FEATURES IN THIS ISSUE

HUMAN RESOURCES

Behind the times

To maintain the growth of Islamic finance, organisations in the sector must move into conventional finance territory. They need to entice wary investors—who will be open to looking at Islamic finance opportunities much more favourably—and fuel the demand for the development of products. A direct consequence of this growth and investor appetite will be the need for Islamic finance sector organisations to attract, grow and develop their talent.
     Even with analysts predicting growth, most global Islamic finance companies, as employers, are in a holding pattern. Although there is a natural cycle of attrition within the Islamic finance marketplace—and this is inevitable—it is nowhere near the attrition rate of conventional finance.
     Islamic finance does need to play its part in developing talent and hiring new blood. The current roles are focused on more senior individuals with industry experience and not fresh graduates, which is the same as conventional finance. If fresh talent is not developed it will affect the whole organisation and sector.
     Within the GCC there are regional nuances that affect hiring. Due care and attention needs to be taken when hiring candidates that work for affiliated or partner companies. Simply put, many company boards are run by a few key individuals, and when CEOs try to recruit employees they must make sure they do not come from companies related to the other activities of the board members. If they do they simply create another problem in their organisation.

..............................................................................................................................

TAKAFUL

Beyond the tipping point

Some of us who have been associated with Islamic finance and takaful since the early 1990s were practically in the wilderness when it came to speaking in conferences on Islamic banking or insurance. Our Islamic banking colleagues were too busy developing their own products and services; takaful was simply an area of little impact or consequence to their top and bottom lines. That takaful was supposed to make their offering holistically compliant was far from their minds.
    Our conventional insurance colleagues simply laughed at it. Takaful is a gimmick, they would say, arguing there was no difference between insurance and takaful and all this talk about lack of transparency, semblance to gambling and riba was window dressing. This was not just because of lack of understanding on their part but also because of how some of us were wrongly representing the takaful industry.
     Very few of the people working in takaful had reasonable understanding of what it meant to be Shariah-compliant. They had found a job in a company that was selling insurance based on certain rules, and they were least bothered to appreciate these rules. They knew conventional policy conditions, which were good enough to be used by relabelling them takaful. Where would they find Islamic funds that would provide fixed return similar to returns on conventional stocks? Without knocking hard enough at the doors of Islamic banks, without lobbying for more Shariah-compliant funds, they would simply place funds in conventional deposits.

..............................................................................................................................

ACCOUNTANCY

Going over the books

Wherever business is growing, there will be a commensurate need for accountants. The growth over the past few years has led to a big increase in dedicated Islamic finance services provided by the big four.
     When growth in Islamic finance gathered pace in the late 1990s the bean counters spotted a new niche to move into. One of the first off the mark was Ernst & Young, which formed its Islamic financial services group in 1998. Bahrain was chosen as its core knowledge base and 12 years on it has offices throughout the Middle East as well as in Malaysia, Luxembourg, the UK and North America.
     Kuala Lumpur and its expanding Islamic finance sector became a natural base for PricewaterhouseCoopers’ global Islamic finance team. It has been advising clients for two years, providing expertise on Shariah-compliance as well as regulatory, accounting and tax matters. Deloitte’s move to form a division dedicated to Islamic finance came a little later. Like its competitors, Deloitte began serving the sector through different parts of its worldwide network. In 2003 it put together a concrete team in Kuala Lumpur. Its foray has grown into three core teams of five to 10 people with deep knowledge in Islamic finance located in Kuala Lumpur, the Middle East and the UK

..............................................................................................................................

TAKAFUL

Lloyd's eyes on takaful

Lloyd’s of London (Lloyd’s) has had a long and illustrious history of innovation. It has a niche in specialist lines of business, such as fine art insurance. It has written some of the most unusual policies, like that of Ben Turpin, the silent film comedian principally known for his crossed eyes. The comedian took out a Lloyd’s policy insuring against the risk of his eyes uncrossing.
     More recently, Gennaro Pelliccia (the coffee taster for Costa Coffee) insured his tongue at Lloyd’s for £10m against the risk of something going wrong with his tastebuds. Clearly Lloyd’s responds to market demands.
     It should come as no surprise that there has been talk of Lloyd’s making moves in Islamic finance, specifically, the creation of a takaful syndicate. Most commentators think that if Lloyd’s does proceed, the first syndicate is most likely to be a re-takaful syndicate or a takaful syndicate writing commercial lines. Both of these would fit the Lloyd’s model very well.
     What might be the potential issues to consider in assessing whether a takaful model can fit within the Lloyd’s framework of operations?
     First, combining a conventional and Islamic operation can be implemented successfully. A number of conventional banks and insurers offer Islamic windows. A key requirement is that procedures are in place to ensure that the Islamic funds are segregated from conventional funds. Given that Lloyd’s is a market where conventional insurers and reinsurers operate, a Shariah board will insist that a takaful pool comprising participants’ donations is segregated from conventional premiums..

..............................................................................................................................

COUNTRY FOCUS

Well connected with GCC states

While many European countries are reviewing their domestic legislation to become more attractive for Islamic finance, Luxembourg has already established itself as an important hub for the industry. This should come as no surprise to those who know Luxembourg and the strong position it has attained. This small European country has become an internationally recognised financial market. It is viewed as the premier captive reinsurance market in the European Union (EU), the premier private banking centre in the eurozone and the second largest investment fund centre in the world after the USA.
     As of May 2009, 3,425 investment funds were registered in Luxembourg, with €1,619 trillion of assets under management. More than 125,000 companies are registered with the Luxembourg Chamber for Trade and Companies, many of which are involved in cross-border finance transactions, including an increasing number of Shariah-compliant finance transactions.
     In 1978, the first Islamic financial institution in a non-muslim country was established in Luxembourg with the purpose of servicing high-net-worth individuals. In 1983, the country was chosen by the Bahraini Solidarity Group for the establishment of Europe’s first Shariah-compliant insurance company. Other Islamic finance institutions followed with the incorporation in 1990 of Faisal Finance (Luxembourg) SA and Faisal Holdings (Luxembourg) SA.
     Many Islamic finance professionals know Luxembourg to be a preferred jurisdiction for the listing of international bonds. The Luxembourg stock exchange has indeed played a leading role as the first European stock exchange to enter the sukuk market.
Clearstream, an international clearing and settlement house, has accepted international sukuk issues, making Luxembourg an attractive prospect for listing sukuk. The major sovereign sukuk were all listed with a local jurisdiction in Luxembourg.

..............................................................................................................................

RATINGS

Called to account

When a credit rating agency is invited to rate takaful and retakaful insurance—which is happening with increasing regularity as their numbers grow—it has to consider the practical implications for its analysis of this Shariah-compliant concept of insurance. Certain aspects of takaful remain outside the analysis. One is the fundamental idea that the customer is less a policyholder paying a premium to buy a policy and more an entrepreneur sharing risk with others while paying a contribution to participate in any surplus that may arise on the takaful company’s underwriting and investment funds.
     Similarly, credit rating agencies are relatively unconcerned by the specialist terminology used, and remain agnostic whether premiums should be called tabarru (donation, contribution or gift), or that policyholders are called “participants”. It is not the role of a credit rating agency to get involved in any debate as to whether only takaful insurers comply with Shariah law regarding riba (usury), gharar (uncertainty), and maisir (gambling).
     When the pursuit of Islamic commercial principles leads to changes in the way an insurer presents its accounts, then the credit rating agency needs to understand what is happening. A glance at the accounts of any takaful insurer will reveal that both the balance sheet and the income statement are split to reflect the separate and sometimes divergent fortunes of the operating and shareholder accounts. The surpluses of each are separately available to policy-holding participants and shareholders respectively.
     A more detailed scrutiny of takaful accounts will reveal significant and sometimes complex financial cross-flows between participants and shareholders. These exchanges between the participant and shareholder accounts may differ according to the type of takaful being practised.