Published Date: 26 November 2008

Opening Address By Ms Teo Swee Lian, Deputy Managing Director (Prudential Supervision), Monetary Authority of Singapore, at The 4th IFSB Seminar on The Regulation of Takaful, Wednesday, 26 November 2008, Singapore

Good morning, ladies and gentlemen, and to our foreign guests, a warm welcome to Singapore.

1   The theme for this year's Seminar on the "Challenges in Maintaining Solvency for Takaful Undertaking" is appropriate and timely given the current uncertainty in global financial markets. I do not propose to speak at length on the technical issues as many of you have a great deal more expertise on this subject and will be discussing these details in more depth in the coming sessions. Instead I will focus my remarks on Singapore’s perspective on the major issues affecting the takaful industry and what we are doing to facilitate the development of Islamic finance, including takaful, in Singapore.

2   The Takaful industry has grown robustly in the past few years. Ernst & Young estimated that the global takaful industry has grown by about 20% annually over the period 2004-06 and gross contributions have exceeded US$2 billion in 2006[1].  Takaful operators now number about 133 world-wide, with more expected to be joining in. They projected that gross takaful contributions will double to about US$4 billion by 2010. The demand for takaful products can also be expected to increase with the rapid growth of the Islamic banking sector and the Islamic capital market.  All these factors highlight the potential for the continued strong growth of the industry. Be that as it may, the industry is currently  small compared to the US$3.7 trillion level of global premiums for conventional insurance[2]. Takaful operators have also not yet significantly penetrated the retail markets in many jurisdictions[3].  

3   Although the Takaful industry is still in its early stages of development, the recent turmoil in financial markets underscore the importance for appropriate standards and regulations to be put in place right from the start, and for firms within the industry to manage their risks well, especially under stressed conditions.  The global financial crisis has affected and will continue to affect real economic activity. As asset prices are subject to greater volatility, firms will need to carefully monitor and manage any price declines which may affect the value of their investments or the underlying risks of their transactions.  This will help safeguard the interests of investors and ultimately foster sustainable growth of the industry.  Specifically on Takaful, we are heartened that work on the industry’s regulatory and supervisory framework was initiated two years ago in a joint study by the Islamic Financial Services Board (IFSB) and the International Association of Insurance Supervisors (IAIS). This study identified issues in the regulation and supervision of Takaful that needed to be addressed[4]. Since then, regulators, including the Monetary Authority of Singapore (MAS), have been contributing to the efforts of the IFSB working groups that are drafting standards for two priority areas: Governance and Solvency Requirements for Takaful Operators. Industry players also have a vital role and interest in this formulation of standards and best practices that will shape the environment in which they will operate. We encourage the industry here as well as internationally to distill from your wealth of practical experience and provide useful feedback when the Exposure Drafts of the two IFSB standards are released for public comments.

4   In Singapore, we regulate Islamic financial services, including takaful, under the same framework as conventional financial services since prudential concerns and supervisory oversight are largely common to both. To ensure that Islamic financial institutions and their conventional counterparts operate on a level playing field, MAS works closely with industry players to ensure that Shariah-compliant products are not disadvantaged in terms of regulatory or tax treatment where the economic substance and risks are similar to conventional products.

5   For example, we fine-tuned our regulatory regime to facilitate the offering of Murabaha financing by banks in Singapore.  MAS has also exempted Murabaha investments which involve the bank undertaking the sale and purchase of commodities, from the restriction against non-financial activities for banks, so long as these activities have the same economic substance and risks as their conventional equivalents. For tax, given that the nature and structure of Islamic financial products tend to inadvertently attract more taxes than their conventional counterparts, we have leveled the playing field by waiving the double imposition of stamp duties in Islamic transactions involving real estate. We have also accorded payouts from sukuks the same concessionary tax treatment granted to interest arising from conventional bonds.

6   A major challenge for takaful operators in many jurisdictions is the lack of Shariah compliant assets for investment. We are encouraged that more Islamic financial products and services are now emerging in Singapore. In May 2008, we saw the launch of the Daiwa FT Shariah Japan ETF, and since then the announcements by Cambridge Industrial Trust on their conversion to an Islamic Reit, as well as City Development’s plans to issue a S$1 bn Sukuk via a MTN programme by end 2008. MAS is also now in the final stages of setting up a sukuk issuance facility to provide Shariah-compliant regulatory assets to financial institutions as part of our efforts to promote the growth of Islamic finance in Singapore.

7   The sukuk structure that we are working on is based broadly on the Al-Ijarah structure, or the sale-and-leaseback of an underlying property. Sukuk issued by the facility will be given equal regulatory treatment as Singapore Government Securities, or SGS, and returns will be tied to the risk-free yield of SGS of equivalent tenor. The facility is open to all financial institutions that plan to or are currently carrying on Shariah-compliant financial services in Singapore. We are issuing on a reverse enquiry basis, which means we can size and time the issuance according to the needs of the financial institutions. A number of financial institutions have already expressed interest and we expect the first issue to take place in early 2009. We invite eligible and interested financial institutions to approach MAS as we work towards a formal launch.

8   Takaful products were first introduced in Singapore in 1995 and have been incorporated into our insurance regulatory framework since then.  One major challenge constraining the growth of the industry is the serious shortage of retakaful providers. As a leading insurance centre in Asia, with a substantial critical mass of international insurers, reinsurers and intermediaries, Singapore is in a good position to leverage on its conventional strengths to play a wider role in takaful.  In recent years, important players like Tokio Marine Retakaful have set up operations and Takaful funds are being offered by HSBC Insurance and NTUC Income. A number of Singapore-based reinsurance companies are also providing retakaful services to takaful operaters in the region. To further encourage firms to offer offshore takaful and retakaful products and services from Singapore, a concessionary 5% tax has been introduced in this year’s budget. 

9   Last but certainly not least, a critical area that the takaful industry needs to address is manpower development. With the strong demand for manpower across the entire spectrum of the Islamic financial services, the cost of experienced and skilled human resources could be the single largest contributor to the operating expenses of an Islamic financial institution, and hence has an impact on its profitability. Training institutions and other ancillary service providers should be encouraged to step up their programmes to fill gaps now faced by the Islamic financial industry. On our part, MAS will work with interested and credible training institutions to tie-up with Singapore-based educational institutes and bodies to meet this rising demand.  We are pleased to note that in recent months, two training providers, the Chartered Institute of Management Accountants (CIMA) and the Securities & Investment Institute (SII) have already made available their Islamic finance training programmes which include modules on Takaful in Singapore.

10   One aspect of manpower development that the takaful industry should take note of is the training of its frontline marketing personnel. This is needed to safeguard against possible misrepresentation and mis-selling of takaful products and services. Takaful operators may want to consider adopting the practice of some of the larger firms that have already initiated in-house skills certification programmes for their marketing and front line counter-staff. 

11   Islamic financial services are fast developing and gaining global attention. MAS will be hosting the next IFSB Summit in May 2009, where central bankers, regulators and industry professionals from all over Asia and the Middle East will discuss "The Future of Islamic Financial Services". We welcome institutions to use the occasion to find out more about the growing opportunities in this industry, including in takaful, and participate actively in its growth and development.

12   May I wish you all a fruitful seminar and useful discussion and for those of you visiting from overseas, an enjoyable stay in Singapore.

13   Thank you.

1 Ernst & Young, The World Takaful Report 2008.
2 Pricewaterhouse Coopers, Takaful: Growth Opportunities in a Dynamic Market, 2008.
3 Ernst & Young, The World Takaful Report 2008.
4 IFSB & IAIS, Issues in Regulation and Supervision of Takaful (Islamic Insurance), August 2006.