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1 International Takaful Summit 1 November 2007 Legal & Regulatory Framework of Takaful Industry in Malaysia Wan Mohd Nazri Wan Osman Bank Negara Malaysia.

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Presentation on theme: "1 International Takaful Summit 1 November 2007 Legal & Regulatory Framework of Takaful Industry in Malaysia Wan Mohd Nazri Wan Osman Bank Negara Malaysia."— Presentation transcript:

1 1 International Takaful Summit 1 November 2007 Legal & Regulatory Framework of Takaful Industry in Malaysia Wan Mohd Nazri Wan Osman Bank Negara Malaysia

2 2 Legal & Regulatory Framework of Takaful Industry in Malaysia Key Features & Factors Shaping the Framework Main Aspect of Legal & Regulatory Framework Updates & Recent Development of Industry

3 3 Strong domestic IF – Growing diversity of players & sophistication of products High potential for international business – Increased linkages & dramatic global IF growth Tremendous prospect of Islamic Finance & takaful moving forward…Industry is reaching mainstream relevance... Comprehensive System Specificities Consumer protection & expectation Complementarities & fair competition Legal & Regulatory Framework Domestic IBIs (2 Islamic banks, 8 IS, 1 window)‏ Foreign IBIs (3 IBs, 5 windows)‏ Takaful operators (4 domestic, 5 foreign participation)‏ Retakaful operators (3)‏ Fund managers Increasing world’s wealth provides larger source for Islamic finance to capitalise on Positive economic growth, coupled with Asia’s booming economies Savings rates of Middle East and developing Asia countries are on upward trend, Total HNWI’s wealth also expanding and thus, provides potential for Islamic finance

4 4 Comprehensive System Specificities Consumer protection & expectation Complementarities & fair competition Legal & Regulatory Framework Instituting core components of financial system The importance of greater inter-linkages among core components Create synergy for Islamic financial system Enhance resilience and robustness to withstand financial shocks and increase the overall stability of Islamic financial system -Conducive environment for an efficient mobiliser of resources and a source of economic growth -Legal framework that provides greater flexibility to expand and develop

5 5 Addressing specificities… Underlyin g principles & contracts Profit sharing contract Loss to be borne by participan t Shariah compliant investmen t Multiple models adopted Surplus sharing practices Non guarante ed benefits Treatment of Expenses Underlying principles Islamic concept of pooling together a sum of contribution for consideration of protection for oneself and fellow participants Contracts Wakalah, Mudharabah & other contracts e.g. waqaf and musyarakah Tabarru’ and mutual cooperation Rel. with participants Participants & Operator Tabarru’ Mutual cooperation Comprehensive System Specificities Consumer protection & expectation Complementarities & fair competition Legal & Regulatory Framework Define the basis of LEGAL & REGULATORY framework for takaful business –E.g. Ownership of takaful fund – belongs to participants, as oppose to insurance company whereby the fund belongs to shareholders

6 6 Comprehensive System Specificities Consumer protection & expectation Complementarities & fair competition Legal & Regulatory Framework Two-tier Shariah framework Shariah Advisory Council Authoritative body on shariah matters relating to Islamic finance and takaful matters Shariah committee part of internal governance to ensure compliance with shariah Greater supervisory oversight is required to ensure proper selling practices in view of non-guaranteed nature of benefits Competency of Intermediaries Disclosures to consumers Ensuring that participants have access to accurate, timely and relevant information Consumer education Fostering greater awareness and understanding of risks and rights with regard to takaful products Availability of Channels to resolve disputes Dispute resolution mechanisms that offer speedy resolution of dispute Market Conduct & Consumer Protection Tax neutrality Supervisory approach Governance structure Market outreach Fair Treatment

7 7 Legal & Regulatory Framework Legal framework Parameters with dedicated boundary Conduct of Takaful Business Returns, Investigation, Winding Up & Transfer of business Requirement to conduct takaful business –Capital requirement, annual registration fee, statutory deposit, surplus of asset over liabilities –Eligibility criteria  Financially sound and competent institutions  Managed by qualified and competent management team Governance –Establishment of Shariah Committee –Directorship for takaful operators  Board responsibilities and oversight management accountability  Appointment of Chairman, directors and CEO  Structure of duties of board committees –Role of the Appointed Actuary  Duties and responsibilities of the appointed actuary  Reporting requirement by the appointed actuary Licensing Establishment and maintenance of takaful fund Allocation of surplus Requirements as to assets of takaful fund Intermediaries Shariah requirement Annual accounts & audit Actuarial investigation & report Power of investigation

8 8 Legal & Regulatory Framework Regulatory framework  Ensure prudent management of takaful fund with high standard of corporate governance  Safeguard participants’ and other stakeholders’ interests  Maintain public confidence as takaful operators are custodians of public fund  Facilitate the intermediation role of financial system in economy Main Thrust Broad Objective  Establish and promote sound and credible takaful sector that conforms to Shariah tenets Allow flexibility on various business models whilst ensuring prudent management of takaful fund and fairness among stakeholders Maintain and ensure fairness in “pricing”, managements and terms of contract Balance between profit maximisation and prudent management of fund to ensure sufficient level of reserves while meeting expectations of shareholders Disclosure requirement with the objectives to enhance corporate governance and protect interest of participants

9 9 Surplus: - Sharing -Non-sharing Treatment in case of Deficit Acceptance of contributions Management of takaful fund Surplus and deficit of fund Commission Management expenses Protection (PSA) Savings (PA) Variation in the treatment of contribution depending on the model Underwriting Investment Retakaful Reserves Claims Takaful practice is consistent with international best practices TRANSPARENCY AND FULL DISCLOSURE OF TAKAFUL BUSINESS OPERATION - IFSB Working Group on Corporate Governance for Takaful - Various approaches in treatment of surplus and deficit of takaful fund Broad Operational Business Flow of Takaful

10 10 Guiding Principles Principle 2 Principle 3 Principle 4 Maintain and ensure fairness protect participants’ interest and fulfill participants’ reasonable expectations Disclosure and transparency to enhance the corporate governance and protect the interests of the relevant stakeholders Strengthening of takaful funds prudent management of takaful funds and operational framework to meet obligations of takaful funds Principle 1 Conformity with Shariah principles operational framework with essential features of takaful and comply with Shariah tenets

11 11 Malaysian Experience Syarikat Takaful Malaysia Berhad1984 Takaful Nasional Sdn. Berhad1993 Mayban Takaful Berhad2002 Takaful Ikhlas Sdn. Berhad2003 CIMB Aviva Takaful Berhad2005 Prudential BSN Takaful Berhad2006 HSBC Amanah Takaful Berhad2006 Hong Leong Tokio Marine Takaful Berhad2006 MAA Takaful Berhad2007 New entrants of takaful players to intensify the competition and advancement of the industry Market Share (%) ‘86‘90‘95‘00‘05‘06 Net contributions 3.84.15.35.4 6.7 Assets3.75.05.35.65.76.1 Robust growth over the last 20 years, with market share of 6.1% and growing at 17.9% in terms of total asset

12 12 Latest Development  Attract takaful players to conduct international currency takaful business 10-year tax holiday Provide support and enabling platform in the origination, issuance and trading sukuk both in Ringgit and multi-currencies to precipitate more investment avenues for takaful and retakaful companies Approved five takaful operators to conduct international currency takaful business  Expanding retakaful market - enhancing industry’s growth frontier & strengthen underwriting capacity of takaful industry Awarded 2 new retakaful licences to reputable reinsurers to conduct retakaful family and general business opening for new retakaful licence with up to 100% foreign shareholding

13 13 Collaborative efforts of key stakeholders are critical to ensure success of further expansion of the industry at domestic and international level. THANK YOU

14 14 Capital adequacy and solvency needs to take into account variations in takaful models……….. Supervisory Approach……………… In the event of deficits in underwriting account, operator needs to provide interest-free loan to make good of the deficit Policyholders are required to make good of the deficits whilst operators act only as administrator of the funds Greater need for active policyholders representation on the oversight of the takaful operators

15 15 Malaysia’s Islamic finance…achieving comparative advantage in Islamic finance Strong domestic market Diversity of players Conducive business environment Talent development Elevate leadership role in Islamic finance Solid foundation (Legal, Shariah, Regulatory)‏ Banking Players Takaful Players Capital Market Players Islamic money market Islamic capital market Strong in domestic business Focus on international currency business (out-out business)‏ Attract global players Attract global activities Islamic banking assets : 12.2% (RM133 b)‏ Takaful assets : 6.1% (RM6.9 b)‏ Islamic PDS : 49.6% of outstanding PDS (RM144.5b) Robust legal, Shariah & regulatory infra Experienced talent pool Total solution for talent development; technical, professional & leadership, INCEIF, IBFIM, ICLIF, SIDC Comprehensive infrastructure – vibrant Islamic money and capital markets Tax neutrality Liberalised foreign exchange rules Liberalisation of equity ownership Domestic IBIs (2 Islamic banks, 8 IS, 1 window)‏ Foreign IBIs (3 IBs, 5 windows)‏ Takaful operators (4 domestic, 5 foreign participation)‏ Retakaful operators (3)‏ Financial market players (25 domestic, 3 foreign)‏ ICBUs (13)‏, IIB (1) Fund managers

16 16 Positive economic growth, coupled with Asia’s booming economies and increase in petrodollars, increase countries’ reserves with Asia dominates total world reserves Savings rates of Middle East and developing Asia countries are on upward trend, higher than the world’s savings rate  High savings will ensure sustained private consumption moving forward amidst moderate global economic growth Driven by real GDP gains and continued market capitalisation, total HNWI’s wealth also expanding and thus, provides potential for Islamic finance World’s wealth HNWI Population Growth Source: World Wealth Report 2006 US$ bil International ReservesGross National Savings/GDP % HNWI Wealth US$ tril Source: World Wealth Report 2006 Source: IMF World Economic Outlook Sept 2006 Increasing world’s wealth provides larger source for Islamic finance to capitalise on

17 17 US share of Gulf wealth eroding Europe share of Gulf wealth eroding Asia’s growing oil demand and trade influence, attracting Gulf wealth ME to Europe ME to US Intra-regional ` ME to Asia-Pacific Predominant direction of investment flow earlier New emerging investment flow Since 2000, accumulated petrodollars: USD1trillion Foreign investment flows from GCC in 06/07: USD450bn * Gulf Cooperation Council refers to Saudi Arabia, UAE, Kuwait, Qatar, Oman, Bahrain Asia-Pacific surpassing Europe as the 2nd largest region for investment from GCC*

18 18  Tax treatment  Regulatory & supervisory framework  Corporate governance principles  Risk Management requirements Near like-to-like parity with conventional offerings except… Basic operating environment Distinct products and services:  Sukuk Ijarah  Musyarakah Mutanaqisah (Diminishing Partnership)  Exchangeable sukuk  Musyarakah venture to undertake development of real estate  Islamic profit rate swap Existing spheres of IF Innovation… Existing sphere of innovation is limited...  Relegation of Shariah as product shaper instead of environment shaper  Non convergence industry vs. Shariah scholars expectation  Islamic finance as mere follower... Replication approach Customers demand Shariah flexibility – dharurah/ maslahah

19 19 Proactive Alliance  More proactive engagement and collaboration among stakeholders – regulators, Shariah scholars, practitioners, industry sponsors, researchers and academics Innovation Paradigm Shift Shariah-based solution  Move away from “replication approach” to maximize potential benefits & prospect of IF  Reflect adherence to Shariah principles in form, substance and values...  Shift from Shariah-compliant products to Shariah-based solution  Build distinct capabilities underpinned by Shariah values Comprehensive approach  Comprehensive risk management infrastructure  Sound corporate governance & disclosure  Expertise in real business activities – technology know-how  Regulatory requirement – capital & liquidity Shifting to new paradigm of innovation... to maximize existing infrastructure & funding opportunities …


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