Why Takaful May Have a Friend in the UK
The UK has carved out a pivotal role in growing it’s footprint in Islamic finance over the past several years.
Islamic finance, which is systemically important in many jurisdictions including the Gulf Cooperation Council (GCC) and Malaysia, is now growing throughout the Middle East, Asia and Africa. Islamic finance has also expanded its global footprint to the United Kingdom, Luxembourg and Hong Kong in recent years largely through the issuance of sukuk.
The UK in particular has carved out a pivotal role in growing it’s footprint in Islamic finance over the past several years. With Brexit having no discernible impact on either the market’s expansion or its central role the UK’s position in international Islamic finance industry will continue to be central for the foreseeable future. Also helping its position is the London Stock Exchange’s role as a key global venue for sukuk listing; London’s position as a global financial hub where many Islamic banks access international markets; and the importance of UK-based legal services due to the use of English law for the majority of international sukuk and Islamic finance transactions.
So why hasn’t the Islamic finance industry achieved true globalization yet?
Brexit is not posing any impediments to the UK’s Islamic Finance stronghold. Nations like Canada are helping to establish a template for other sovereigns in embracing alternative and “socially conscious” forms of investing like Islamic Finance. Additionally, the Islamic Finance market is hoping to expand on “socially conscious” investing through the use of green bonds, the issuance of which has picked up steam in Europe and Asia and is making ripples in the United States as well.
The chief reasons appear to be that Islamic Finance industry, despite its strides, has no international or regional standardization. Moreover, the border global universe neither has a suitable regulatory environment in place nor awareness of the industry on a global level. Although no doubt that a clearer regulatory and legal frameworks will boost the industry, this will not be easily achieved on a global level at least in the medium term. One of the areas, however, that could change that is Takaful (Islamic insurance). Its target: non-Muslim markets, which is the focus of this article.
Takaful is an important part of Islamic finance markets that could expand meaningfully to other parts of the world if it manages to find an appropriate way to cross over to non-Muslim markets. This could be achieved by finding commonalities between takaful and other forms of insurance. For instance, friendly societies and other forms of cooperative or mutual insurance, can act as vehicles that help to propel takaful into wider markets.
Takaful, which translates to “solidarity” in Arabic, would by its very nature mean that a group of members agree to support one another cooperatively.
Takaful, which translates to “solidarity” in Arabic, would by its very nature mean that a group of members agree to support one another cooperatively. In a takaful agreement, the participants contribute a sum of money as a donation into a common fund, which will subsequently be used for mutual assistance of the members against specified losses or damages.
According to recent reports by Thomson Reuters, the takaful sector accounted for US$43 billion of global Islamic finance assets in 2016, up 7% from 2015. A total of 48 countries had takaful operators or takaful windows in 2016, together totalling 339 operators.
London has characteristics that make it ripe for the successful development of a takaful market because:
· London has already established itself as a major western Islamic finance hub
· The UK is estimated to account for nearly 15% (four million) of Europe’s Muslim population
· The UK has regulations in place for friendly societies that date back well over 100 years with a specific Act for Friendly Societies
· The UK has an established global insurance and reinsurance market.
Not only do we see common ground between takaful and friendly societies, but there is a potential for growth and crossover between these two markets as well. This also supports the financial inclusion for the segment of society that, for reasons of religious restraints, is not open to the idea of insurance.
This does not come without its challenges. For one, Islamic finance (and takaful in this case) has specific sharia requirements that need to be met or at least find a compatible arrangement. Lack of awareness of commonalities, the skills and resources to promote and apply such schemes could be another key barrier at least in the short to medium term. Other challenges will be finding a legal structure that would be acceptable to investors, customers, sharia boards, and the appropriate regulatory body to govern all such activities.
Friendly societies, cooperative, mutual and micro insurance could be a catalyst that helps provide takaful with a meaningful push into non-Muslim markets. This will be worth close watch particularly in the UK, which is making a more concerted push for Islamic finance to play a greater role in its markets as a whole.