Political risk insurance necessary in the midst of MENA instability |
Saudi Gazette - 03 July, 2012
The instability in some of the Middle East and North Africa (MENA) countries is pushing demand for export credit and political risk insurance, which according to Fahad R H Al Ibrahim, Director General of the Kuwait-based Arab Investment and Export Credit Guarantee Corporation (Dhaman), is set to increase sharply over the next few years.
Dhaman, which started operations in 1975, is an Arab supranational political risk and export credit agency (ECA), whose membership comprises the 21 Arab League states and four international Arab organizations including the Arab Fund for Economic and Social Development, Arab Monetary Fund, Arab Bank for Economic Development in Africa and the Arab Authority for Agricultural Investment and Development.
With a wide-ranging and changing mandate, including the promotion of the flow of foreign direct investment (FDI) into Arab countries; supporting Arab exports, domestic trade and economic growth through the provision of a motley of political risk, export credit, commercial risk and other insurance products and services, the corporation recently came to London to showcase its services to British banks and companies dealing with the Arab world. "I believe that the demand is good for the investors’ credit guarantees and for investment and export credit insurance. In 2003 the volume of our business totaled $ 350 million.
By 2011 this volume had increased to $ 1.4 billion. This means there is a huge demand for our products and services," Al-Ibrahim said.This demand, according to Dhaman, in the wake of the Arab Spring has two elements: a huge increase in demand for political risk insurance because there is instability in this area, and the ever-changing nature of this demand.In response to the increased enquiries from investors about the guarantees offered by Dhaman, the corporation, for instance, amended its Articles of Association to allow it to underwrite not only new investments under the current regulations but also to underwrite existing old projects, which in turn has seen a huge surge in demand for political risk insurance to cover these projects in the wake of the Arab Spring.
Fahad Al-Ibrahaim agrees that the culture of political risk insurance (PRI) and export credit insurance (ECI) in Arab countries can be further improved, especially in terms of market penetration and premium income to GDP, which are still very low for MENA countries. But with this increased underwriting capacity and demand, is Dhaman adequately resourced in terms of capital? Dhaman’s total equity stood at $ 317.5 million at end 2011 of which $ 199.3 million is paid up. Dhaman knows how to leverage the nature of its membership which are the governments of the region. Its underwriting is usually with the agreement of the respective government of the entity. "We are not giving guarantees to any investor unless we take approval from the country.
So there is only political risk and this is signed between Dhamam and these Arab countries. That’s why we don’t have any problem with payment default. In terms of LC confirmation insurance for banks, we are dealing with the banks through the respective central bank. We are not afraid if there is any delay, because we know that eventually it will be resolved and paid up.
We have not had one payment default since the LC confirmation was started two years ago," added Fahad Al-Ibrahim. Dhaman’s bank client list comprises 400 banks covering 60 countries. According to Azza Al-Hunaidi, Assistant Director, Financial Institutions at Dhaman, the corporation caters to both conventional and Islamic financial institutions, especially for deferred payment LCs, leasing, and ECI for Murabaha transactions. He acknowledges that demand for Shariah-compliant PRI and ECI is increasing given that Islamic finance now accounts for 30 to 40 percent of total banking market share in many GCC countries.
"We have several lines of Shariah-compliant business which cater for any exporter or any investor who wants to use such products. We have no obstacles to underwriting on a Shariah-compliant basis." Although Dhaman is essentially a conventional underwriter, Shariah-compliant business lines are now part and parcel of its offerings, although ultimately it depends on the demand from investors and exporters. In fact, Dhaman is reviewing its Islamic insurance products strategy through its Investment Committee and hopes to expand its product and services suite in this respect. Currently, most of its Islamic underwriting for banks, for instance, pertain to Murabaha (cost-plus financing) and Ijara (leasing), which has been "very successful and is good business." Dhaman’s Guarantee Contract Portfolio in 2011 totaled $ 1.441 billion and its total assets at the beginning of 2012 were $ 341.2 million. In the context of intra-Islamic trade of a total of $ 2.5 trillion, the breathtakingly modest underwriting capacity of Dhaman becomes evident.
Al-Ibrahim puts this down to the dominance of foreign ECAs such as France’s COFACE and Germany’s Hermes operating in the Arab countries. To start countering this dominance, Dhaman has teamed up with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the standalone Shariah-compliant ECA of the Islamic Development Bank (IDB) Group, and other ECAS such as Turk Eximbank and Eximbank of Malaysia, to establish the Aman Union, the professional ECA body which teams up ECAs from the Arab and Muslim world. The aim of the Aman Union is foster cooperation in the field of PRI and ECI provision in member countries.
"We want to cooperate together to leverage our opportunities and to get more benefit from our trade finance operations, otherwise we will continue to suffer. I don’t believe that COFACE will come and give us their know-how," he explained. Establishing ECAs of the quality of COFACE requires the right regulatory and legal framework, which unfortunately is still lacking in many MENA countries. Similarly, COFACE has strong support from the French government, which ECAs in the Arab countries do not necessarily enjoy from their respective governments. This has allowed COFACE to be well entrenched in markets such as the Arab countries, because very often COFACE underwriting is linked to contracts which French companies have won or executing in the region. Not surprisingly, Western ECAS reacted negatively to the establishment of Aman Union, which is due to hold its annual meeting in Kuala Lumpur in November this year.Dhaman also has potential problems in western markets because some members such as Sudan and Somalia are subject to selective political sanctions. In the London reinsurance market for instance, it is a major problem where underwriters will not accept any business relating to Sudan, Somalia and Iran. As such, Dhaman has a responsibility to come and give support to these countries.Al-Ibrahim also agrees that there are potentially huge new opportunities in new business areas such as bond and Sukuk insurance and Takafaul and third party guarantees.
The global sukuk outstanding has reached $ 200 billion, but Dhaman seems to think that it is not equipped at least currently to take on such new business responsibilities. Instead it wants ICIEC to lead in this area albeit Dhaman and other ECAS will support any such initiatives. Dhaman currently operates under its "2007- 2014 Strategic Plan" which highlights products such as factoring insurance; leasing insurance; IC confirmation in addition to PRI and ECI.
Two years ago the Corporation also started to underwrite domestic business of member countries, which now totals $ 400 million. "Our priority for the next few years is to concentrate on our LC confirmation business, which we believe is very essential, mainly for the countries which are suffering from the impact of high oil, gas, petroleum products and commodities prices. Similarly, leasing is also a very important product for us. What we need from these countries is political stability which would generate more employment policies and rejuvenate the tourism industry which is a major revenue and employment generator," he noted.