Jan 21 Oman has seen the birth of its first Islamic insurance (takaful) firm as two others prepare to enter the market, hoping to gain an edge in the sultanate's crowded insurance sector.
This month Oman's eighth largest insurer, Al Madina Takaful , converted itself from a conventional insurer to a takaful company. Takaful follows religious principles such as bans on interest and pure monetary speculation; risk is pooled among policy holders rather than borne entirely by the company.
Set up in 2006, Al Madina has accumulated a 5 percent share of the insurance market. It changed its conventional insurance clients to takaful policies after a customer education process, and said it did not experience client exits or other problems.
It now hopes its switch to takaful will attract clients who may have shied away from financial products for religious reasons. This could prove important in a market where the top seven firms, out of 23, account for as much as 70 percent of total gross written premiums.
"We have the opportunity of saying something different in the market. It is overcrowded but we have the 'new' factor," Al Madina's chief executive Gautam Datta told Reuters.
"This gives us an opportunity to grow into areas where we might not have been able to make a dent."
In the next two years, the firm plans to add up to seven new branches to its network of three, and distribute products via Islamic banks, a practice known as bancatakaful, said Datta.
Two new firms could soon follow in Al Madina's footsteps. One is Takaful Oman Insurance IPO-TKOS.OM, which completed an initial public offer of shares last month, backed by investors including Kuwait's T'azur Takaful Insurance.
Takaful Oman projects reaching a 4 percent share of the overall insurance market within five years of starting operations, its IPO prospectus shows.
Last February, Oman United Insurance obtained board approval to incorporate a takaful firm of its own, but it has not provided further details of its plans.
Because these two are new takaful firms, rather than conversions of existing ones, their entry could crowd the market further and add to pressure on profitability.
"Considerable over-capacity in the Oman insurance industry depresses the market's overall performance," said Mohammed Ali Riyazuddin Londe, analyst at Moody's Investors Service.
"The Omani insurance market is fragmented and highly competitive, albeit price competition is arguably less than that witnessed in Kuwait or the United Arab Emirates."
Oman opened to Islamic finance in 2011, introducing an extensive Islamic banking framework at the end of 2012. But the financial regulator, the Capital Market Authority (CMA), has yet to publish its final rules on takaful, while an insurance law is still in the draft stage.
The CMA is considering whether to increase the minimum paid-in capital required for firms writing life and non-life insurance to 10 million rials ($25.9 million) each, said Londe.
Currently, firms need to hold 5 million rials of paid-in capital; the new rules would require composite insurers to hold a minimum total of 20 million rials.
"This could lead to some insurers exiting the market and may increase consolidative pressures in the sector."
That fits with the regulator's desire to see consolidation in both the banking and insurance sectors.
Firms such as Al Madina also face limits on their foreign investments, which are capped at 25 percent of their total investments, and holdings of fixed income securities, which are restricted to 10 percent, said Datta.
The CMA has been flexible in granting grace periods to comply with such limits, but a long-term solution will require a deepening of local Islamic capital markets, said Datta. "This is a critical aspect for takaful business viability."
Datta does not expect an immediate change to Al Madina's market share, but the company projects its assets will grow by 11.9 percent in 2014 to 45.8 million rials, and 12.8 percent in 2015, with a return on capital in the range of 9 percent.
The company completed an initial public offer of its shares in November, selling 66.67 million shares at a price of 0.14 rials each; the shares have dropped 2.1 percent since their Dec. 10 listing, underperforming a 6.0 percent rise in the main Oman stock index.
Al Madina currently only offers general takaful products but it has a composite licence and thus plans to develop life products, aiming to introduce them in 2015, Datta said. ($1 = 0.3850 Omani rials) (Editing by Andrew Torchia)