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									Legal & Regulatory Framework of Takaful Industry in Malaysia
                   Wan Mohd Nazri Wan Osman
                     Bank Negara Malaysia




                                              International Takaful Summit
                                                   1 November 2007


                                                                             1
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




                                                      2
                             Tremendous prospect of Islamic Finance & takaful moving
                             forward…Industry is reaching mainstream relevance...




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



                                                                                                             3
                                                         Comprehensive
Instituting core components                                                        Specificities
                                                            System
  of financial system
                                                                        Legal &
                                                                      Regulatory
                                                                      Framework

                                                            Consumer        Complementarities
                                                            protection &          & fair
                                                            expectation        competition




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
                                                                                                   4
 Addressing specificities…

Underlying principles                                    Comprehensive
    Tabarru’        Islamic concept of pooling                                       Specificities
                    together a sum of contribution for      System
     Mutual
  cooperation       consideration of protection for
                      oneself and fellow participants                   Legal &
Contracts                                                             Regulatory
                                                                      Framework
    Rel. with         Tabarru’ and mutual cooperation
   participants
                                                           Consumer             Complementarities
  Participants &      Wakalah, Mudharabah & other          protection &               & fair
    Operator          contracts e.g. waqaf and             expectation             competition
                      musyarakah




                                                                           Profit
                                                                          sharing
 • Define the basis of LEGAL &                                            contract
   REGULATORY framework for                                 Shariah                      Loss to be
                                                          compliant                      borne by
   takaful business                                       investmen                      participan
                                                                          Underlyin
        –    E.g. Ownership of takaful fund –                  t                              t
                                                                              g
             belongs to participants, as                     Non          principles
             oppose to insurance company                  guarante            &
             whereby the fund belongs to                      ed          contracts       Multiple
             shareholders                                  benefits                       models
                                                          Treatment                       adopted
                                                              of           Surplus
                                                          Expenses         sharing
                                                                          practices
                                                                                                      5
Two-tier Shariah framework
  Shariah Advisory Council
  Authoritative body on shariah matters relating to Islamic         Comprehensive
                                                                                               Specificities
  finance and takaful matters                                          System

  Shariah committee                                                                 Legal &
  part of internal governance to ensure compliance with                           Regulatory
  shariah                                                                         Framework


                                                                        Consumer        Complementarities
                                                                        protection &          & fair
                                                                        expectation        competition


Market Conduct & Consumer Protection

Availability of Channels to           Disclosures to                          Fair Treatment
resolve disputes                      consumers
Dispute resolution mechanisms that    Ensuring that participants have         • Tax neutrality
offer speedy resolution of dispute    access to accurate, timely and
                                      relevant information                    • Supervisory approach
                                                                              • Governance structure
Consumer education                    Competency of Intermediaries
Fostering greater awareness and       Greater supervisory oversight is        • Market outreach
understanding of risks and rights     required to ensure proper selling
with regard to takaful products       practices in view of non-guaranteed
                                      nature of benefits




                                                                                                               6
Legal framework                                                                                 Legal &
                                                                                              Regulatory
•   Parameters with dedicated boundary                                                        Framework




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

      • Power of investigation


                                                                                                           7
                                                                                    Legal &
 Regulatory framework                                                             Regulatory
                                                                                  Framework




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




                                                                                               8
Broad Operational Business Flow of Takaful


         Acceptance of                        Management of                     Surplus and
         contributions                         takaful fund                     deficit of fund



 • Commission                        • Underwriting                   • Surplus:
                                                                          - Sharing
 • Management expenses               • Investment
                                                                          - Non-sharing
 • Protection (PSA)                  • Retakaful
                                                                      • Treatment in case of
 • Savings (PA)                      • Reserves                         Deficit
                                     • Claims


 Variation in the                    Takaful practice is              Various approaches in
 treatment of                        consistent with international    treatment of surplus and
 contribution depending              best practices                   deficit of takaful fund
 on the model



      TRANSPARENCY AND FULL DISCLOSURE OF TAKAFUL BUSINESS OPERATION
                      - IFSB Working Group on Corporate Governance for Takaful -




                                                                                                  9
                   Guiding Principles


Principle 1                    Conformity with Shariah principles
               operational framework with essential features of takaful and comply with
                                           Shariah tenets


Principle 2                       Strengthening of takaful funds
               prudent management of takaful funds and operational framework to meet
                                   obligations of takaful funds



Principle 3                       Maintain and ensure fairness
              protect participants’ interest and fulfill participants’ reasonable expectations



                                  Disclosure and transparency
Principle 4     to enhance the corporate governance and protect the interests of the
                                       relevant stakeholders




                                                                                                 10
 Malaysian Experience

Robust growth over the last 20 years, with market share of 6.1% and growing at 17.9% in terms of total
asset
                                         Assets
                                                                             Market Share       ‘86    ‘90    ‘95    ‘00     ‘05      ‘06
                8,000.0                                                      (%)
                7,000.0
                                                                             Net                3.8    4.1    5.3    5.4     5.4      6.7
                6,000.0
                                                                             contributions
    RMmillion




                5,000.0
                4,000.0                                                      Assets             3.7    5.0    5.3    5.6     5.7      6.1
                3,000.0
                2,000.0
                1,000.0                                                            New entrants of takaful players to intensify the
                    0.0                                                            competition and advancement of the industry
                           '90 '92 '94 '96 '98 '00 '01 '02 '03 '04 '05 '06
                                      General       Family                    Syarikat Takaful Malaysia Berhad                     1984
                                                                              Takaful Nasional Sdn. Berhad                         1993
                                    Net Contributions
                2000.0                                                        Mayban Takaful Berhad                                2002
                1800.0
                1600.0                                                        Takaful Ikhlas Sdn. Berhad                           2003
                1400.0
  RMmillion




                1200.0                                                        CIMB Aviva Takaful Berhad                            2005
                1000.0
                 800.0
                 600.0
                                                                              Prudential BSN Takaful Berhad                        2006
                 400.0
                 200.0
                                                                              HSBC Amanah Takaful Berhad                           2006
                   0.0
                          '90 '92 '94 '96 '98 '00 '01 '02 '03 '04 '05 '06
                                                                              Hong Leong Tokio Marine Takaful Berhad               2006
                                        General       Family
                                                                              MAA Takaful Berhad                                   2007


                                                                                                                                          11
Latest Development



    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



    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




                                                                                  12
 Collaborative efforts of key stakeholders
  are critical to ensure success of further
expansion of the industry at domestic and
                         international level.


                               THANK YOU




                                                13
Capital adequacy and solvency needs to take into account
variations in takaful models………..

                    Supervisory Approach………………



  In the event of                                        Policyholders
  deficits in                                          are required to
  underwriting                                          make good of
  account,                                                  the deficits
  operator needs                                       whilst operators
  to provide                                                act only as
  interest-free                                        administrator of
  loan to make                                                the funds
  good of the
  deficit

                                        Greater need for active
                                  policyholders representation on the
                                   oversight of the takaful operators



                                                                           14
Existing sphere of innovation is limited...
      Replication                Customers                Shariah flexibility
       approach                   demand                    – dharurah/
                                                             maslahah



                               Existing spheres of
                                 IF Innovation…

                                                         Near like-to-like parity with
Basic operating environment
                                                       conventional offerings except…

   Tax treatment                                    Distinct products and services:
   Regulatory & supervisory                            Sukuk Ijarah
    framework                                           Musyarakah Mutanaqisah
   Corporate governance                                 (Diminishing Partnership)
    principles                                          Exchangeable sukuk
   Risk Management                                     Musyarakah venture to undertake
    requirements                                         development of real estate
                                                        Islamic profit rate swap




      Relegation of Shariah as product shaper instead of environment shaper
      Non convergence industry vs. Shariah scholars expectation
      Islamic finance as mere follower...

                                                                                           18
Shifting to new paradigm of innovation...
                                      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




                                             Innovation
                                            Paradigm Shift
           Comprehensive approach                                       Proactive Alliance
   Comprehensive risk management                                More proactive engagement and
    infrastructure                                                collaboration among stakeholders –
                                                                  regulators, Shariah scholars,
   Sound corporate governance & disclosure                       practitioners, industry sponsors,
   Expertise in real business activities –                       researchers and academics
    technology know-how
   Regulatory requirement – capital & liquidity




    to maximize existing infrastructure & funding opportunities …
                                                                                                       19

								
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