There is great potential for takaful in Egypt, with improved awareness, growth in microtakaful and regulatory changes likely to expand the market, says Mr Mahomed Akoob of Hannover ReTakaful.
Takaful remains an attractive segment of the Egyptian market with great potential. Hopes for improved awareness and microtakaful along with expected regulatory changes are likely to expand the takaful horizon. A sufficient offering of Shariah-compliant investments and market transparency are other challenges.
The story of modern Islamic finance in Egypt goes back a long way. Many observers consider the 1963 Mit Ghamr experience to be the first effort in establishing a non-interest savings and investment institution in the Middle East. That institution is said to have focused a great deal of its investment activities in the areas of microfinance. In the years that followed, many other institutions were established to shape what we know today as Islamic finance.
About 40 years after 1963, the first Egyptian takaful operator was established.
Impressive growth of takaful
While Egypt clearly pioneered the area of modern Islamic finance and microfinance, takaful seemed to have needed a long time to establish a foothold in the Egyptian financial services marketplace. However, between the establishment of the first takaful operator, Egyptian Saudi Insurance House, in 2003 and today, the development of takaful in Egypt is exceptionally remarkable.
A 2014 book published by the Insurance Federation of Egypt (IFE) on the history of the industry shows that the national industry started around 1900 with the establishment of the National Insurance Company of Egypt. The first milestone in today’s landscape was the establishment of Misr Insurance in 1934.
Even though the Egyptian insurance industry is more than a century old, the very young takaful industry has clocked a lot of mileage on the route to being a viable alternative to conventional insurance. The segment now accounts for about 13% of the market, which is substantial considering that 60% of the market is dominated by one player. Takaful has also shown impressive growth in the past few years with the establishment of seven operators between 2006 and 2009. However, this track record leaves more to be desired.
Regulatory changes to have positive impact
Egypt is amending its regulations, as with many of the regional markets, with a new insurance law being drafted. In a highly commendable effort, the Egyptian Financial Supervisory Authority (EFSA), has worked on updating the current legal regime regulating insurance in Egypt.
The new law is said to have a section dedicated to takaful. As an industry participant in Egypt and elsewhere, I expect this to have a very significant and positive impact on the takaful segment, if EFSA makes sure it avoids the issues that may have been faced by other regulators in their early stages of presenting a specialised regulation for takaful. The experience of Bank Negara Malaysia and the Central Bank of Bahrain in this particular area should be worth considering.
Microtakaful worth exploring
Another aspect that is likely to have a positive impact goes back to the Mit Ghamr experience. As that institution found its purpose in microfinance, takaful in Egypt today needs to approach this area with perhaps greater appetite. Microtakaful is an area of both economic and business growth and social responsibility. Briefly considering the population and economic aspects of the society in Egypt strongly suggests there is sufficient room for microtakaful schemes.
Of course, microtakaful is not free of its own challenges, which were also outlined in the IFE book referred earlier. However, with genuine interest of EFSA and the takaful community, this area is worth exploring. Moreover, the current political situation and the role of the government suggests that efforts by the industry in cooperation with government agencies for the benefit of the general public are highly likely to be well-rewarded. In this context, the Malaysian experience in microtakaful is exceptionally enlightening. And when it comes to conventional microinsurance, the South African experience warrants some thought.
Need for Shariah-compliant investments
When talking about takaful, we cannot miss the need for Shariah-compliant investments. Even though last year Egypt has its largest Shariah-compliant finance deal at EGP1.5 billion (US$191 million), it is still not clear whether there is an active role for sukuk financing in the Egyptian economy.
That said, the recent announcement that the government is revisiting the possibility of sovereign sukuk issue in the near future is a good sign. Takaful operators have a very limited leeway when it comes to investing on behalf of the takaful fund. An active sukuk market is essential for takaful’s investment activities. Equities, Shariah-compliant or otherwise, remain a relatively volatile investment compared to conventional bonds or sukuk. This might seem to be a very significant challenge for the takaful industry in Egypt, but the indications of economic rebound and the government plans seem to point in a good direction.
Cooperation with other sectors
Besides these issues that are more specific to takaful, takaful operators in Egypt share the great potential of the economy and the insurance industry with their conventional brethren. For an economy and a population of the size of Egypt, an insurance penetration of 1.2% is extremely low even by regional standards. Also with the efforts of the industry represented by the IFE, the need for awareness remains great.
Perhaps, joint efforts with other industries or trade organisations might have some value. These have been tried and tested in other markets and to some extent in Egypt, in the automotive and the shipping industries and most certainly, the banking sector. However, it is not clear how far this cooperation is going with industries like telecommunications, retail, airlines and many others. While this is not the platform to go into details, it might be sufficient to point out that there is much to be cross-sold and, perhaps more importantly, cross-learned.
Need for more transparency
With these few issues, takaful in Egypt does have potential to be realised, but it also has several challenges and unanswered questions that need to be contemplated. While there is much effort on the part of EFSA and the Federation to develop the insurance and takaful markets, the degree of transparency under which the market operates needs even more effort.
The Authority issues an annual report on the performance of the market, which is a valuable tool for all market participants. Compiling the report is certainly not an easy task. While this report endeavours to present a clear picture of the financial health of the industry, perhaps with the introduction of specialised legal text for takaful, this report would have a section addressing takaful specifically.
Also, the fact that most insurers and virtually all takaful operators are privately held and not listed on the Egyptian Exchange means their financial reports may not always be available to the public. This, too, poses a question on transparency. In this respect, the Saudi experience whereby the Saudi Arabian Monetary Authority requires all insurers to be listed and publicly traded is a great example. Of the many objectives this serves to meet, transparency and allowing the public a clear view of their risk carriers is certainly an important one.
Another unanswered question that also feeds into the same argument for more transparency is the recent news that the principal investors in one of the takaful operations in Egypt have decided to sell their equity. Whether this was a response to an attractive bid by the buyers, or the sellers’ own view of the market, is not clear. Using a simplistic logic, if the former is the case, it sheds positive light on the market. If the latter is the case, current market players might want to reconsider their positions. Either way, a more transparent marketplace would perhaps point in the right direction to market participants and other observers.
A segment with great potential
To summarise, this brief note shares a few thoughts on the state of the takaful business in the Egyptian market. Of course, you could write volumes about the issue, but the short list are the highlights, in my opinion. Takaful remains an attractive segment of the Egyptian market with great potential. Hopes for improved awareness and microtakaful, along with expected regulatory changes, are likely to expand the takaful horizon. Sufficient offering of Shariah-compliant investment and market transparency are the other challenges.
Mr Mahomed Akoob is CEO of Hannover ReTakaful.