Experts: Takaful companies in Egypt need closer partnerships with Islamic finance industry to grow market share

Ahmed Lotfy

Cairo February 20 (Reuters) – Egypt’s takaful sector, which makes up a small percentage of the Islamic finance market, can strengthen its position by forging closer partnerships with the larger sharia-compliant industry, including Islamic banks, sukuk issuers and Islamic leasing (ijara) companies, said experts at a recent takaful conference held on Tuesday in Cairo.

Takaful provides insurance coverage that complies with sharia, with the obligation that participants’ contributions will not be invested in activities that go against the principles of Islam.

The takaful sector worldwide makes up 0.8 percent of the overall Islamic finance industry, whose total assets has surpassed a trillion dollars.

As a whole, Egypt’s insurance penetration rate is a very low one percent, Hisham Abdul Shakoor, Managing Director of the Egyptian Life Takaful Company told Reuters.

The country is home to eight takaful companies and 21 conventional insurance companies, with takaful accounting for five percent of the overall insurance market.

Egypt’s takaful sector is far less developed than the GCC’s or Southeast Asia’s, where takaful was introduced much earlier.

The first takaful company to open its doors in Egypt was the Egyptian Saudi Insurance House in 2002. However the sector only really took off in 2008 when four other takaful companies started operations, said Suraj AlHadi, Secretary-General of the World Federation of Takaful, a global standards setting body based in Sudan.

“It is true that Egypt is late in joining the takaful market, (however) the sector can expand given the appropriate products for Islamic banks and the wider Islamic finance ecosystem,” explained AlHadi.

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“Takaful companies should structure products that match the market’s needs,” AlHadi continued. “Takaful products should include the needs of farmers, factories, as well as personal needs including illness, life, death and education.”

He added that there is a need for microfinance in Egypt, but that banks shy away from providing microfinance primarily due to difficulties securing guarantees. There is hence a gap in the market that takaful companies can fill, by offering microtakaful products to support Islamic banks.

AlHadi also called for Egyptian takaful companies to design better distribution channels to reach segments of the population that reject conventional insurance for religious reasons.

OPPORTUNITIES IN LEASING SECTOR

Shahinaz Rashad, president of the Egyptian Leasing Association and vice president of Metropolitan Finance Consultancy, believes there are significant opportunities for the Egyptian takaful sector in sharia-compliant leasing.

"Leasing companies often need to raise money from banks or Islamic instruments and insurance companies to be able to finance the Islamic portfolios of leased assets,” said Rashad.

“If the sharia-compliant insurance coverage component was not supported or if there aren’t enough takaful companies, then leasing companies may need to buy coverage from conventional companies, which would not be appropriate,” she added.C“If the takaful companies dealt with the needs of the leasing companies the right way, they will win a bigger slice of this sector.”

Rashad estimates that the size of lease financing in Egypt grew to approximately eight billion Egyptian pounds ($1.19 billion) in 2012.But exact figures are not available.

Two out of 10 leasing companies in the market are sharia-compliant - Adi Lease, a subsidiary of Abu Dhabi Islamic Bank, and AlTawfeeq, a company affiliated with AlBaraka Bank, according to Rashad.

Takaful operators would need to build close partnerships with ijara companies in Egypt to ensure their ability to protect their investments, at the same time buying into sukuk issued by these ijara companies, said Rashad.

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Mohammad AlSharaf, business development manager at Thomson Reuters, said that the takaful sector would benefit from sukuk, and hopes that the Egyptian government will pass the sukuk law soon.

Takaful companies need to invest their surplus liquidity and sukuk will satisfy this need, with a diversified range of structures based on murabaha, musharaka and ijara, said AlSharaf.

The Egyptian government is still working to pass a new sukuk law whose earlier draft was rejected by sharia scholars from Al Azhar. The scholars’ main criticism of the draft law was that public assets would be surrendered to sukuk holders in the case of default.

The Egyptian government hopes that sukuk would help finance the country’s growing deficit.

Mursi Hijazi, Egypt’s Finance Minister stated last Monday that 2013 may witness the issuance of Egypt’s first sovereign sukuk, and that the government is keen on finalizing the sukuk law very soon.

Edited by: Moneer Al Bowaiti

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