KUALA LUMPUR/DUBAI, April 15 Malaysia is promoting overseas investment by its takaful firms(Islamic insurers) as it seeks to internationalise its Islamic finance industry, but a lack of expertise and low risk appetite are likely to slow the drive.
The takaful firms currently invest little abroad; a shift from the safety of local assets to better-yielding instruments abroad could boost their profits while increasing demand for sukuk (Islamic bonds) from the Gulf.
Malaysia's takaful firms are already major investors in domestically issued sukuk, holding over 60 percent of their 19 billion ringgit ($6.1 billion) of assets in domestic private and government debt securities as of December 2012, according to central bank data. Assets were up 12.4 percent from a year ago.
To encourage cross-border Islamic business, the Malaysian government said last month that takaful operators would be allowed to invest abroad without limit, lifting a requirement for them to hold at least 80 percent of assets locally.
But currently, firms are far below the old limit on foreign investment, suggesting it was not the rules but their own inclinations that curtailed their overseas activities. In some cases the firms have no foreign exposure at all.
"We adopt a prudent approach when considering overseas investments and the appetite for Gulf sukuk is fairly moderate,"
said Ahmad Rizlan Azman, chief executive of Etiqa Takaful, Malaysia's largest takaful operator.
The domestic focus is partly due to ample supplies of sukuk in Malaysia; last year the local market saw $103 billion worth of sukuk issued, according to estimates from Zawya, a Thomson Reuters company.
"Most of the sukuk issuances (globally) last year were from Malaysia, including some by Gulf companies. If this trend continues, we do not expect significant liquidity to move to the Gulf," said Azman.
Another obstacle to internationalisation is the meagre experience of some Malaysian takaful firms; four were set up in the last four years, said Mohd Faruk Abdul Karim, head of the investment department at MAA Takaful, part of listed MAA Group .
Industry concentration aggravates the problem, with the top three operators holding roughly 90 percent of assets, according to Reuters analysis of the industry's financials. There are a total of 12 firms.
Market leader Etiqa Takaful held 9.5 billion ringgit as of June 2012, approximately half of industry assets, leaving other firms struggling for scale. Five other firms which publicly reported financials had assets below 2 billion ringgit each.
Etiqa Takaful currently allocates roughly 2.5 percent of assets under management to foreign sukuk, while other firms are believed to have low overseas allocations as well, Azman said.
Dependence on local assets has come at a price, with many takaful firms missing their target returns, said the financial controller of another Malaysian takaful operator, who declined to be named because of the sensitive nature of the issue.
"There is a lack of creativity compared to conventional insurers, because the conventional side is a developed market with more intense competition and more pressure to innovate."
Several firms have been suffering losses or shrinking pofits. Great Eastern Takaful, which held 183.8 million ringgit in assets as of December 2012, posted a 15.2 million ringgit loss in 2012 and a 19.1 million ringgit loss a year earlier.
Etiqa posted a net profit of 9.6 million ringgit in the first half of 2012, but that was down from 109.6 million ringgit a year earlier, according to company financials.
Bucking the trend is Takaful Malaysia, the second-largest takaful firm in the country and majority-owned by BIMB Holdings. It posted a 100.1 million ringgit group profit in 2012, up from 76.4 million in 2011.
In September, the firm said it was preparing to set up a wholly owned subsidiary in Labuan, Malaysia's offshore centre, for the purpose of investing in British real estate. But for the time being at least, such initiatives will be the exception rather than the rule.
"I don't think they have the expertise and they are not known to be risk takers nor sophisticated investors. They will stay with safe local assets and declare peanut returns," said Mahadzir Ahmad, Islamic finance consultant at Kuala Lumpur- based Hei Tech Padu, an information technology consultancy.
"Of the 12 operators we have, not all are offering unit-linked products, and for those who do, I have not come across anyone offering a foreign asset class," Ahmad said. (Editing by Andrew Torchia)