Takaful market set to grow in S. Africa and beyond

By MUSHTAK PARKER | ARAB NEWS
Published: Sep 18, 2011 23:37 Updated: Sep 19, 2011 16:01

Another sign that the mainstream banks in South Africa are taking Islamic finance as a serious niche market business is the acquisition last week of the local Islamic insurance company, Takafol SA, by Absa, one of the republic's largest banking groups.

In a deal which could have implications for the reach of Takaful (Islamic insurance) beyond the borders of South Africa to southern, central, West and East Africa, Absa Insurance Company Limited (AIC), a wholly-owned subsidiary of Absa Financial Services Limited (AFS), bought the book of business of Takafol South Africa (Pty) Limited (Takafol SA), which is a subsidiary of the Hannover Reinsurance Group, a major global reinsurer, and which was established in 2003.

The Takaful premium market in South Africa is currently estimated at about 3 billion South African rands (about $420 million), which is very modest compared to the conventional insurance market. As such market penetration potential is huge because of the low base, especially in country with a fast growing population of over 45 million of which only about 3 million are Muslim, but with a relatively largish affluent Muslim middle class.

Islamic banking has been around in South Africa since 1989, when Albaraka Bank South Africa, now a joint venture between the Saudi-owned Albaraka Banking Group and UK-based DCD London & Mutual Plc, was licensed by the Reserve Bank of South Africa, the central bank. Over the last decade or so, the mainstream banks in South Africa, where banking is a lucrative business because of some of the highest banking charges in the world, have started to show interest in offering Shariah-compliant products initially at home and now increasing in Sub-Saharan Africa as far as Nigeria and Tanzania.

They include First National Bank (FNB); ABSA, in which Barclays Bank Plc of the UK has a 55.5 percent stake; Nedbank and Standard Bank - all of which have thriving Islamic banking windows and which have overtaken Albaraka Bank SA in terms of book business and branch reach. Albaraka Bank SA for instance has only 11 branches in the country, including the headquarters. Not surprisingly, Albaraka Bank SA has an agreement in place with Standard Bank and Absa whereby its customers can deposit funds into their accounts via Absa or Standard Bank branches.

Banks such as Absa and Standard Bank have clear strategies of growth and expansion beyond South Africa to sub-Saharan Africa, and Islamic banking and insurance are an attractive component of this offering especially in countries with large and affluent Muslim populations.

At the same time banks offering Islamic financial products in the “rainbow republic” are encouraged by the increasingly proactive policy of the South African government of President Jacob Zuma, toward the facilitation of Islamic finance in the country under financial inclusion policy and other reasons.

The South African National Treasury has introduced tax neutrality measures for Mudaraba, Murabaha and Diminishing Musharaka products and emphasized that "the development of Islamic finance in South Africa is critical to the expansion of National Treasury's strategy to position South Africa as a gateway into Africa. The Treasury envisages South Africa being a central hub for Islamic product development and ensuring the rollout of such products into African markets."

South African Finance Minister Pravin Gordhan, introducing the Taxation Laws Amendment Bills 2010 in the National Assembly in Cape Town in August 2010, gave further insight into the government's rationale for the tax changes relating to the Islamic financial products.

"South Africa is an ideal location for multi-nationals to base their regional operation for investments into sub-Saharan Africa. South Africa offers world-class financial services, strong and clear financial regulatory architecture and world-class infrastructure ... Certain domestic tax anomalies, the exchange control regime and fierce competition from certain low tax countries, remain stumbling blocks to South Africa taking full advantage of the opportunities that are available. An important area of innovation relates to the growing use of Islamic financing, which contains certain prohibitions in respect of finance, including prohibitions against interest, immoral substances and the lack of transparency in respect of investments. At issue is the tax system's lack of recognition of Islamic finance, as it mainly focuses on traditional forms of finance. The proposed amendments will level the playing field in respect of certain Islamic financial products when undertaking savings and investments and when attempting to bank finance," explained Gordhan.

Standard Bank and Absa are spearheading this Islamic finance foray into the African continent. In July the Central Bank of Nigeria, for instance, gave approval to Stanbic IBTC Bank, the Nigerian subsidiary of Standard Bank, a license to set up an interest-free Islamic banking subsidiary subject to complying with the approval terms within six months. In Tanzania, Standard Bank has also launched a number of Islamic consumer finance products including Islamic mortgages, leasing, business account facilities and Takaful.

Absa at the same time has an established and dedicated Absa Islamic banking brand and window. With the acquisition of Takafol SA, which is awaiting final approval from the banking and insurance regulator, Absa is keen to build an additional brand, Absa Takaful.

In fact, Takafol SA has a history with the Absa Group through its underwriting relationship with Absa Insurance Company Limited (AIC). In 2008, Takafol SA appointed AIC their underwriting partner and this relationship, according to both parties, contributed to Takafol SA's further development, with personal lines and commercial business growing by more than 66 percent over the next two years.

Takafol SA offered short-term Takaful for business, vehicle, personal and household cover. The merger of Takafol SA into AIC will bring many economies of scale including direct control over underwriting and pricing, and greater clarity and certainty in terms of global standards of Shariah governance.

Absa Takaful will be headed by Uwaiz Jassat, Takafol SA's CEO, who will report to Edwyn O'Neill, managing director of Absa Insurance Company. At the announcement of the acquisition, O,Neill emphasized that "this deal demonstrates Absa's commitment to provide the Islamic community with a holistic financial services offering that is Shariah-compliant. Today, we cement our relationship with the Islamic community and recognize that there is a need for similar products in the rest of Africa."

Takaful provision in South Africa is so underdeveloped and incestuous that other banks such as Albaraka SA offers Takaful services to it clients through its association with Takafol SA. Albaraka Bank SA has close relations with Absa, which also manages its Islamic equity fund offerings.

However, this may also be a cue for Takaful providers from abroad to think about using South Africa as a gateway to spearhead Takaful business into new markets in Sub-Saharan Africa.

Source : http://arabnews.com/economy/islamicfinance/article503525.ece