Bahrain plans to issue new takaful rules

February 02, 2014 - 1:27:22 am
MANAMA: Bahrain’s central bank will release a new regulatory framework for Islamic insurance (takaful) this quarter, in an overhaul of standards which the regulator hopes will attract new business in a sector it helped to pioneer.

Bahrain already has takaful-specific rules but regulatory reform could help it grab a larger chunk of the sector, which Ernst & Young estimates will globally total $17.1bn in gross contributions by 2015. 

The new rules, developed after two years of consultations with the industry, cover the operations and solvency of takaful firms, said Abdul Rahman Mohammed Al Baker, executive director of financial institutions supervision at Bahrain’s central bank.

They are expected to increase takaful firms’ ability to distribute surpluses to policy holders and dividends to shareholders, he said. “We are in the final process of the new solvency framework for takaful. This will not only enhance the industry in Bahrain but also have an impact around the world.”

Addressing how takaful solvency requirements — a concept similar to capital adequacy ratios for banks - are calculated will help to ensure firms match the risks on their books to their future obligations to policy holders, Al Baker said. This is expected to provide greater clarity to the sector while attracting firms to set up in Bahrain, he added.

An alternative to conventional insurance, takaful is based on the concept of mutuality, where a takaful operator sets up a shareholders’ fund to oversee and manage separate pools of money contributed by policy holders.

But this relationship has raised concerns because of the use of “benevolent loans”, known as qard hasan, which shareholders extend on a voluntary basis to plug any deficits in a policy holders’ fund. The practice is criticised by some scholars as contradicting Islamic risk-sharing principles; they say qard hasan is meant to be used when a policy holders’ fund runs out of money, rather than to handle recurring regulatory deficits.

The abolition or replacement of qard hasan has long been on the industry’s agenda, but a broad consensus has not been reached.

Bahrain’s rules call for a new way of calculating capital and replacing qard hasan with capital injections. Under the proposed rules, total capital would include both the available capital of the shareholders’ fund and the net admissible assets of the policy holders’ funds, said Al Baker.

This amount would be compared to the solvency requirements for policy holders’ funds to determine excesses or deficiencies of capital; any deficiency would then be addressed by capital injections from shareholders instead of qard hasan.

Calculation of these amounts would require the endorsement of the firm’s Shariah board and board of directors, while distribution of surpluses from policy holders’ funds would also need central bank approval. Reuters