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The State Council (Oman’s upper house) approved a draft law for Oman’s shariah-compliant insurance (takaful) market in mid-February.  The takaful law is one of a series introduced to regulate the country’s nascent Islamic banking and finance sector. The draft prepared by the insurance regulator, the Capital Market Authority, was reportedly amended after deliberation by the State Council and the Majlis Ash’shura (Oman’s lower house).  Once enacted by royal decree, the law is expected to spur confidence and growth in Oman’s emerging takaful market.

The law will regulate all aspects of a takaful operator’s activities including oversight and reporting requirements, product standards and liquidity levels. It requires takaful insurers to be publicly listed on the Muscat Securities Market (MSM) with a minimum capital of OMR10 million. This aligns with regulations introduced in August last year doubling minimum capital requirements for conventional insurers from OMR5m to OMR 10m and requiring all insurers to list on the MSM within 3 years. Crucially, the new law restricts the conduct of takaful insurance business to dedicated takaful companies. This will prevent conventional underwriters from setting up Islamic insurance windows (in contrast with the Islamic banking sector where the regulations allow non-Islamic banks to own and operate Islamic ‘windows’).

These combined capital-centred and market regulatory provisions aim to create a level playing field for Oman’s fledgling takaful industry which, like in other GCC markets, faces the challenge of an established and fiercely-competitive conventional insurance industry.  According to Moody’s rating agency these types of measures are effective to improve overall underwriting quality and are likely to lead to consolidation among smaller market players in a crowded market.

Industry analysts predict significant growth potential for takaful insurance in Oman due to the low current rate of insurance penetration (1.1%). The global takaful market led by Saudi Arabia and GCC (63%) and Malaysia and Indonesia (30%) has maintained double-digit growth since 2011 and is forecast to be worth $20bn by 2017.  Investor response to two takaful insurer IPOs at the end of 2013 indicate a strong appetite for takaful.  These successful IPOs, one a conversion of Al Madina Insurance into Al Madina Takaful, and the other, Takaful Oman, a new company backed by investors including Kuwait’s T’azur Takaful, were heavily over-subscribed. Both IPOs were handled by AMJ’s Corporate and Capital Market’s team.

Increased activity in the Islamic banking and finance sector overall is likely to raise awareness and fuel consumer appetite takaful insurance as well as other faith-based products and services. A main market driver in 2015 will be the issuance of several sukuk or Islamic bond offerings.  These include the long-awaited sovereign sukuk offering by the government of Oman and several banking sukuks.  The sukuks issuances will help to diversify the limited range of investment options currently available to the shariah-compliant sector within Oman and to soak up the excess liquidity.

The shariah-compliant index (SCI) launched by the MSM in mid-2013 to enable investors to identify suitable investable assets will come more to the fore  as an increasing number of shariah-compliant products and services come online in the coming years.  A the end of 2014, it  included more than 30 listed financial, industrial and services companies that comply with the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) requirements for Islamic investment principles.