Fitch publishes criteria on Takaful businesses

by Gill Montia

Story link: Fitch publishes criteria on Takaful businesses

Fitch Ratings, the credit rating agency, has published details of its expected approach to rating Takaful firms, which are set up to be compliant with Islamic principles.

The Takaful principle is based on solidarity and mutual guarantee and Takaful businesses are required to avoid interest-bearing assets or liabilities, investing in certain industries and excessive risk and uncertainty.

In its Exposure Draft, entitled Takaful: Rating Methodology and Review, Fitch specifies several areas of analysis that are particularly important in assessing the financial security of a Takaful firm.

In the case of such a businesses, Fitch believes that much of its conventional insurance rating criteria are applicable.

However, in undertaking its analysis, the agency will give greater emphasis to matters such as applicable legal and regulatory frameworks, risk concentrations, product design, risk management and corporate governance.

Fitch believes that a Takaful business seeking an insurer will need to be able to demonstrate that all assets of the firm will be available to meet underwriting and investment losses.

This can be achieved in a number of ways but is likely to involve reference to country legislation, firm-specific legal documentation or a binding and legally effective commitment to arrange suitable interest free loans.

Fitch expects strong growth in the Takaful sector in the coming years and the agency is considering other potential mechanisms that can be put in place to ensure that the total assets of a Takaful business are available to support its liabilities.