International Takaful Summit 1 November 2007

1. Legal & Regulatory Framework of Takaful Industry in Malaysia Wan Mohd Nazri Wan Osman Bank Negara Malaysia International Takaful Summit 1 November 2007

2. Legal & Regulatory Framework of Takaful Industry in Malaysia • Key Features & Factors Shaping the Framework • Main Aspect of Legal & Regulatory Framework • Updates & Recent Development of Industry

3. Comprehensive System Specificities Legal & Regulatory Framework Consumer protection & expectation Complementarities & fair competition Tremendous prospect of Islamic Finance & takaful moving forward…Industry is reaching mainstream relevance... High potential for international business – Increased linkages & dramatic global IF growth Strong domestic IF – Growing diversity of players & sophistication of products • Domestic IBIs (2 Islamic banks, 8 IS, 1 window)‏ • Foreign IBIs (3 IBs, 5 windows)‏ • Takaful operators (4 domestic, 5 foreign participation)‏ • Retakaful operators (3)‏ • Fund managers • Increasing world’s wealth provides larger source for Islamic finance to capitalise on • Positive economic growth, coupled with Asia’s booming economies • Savings rates of Middle East and developing Asia countries are on upward trend, • Total HNWI’s wealth also expanding and thus, provides potential for Islamic finance

4. Comprehensive System Specificities Legal & Regulatory Framework Consumer protection& expectation Complementarities & fair competition • Conducive environment for an efficient mobiliser of resources and a source of economic growth • Legal framework that provides greater flexibility to expand and develop Instituting core components of financial system The importance of greater inter-linkages among core components • Create synergy for Islamic financial system • Enhance resilience and robustness to withstand financial shocks and increase the overall stability of Islamic financial system

5. Profit sharing contract Shariah compliant investment Loss to be borne by participant Underlying principles & contracts Non guaranteed benefits Treatment of Expenses Multiple models adopted Surplus sharing practices Addressing specificities… Comprehensive System Specificities Underlying principles Islamic concept of pooling together a sum of contribution for consideration of protection for oneself and fellow participants Tabarru’ Mutual cooperation Legal & Regulatory Framework Contracts Consumer protection& expectation Complementarities & fair competition Rel. with participants Tabarru’ and mutual cooperation Participants & Operator Wakalah, Mudharabah & other contracts e.g. waqaf and musyarakah • Define the basis of LEGAL & REGULATORY framework for takaful business • E.g. Ownership of takaful fund – belongs to participants, as oppose to insurance company whereby the fund belongs to shareholders

6. Competency of Intermediaries Availability of Channels to resolve disputes Disclosures to consumers Greater supervisory oversight is required to ensure proper selling practices in view of non-guaranteed nature of benefits Dispute resolution mechanisms that offer speedy resolution of dispute Ensuring that participants have access to accurate, timely and relevant information Consumer education Fostering greater awareness and understanding of risks and rights with regard to takaful products Two-tier Shariah framework Comprehensive System Specificities Shariah Advisory Council Authoritative body on shariah matters relating to Islamic finance and takaful matters Shariah committee part of internal governance to ensure compliance with shariah Legal & Regulatory Framework Consumer protection & expectation Complementarities & fair competition Market Conduct & Consumer Protection Fair Treatment • Tax neutrality • Supervisory approach • Governance structure • Market outreach

7. Legal & Regulatory Framework Legal framework • Parameters with dedicated boundary Conduct of Takaful Business • Requirement to conduct takaful business • Capital requirement, annual registration fee, statutory deposit, surplus of asset over liabilities • Eligibility criteria • Financially sound and competent institutions • Managed by qualified and competent management team • Governance • Establishment of Shariah Committee • Directorship for takaful operators • Board responsibilities and oversight management accountability • Appointment of Chairman, directors and CEO • Structure of duties of board committees • Role of the Appointed Actuary • Duties and responsibilities of the appointed actuary • Reporting requirement by the appointed actuary • Licensing • Establishment and maintenance of takaful fund • Allocation of surplus • Requirements as to assets of takaful fund • Intermediaries • Shariah requirement Returns, Investigation, Winding Up & Transfer of business • Annual accounts & audit • Actuarial investigation & report • Power of investigation

8. Legal & Regulatory Framework Regulatory framework Broad Objective • Establish and promote sound and credible takaful sector that conforms to Shariah tenets Allow flexibility on various business models whilst ensuring prudent management of takaful fund and fairness among stakeholders Main Thrust • Maintain and ensure fairness in “pricing”, managements and terms of contract • Balance between profit maximisation and prudent management of fund to ensure sufficient level of reserves while meeting expectations of shareholders • Disclosure requirement with the objectives to enhance corporate governance and protect interest of participants • Ensure prudent management of takaful fund with high standard of corporate governance • Safeguard participants’ and other stakeholders’ interests • Facilitate the intermediation role of financial system in economy • Maintain public confidence as takaful operators are custodians of public fund

9. Broad Operational Business Flow of Takaful Acceptance of contributions Surplus and deficit of fund Management of takaful fund • Surplus: - Sharing • Non-sharing • Treatment in case of Deficit • Underwriting • Investment • Retakaful • Reserves • Claims • Commission • Management expenses • Protection (PSA) • Savings (PA) Various approaches in treatment of surplus and deficit of takaful fund Variation in the treatment of contribution depending on the model Takaful practice is consistent with international best practices TRANSPARENCY AND FULL DISCLOSURE OF TAKAFUL BUSINESS OPERATION - IFSB Working Group on Corporate Governance for Takaful -

10. Guiding Principles Conformity with Shariah principles operational framework with essential features of takaful and comply with Shariah tenets Principle 1 Strengthening of takaful funds prudent management of takaful funds and operational framework to meet obligations of takaful funds Principle 2 Maintain and ensure fairness protect participants’ interest and fulfill participants’ reasonable expectations Principle 3 Disclosure and transparency to enhance the corporate governance and protect the interests of the relevant stakeholders Principle 4

11. Malaysian Experience Robust growth over the last 20 years, with market share of 6.1% and growing at 17.9% in terms of total asset New entrants of takaful players to intensify the competition and advancement of the industry

12. Latest Development • Expanding retakaful market - enhancing industry’s growth frontier & strengthen underwriting capacity of takaful industry • Awarded 2 new retakaful licences to reputable reinsurers to conduct retakaful family and general business • opening for new retakaful licence with up to 100% foreign shareholding • Attract takaful players to conduct international currency takaful business • 10-year tax holiday • Provide support and enabling platform in the origination, issuance and trading sukuk both in Ringgit and multi-currencies to precipitate more investment avenues for takaful and retakaful companies • Approved five takaful operators to conduct international currency takaful business

13. THANK YOU Collaborative efforts of key stakeholders are critical to ensure success of further expansion of the industry at domestic and international level.

14. Capital adequacy and solvency needs to take into account variations in takaful models……….. Supervisory Approach……………… Policyholders are required to make good of the deficits whilst operators act only as administrator of the funds In the event of deficits in underwriting account, operator needs to provide interest-free loan to make good of the deficit Greater need for active policyholders representation on the oversight of the takaful operators

15. Existing sphere of innovation is limited... Shariah flexibility – dharurah/ maslahah Replication approach Customers demand Existing spheres of IF Innovation… Near like-to-like parity with conventional offerings except… Basic operating environment • Tax treatment • Regulatory & supervisory framework • Corporate governance principles • Risk Management requirements • Distinct products and services: • Sukuk Ijarah • Musyarakah Mutanaqisah (Diminishing Partnership) • Exchangeable sukuk • Musyarakah venture to undertake development of real estate • Islamic profit rate swap • Relegation of Shariah as product shaper instead of environment shaper • Non convergence industry vs. Shariah scholars expectation • Islamic finance as mere follower...

16. Shifting to new paradigm of innovation... Innovation Paradigm Shift to maximize existing infrastructure & funding opportunities …