H.E. Alderman David Lewis, Lord Mayor City of London, distinguished guests, ladies and gentlemen.

It is a great pleasure for me to be here today and to have this opportunity to speak at the 2nd International Takaful Summit organised by the Islamic Banking and Finance Institute Malaysia . I believe that this Summit , with the presence of not only practitioners and key players of the takaful sector, but also those from the insurance industry and the financial world, can become a good platform to foster greater understanding and appreciation of takaful and its increasing role in the international financial system.

At the first International Takaful Summit last year, we have shared some thoughts on how Malaysia has strengthened its position as a preferred platform for global takaful and retakaful activities and how other takaful players could leverage on Malaysia's experience to further contribute to the development of global Islamic finance, particularly by capitalizing on various initiatives and incentives under the platform of Malaysia International Islamic Finance Centre.

Today, I want to share my thoughts on how to elevate the takaful sector to the next level and explore some of the strategies for the industry in moving forward. My remarks today will be in two parts. I will start on what I think are the significant trends surrounding the takaful industry in recent years and also share some "reality checks" on the sector's contribution in the fast changing and dynamic environment. I will then outline on the strategies needed to move the industry forward. In the process, I will also highlight a couple of initiatives undertaken by Malaysia towards further enriching the depth and breadth of the takaful sector.

Takaful becoming an important component of the global financial system

As a starting point, allow me to share with you some significant trends of the industry in the past few years.

First, there has been a significant momentum in terms of growth and participation of takaful players in the global market. With its rapid annual growth of between 15-20%, the global takaful industry is one of the fastest growing components of the insurance market. Based on the 2007 Oliver Wyman Report, the potential premium for takaful worldwide, is at least USD20 billion annually, while the current figures for premium is estimated at USD4 billion. The report also estimates that up to 20% of the takaful revenues originated from non-Muslim customers. The strong growth was also attributed by the increasing number of companies offering takaful services across jurisdictions. Currently, there are more than 250 ¹ takaful operators worldwide. There is also a growing participation of established conventional players in the takaful and retakaful industry. There are large conventional players from the UK , US and Germany that have set-up takaful or Retakaful companies within their groups. This is an important development. A strong and credible retakaful industry is a crucial contributor to promote the expansion of the takaful industry worldwide.

Second, there is a growing global demand for takaful products following the phenomenal growth of various components in the Islamic financial system particularly the Islamic banking sector and the Islamic capital market. The advancement by both sectors contributed towards the strong growth of takaful and retakaful industry. For instance, the tremendous growth of Islamic financing and mortgages provide natural demand for mortgage protection takaful covers as part of the package to complement Islamic financing products. The increasing popularity of sukuk issuance also provides great support to the growth of the takaful industry. The issuance of more sukuk with longer tenure to match investment and risk management of longer-term liability would spur the growth of the investment-linked takaful products. The upside on this is takaful has a ?natural constituent' for it to grow further in the future.

Third, much progress has also been achieved in the regulatory sphere in the last two years. The Islamic Financial Services Board (IFSB) has established a joint working group with the International Association of Insurance Supervisors to develop standards applicable to takaful operators. I understand that IFSB have made significant progress in this initiative, including issuance of concept paper on the regulation and supervision of takaful entities. Further, the IFSB working group is in the midst of finalising an exposure draft on corporate governance standards for the takaful industry. The corporate governance standard will cover key issues in the takaful business including rights and obligations of stakeholders in takaful operations and risks ownership. IFSB has also set up a working group on solvency in takaful business. This will further improve comparability between takaful companies, promote harmonisation of practices and give more confidence to the industry as a whole. These are certainly positive developments for takaful industry, to be recognised as an emerging component in the mainstream global financial system.

"Reality Checks"

In the course of striving for further development of the takaful industry, the enhanced international dimension of the industry has also presented itself several key challenges. I shall discuss some of them.

• Limited Size and Capacity Despite the relative improvement in the international takaful landscape and the growth of the industry in recent years was very strong, the takaful industry still remains small in comparison to the overall insurance industry. Takaful premiums stood at USD2 billion, which accounted for only 1% of USD3.7 trillion global insurance premiums in 2006. Within the Islamic financial system, the takaful sector progressed at a relatively slower pace in comparison to the other components of Islamic finance. The takaful assets currently are only a fraction of the Islamic banking assets. The takaful assets are estimated to be around USD20 billion, in contrast to the Islamic banking assets of US500 billion. Takaful sector also grew slower than the sukuk market, which has been growing at a rate of 40%. Takaful players are relatively small with the largest takaful company having a total assets of only USD3 billion. Because of the newness of its operations, many takaful operators also lack in the capacity, capabilities and expertise to manage businesses that involved large and complex risks.
• Low penetration rate Another issue is that the awareness among a large proportion of Muslim consumers who do not view takaful protection as an important tool for risk management. In fact, the takaful contributions in Muslim countries constitute only 1% of the total global insurance premium, whereas the Muslims account for 22% of the world's population. There is therefore a huge latent demand for takaful products and services within the Muslim community.
• Lack of Retakaful support and capacity There is also a concern on adequacy of strong retakaful support and capacity. Retakaful is a vital part of the takaful sector to provide risk-mitigating mechanism, capital relief provision and importantly to provide the essential technical capabilities in managing risks. Currently, there are about 10 to 15 ² retakaful companies available to support over 250 takaful operators worldwide. Currently, the takaful industry is still dependent on conventional reinsurance as majority of takaful companies rely on conventional reinsurance because of limited capacity in the retakaful market. Thus, there is a need to build retakaful capacity, which would cater to the unique principles of takaful products. Nevertheless, the last year or two, many big companies have set up retakaful entities that would provide the much-needed additional capacity. However, takaful company must also be willing and ready to reduce their dependence on reinsurance companies. While the practice of using conventional reinsurers is allowed by many Shariah boards because of necessity, this practice needs to be revisited in view of the additional retakaful capacity coming onstream.

Moving towards the next level of excellence

These achievements and some of the challenges amplify the importance of taking a concerted approach to the development of takaful and retakaful at the global level. Takaful products and services need to be spread to more countries, to be accessible by more consumers, to have greater range of products to meet wider public needs, so that the benefits of takaful can made available to the global community. It is also important to maintain and enhance public confidence on takaful, supported by strong legal and regulatory infrastructure, robust risk management practices, comprehensive IT solutions and transparent disclosure and operating requirements.

Let me now share some observations on how we, as the global community, could strategize towards realizing these objectives.

The first strategy is by building a more globalized takaful industry through greater connectivity across sectors and nations. There is a need to transform the current approach of developing takaful as a domestic focused industry into an industry with greater cross border interlinkages at regional and international level. It is timely to internalize the essence of takaful concept in the global context, as a cooperative alliance towards common good of the participants. There are a few ways to give effect to this strategy.

Joint venture approach

In Malaysia, a joint venture approach was implemented by granting licences to takaful companies with foreign participation with the aim to synergize domestic experience and foreign resources and network. This linkage is imperative in promoting strategic alliances within the takaful and retakaful business globally as well as building a solid foundation for greater mutual respect across jurisdiction. This approach will create more takaful companies with large capacity, provide economies of scale, increase cost efficiency and promote shared skills and expertise across nation and jurisdiction. A recent development, the joint venture of a large Dubai financial institution with companies from Malaysia and Singapore in establishing the world's largest retakaful companies is an important milestone for cross border partnership in the takaful industry. Similar initiatives must be implemented to further enrich the industry as well as to enlarge market access, across countries, across regions.

International association approach

The "Global Takaful Group" or GTG is another platform to enhance greater mutual co-operation and foster connections among operators globally. GTG is a tangible vehicle of cooperation among takaful operators and provides a conduit for exchange of information on all facets of takaful operations among the members. Today it has expanded its membership to 35 comprising takaful and retakaful operators from various countries. This excellent effort provides a platform for greater interaction and collaboration. I hope that more players from all over the world will join this group. There is also the possibility of expanding collaboration to promote shared services among takaful companies within the group to increase efficiency and effectiveness and reduce cost.

Global approach

It may now be timely to explore a global initiative to efficiently pool the fund and resources globally that would result in a higher capacity to write business as well as to gather critical technical expertise to manage specialised risks. The spread of risks amongst different takaful operators across the globe would also effectively reduce the cost of doing business for domestic takaful operations. The bigger capacity and pool of expertise available to underwrite new businesses and risks could potentially improve the ratings of takaful operators, which may not be easily achievable individually.

This new platform, anchored on the true spirit of solidarity, brotherhood and ta'awwun (mutual assistance), across countries would create bigger resources and capacity and could improve the ratings of participating takaful operators.

Second strategy is towards a more concerted branding for takaful  

United in driving the value proposition

We need to mobilise our efforts in promoting the value proposition and distinct features of takaful that would enhance the appeal of takaful to the global community. Apart from creating awareness of the principles of mutuality, transparency and ethical values, it is important for the industry to be united in driving the importance of Shariah-compliant end-to-end solution for the whole value chain of the Islamic financial products. For example, there must be a higher level of appreciation that an Islamic financial product must not only be Shariah compliant in its content, but also in other related services such as financing and insurance cover. For takaful, each stage of the takaful cycle - beginning from the design of the product, the products distribution, market practices, risk management mechanism, the investment of the takaful fund and the retakaful as well as other hedging mechanism must strictly adhere to the Shariah principles.

The end-to-end solution approach has been Malaysia's strategy at the very onset of our effort to develop our takaful industry. We have put in place a comprehensive Islamic financial system that includes Islamic banking and Islamic capital markets that is condusive to the growth of the takaful industry. The comprehensive Islamic financial system consisting diversity of players and a wide range of products and services complemented by legal, human capital, Shariah and regulatory infrastructure offer the takaful industry a ?ready ally' for doing business.

Takaful as a savings tool

Takaful may also be marketed as a savings tool. This can serve as a strong appeal factor that could result in higher participation and renewal rates. In addition to protection cover, savings element in takaful would create sustainable demand and reduce termination of takaful policies, especially during hard times. Adequate emphasis need to be given to raise awareness among participants that takaful can serves as an investment for their future needs. The onus still remains with the global takaful industry to educate consumers about takaful principles, to change the public perception that perceive takaful or insurance as solely a protection tool. For this, takaful players need to invest and expand in a pool of well-certified takaful marketing officers or agents who are competent to market, explain and educate the unique value proposition of takaful products.

In the case of Malaysia , the industry association and the training arm for Islamic finance, IBFIM, have jointly developed and introduced the takaful basic examination as an entry qualification for takaful agents and executives in the financial services industry to promote takaful products and services. Upon completion of the programme, takaful intermediaries are expected to be conversant with the takaful concepts, operations of family and general takaful as well as ethical practices in takaful business. Other education and training institutions are encourage to leverage on this initiatives to form a collaborative arrangement to enrich talent development programmes in takaful.

The third strategy is to position Shariah as an enabler for greater linkages of takaful markets globally.

Mutually recognised rules and practices

For the past two decades, we have witnessed the enhancement of innovation for takaful industry that includes business modalities, product structures and designs, investment and wealth management as well as retakaful and hedging mechanism. Takaful modality is currently structured not only based on mudharabah and wakalah, but also using waqf . The flexibility accorded by Shariah is one of the catalysts for this positive development. At the same time, we have seen several issues being raised particularly in respect of divergence of Shariah views including takaful modalities and operations.

This development provides a new set of challenges in the more globalised market today. It is important to ensure that the progress of this innovation is not impeded by differences in Shariah views and practices. For this, it is vital for the jurisdictions to mutually recognise the validity of respective rules and practices and underlying Shariah interpretations, deduced based on mutually recognise principles and vigorous processes. Uniform adoption by all including relevant institutions and stakeholders such as rating agency and regulators would reinforce Shariah as the foundation for the development of takaful and retakaful industry.

The need for a robust reseach and development efforts

The takaful industry is still at nascent stage. There are still many areas that need to be explored and resolved. The operational aspects of takaful give rise to many issues that require Shariah scholars to give guidance. In particular, there is a need to conduct further in-depth research to examine the compatibility of the international standards for insurance such as accounting treatments and capital framework that takes into account the unique principles of takaful. An in-depth research would also assist in dealing with divergence in takaful operational practices and Shariah application across jurisdictions.

Malaysia offers various platforms for innovation and research in Islamic finance. There are several dedicated institutions with specific mandate to undertake research and consultancy in Islamicc finance. This includes the industry-owned research and training institute in Islamic finance, the Islamic Banking and Finance Institute Malaysia (IBFIM) and INCEIF. A recent development, the International Shariah Research Academy for Islamic Finance (ISRA) was recently established to conduct applied Shariah research on contemporary Islamic finance issues. Through pioneering research activities and vigorous intellectual dialogues, ISRA will instil innovation and dynamism, and expanded into new boundaries of Islamic finance.

Fourth strategy is to build strong supporting infrastructure for takaful business, especially the IT solution to support the operation of takaful business. Takaful requires system solutions that fit the specificities in its concept, features and operations. The right IT solution would not only increase processing efficiency, but would also contribute in automating processes and decision making but also speeding up the handling of claims of consumers.

The current approach of leveraging on the conventional insurance IT system may not be sustainable and appropriate for takaful companies in the long run. Malaysian experience also showed that the cost of structuring new IT solutions individually for each company is rather prohibitive. Moving forward, strategic collaboration among players, IT providers and Shariah scholars in designing appropriate IT solutions for takaful players is indeed crucial, not only to achieve efficient cost allocation among users but also to improve risk management practices and overall efficiency of the takaful operators.

Fifth strategy is to align the strategic development of takaful with the broader socio-economic environment of the global community. Steps should be taken to bring out the virtues of takaful for the benefits of the large population of less well-off global community. In particular, there is a large population of low income communities in Muslim countries that would benefit tremen id=dously from low cost takaful scheme or in conventional insurance known as microinsurance.

While takaful on its own is not a solution for poverty eradication, it can assist poor segment of society in its useful form as a social safety net, which provides financial protection against losses and other unfortunate events that would prevent the less well-off population from falling again into extreme poverty. Takaful, with its strong emphasis on mutual help and assistance, can evolve a structure or modality that serves this segment of society. One possible way is to explore a global takaful alliance that leverage on the wealth of many Muslim countries, including zakat collections, into a structured microtakaful arrangement, that is professionally and efficiently run by tapping into the existing delivery channels to deliver this product to the needy. While at the first glance, this might seem a small business that invite huge cost outlays, experience in microfinance showed that a properly structured microtakaful can become a profitable and sustainable business venture.

Conclusion

The business and financial communities attending this Summit may wish to explore optimizing our collective strength to fully realize the potential of the industry. The future prospects of the takaful industry will be very much dependent on the combined efforts of all the relevant parties; the regulators, market participants, Shariah scholars and the international community at large.

The spirit of brotherhood and helping each other with sincere intention will invoke further blessings from God, thus would further enrich the growth and development of a comprehensive takaful industry.

Thank you.

^{1 The World Takaful Report, Ernst & Young
2 ICMIF website}