‘Takaful’ is an Arabic word which means ‘mutual or joint responsibility’. Accordingly, takaful insurance works as mutual or co-operative insurance, whereby participants contribute – by way of ‘tabarru’ (donation) - a certain sum of money to a common pool.
The fund is managed by a ‘mudharib’, or takaful operator, who manages the fund and compensates those participants who may require assistance.
In order to eliminate the element of ‘gharar’, or uncertainty, considered to be present in conventional insurance policies, takaful incorporates the concept of tabarru, or donation. Participants in the scheme agree to give up as tabarru a proportion of their takaful contributions in the event that any of their fellow participants suffer a defined loss.
Any profits that may be derived from the operations of a takaful are made only after the obligation of compensating those participants in need has been satisfied.
Takaful legislation in Oman
Royal Decree 69 of 2012 amending some provisions of Banking Law and laying the groundwork for the introduction of Islamic banking was promulgated in the Sultanate of Oman. The various elements of the decree have been implemented gradually, with Islamic banking being introduced first, then takaful, followed by Islamic bonds, or sukuk.
Later that year the Central Bank of Oman (the “CBO”) issued a Circular IB 1 on 18 December 2012 permitting conventional banks to set up Islamic windows. The following year, the CBO announced that amendments to the Banking Law were in progress, and that a new framework for the regulation of Islamic banking had been completed.
For its part, the Capital Markets authority (the “CMA”), the authority responsible for the insurance sector in Oman, had been preparing new regulations governing takaful.
Draft Takaful Law
The result of the CMA’s work has been the draft Takaful Insurance Law, which creates a regulatory framework for institutions offering takaful, including liquidity levels and product standards as well as reporting and oversight requirements.
Takaful operators must be listed on the Muscat Securities Market (the “MSM”) and have a minimum capital of OMR 10 million.
Only exclusively sharia-compliant firms may offer Takaful in Oman.
The first issue that had to be considered by the CMA in drafting the regulations governing takaful was whether the regulations should permit conventional insurance companies to offer Islamic windows. As the consultation phase progressed, the debate moved in favour of those who argued that only exclusively sharia-compliant entities should be allowed to open Islamic windows.
It was felt that separating mixed entities at a later stage could prove difficult to manage in practice. Moreover, experts considered that there was a risk of co-mingling Islamic finance products with conventional business which might compromise true sharia-compliance.
The second issue was the size of the minimum capital requirement of OMR 10 million. Some felt this high barrier was a considerable disincentive to smaller market players. Supporters of the limit argued that such a high level was necessary to ensure that only players who were well-capitalized would be able to enter the market.
The draft Takaful Insurance Law was approved by the State Council in February of this year, bringing it one step closer to being finalized, thereby encouraging investment in the takaful industry in Oman.