April 5, 2016
- Closing the human capital gap in the takaful industry
- Sukuk issuance from GCC governments could surge in 2016 to finance budget deficits
Stabilization is becoming a key word with regards to China’s economic future which is helping global markets to stabilize as well. The Federal Reserve moves indicate they plan to back off further rate hikes has led to a weakening of the US dollar whose strength was connected to so much of the disruption to foreign exchange and commodity markets in 2014 and 2015. Large oil inventories will likely keep a ceiling on oil prices. However, the $35-40 per barrel level seems to be a short-term equilibrium price for oil which is below many countries’ fiscal breakeven prices which will support the higher sovereign issuance of both bonds and sukuk discussed below.
A shortage of human capital is felt across the Takaful industry and is more acute than in the rest of the Islamic financial services industry. The dearth of human capital and the challenges the takaful industry faces due to this acute shortage were highlighted in a survey conducted as part of the Finance Forward World Takaful Outlook Report 2016.
When we asked about the availability of appropriately qualified takaful staff in various functions in the survey respondent’s jurisdiction, the biggest gaps were seen on the managerial side rather towards the technical front. There is a shortage of qualified executives with good leadership and managerial skills, and 47% of the respondents cited this role as having limited availability of competent executives and senior management. Moreover, 50% cited a shortage in the number of board members which, combined with shortages at the executive level, raises questions about the strategic vision guiding many operators which is set at the board level.
Fixing and filling this gap could help the industry take a major leap as competent leaders and mangers would not only help takaful companies survive locally but also help them to navigate into the global insurance landscape.
Further hindering growth at the level of human capital is the absence of qualified staff in the ‘product development area’ as approximately 45% cited such staff to be limited. With limited qualified marketers who can promote or create awareness of takaful products, the takaful industry will be held back further. Only 40% cited ‘marketing and promotion’ to be adequate, whereas more than 45% respondents deemed the availability of skilled staff in this area to be limited. Practitioners taking new product initiatives and infusing innovations can support the industry which otherwise has been lacking greatly.
Although, takaful industry still lags behind the conventional insurers in terms of the presence of technically sound staff, the respondents showed considerable confidence in the industry’s human capital compass on the technical front. With the exception of actuarials (Only 29% respondents cite them to be adequate and over 50% cite them to be either limited or very scarce), the rest of the technical staff was deemed to be adequately available.
Although respondents showed confidence for staff in the areas falling under claims, underwriting and risk management, without the senior management and board level expertise needed to set the long-term vision for each takaful operator, they will have trouble competing with their conventional competitors.
Issuance by GCC sovereigns has not been as common as many in the financial sector would like, but plans by Kuwait to issue over $3 billion in sovereign sukuk this year could be the start of much larger issuance across the region. With significant need by Islamic banks for high quality liquid assets, there is a potential for the current period of low oil prices, if it does not outlast the fiscal buffers, could transform regional capital markets.
According to Zawya, sovereign issuance during 2015 was $6.0 billion, down from $7.1 billion the year before. Around $3.0 billion was issuance by the Central Bank of Bahrain which has an active issuance programme dating back many years. Other sovereigns have less track record on sovereign issuance—Qatar Central Bank had a regular issuance program, Saudi Arabia issued 2 large sukuk for the General Authority on Civil Aviation (GACA), Dubai and Sharjah have each issued sovereign sukuk and the Central Bank of Oman debuted the country’s first sukuk last year.
An analysis of the projected size of the budget deficit, both those reported in the October 2015 Regional Economic Outlook issued by the International Monetary Fund and media reports of the projected size of the 2016 deficit released earlier this year suggests that sovereign issuance could more than double in 2016 compared to either 2015 or 2014 levels, if sovereigns use capital markets and Islamic capital markets in similar proportions to Kuwait’s planned issuance programme.
To compile the forecast, Finance Forward estimated 2016 GDP using IMF projections for real GDP growth and used the fiscal balance estimates for 2016 from either the IMF or media reports. Based on these estimated deficits, the capital market activity was projected based on Kuwait’s split between using its accumulated fiscal buffer and capital markets whereby approximately one-sixth of the total fiscal deficit is covered from capital markets and it is split evenly between bonds and sukuk.
The estimated issuance from across the GCC sovereign spectrum could reach $14.8 billion in 2016, a 147% increase over 2015 levels and a 109% increase over 2014 levels. This would significantly expand the market for sukuk in the GCC which accounted for just over $18 billion in 2015. The new issuance woul provide a healthy supply of HQLA for the Islamic banks (particularly since demand is lower due to reduced liquidity in the region).
Furthermore, if it spurred on more corporate issuance—something that has been expected for many years—it would provide a healthier supply of fixed income assets not just for banks but also for takaful operators who are seeing regulatory winds turn towards more fixed income investments and fewer equities, real estate and alternative assets which have filled takaful balance sheets for several years.
 When choosing which estimate to use, we erred on the side of caution and selected whichever estimate was lower.
 The degree of conservatism in our estimates comes through when comparing the projected capital markets activity by Saudi Arabia ($17.2 billion) against the regular SR 10 billion ($2.67 billion) in monthly issuance during 2015 which comes out to $32 billion at an annual rate.