The idea of a third party sukuk guarantee fund is still being considered by the Islamic Corporation for the Insurance of Export Credits and Investment (ICIEC), the standalone export credit agency of the Islamic Development Bank (IDB) Group. However, according to Abdel Rahman Taha, the chief executive officer of ICIEC, the corporation "has initiated work internally to design a new sukuk policy which can be offered as a means to enhance the credit structure and appeal of sukuk. It is expected that this new policy will be able to provide the much needed respite to the sukuk market." (source)
The 2007 ruling by the Shariah Advisory Committee of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) criticizing the guaranteeing of principal and purchase undertaking by issuers relating to Musharaka and Mudaraba Sukuk, has had a major impact on the global sukuk market. This ruling coupled with the advent of financial crises, says ICIEC, put a lot of pressure on the existing sukuk issues and also dried up the supply side.
While it is now clear that in order for a sukuk to be Shariah-compliant, explained Taha in an interview with Arab News, "it will have to work out a structure without a guarantee from the sukuk issuer/sponsor. This however, poses a unique challenge; having resolved Shariah issues, how to enhance the credit structure to attract sukuk investors. To address concerns of the sukuk market, ICIEC proposed in 2009 to structure a fund which would provide the necessary third party guarantee thereby helping the sukuk market to regain its luster, more importantly, in a Shariah-compliant manner. ICIEC is best placed to launch and manage such a fund. ICIEC has a long and impressive history managing credit Takaful and is the only Shariah provider of credit and political risk insurance in the world."
In fact, bond/sukuk insurance; cooperation in reinsurance and retakaful; new products such as exchange risk insurance; and the role of central banks in supporting export credit agencies (ECAs) are some of the proposed topics on the agenda of the third annual meeting of the Aman Union, the association of investment and export credit agencies in the Arab and Islamic World, which will be held in Kuala Lumpur in 2012.
The prime movers behind the Aman Union are the Jeddah-based, ICIEC and Dhaman (the Arab Investment and Export Credit Guarantee Corporation). The union's aim is to enhance cooperation among Arab and Islamic export credit institutions; to encourage the development of investment and export credit insurance industry in its member countries; and to offer technical assistance to establish new agencies while also enhancing the insurance capacity of existing agencies.
ICIEC maintains that it stands ready to provide all kinds of support needed by its stakeholders. In this regard, the corporation is working in parallel to develop new products, to strengthen existing ones and to forge new reinsurance/coinsurance alliances and convince the Central Banks (CBs) in its member countries on the usefulness of credit and political risk insurance services provided by the ECAs.
In this respect, ICIEC conducted a number of seminars and has also met top central bank officials in Saudi Arabia, Malaysia, Bahrain, UAE, Pakistan and Egypt as part of the first phase of this initiative. In the next phase ICIEC intends to meet more member country central banks. The major focus of these meetings is to help the CBs to understand the ECA products; their ability to transfer risk and their treatment under the Basel II regime.
Taha believes that the CBs, once they understand the risk mitigating features of export credit insurance and political risk insurance, would allow its use by the commercial banks under their supervision. ICIEC has received positive feedback on these efforts.
Cooperation in reinsurance, according to Taha, is a strategic area of cooperation between the Aman Union ECAs, where there is a strong potential for cooperation. The major idea is to increase the reinsurance integration between the members and perhaps establish a common reinsurance pool.
Exchange risk insurance is a new product developed by the Export Guarantee Fund of Iran (EGFI) to cover the risk of fluctuation of exchange rates, which is not normally covered by ECAs. While exchange risk insurance is rightly on the agenda, but given the sovereign debt crisis in the euro zone and the fact that it is also plaguing many member countries of the Aman Union and the IDB, surely there is also place for a new product - sovereign debt risk insurance.
Taha agrees, especially in light of the developments taking place in the global arena over the past couple of years. "I am pleased to report that we have had the foresight to identify the need for a product that addresses the issue of sovereign debt.
We have a product called 'Non-honoring of sovereign financial obligations (NHSFO)', which protects investors and financiers against the risk of the sovereign host country not complying with the demand to pay under an unconditional and irrevocable financial guarantee. We launched this product a year and half ago and we have seen a great deal of interest for it in the market. We have already issued two policies, one direct insurance and one reinsurance, and are now working on a number of other applications, including two that we expect to issue in the coming several weeks."
According to the 2010 annual report of the Aman Union which was unveiled in Istanbul at the union's second annual meeting in October 2011, the insured business of member countries reached a mere $15.06 billion against $13.02 billion in 2009 generating $122.82 million of premium income against $72.91 million in 2009. Paid claims year on year increased from $22.88 million to $23.88 million and recoveries fell from $69.4 million to $28.9 million.
This means that there is massive untapped underwriting capacity in this sector running into hundreds of billions of dollars which remain untapped because of the underdeveloped culture of export credit and political risk Takaful or insurance.
The figures released by the Aman Union in its 2010 annual report also reveal how stark the challenge is for the member ECAs and for the export credit and political risk insurance industry in the IDB member countries. Insured business of $15 billion is paltry in the context of the total trade of some $2.3 trillion of the OIC member countries. Similarly, it has to be compared to the $1.4 trillion of credit insurance provided by the International Association of Export Credit Insurers (Berne Union) representing 10 per cent of the world trade.
However, the expectations for 2011 are positive mainly for the top ECAs of the Aman Union (like ICIEC and Turk Exim Bank) which expect a high growth in business insured and premium. This, says ICIEC, will immediately reflect positively on Aman Union performance globally.
These figures, agrees Taha, "show that the credit insurance is still in its initial stages in the Aman Union member ECAs. The major reasons are the lack of credit insurance awareness. However, we have witnessed in the last few years an increasing demand for credit insurance and special interest from some countries of our region to create their own ECAs to promote the national exports. These efforts in addition to the role of the Aman Union will help to increase the awareness of the importance of credit insurance."
There is also the question to what extent Shariah-compliant export credit and political risk insurance is established among the Aman Union member ECAS. As a dedicated provider of Takaful products in this space, ICIEC may sometimes constrained in its cooperation and entry into new markets given the lack of understanding or legal and regulatory infrastructure to accommodate the specificities of Shariah-compliant insurance products.
Taha maintains that while the Aman Union member ECAs offer credit insurance through providing either Shariah-compliant or conventional products, from a technical point of view, there are not much differences between the two products. "The differences between Shariah-compliant and conventional credit insurance is related mainly to the relationship between the shareholders in the company and the policyholders. The insurance operation is managed by the Company on behalf of the policyholders," he adds.
The Aman Union admitted several new members at its second annual meeting in Istanbul. They include the Qatar Export Development Agency - Tasdeer (Associate Member); African Trade Insurance Agency (Observer); Atradius Reinsurance Ltd (Observer); Catlin (Observer) and Rime (Observer). This brings the membership of the union to 17 full member ECAs, 2 associate members and 8 observers.
In Istanbul there was much technical discussion over credit insurance. However one of the major issues and demand currently is for commercial risk insurance. In fact, there should be a natural fit between Islamic finance and this type of risk insurance. Taha confirms that the demand for commercial credit insurance has certainly increased after the current financial crisis. "All of our Aman Union ECAs members are actively covering this risk and the majority have seen an increase in the demand for their services covering commercial risk which includes risks related to the buyer financial situation (insolvency, unwilling to pay, bankruptcy, etc)," he says.
