appointment of auditors of Takaful firms in an effort to instill professionalism in the audit of such firms.

The Takaful Director General, Dr. Zeti Akhtar Aziz, who is also the governor of Bank Negara, however, remains upbeat about the industry’s “resilience and robust (headline) performance” in 2005 with the usual caveats of health warnings for the future regarding competition, a lack of innovation and intellectual capital development. “Greater attention needs to be accorded to enhance the capacity for innovation in the areas of product development, services and the overall operational efficiencies. The support of intellectual capital will be one of the crucial factors that is able to drive innovation,” she stressed in her annual statement.

Family Takaful (life Takaful) is by far the strongest sector in Malaysia. Of the combined family and general Takaful net contributions of RM1.33bn in 2005, RM977.1m was accounted for by family Takaful and only RM356.6m by general Takaful, which include motor, fire, marine and aviation insurance. With most of the Takaful operators part of major financial groups, they have been leveraging the distribution of Takaful products by using Group structures and branch network.

Not surprisingly products marketed through Bancatakaful increased significantly with a market share of 20.4 percent in 2005 compared with just 6.5 percent in 2004. However, direct marketing accounted for 44.3 percent of new business, although this dropped insignificantly from the 61 percent in the previous year.

Family Takaful accounted for RM725.5m of new business, with mortgage Takaful, endowment, investment-linked and education plans proving to be the most popular.

Total assets of family Takaful increased by 17.3 percent to RM5.48bn from RM4.3bn.

The growth in general Takaful contributions was driven by demand for motor business (RM208.4m) which increased year-on-year by 39.1 percent, the largest growth burst by motor business in the last five years.

Bank Negara during 2005 issued four new Takaful licenses including one to a joint venture comprising HSBC Amanah and local partners. This brings the number of Takaful operators in Malaysia to eight.