Malaysia: New regulations to boost market for takaful

An overhaul of Malaysia’s Islamic finance regulations is expected to increase take-up of sharia-compliant insurance (takaful) products, although the new rules could encourage smaller operators to join forces with more established rivals.

New legislation came into effect on June 30, along with parallel laws revamping the operations and regulation of the conventional financial sector. The new Islamic Financial Services Act (IFSA) replaces previous legislation enacted over the past 30 years, strengthening regulatory oversight and boosting industry transparency.

According to a statement from Bank Negara, the central bank, the new rules will provide “a comprehensive legal framework that is fully consistent with sharia in all aspects of regulation and supervision”.

Under the new act, religious advisers will be held legally accountable for financial products. They will also be subject to monetary penalties and could face imprisonment if found to be in breach of the laws.

In the takaful sector, the IFSA will require insurers to separate their life and non-life business lines. Firms that hold composite licences will need to divide their operations within five years.

The new rules are expected to help ensure the rights of takaful consumers, setting out disclosure requirements and mandating that insurers provide a minimum level of information to customers at each stage of the contract process.

“The IFSA will lead to greater consumer protection and subsequently greater confidence in takaful,” Mohamed Rafick, CEO of Munich RE Retakaful, told OBG in an interview in mid-July. “It will also hold takaful companies accountable for their pricing strategies by ensuring that risk funds are sustainable.”

The stringent pricing accountability could put pressure on smaller operators in the industry, Rafick added. They could also face challenges in meeting the new higher capital requirements that are specified by the IFSA.

While there are around a dozen takaful operators in the market, the sector is dominated by a few firms that, between them, account for about 90% of the estimated combined $6bn worth of assets held.

Some of the larger players have expressed interest in acquiring smaller outfits in the wake of the new regulations.

In July, Hassan Kamil, group managing director of Syarikat Takaful Malaysia, the second-largest Islamic insurer, told Reuters his company might be in the market to absorb smaller rivals. “If their portfolio is attractive, we could be buying up business,” he said.

However, analysts are confident that the new regulations will help the sector to expand.

Ahmad Rizlan Azman, CEO of Etiqa Takaful, said the improved regulatory environment, alongside growing public understanding of takaful products, would help the sector to develop into 2015 and beyond.

“Recent reports indicate that the Malaysian takaful industry is expected to grow by 20% per annum for the next two years as consumer acceptance grows and regulatory changes provide a stronger and more stable infrastructure for the shariah-compliant insurance industry,” he told a conference in Kuala Lumpur in late June.

However, the takaful sector still lacks the level of consumer acceptance required to underpin strong growth. Many products in the takaful range, as yet, have limited exposure in the Malaysian market. The penetration rate for life takaful stands at 13%, considerably lower than that of conventional life insurance, at 55%.

According to a recent survey commissioned by Swiss Re, about 30% of Muslims in Malaysia have a good understanding of takaful, while 16.5% hold policies. Though this is a far higher rate than in Indonesia, where only 5% of the population were found to be familiar with takaful and 1% choosing to hold the sharia-compliant product, the survey indicates that more work needs to be undertaken to boost penetration rates.

By tightening up the regulatory structure of its takaful segment, Malaysia will further bolster confidence in both the product and the broader Islamic financial sector and may well set the benchmark for other countries seeking to boost accountability and transparency in their own sharia-compliant markets.

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Malaysia: New regulations to boost market for takaful

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Malaysia: Retail optimism tempered by caution

A gradually improving economic climate is expected to support continued retail growth in Malaysia in 2013. However, downside risks from the international environment and political uncertainty may affect economic expansion before the year is through.

In January, local press reports suggested the retail market would grow by 5-6% this year. The sector is expected to track or even outstrip broader economic growth, which official estimates suggest will come in at 4.5-5.5%.

Retail Group Malaysia, a local retail consulting firm, said in a recent report the sector would grow by 6% in 2013, following growth of 6.9%, 5.9%, 4.8% and 5.7% in the four quarters of 2012. The organisation said the market would receive a fillip in the first quarter of 2013 from the second round of the government’s 1Malaysia People’s Aid (Bantuan Raykat), which began in January.

Segments that are expected to benefit include electrical and electronics, largely due to a RM200 ($65) rebate on smartphone purchases for 21-30-year-olds who have monthly incomes that do not exceed RM3000 ($965); and bookshops capitalising on the RM250 ($80) book tokens to be given to all university students.

Spending associated with Chinese New Year should also have provided another boost at the beginning of 2013. Retailers often offer promotions during the holiday period, adding momentum during what is already a busy time of year. However, the holiday is usually followed by a dip in sales.

At the beginning of the year, Yen Global, a Malaysian clothes manufacturer, wholesaler and retailer, said the fashion and lifestyle segment had grown by a “modest” 5% in 2012. However, the company considers the outlook good enough to undertake significant investments in expansion, extending its branch network, revamping its products and providing incentives for frontline staff.

“Retail companies that want to chart a growth path will need to expand cautiously, and with the right timing and location in order to rise above the competition,” said Goh Kok Beng, executive chairman of Yen Global, in the company’s annual report.

Similarly, CapitaMalls Malaysia Trust, a real estate investment trust, said in January that it was continuing to look into mall acquisitions, expecting 6% retail growth in 2013 after a successful 2012. The fund focuses on suburban “neighbourhood” malls in which people do day-to-day shopping, a model that has become increasingly popular in recent years as the “destination mall” market has become more saturated.

The single-biggest reason for optimism among retailers, wholesalers and mall investors is Malaysia’s continued strong economic performance, despite a difficult international situation coloured by the eurozone crisis and the US’s debt troubles. Consumer confidence is currently at a two-year high. Momentum is being maintained by a variety of factors, including high prices for Malaysia’s commodity exports, but more importantly, domestic demand supported by investment, a favourable interest rate environment and low inflation.

Public and private investments under the Economic Transformation Programme (ETP), which seeks to boost value-added in the economy and put the private sector at the forefront of growth, is particularly important. The ETP, which involves a raft of investments and reforms, is being rolled out through to 2020 as part of Malaysia’s ambition to become a high-income country by the end of the decade.

Meanwhile, inflation in 2012 averaged 1.6%, half the level recorded in 2011. Analyst surveys forecast that the central bank will keep rates on hold until the second half of the year.

While these factors mean there is good reason to be upbeat about the outlook, there are a number of downside risks to take into account. First and foremost is the broader economy, which could take a hit if the global situation worsens. Significant softening in commodity prices, a worsening in the eurozone crisis affecting the international economy or other unforeseen challenges (such as an oil price spike caused by conflict in the Middle East) could all cool growth in Malaysia.

Another factor that retailers are taking into account is the general election, which is expected by June. Opinion is divided about the impact of the run-up to the poll on the sector; while some expect there to be little effect, others are already reporting a degree of caution among shoppers, particularly regarding big-ticket purchases. Depending on the result of the election, uncertainty after the vote could cause both investor and customer sentiment to dip.

The Malaysian retail sector performed well in 2012, and looks set for another good year in 2013. However, a number of factors, both internal and external, could have a dramatic impact on growth as the year unfolds.

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Malaysia: Retail optimism tempered by caution

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