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Pakistan tightens rules on Islamic banking windows Cobalt Underwriting boosts takaful capacity

KARACHI, March 29, (RTRS): Pakistan’s central bank has issued new rules for the operation of Islamic banking windows, aiming to strengthen their role in the world’s second-most populous Muslim nation. The new requirements come at a time when Pakistan is stepping up efforts to develop Islamic finance, prompting several banks to expand their operations in the sector. Banks will have to obtain written approval from the State Bank of Pakistan before opening each Islamic window, as well as providing the regulator with additional details on staffing, training and marketing arrangements. Islamic windows allow conventional lenders to offer Islamic financial services, provided client money is segregated from the rest of the bank.

As of December, Pakistan’s full-fledged Islamic banks had a combined network of 767 branches while conventional banks had 441 Islamic branches and 96 sub-branches, the central bank said. Different approaches to the Islamic window format have emerged over the years: In Oman windows are allowed only through standalone branches, while in 2011 Qatar banned Islamic windows outright. The rules could help consumers better distinguish Islamic financial products from conventional ones, improving the industry’s perception and overall uptake.

Regulators in Pakistan hope to expand the industry’s branch network and bring Islamic banking’ s market share to 15 percent of the system by 2018. As of December, Islamic banks held assets worth 1 trillion rupees ($10 billion), a 21.1 percent increase from a year earlier and representing 11.2 percent of total banking assets. Some conventional lenders are also opting to convert their operations into full-fledged Islamic banks. Last week, the majority shareholder of Karachi-based Faysal Bank said it would convert the bank into a full-fledged Islamic unit in the next two to three years. Last year, Summit Bank said it would convert itself into a full-fledged Islamic bank over a three- to five-year period. It opened its first Islamic banking branch earlier this month.

London-based Cobalt Underwriting said it was signing the European unit of QBE to its sharia-compliant insurance platform, helping address capacity constraints in the takaful (Islamic insurance) industry. The Cobalt platform is part of a range of initiatives aimed at boosting London’s credentials in the Islamic finance industry, which follow religious guidelines such as a ban on interest and pure monetary speculation. Cobalt will has increased its capacity to underwrite property risks to $425 million from $300 million, construction to $160 million from $100 million and an additional $50 million for casualty risks, the firm said in a statement. “It has long been our intention to broaden the range of products we offer since our launch last year, and we will continue to do so,” said Cobalt chief executive Richard Bishop. The platform uses a syndication model to help spread risk across a panel of underwriters, allowing multiple insurers to pool their capacity while each can subscribe to the desired level of risk though individual Islamic windows.

The risk is priced by a lead insurer and other firms must then subscribe under similar terms, a similar approach to the subscription model used in London’s Lloyds insurance market. Cobalt, formed with capital from Capita insurance services and the Bank of London and The Middle East, hopes to address gaps in the takaful and re-takaful sectors. Takaful is based on the concept of mutuality, where a company oversees a segregated pool of funds contributed by policy holders. The firm seeks to underwrite large transactions of no less than $30 million in value, and further capacity could be added for other risks including trade finance, Islamic finance institutions, energy and aviation.

Operators in the takaful sector, which has its core markets in the Gulf and southeast Asia, have been limited in their ability to take on large commercial risks partly due to a lack of scale. Reinsurance options are also scarce, with some takaful firms forced to reinsure through conventional lines, a practice allowed under the concept of darura, or extreme necessity. Industry purists, however, are increasingly challenging whether the darura concept is still applicable in today’s market and are encouraging alternatives.

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