Saudi takaful rise to boost local bonds

Rapid growth among Saudi Arabia's Islamic insurers will benefit the domestic bond market but bypass dollar-denominated issues due to regulations that keep insurers' investment close to home, analysts and executives said.

Strong growth in the takaful, or insurance industry has underpinned hopes it will give a boost to the market for sukuk.

Insurers are important investors in conventional fixed-income markets, but sukuk have been mostly bought by Western investors such as hedge funds and banks. "Saudi Arabia is the largest and most underdeveloped insurance market in the region," said Ashraf Bseisu, acting chief executive of Solidarity, the takaful arm of Bahrain-based lender Ithmaar

Insurance penetration in Saudi Arabia is low, but government efforts to make health insurance mandatory have spurred annual growth of more than 20 per cent as they have raised awareness of other insurance products as well, executives said.

Takaful premiums in Saudi Arabia totalled $1.7 billion (Dh62bn) in 2007, according to a report by Ernst & Young published last year, or about half of global takaful premiums.

Saudi Arabia launched a bond trading platform on its Tadawul stock exchange last June, but trading has been sluggish.

Analysts said that takaful companies in the region have mostly invested their assets in real estate and equity rather than sukuk, partly a result of the lack of Shariah-compliant investment-grade assets.

"Part of this problem is regulatory, where takaful firms in loosely regulated jurisdictions have been permitted to make investments far outside what one would consider prudent in insurance," said John Sandwick, a consultant on Islamic wealth management. 

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