Limited clarity in regulatory framework a challenge for takaful sector, says Fitch

Nonetheless, with the introduction of guiding principles and standards for the Islamic financial services industry by the Islamic Financial Services Board (IFSB), a Malaysia-based international standard-setting organisation, the situation is gradually improving.

To date, the IFSB has issued twelve standards, guiding principles and technical notes for the Islamic financial services industry, which include risk management, capital adequacy, corporate governance, and supervisory review process. Furthermore, it has recently released an Exposure Draft on the Solvency of takaful Firms, addressing this principal area of concern for many regulators worldwide and takaful operators alike.

"The guiding principles put forth in the Exposure Draft on Solvency of takaful Firms are generally in line with Fitch's takaful rating Methodology," says Wan Siew Wai, Director in Fitch's Insurance team. In assessing the financial strength of a (re)takaful undertaking, the agency considers that it is very important to understand the sources of the takaful firm's financial strength, and will therefore seek to gain an understanding of the financial strength at the individual takaful fund; takaful operator; and combined firm levels.

From a credit perspective, Fitch views that IFSB's work is of critical importance in shaping the regulatory landscape of the takaful industry. "As the takaful industry continues to evolve, the agency will continue to monitor market and regulatory developments and will review its rating methodology on a regular basis to ensure its relevance," adds Mr. Wan.