| DUBAI, June 24
DUBAI, June 24 The spread of Islamic trade
finance is boosting demand for sharia-compliant reinsurance in
the Gulf, trade credit insurer Euler Hermes says, predicting the
sector could eventually account for over a third of its business
in the region.
Islamic finance, which bans interest payments, is used for
only a tiny fraction - perhaps less than 1 percent - of the
foreign trade of the six-nation Gulf Cooperation Council, which
totalled roughly $1.5 trillion last year.
But in some non-oil areas, such as Dubai's booming
merchandise trade, Islamic finance has been gaining ground,
partly because of a jump in trade flows between the Gulf and
predominantly Muslim countries in southeast Asia.
Euler Hermes, part of Germany's Allianz insurance
group, is involved in the business because it is one of the
region's biggest trade credit insurers, offering companies
protection from customers' insolvency or default.
The company launched a sharia-compliant trade credit
insurance product in 2008 and the business began growing
substantially three years ago, now accounting for about 10
percent of Euler Hermes' total GCC business, said Massimo
Falcioni, chief executive for GCC countries.
"There's a lot of potential - I wouldn't be surprised if it
was 40 percent of total business eventually," Falcioni said in
Euler Hermes' GCC operations had total turnover exceeding
$40 million last year, and exposure to its clients of more than
$12 billion. Turnover has been growing at an annual rate of over
30 percent for the past three years and is expected to continue
rising at similar rates for the next few years, Falcioni said.
Islamic trade finance has been hampered by a lack of
familiarity with sharia-compliant structures among both
companies and banks, which has tended to raise costs.
Falcioni said demand for sharia-compliant trade credit
insurance began rising when takaful (Islamic insurance) firms in
the region became more active in offering the service to local
The takaful firms are now seeking to offload some of their
risk to reinsurers, but the industry's retakaful capacity is
limited; laying plans last year to develop its Islamic finance
sector, Dubai's government identified a lack of retakaful
capacity as a major constraint.
That leaves an opening for Euler Hermes to market its
sharia-compliant trade credit insurance through GCC takaful
"There is a large amount of latent demand because for small
and medium-sized companies doing international trade, 60 to 70
percent of the firm's assets are typically trade receivables,"
Trading companies using conventional finance are able to
reduce their risk through factoring, in which a business sells
its trade receivables at a discount which includes an allowance
for expected bad debts.
This arrangement isn't possible with sharia-compliant
companies and banks because of Islamic finance's preference for
risk-sharing rather than pure debt, Falcioni said. That makes
the role of takaful firms more important.
Euler Hermes currently issues takaful policies, which create
a cooperative structure to provide financial protection, in the
United Arab Emirates and Bahrain. It plans soon to offer them in
Saudi Arabia, Falcioni said.
(Reporting by Andrew Torchia; Editing by Olzhas Auyezov)