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Islamic Insurance
Takaful
Takaful is a noun stemming from the Arabic Verb "Kafala"
meaning to guarantee.
Takaful is an alternative for the contemporary insurance contract.
A group of persons agree to share certain risk (for example, damage
by fire) by collecting a specified sum from each. In case of loss to
anyone of the group, the loss is met from the collected funds Thus it
can be visualized as a pact among a group of members or participants
who agree to jointly guarantee among themselves against loss or
damage that may inflict upon any of them as defined in the pact.
Should any member or participant suffer a catastrophe or disaster he
would receive a certain sum of money or financial benefit from a fund,
as also defined in the pact, to help him meet the loss or damage.
In other words, the basic objective of Takaful is to pay for a defined
loss from a defined fund. Each member of the group pools effort to
support the needy. It means mutual help among the group.
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Islamic Insurance
Islam & Insurance
Precedents for Islamic Insurance (Takaful)
An Islamic alternative to contemporary insurance is known as Takaful,
and is based on the concept of Ta'awun, or mutual assistance. Ta'awun
forms the basis of many Islamic practices. The teaching of Islam in
regard to the equality and brotherhood of believers, and their
responsibilities toward one another and all humanity led to several
forms of mutual assistance both social and economic. Takaful as
practiced in the sixth century (Christian era A.D. and +50 Hijrah)
actually evolved from tribal practices of mutual assistance dating back
to pre Islamic times. There are several examples in pre-Islamic history
whereby families, tribes or related members throughout the Arabia
peninsula pooled their resources as a mean to help the needy on a
voluntary and gratuitous basis. There practices were validated by
Prophet Muhammad (PBUH) and incorporated into the institutions of
the early Islamic State in Arabia around 650 C.E.
Examples of these early Islamic practices include the following:
Merchants of Mecca formed funds to assist victims of natural
disasters or hazards of trade journeys.
Surety called Daman khatr al-tariq was placed on traders against
losses suffered during a journey due to hazards on trade routes.
Assistance was provided to captives and the families of murder
victims through a grouping known as a'qila.
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Islamic Insurance
Contracts, called 'aqd muwalat, were entered into for bringing
about an end to mutual amity or revenge.
Confederation was brought about by means of a hilf, or an
agreement for mutual assistance among people.
To illustrate the importance of this relationship in a life of a Muslim,
Islam calls for the protection of certain basic rights, viz.: -
The right to protect the Religion.
The right to protect the life.
The right to protect dignity/honor.
The right to protect the property.
The right to protect the mind.
In view of the above as well as the real need for insurance cover,
Muslim jurists looked further into the Islamic system of insurance. Their
conclusion was that insurance in Islam should be based on the
principles of mutuality and cooperation. On the basis of
these principles, Islamic system of insurance embodies the elements of
shared responsibility, joint indemnity, common interest, solidarity, etc.
According to the jurists this concept of insurance is acceptable in Islam
because,
the policyholders would cooperate among themselves for their
common good;
every policyholder would pay his subscription in order to assist
those of them who need assistance;
it falls under the donation contract which is intended to divide
losses and spread liability according to the community pooling
system;
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Islamic Insurance
the element of uncertainty will be eliminated insofar as
subscription and compensation are concerned;
it does not aim at deriving advantage at the cost of other
individuals.
Takaful Referenced with the Qura'an and Sunnah
Although the word Takaful does not appear in the Holy Qura’an, it is
derived from the term Ta'awun, or mutual assistance and connotes the
same meaning. The second verse of Surah 5 in the Holy Qura’an
exhorts the individual to assist others:
"Assist one another in the doing of good and righteousness.
Assist not one another in sin and transgression, but keep
your duty to Allah" V.5:2.
In addition, many of the virtuous customs from the pre-Islamic period
of Jahiliyya were declared "Islamic" by the Prophet Muhammad (PBUH)
when he said: “the virtues of the Jahiliyya are acted upon in Islam." He
further clarified this point in the constitution written in Medina.
They {Muslims of the Quraysh and Yathrib tribes} are one
community (ummah) to exclusion of all men. The Quraysh
emigrants according to their personal custom shall pay the
blood-rite {aqila} within their number and shall redeem their
prisoners with the kindness and justice common among
believers."
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Islamic Insurance
Believers are to other believers like parts of a structure that
tighten and reinforce each other." Al-Bukhari and Muslim.
The Believer, in their affection, mercy and sympathy towards
each other, are like the body- if one of its organs suffers and
complains, the entire body responds with insomnia and
fever." Muslim.
Given the Qura’anic admonition to "assist one another" and the words
of the Prophet Muhammad (PBUH) regarding mutual assistance,
Takaful may be understood as an imperative upon Muslim believers:
"… a system based on solidarity, peace of mind and mutual
protection which provides mutual financial and other forms of aid
to Members {of the group} in case of specific need, whereby
Members mutually agree to contribute monies to support this
common goal." O.Fisher
Finally, although a believing Muslim is required to accept (destiny or
pre-ordainment) which can incorporate misfortune, s/he is not a
passive "victim of circumstances.
Conversely, the believing Muslim is exhorted by the injunctions of the
Holy Qura'an to proactively take precautions in order to minimize
potential misfortune, losses or injury from unfortunate events. One
specific such instruction appears in Hadith to the owner of the
camel to first tie your camel then rely upon the destiny
ordained by Allah (swt).[Al Tirmidhi Vol.4,p.668].
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Islamic Insurance
Main Objections against Conventional Insurance
While there a number of objectionable elements existing with
conventional insurance, three main ones stand out.
Qard Al Hassan
According to Islamic principles, only one type of loan, Qard el Hasan
(lit. good or benevolent loan) is allowable. Under the concept of Qard el
Hassan, the lender may not charge interest or any premium above the
actual loan amount. Some Muslim jurists state that this restriction
includes directly or indirectly any benefits associated with the loan: "…
this prohibition applies to any advantage or benefits that a lender
might secure out of the qard (loan), such as riding the borrower's mule,
eating at his table, or even taking advantage of the shade of his wall."
Muslims are encouraged to invest actively in ventures with an intent to
share profits or losses that may result, rather than becoming a passive
creditor. Unlike conventional commercial banking (largely based upon
fixed, guaranteed rates of return-interest), this mutual sharing of risk
promotes communal enterprises, risk-taking and productive activities.
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Islamic Insurance
Monies are not sitting idle or invested at nominal, fixed rates of return.
Instead, monies are applied to commercial transactions or agrarian
cultivation where risks and rates of return are balanced. A higher
degree of risk in investment attracts a concomitant high rate of return
to investors, provides stimulus to an economy and creates an
environment for entrepreneurs to maximize their productive efforts.
By contrast, most conventional insurers invest premiums in
bonds/loans (corporate and municipal) as well as other interest
generating investments (involving Riba from Islamic perspective).
Riba (Interest/Premium/Usury)
The single most important aspect that differentiates Islamic finance
from conventional finance and banking is the absence of interest. As
discussed earlier, the Shariah prohibits both the taking and paying of
interest (Riba) no matter what the purpose of the transaction, or the
amount of interest charged. Apart from a minority interpretation of
Shariah by a few Scholars, the consensus among Islamic jurists is that
Riba and interest are the same.
There are four occasions in the Holy Qura’an where Riba is clearly
prohibited. Refer to V.30:39; V.4:161; V.3:130 and V.2:275-276.
The use of Riba is clearly prohibited by Prophet Muhammad (PBUH) in
a Hadith, where the Prophet (PBUH) condemned those who accept
interest, as well as those who pay it or are witness to such a
transaction.
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Islamic Insurance
Riba, however, circumscribes other aspects that make commercial
transactions suspect as well: "The Prophet (PBUH) forbade
indeterminist, doubtful or speculative transactions or selling something
before having possession of it." "The Prophet (PBUH) forbade
purchases from needy people and purchases involving uncertainty
such as the sale of fruit before its maturity. "
Al Gharar (Uncertainty)
All commercial transactions must contain full disclosure. In other
words, any transaction entered into should be free of uncertainty,
deception and unknown elements or speculation. Al parties involved
should have "full disclosure" or knowledge of the "counter values
intended to be exchanged as a result" of the transaction, including the
fact that "profits" cannot be guaranteed. The purpose of this
prohibition is to avoid exploitation and injustice, especially on the part
of the holder of capital.
Examples of prohibited transactions include: options, futures,
derivatives, short sales and forward foreign exchange transactions
(rates are determined by interest differentials). A number of
transactions are treated as exceptions to the rule of Gharar. Such
commercial transactions contain special treatments to assure they are
organized to minimize harm and risk to both parties. Such transactions
are:
a. Sales with payment in advance (bai'bithaman ajil)
b. Contract to manufacture (Istisna)
c. Hire contract (Ijara).
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Islamic Insurance
Specifically, Takaful transactions are design to minimize Al Gharar
since the risk of future events can neither be known in advance nor
influenced in any way. Note that the mere fact of purchase of a Takaful
Contract in no manner affects future events nor does it guarantee that
any specific outcome will/will not occur. Obviously, nothing in Takaful
operations can influence Al Qadar (Allah's swt destiny).
Principles & Models of Takaful
Origins and Operations of Takaful System
Background Elements to Takaful
Four fundamental factors must co-exist to establish the proper
framework for a Takaful system:
A. Nea’a or utmost sincerity of intention for knowingly following
guidance and adhering to the rules of a Takaful system.
B. Integration of Shariah Conditions, namely: risk protection
sharing under ta'awuni principle, coincidence of ownership,
participation in management by policyholders, avoidance of Riba and
prohibited investments, and inclusion of al Mudharabah or Wakalah
principles for Takaful management.
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Islamic Insurance
C. Presence of Moral Values and Ethics, business is conducted
openly in accordance with utmost good faith, honesty, full disclosure,
truthfulness and fairness in all dealings.
D. No Unlawful Element that contravenes Shariah and strict
adherence to Islamic rules for commercial contracts; namely the key
elements present are:
Parties have Legal Capacity (i.e. +18 years old) and are mental
fit
Insurable Interest
Principle of Indemnity prevails
Payment of Premium is consideration (offer and acceptance)
Mutual Consent (which includes voluntary purification)
Specific Time Period of Policy and underlying Agreement
The Principles of Takaful Insurance
Uncertainty is eliminated in respect of
subscription and compensation.
It does not derive advantage at the cost of
others.
Solidarity and joint guarantee
Self reliance and self sustaining for community
well being
Assist those that need assistance
Community pooling system
Halal investments
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Takaful Models
As a matter of deep faith, Muslims believe that there is unity in
diversity. One expression of this is that no single "best" model exists
for Takaful. Shariah scholars worldwide concur on fundamental
components that characterize a Takaful scheme, yet in their judicial
opinions (fatwas) operational differences are tolerated that do not
contradict essential religious tenets.
As such, Takaful Models may be separated into three categories:
(A) Ta’awuni Takaful Non-Profit Model, includes social-
governmental owned enterprises and programs operated on a non-
profit basis (such as Al Sheikhan Takaful Company - Sudan), which
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utilize a contribution that is 100% Tabarru (donation) from Participants
who willingly give to the less fortunate members of their community.
(B) Al Mudharabah Model, whereby cooperative risk-sharing occurs
among Participants yet the Takaful Operator shares also in any
operating surplus as a reward for its careful underwriting on behalf of
Participants. Examples of this Model include Takaful Malaysia (STM -
Malaysia), Takaful Nasional (Malaysia) and Takaful International
(Bahrain).
(C) Al Wakalah Model, whereby cooperative risk-sharing occurs
among participants with a Takaful Operator earns a fee for services
{as a Wakeel or Agent} and does not participate or a share in any
underwriting results as these belong to Participants as Surplus or
Deficit, under the Al Wakala Model, the operator may also charge a
funds management fee and a performance incentive fee (as Bank
Aljazira does).
Ta’awuni model
Ta'awuni is a system of mutual cooperation for financial assistance and
protection based upon the Qura’anic principles of "Ta'awuni, or mutual
assistance."
In the context of takaful, Ta’awun meaning mutual help allows
participants make donations with the intention of helping one another
within the takaful group. The elements underpinning the Ta’awun
concept as applied in takaful, can be broken down into the following:
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1) Mutual responsibility
2) Mutual cooperation
3) Mutual protection
Benefits of Takaful Ta'awuni?
Fulfils the social obligations towards community and family.
Enables financial assistance for the unfortunate and needy.
Avoidance of Al-Riba, Al Maysir and Al Ghirar and similar
prohibited elements within financial dealings.
Promotes moral values, ethical dealings and full disclosure in
all its business activities and operations.
Protection of lifestyle.
Security for the family and the group against misfortune.
Through "Tabarru" donations it allows Participants to achieve self-
purification and peace of mind
Mudharabah-A Profit Sharing Islamic contract
Points to consider with Non-Surplus Sharing Mudharabah
Model
Excellent and laudable model
In many ways exceeds a Mutual insurance model as no expenses
are charged to the participants funds
Operator does not share in surplus therefore no Mudharabah
issue to debate
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Islamic Insurance
Very difficult business model as a stand-alone Family/Individual
Life Takaful operation (especially where no charging of expenses
to participants fund envisaged)
Possibly only potentially viable where a composite Takaful
operation is being considered.
Could take many years to realize a commercial profit from such a
business model as it relies on the build up of reserves and
savings funds
As a stand-alone model, would lend itself to a philanthropic, state
sponsored or participants providing capital, business operation.
Points to consider with a Mudharabah Surplus Sharing Model
First and foremost, this is a Shariah issue, not an issue between
operators
Surplus is what remains of capital/contributions after the
deduction of claims and direct expenses.
Profit is the creation of a value in excess of the capital provided.
As no profit (only surplus) is generated in the Takaful
underwriting operations , the application of a Mudharabah
contract is being debated by Shariah scholars
Applying a Mudharabah contract to the investment profits
however, is accepted
Wakalah-A fee driven Islamic contract
Points to consider with the BAJ Wakalah Model
Fees only taken if a product is sold
No charging of expenses to the participants fund
Operator alone totally responsible for all start up expenses and
operational costs
No issue of agency or commission sales
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Islamic Insurance
Clear separation between participant and operator
Wakalah Fee on Surplus accepted by Shariah advisors
Total transparency on all aspects of the operation and fee
structure
Wakalah Model-1
Same Wakalah model for all plans, Group or Individual
A single Wakalah contract throughout for both underwriting and
investment operations.
Contribution is clearly broken down into Tabar’ru, Fees and
where applicable, individual investments.
Tabar’ru is only applied when the cost of risk is due.
Total transparency and clear breakdown of costs and Wakalah
fees stated in contract schedule.
Participants therefore only pay actually costs plus declared
Wakalah fees. No unknown loadings.
Takaful vs. Conventional Insurance
“Commercial insurance is originally haram as agreed upon by most
contemporary scholars. It is well known that in most non-Islamic
countries there are cooperative and mutual insurance companies.
There is no harm from the Shariah point of view to participate in
these services. So, it is unlawful for a Muslim living in a country
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Islamic Insurance
where there is such a cooperative insurance company to make an
agreement with a commercial insurance company. But, if a
cooperative insurance company is not found one may enter into a
contract with a commercial insurance company only by way of
necessity. If a person is forced by law to insurance or by way of
need, it is obligatory for him to be content with the minimum
proportion of insurance that covers his need or to the minimum of
such transaction he’s being forced to carry out.”
European Council for Fatwa and Research
Brief Comparison of Conventional Insurance and Takaful
It is beyond the scope of this paper to present the features of each
model and the Shariah arguments for or against. However, the key
structural issues to be examined and understood - especially to fully
appreciate differences between conventional insurance and Takaful -
are the following items:
Sources of Capital and Returns to Capital
Organizing principle; i.e. Relationship among participants
themselves and between Participants and the Takaful Operator.
Treatment of Expenses and Liability for Claims
Zakat and Charitable features - how to cleanse profits
Funds management - pooled or unitized
Investment of Premiums in accordance to Shariah
Dissolution - who ends up with any surplus capital
Regulations, Taxation and Auditing
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A comparison is made below to highlight the salient differences
between conventional insurance (excluding mutual companies that
share many aspects in common with Takaful companies) and Takaful
companies:
Conventional Insurers Takaful Operators
Sources of laws & regulations are set
by state and man-made.
Sources of laws are based upon
Divine revelations (Holy Qura’an
and Hadith)
Profit-motive, maximizing returns to
shareholders.
Community well-being optimizing
operations for affordable risk
protection as well as fair profits
for the operator.
Profits and/or Bonus units to be
returned to policyholders as
determined by managers and Board
of insurer.
Takaful contract specifies in
advance how and when
profit/surplus and/or Bonus units
will be distributed.
Initial capital supplied by
shareholders.
Initial capital supplied by Rabb al
Mal (Agent) or paid in via
premiums from participants.
Separation of policyholder and
insurer with differing interests.
Coincidence of interests between
policyholder and operator as
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appointed by participants.
Transfer of losses among insurance
pools and from policyholders to
shareholders.
Losses retained within classes of
business written and sole
obligation of Participants.
Right of insurable interest is vested in
the Nominee absolutely in Life
insurance.
Right of insurable interest is
determined by Islamic principles
of Faraid (inheritance).
Insured may elect cost or
replacement cost valuation and claim
accordingly whether or not they
chose to rebuild property.
Insured may not "profit" from
insurance and entitled to
compensation only for repair or
rebuild or replacement.
Agents and Brokers are typically
independent from insurer and paid a
fee from the premium charged to
policyholders that is not disclosed
that is not disclosed.
Agents are employees of the
Takaful and any sales
commission should be disclosed.
Investment of premiums conducted
by insurer with no involvement by
policyholders.
Takaful contract specified under
principles of al Mudharabah how
premiums will be invested and
how results are shared. Under al
Wakalah, similar practice plus
Participant can direct his
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Islamic Insurance
investments into a range of
unitized funds.
Insurer invests premiums consistent
with profit-motive with no moral
guidelines; hence co-existence of Al
Riba and Al Maisir.
Takaful invests premiums in
accordance with Islamic values
and Shariah guidelines.
Dissolution - reserves and
excess/surplus belong to the
shareholders.
Dissolution - reserves and
excess/surplus could be returned
to Participants, although
consensus opinion prefers
donation to charity.
Taxes - subject to local, state and
federal taxes.
Taxes - subject to local, state and
federal taxes (if any) plus
obligated to arrange annual tithe
(Zakat) donations to charity.
Benefits paid from general insurance
account owned by insurer.
Benefits paid from contributions
(Al tabarru) made by participants
as mutual indemnification.
Accounting consistent with GAAP and
prevailing statutory rules Auditing for
uniform application of accounting
standards.
Accounting standards consistent
with national rules (with may be
GAAP) plus prevailing statutory
rules. Auditing same standards
plus conformance with Islamic
rules; typically with Shariah
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Islamic Insurance
Advisory oversight.
Part II Profile of Global Takaful Industry & Trends
Introduction
The Takaful industry is roughly 30 years young as the first Takaful
company was established in 1979 - the Islamic Insurance Company of
Sudan. Today there are some 28 registered Takaful companies
worldwide writing General Takaful (commercial property/liability) and
Family Takaful (Life) on a direct basis. In addition, there are 10 more
Takaful programs either as Islamic "Windows" or marketing agencies
that place insurance risk with conventional insurers or with takaful
operators. In fact, the total number of takaful companies could be
higher because all insurance companies in Sudan are deemed to
operate in accordance with Islamic Shariah guidelines.
More takaful companies are under formation in Sri Lanka and in
Singapore. At least four more takaful companies will likely be
established in the Middle East (viz. Bahrain, Kuwait, U.A.E. and Egypt).
Several others are being contemplated in various countries such as
Saudi Arabia, Pakistan, Australia and Lebanon. It is also understood
that interest is shown in Takaful in the Philippines, South Africa,
Nigeria, and some of the former states of the Soviet Union.
Overall, the Takaful industry in the Middle East region is newly
emerging when compared to other relatively developed markets such
as Malaysia. The more successful companies in the Middle East
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(Bahrain/UAE) have grown at 10% annually whereas in Malaysia the
rate of growth has been 60% annually.
Proliferation of Takaful Programs
Spurred on by such re-confirmations by Islamic scholars and their own
person discomfort with existing insurance schemes, Muslims began in
1973 a rediscovery of the Takaful models and to pioneer their
implementation. In rapid succession, groundbreaking efforts to
introduce Takaful schemes as Islamic alternatives to conventional
insurance produced outcroppings in many countries:
Sudan (1968), General United Insurance Co.
Sudan (1973), National Reinsurance Company of Sudan
Sudan (1979), The Islamic Insurance Company
Saudi Arabia (1979), The Islamic Arab Insurance Company
UAE (1980), The Islamic Arab Insurance Company (Dallah)
Switzerland (1981), and UK (1982) Dar Al Mal Al Islami
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Bahrain (1983), Bahrain Islamic Insurance Company
{recapitalized and renamed Takaful International in 1999}
Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company
Luxembourg (1983), Islamic Takaful Company
Sudan (1984), Al Barakah Insurance company
Saudi Arabia (1983), Takaful Islamic Insurance Co. / Bahrain
Bahrain and Saudi Arabia(1985), Islamic Insurance and
Reinsurance Company
Malaysia (1984), Sayrikat Takaful Malaysia
Saudi Arabia (1986), National Company for Cooperative
Insurance
Turkey, Uluslarais Sigorta ve Reasurar
Saudi Arabia (1992), Al Rajhi Islamic Company for Cooperative
Insurance
Bahrian (1992), Al -Salam Islamic Takaful Co.
Brunei (1993), Takaful IBB Berhad
Brunei (1993), Takaful TAIB Berhad
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Brunei , Tabung Amanah Islam
Iran, Alborz Insurance Company*
Iran, Beimeh Iran Insurance Company*
Indonesia (1994), PT Sayarikat Takaful Indonesia
Indonesia (1994) , PT Asuransi Takaful Keluarga
Indonesia (1994), Asuransi Takaful Umum
Singapore (1995), Syarikat Takaful Singapore
Singapore (1997), Keppel Insurance Co. Ltd
Singapore Ampro Holding , Pte.
Malaysia (1993), Malaysia National Insurance Takaful Company
Qatar (1995), Islamic Insurance Company of Qatar
UAE/Dubai (1997), Dubai Takaful Insurance Co.
Trinidad-Tobago Takaful Friendly Society (1999)
USA (1997-2000), First Takaful USA*
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Pakistan (2005-06), Pak-Kuwait Takaful Company.
Note* Operates under Takaful/cooperative principles while evolving
into full accordance with Takaful model.
Additional recent initiatives
Soar Al-amane, Senegal (1998), Amana Takaful Ltd., Sri Lanka (1999),
the Bangladesh Islamic Insurance Co. (1999), plus 3 new Takaful
licenses approved in Kuwait (2000), a Takaful Taawuni (Family/Life)
program sponsored by Bank Aljazira in Saudi Arabia to be launched in
early fall 2001 and at least one license under review in Egypt. Further
takaful licenses are being considered in Malaysia.
Retakaful or Reinsurance
As more progress occurred and primary Takaful operators aggregated
risks on commercial property (General Takaful) and on persons
(Life/Family Takaful), there emerged a concomitant need to share
these risks with other insurers, commonly called reinsurance. However,
Islamic insurance companies are required to reinsure their risks on a
Re-Takaful basis. According to the Islamic Banking and Insurance
Encyclopedia (IIBI, London 1998) due to the meager reinsurance
capacity of Retakaful operators, latitude has been granted by Shariah
Advisors to cede primary Takaful premiums to conventional re-
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insurers. Such dispensation is understood to be for a temporary period
and lay down the challenge to Takaful and Retakaful operators alike to
work towards for a swift resolution of these anomalies.
The evolution of primary Takaful operators has naturally spawned
creation of Retakaful entities:
Sudan (1979) - National Reinsurance
Sudan (1983) Sheikan Takaful Company
Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company
Bahrain/Saudi Arabia (1985) , Islamic Insurance and Reinsurance
Company
Malaysia (1996), ASEAN Takaful Group which evolved into ASEAN
Retakaful International (ARIL) in 1997, Labuan
Tunisia (1985), Beit Ladat Ettamine, Sauodi Takafol, Ltd. (BEST
Re)
Malaysia (1993) - Takaful Nasional, part of the Malaysian
National Insurance (MNI) Group.
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Launch of Takaful in Pakistan
Pak-Kuwait Takaful Company Limited (PKTCL) is pioneer and
multinational joint venture partnership between Pakistan, Kuwait,
Malaysia, Saudi Arabia and Sri Lanka. With an Initial Paid up capital of
Rs.250 million and an authorized capital of Rs.500 million, along with
the financial strength and backing of equity partners. PKTCL is well
poised to launch operations in an environment of trust and reliability.
The Takaful way of Insurance in Pakistan is greatly needed and much
awaited as a significant segment of population desire Shariah-
Compliance in all their financial dealings.
A parallel can be drawn from the immense success of the Islamic
Banking in Pakistan.
PKTCL, emerging in this backdrop, is well positioned to assist all such
individuals and organizations. Equipped with the repute and financial
standing of its local and foreign sponsor.
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Islamic Insurance
Shariah Advisors Profile
Justice (Retd.) Mufti Muhammad Taqi Usmani
Dr. Muhammad Imran Ashraf Usmani
Moulvi Muhammad Hassan Kaleem
Shareholders
Local Shareholder:
Pakistan Kuwait Investment Company (Private Limited, Pakistan.
Meezan Bank Limited, Pakistan
Saudi Pak Industrial and Agricultural Investment Company (Pvt)
Ltd, Pakistan
Foreign Shareholders:
TN Overseas Investments Pte Ltd, Malaysia (Representing
Takaful Nasional of Malaysia, the largest Takaful Company in the
world).
Noor Financial Investment Company, Kuwait.
Takaful Holdings Limited, Dubai (representing Amanah Takaful of
Sri Lanka).
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Part III Financial Profile of Takaful Industry
Takaful Industry Statistics
A broad estimate of the total Gross Premiums Written (GPW) within the
Takaful industry in 1998 is approximately US$500m for both Life and
Non-Life business, of which around $200m pertains to Asia Pacific
region. Malaysia is one of the largest markets outside the Arab region
for Takaful, writing 78% of the non-Arab takaful business. A
geographical spread of takaful business is shown below:
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The growth in Takaful business had indeed been very impressive. As
the following Table illustrate, the annualized average growth since
1994 has been 92% in Family Takaful and 34% in General. Most growth
appears to be in the Family and group Family Takaful (68% and 11%
respectively) of GPW as compared to General Takaful (4-6%). In Family
Takaful the products sold were individual and Group Term as well as
savings products, mortgage policies and pension plans. In General
Takaful, all classes of commercial business were sold.
Retakaful
Collectively, these Retakaful operators write approximately $35 - $75
million of premiums annually. Their staff is estimated to be about 750
and their paid-up capital ranges between $80 - $100 million. A
thumbnail sketch of the reinsurance industry may assist us to become
more familiar with their traditional counterparts. Global reinsurance
premiums in 1998 grew 10% to $76 Billion. Five OECD nations
dominate this sector with 77% of worldwide reinsurance:
Germany
USA
Switzerland
UK
Japan
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The reinsurance business overall was profitable in 1988 with Pre-Tax
profits of $3.9 Billion {vs. $7.0 Bil. in 1997}. The industry Loss Ratio
was 73.6% vs. 71% {1997 was the lowest in 10 years}.
A quotation from the Journal of Commerce, USA(September 19, 1999)
is very informative: "At the beginning of the decade (1990) a rein surer
was consider strong if it had capital and /or surplus of $50 Million.
Today, capital of 10 times that is considered barely adequate with
several companies having many billions." Examples are: Gen RE, $505
Bil; Employers RE,$4.0 Bil; American RE $1.8 Bil. There are massive
stock corporations with substantial capital assets and a global reach.
Taking the 15 countries with dominant Muslim populations
Bahrain, Brunei, Egypt, Indonesia, Jordan, Kuwait, Morocco, Pakistan,
Qatar, Singapore, Tunisia, Turkey, Saudi Arabia and UAE.
There are today Life and Non-Life insurance premiums written annually
of $24.5 Billion (of these 50% is in ASEAN countries). Assuming that
over the next ten years, the Insurance Penetration Rates (i.e., Per
Capita usage increases - refer to the section following in this paper)
and the local market share of Takaful coverage rises to approximately
15% then the Gross Premiums Written could climb to $3.75 Billion.
Further, if 33% of this were to be ceded to Retakaful operators, then
$1.2 Billion of Retakaful revenues could result as reinsurance business,
which would require a capital base of between $600 Million and $1
billion. This compares with the existing (estimated) global capital base
for Retakaful companies of less than $100 Million (1999).
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Acceptance Rates of Insurance
Acceptances of insurance, so called Penetration Rates, are measured
as an average percentage of per capita expenditures. In 1999,
industrialized nations enjoyed Penetration Rates of 8.8% of Net
Domestic Product, or $2,285. Switzerland was the highest overall at
$4,643 per capita, with 5% Penetration Rate ($1,729) in Life per capita
premiums. Japan's 10% Penetration Rate ($3,103) for Life per capita
alone is the highest in the world.
From these charts it is quite clear that the traditional cultural
perspective on risk and risk protection throughout the Central Asia,
Pacific and Middle East regions has curtailed the development of an
insurance industry and limited the penetration, especially for Life
insurance, as a percentage of per capita income. The highest rates of
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penetration exists in mature markets of Asia Pacific region, 1.72%
($62/year) for Non-Life and 2.16% ($78/yr) for Life in Malaysia and
1.03% ($271) for Non-Life and 3.15% ($828) for Life in Singapore,
respectively. By contrast, the lowest penetration rates are in Saudi
Arabia with 0.55% ($37) for Non-Life and 0.01% ($0.60) for Life and in
Kuwait with 0.50% ($77) for Non-Life and 0.11% ($16) for Life,
respectively
Part IV Products & Services
Executive Overview
The ranges of Takaful Products offered are categorized into
two areas:
A. Risk type products. These products are provided for the
protection of the Participants. There is little, if any, maturity benefits
payable at the end of the contracted term. There is no Participant
investment component involved, therefore, such products are marked
risk only.
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B. Investment type products with an element of Risk. These
products are generally regular savings plans where a Participant
indicates his need to achieve a target savings lump sum through
saving on a regular basis, by a certain time in future. The risk element
under such products reduces over time as the accumulated savings
increase, or can be maintained at a fixed level, depending on the type
of cover chosen by the Participant at plan inception .
Savings plans are offered under different 'labels', e.g. as a Retirement
plan (to save for retirement) or as an Education plan (to save for the
children's college education).
.
Investment Products
The theme for each product is that the takaful cover is to provide for a
target savings amount at a future date and to also provide protection
for the possibility that the participant does not survive the term of the
savings contract.
Retirement Plan
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Under this plan the participant contracts to contribute a monthly
amount under a Retirement Takaful Plan. The term of the plan will be
the difference between the targeted retirement age and his current
age.
The death benefit under this plan will reflect the various options
available to the client (i.e. escalating, level or reducing) and the value
of his accumulated savings under the plan at the date of death.
Ladies Flexible Savings Plan
It is appreciated that ladies could have certain targeted savings at
particular points in their lifetime. For example, to provide for their
children's education. This product is basically the same as the
Retirement Plan in its features but is repackaged to appeal to the
female population.
Ladies Single Contribution Plan
This is the Ladies Plan above but where the contribution is a single
lump sum. Under this plan death benefit choices will be available.
Capital Plan
This is a regular savings plan where the executive chooses a certain
level of death cover (which remains unchanged over the period) and
fixes the annual contribution over a chosen term.
This product has been designed to compete with similar mutual
funds/conventional insurance combinations available in KSA .
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Capital Plan
This is the Single Premium version of the previous plan. As with the
ladies single premium plan the death cover is equal to the single lump
sum contribution. The participant determines the term of the plan.
Education Plan
This plan will be marketed as a savings plan for the breadwinner of the
family for his children's university education.
Based on a targeted savings amount at the point of time the child is
expected to attain university entry age, a monthly contribution is
determined. The benefit on death or disability will be premium waiver
for the balance of the contract period
Marriage Plan
This plan is identical to the Education Plan except that the target
expense here is the expected marriage expenses of the child and the
maturity age is the expected age at marriage of the child.
Savings for Awqaf Plan
This is a plan to save towards a Waqf contribution. The proceeds of this
plan will go to the selected charities chosen from a list provided by the
Shariah Advisory Council of BAJ and administered by the same.
Term with Return of Contribution Plan
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Under this plan the contribution to the takaful plan is returned to the
participant if he survives the term of the contract. On death during that
period the contracted level death benefit is payable.
Risk Only Products
Level Term (Risk Only)
Under this variation of the preceding plan, the contribution to the
takaful plan is not returned to the participant if he survives the term of
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the contract. On death during that period the contracted level death
benefit will be payable.
Key man Takaful (Risk Only)
The bank disburses significant amounts of loans to businesses for
working capital and the purchase of capital goods. These businesses
are usually controlled and/or run by certain key individuals. Under Key
man Takaful these individuals are covered for an amount equal to the
loan taken up, over the duration of the loan. On death or total
permanent disability during this period an amount equal to the loan
taken up is payable. This amount is then available to repay the loan
from the Bank thus protecting the partners in the business, the
deceased's immediate family and the Bank.
Decreasing Term (Risk Only)
This variation of level term pays a decreasing level of cover throughout
the contract period, allowing for a high level of cover at inception
reducing to zero at contract maturity.
Increasing Premium/Limited Payment (Risk Only)
Commonly known as a "low start premium” plan, it allows an individual
to take a high level of cover at a low initial premium with the premium
increasing throughout the term of the contract but ceasing a number
of years prior to the cover under the contract terminating.
Group Products
Group Takaful Products
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These are Takaful Ta'awuni products where many participants are
grouped under one contract. These products provide for a death and
total permanent disability cover determined by the relationship
between the contract holder and the participants as explained below:
1) Group Loan Repayment Plan
The Takaful Ta'awuni Group Loan Repayment Plan is designed to repay
outstanding loans/leases/financing upon death or total permanent
disability of the Borrower/Lessee.
Benefits to Employer/Company
Raises esteem of company when covered by Islamic
Insurance.
Eliminates bad debts and write-offs of Loans, Leases and
Installment Sales.
Guarantees that financing/leasing will be repaid upon death or
total permanent disability of Borrower/Lessee.
Avoids expense and time of repossessing Assets upon default.
Protects company's Principal and Profit in asset financing and
leasing.
2) Group Retirement Plan
The Takaful Ta'awuni Group Retirement Plan enables the employer to
provide its employees with retirement benefits, in form of either a
lump sum payment at retirement, or a lump sum used to purchase an
annuity, i.e. monthly,quaterly,half yearly, yearly income during
employee's retirement. Upon maturity of the plan, the benefit payable
is the final maturity value in the investment plan.
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Benefits to Employer/Company
Powerful Incentive to reward and to retain Key Employees.
Depending upon employer/company, the Group Retirement
Plan can be designed to be Contributory or Non Contributory.
Depending upon employer/company, Plan can have a flexible
period of "Vesting" whereby ownership of retirement benefits
passes from employer to employee. If an employee resigns
prior to retirement, either no benefits, or a proportion of the
accumulated saving could be paid to employee with balance
returned to the company/employer.
Reduced employee turn-over and saving for company in less
training costs, less down time, less disruption to staff
productivity.
Staff loyalty is enhanced resulting in better retention of key
staff.
Added Financial Incentive/Reward for Key Employees.
Encourages higher Productivity from Key Employees.
Expands the company's Compensation Package and Benefits
to be more competitive.
Enhanced Benefits can help attract better talent from job
market.
3) Group Term Protection Plan
The Takaful Ta'awuni Group Term Protection Plan is level risk
protection coverage that protects employees in the event of death or
disability, so that a multitude of that employee's yearly salary can be
paid to his family or dependants to ease their financial burden in a sad
time of loss. This multiple is typically two or three times annual salary
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in the year of death. Minimum protection is 12 months salary or SR
50,000, whichever is greater. Maximum level of protection is five (5) to
eight (8) times annual salary, depending upon underwriting
considerations.
The Plan is sponsored by the employer/company on a yearly renewable
contract. Additional Riders are available for coverage of Total and
Permanent Disability; Permanent and Partial Disability.
Benefits to Employer/Company
Shows Caring attitude towards employees.
Peace of mind for employees.
Added Financial Security for employees and family.
Reduced Employee Turnover and saving for company in less
training costs, less down time, less disruption to staff
productivity.
Staff loyalty is enhanced resulting in better retention of staff.
Happier staff means higher Productivity.
Better compensation package with Takaful Benefits helps
attract qualified staff.
Many employees do not accept coverage on a conventional
insurance basis; Takaful coverage would raise the esteem
employees have for their employer.
Avoids Lump Sum Payment by employer/company from its
own funds to deceased employees family (typical moral
obligation)
Enhances Image of employer/company in local community.
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4) Key Man Protection Plan
The Takaful Ta'awuni Key Man Protection Plan is term protection
coverage on Key management staff or technical personnel critical to
operations of an employer/company in order to protect the interests
and the core business of the company.
Benefits to Employer/Company
Protects primary Partners in business from serious losses due
to death of a Key Owner or Personnel.
Provides payment of benefits to a company to assist in finding
a replacement or temporary staff for the job performed by
deceased worker.
Covers any financial obligation from Key Employee to
company (i.e. Executive Loans etc)
Reduces downtime and lost productivity that weakens
business effectiveness.
Resource for the business to compensate beneficiaries of
deceased where it is agreed that upon death the owner's
shares will be bought out (buy-sell agreement).
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Riders Products
Riders or Supplements (All Risk Only)
As well as the base products identified in the foregoing, a number of
riders will be offered as either standalone products to be attached to
the base product at the participant's request or as a bundled
attachment to a base product. The riders to be made available to the
participants are as follows
1. Total Permanent Disability
2. Partial Permanent Disability
3. Premium Waiver on either Disability or Death
4. Critical Illness
5. Family Income Benefit
6. Term Rider
7. Top-Up Rider
Concise Profile of Takaful Products
Property Takaful
Fire & Allied Perils Policy
Householder’s Comprehensive Policy
Shop Owner’s Policy
Contractor’s All risk Policy
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Erection All risks Policy
Machinery Breakdown Policy
Contractor’s Plant and Machinery Policy
Motor Takaful
Private Car
Motor Cycle
Commercial Vehicle
Marine Takaful
Imports
Exports
Inland Transit
Miscellaneous Takaful
Accident Takaful Policy
Money Takaful Policy
Fidelity Takaful Policy
All Risk Takaful Policy
Third Party Liability Takaful Policy
Product Liability
Burglary
Work’s men Compensation
Public Liability
Plate Glass
Travel Takaful
Umrah & Hajj Travel Takaful
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Part V Strengths, Weaknesses, Opportunities and
Threats
In this section we will show and analyze the overall strengths,
weaknesses, opportunities and threats facing the Takaful Industry.
Understanding these issues will allow a better understanding of the
goals and objectives of the master plan.
Strengths
1. Takaful life insurance is in its infancy. This is a major gap in the
provision of an Islamic financial service to the Muslim community
worldwide. Significant opportunities exist to develop this market
2. Offering a Shariah compliant Takaful product to a Muslim
provides him with both a financial product required in everyday
life plus the added benefit of adhering to Islamic principles as
well as potentially assisting brother Muslims within the
cooperative Takaful pool
3. Takaful allows the avoidance of “haram” elements associated
with conventional insurance products.
4. Conventional insurance operators are showing a great interest in
Takaful. Adoption by one or two international players will see an
immediate global development of Takaful.
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5. Islamic and conventional banks have the opportunity to create
and develop Banctakaful programmes which will greatly enhance
the ability to introduce Takaful to the Muslim communities
worldwide
The synergy between life insurance and the asset management
industries is well known. It is no different for the Takaful and Islamic
asset management industries. The development of Takaful will greatly
enhance the ability of Islamic fund managers to significantly increase
assets under management as well as the number of clients in a fund
Weaknesses
1. The lack of a “supreme” Shariah judicial authority and the
uniform Shariah decisions such an authority would provide, or
endorse where decisions are referred to them from “national” or
company Shariah boards, will continue to undermine the Takaful
industry, both now and the immediate future. The industry will
be weakened in the eyes of many until this matter is resolved.
2. To this day many Shariah scholars refuse to accept the concept
of insurance, whether it be Islamic or conventional. Worse some
scholars cause confusion amongst the Islamic community by
declaring there is no difference between commercial and Takaful
insurance, thus undermining the industry’s attempts to both
distinguish itself from conventional insurance and the “haram”
elements contained therein
3. The lack of a uniform Corporate Governance standard and
Shariah audit guidelines, which the industry can follow, leaves
the industry open to criticism when companies fail or fail to
protect the consumer. The potential to utilize participant’s funds
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in a way, which contradicts good corporate governance within
the Takaful industry, is a very real threat going into the future.
4. Because of the very nature of Takaful and the Islamic elements
making it Shariah compliant, other than Malaysia (and Sudan)
where a separate Takaful law has been introduced, nowhere else
in the world is there an insurance regulation, which embraces
Takaful. This causes difficulties in establishing Takaful in specific
areas such as the European and USA markets. This is also a
problem, albeit less of a one, in predominantly Muslim countries.
5. Within many Muslim countries, especially those in the Middle
East where conventional life insurance has also taken hold, the
concept of long term savings is an alien concept to many
Muslims who rely on the state or state pension, as well as family
ties for security in their old age or time of crisis.
6. This also applies to the concept of risk protection, again be it one
of conventional or Takaful. The concept is alien to many in the
Middle East countries.
7. Having no rated Retakaful company causes consternation
amongst many, both inside and outside of the Takaful industry.
Although the problem is really one of “a chicken and an egg”, in
that you cannot have retakaful unless and until you have built up
a sufficient pool of Takaful business, this necessitates the use of
conventional reinsurance. Critics do rightly point out that even
with Shariah dispensation in supporting the use of conventional
reinsurance, that the Takaful industry is a “cocktail” of
conventional and Islamic. ARIL, at this time, is the only Islamic
retakaful operator providing life retakaful support, but
unfortunately does not have a rating. This situation will continue
to dog the industry until resolved.
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8. As many of the new life Takaful operators are adopting a unit-
linked rather than a pooled investment strategy, the range of
unit linked funds open to a Takaful participant is somewhat
limited and ranges from Equity to Murabaha but at this moment
in time is quite weak in the areas in between i.e. Islamic property
funds, Islamic Leasing funds, Islamic Sukuk funds. More effort is
needed by the Islamic asset industry to introduce a broader
range of Islamic unit-linked funds for the Takaful industry.
9. Unfortunately in some areas of the Islamic world, government
agencies and leading Islamic institutions, although praising the
development of Takaful and in many ways supporting this
development, are not supporting it in a commercial sense by
either changing from conventional life insurance to Takaful or
adopting Takaful where the use of conventional life insurance is
quite rightly prohibited.
10. In many ways the Takaful life industry does not help itself
when promoting and selling Takaful products. The very essence
of Takaful is mutual risk protection between members on a
cooperative basis, under Shariah compliant principles. The
adoption of a savings element for individual participants is to be
lauded and welcomed but as in conventional insurance, such
funds are not mutual or cooperative but belong exclusively to the
member making the contribution. It is therefore unfortunate that
as an industry we market Shariah compliant investment
products, with very little or no Takaful coverage included, as
Takaful. To move away from the very essence of Takaful and
what it means is to lean too far towards a conventional insurance
model, mimicking the tax advantages of products which are
significantly more investment and tax avoidance vehicles than
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they are protection or Takaful products. The industry is open to
criticism if we do not recognize the roots of our Takaful concept
as being mutual risk protection under Shariah law.
Opportunities
1. Takaful is being driven by the vast untapped Islamic market,
which can be introduced to the Takaful concept. Whether such
potential participants are part of a Muslim majority in markets
such as the Middle East, or part of a minority in European
countries, the potential for Takaful life insurance is enormous.
2. Although many of the potential Takaful markets are familiar with
an insurance concept, many more, specifically in the Middle East
are not, resulting in a very low penetration level for the
insurance industry in general.
3. Potential sales to government and leading Islamic agencies is
enormous, where such agencies presently either do not utilize
life insurance or perhaps do accept conventional life insurance
because of a lack of Takaful in the past.
4. Regions of low insurance penetration can jump direct to a
Takaful concept leaving the insurance industry little choice but to
move directly to Takaful as a solution. As such there is little or no
opportunity for the conventional life insurance industry in such a
situation. Saudi Arabia is a prime example of such a
development with nearly all of the new life insurance licenses
issued being for Takaful operators.
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5. Many “virgin” Takaful regions have high income levels resulting
in the opportunity for significantly higher levels of premiums
than possible in either existing Takaful regions such a Malaysia
or even potential Takaful regions such as Europe
6. Many Takaful opportunities are in regions with very large
populations i.e. Pakistan, India, Egypt, Iran etc. although
contributions may be smaller, the market size is significant
7. The Muslim minorities in the west are a vast untapped potential
8. Banctakaful and the relationship with Islamic banks, or, where
permitted, conventional banks with Islamic windows, opens up
yet again significant potential for development.
9. Although many Takaful markets still remain untapped the fact of
the matter is that the Muslim population worldwide is growing
with some populations predicted to double by 2020 i.e. Saudi
Arabia
Threats
1. As a repeated theme in this paper, the lack of a Shariah
consensus is not just a weakness but is a very real threat to the
development of Takaful. If the industry is to be taken seriously,
this issue needs to be resolved
2. Again, a perceived weakness also becomes a threat where
potential participants are subjected to conflicting arguments
between scholars on their beliefs concerning conventional and
Islamic insurance. We cannot afford to have a perceived
weakness turn into a threat because of a lack of action on the
part of the industry to resolve such issues.
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Islamic Insurance
3. Unless a movement, presently underway between the IFSB and
the ISIS, meets in success whereby the conventional insurance
industry embraces Takaful at the highest level, thus leading the
way in resolving the many difficulties faced by the industry in its
dealing with national regulators, such potential failure to resolve
such issues would result in Takaful not developing beyond the
borders of predominantly Muslim countries
4. WTO developments, in many of the countries in the Middle East,
sees the breaking down of traditional protectionism practices,
which is to be welcomed. What must also be clearly understood
though is that such practices should not lead to an unwelcome
competitive advantage for the conventional insurance industry.
5. The 9/11 events still remain, to many, an obstacle to Takaful
even starting the development process in the USA and possibly
some European countries. This may be a perceived rather than
an actual threat but clouds still hang over many potential Islamic
financial developments in the USA.
6. Pending any developments recommended in this paper as
essential to the development of Takaful over the next ten years,
one final threat to this industry does remain. Unless the Takaful
operators can unite in a cause to jointly develop Takaful
worldwide, albeit via their own possibly small contribution within
their own borders, with the adoption of uniform standards even
before such may become compulsory, then the threat of
fragmentation looms over the industry moving forward over this
next decade.
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Strengths
Significant gap in Islamic
Financial Services industry
Shariah compliant means
products conform with
Islamic principles
Provides an ethical
alternative to conventional
life insurance
Of significant interest to
conventional insurance
operators
Typical for the industry is
the synergy with Islamic
banking
Synergy with the Islamic
Asset Management industry
Weaknesses
No uniform Shariah
authority
Divisions within Shariah
scholars on many issues
relating to Takaful
No significant Corporate
Governance or Shariah audit
guidelines
Lack of uniform
insurance/Takaful regulatory
arrangements
Lack of a long term saving
culture in many Muslim
communities creates a
challenge to persuade
Muslims to save long term.
Lack of awareness in Muslim
communities on Takaful
insurance and risk
protection inhibits demands
for insurance
Lack of Retakaful. So far
there is no retakaful
company rated with BBB
and above.
Lacking in broad range of
Shariah compliant
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investment vehicles for
investors
Opportunities
Vast untapped market
outside the Far East
Low level of insurance
penetration in most markets
Sales to government and
Islamic agencies
Even lower levels of life
Takaful penetration
Affluent markets in many
Muslim countries, resulting
in high
premium/contributions
Large Muslim populations in
many countries
Muslim minorities in western
countries i.e. France,
Germany, UK, USA.
Banctakaful
In general the Muslim
population is growing
significantly worldwide.
Threats
No Shariah consensus could
undermine Takaful
development
Anti insurance beliefs by
some Islamic scholars
Conventional insurance
regulators could hold up
Takaful development
WTO could dilute the
benefits of protectionism
enjoyed by local companies
9/11 and perceived anti
Islamic feelings in the west
Lack of consensus amongst
Takaful operators
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