Takaful articles
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Number 1: August 2005
Takaful in the
new millennium
Where are we now? Where do we go from here?
Dawood
Yousef Taylor
Assistant General
Manager, Head of
Takaful Ta’awuni
(Saudi Arabia)
www.baj.com.sa/takaful
Takaful, or Islamic insurance is a relatively new industry. Although the origin of takaful
can be traced back to Islamic practices 14 centuries ago, the development of takaful in
modern times was initially undertaken in Sudan in 1979 and Malaysia in 1984. The
culmination of this initial development was encapsulated within the 1985 Fiqh Academy
ruling declaring that conventional commercial insurance was haram (forbidden) and
insurance based on the application of cooperative principles, sharia compliance and
charitable donations was halal (acceptable).
During the past two decades we have seen takaful operations opening up in many
countries throughout the world, primarily in Islamic countries and countries with a
large Muslim community. In the Far East, Malaysia has been at the forefront of takaful
development with Bank Negara taking the lead with the introduction of separate
takaful regulations allowing the takaful business to flourish in that country. Singapore,
Indonesia, Brunei have all followed with the development of takaful operations.
In the Middle East, takaful operations have developed in Saudi Arabia, Bahrain, Iran,
Qatar and Iran with new operations opening up in Egypt, UAE and Kuwait in recent
years.
It is fair to say that the Far East and Middle East regions lead the way in takaful
development but other countries are also moving in this direction i.e. Bangladesh and
Sri Lanka.
Outside these two primary regions, takaful has also been introduced into Europe and
the USA but, as yet, development of takaful in the western world has not met with any
major degree of success. There is no doubt that there is a tremendous opportunity for
takaful to develop in these regions, with large Muslim communities not being able to
avail themselves of takaful products and services. But significant investment is required
to compete with the conventional insurance industry and regulatory changes would be
also be necessary, as seen in the Malaysian market, to allow takaful to compete on equal
terms with the conventional insurance operators.
Focusing on takaful developments in the Middle East region, there is presently a
healthy and growing general takaful industry. Saudi Arabia, leads the way with a
number of takaful operations offering a full range of non-life takaful products such
as motor, health, marine, aviation property etc. Similar general takaful products are
available from the numerous other takaful companies operating in this region. Takaful
International in Bahrain and Jordan Islamic Insurance, Jordan, are at the forefront of
takaful development in their respective countries. Where the takaful market is failing to
make significant headway though is in the area of life/savings takaful or Family Takaful,
as it is known in the Far East and Takaful Ta’awuni in Saudi Arabia. There are a number
of reasons for this situation.
First and foremost is the misconception that life insurance is haram in Islam. Certainly
from a conventional insurance perspective this is correct. But if practiced in accordance
with the declared Islamic principles as stated in the 1985 Fiqh Academy ruling, takaful
compliant life insurance programs are acceptable in Islam. In the Middle East, only
three takaful operations offer takaful life programs at this time and of these three only
Bank Aljazira of Saudi Arabia operates an exclusive Takaful Ta’awuni life program and
is not a composite takaful operation offering both general and life products. Composite
operations have the benefit of offering one-year annual products, which are expense
and surplus driven, allowing an early, and much needed cash flow for a successful
takaful business operation. Takaful Ta’awuni life programs are, on the other hand, cash
absorbing businesses in the early formative years and are seen as less attractive as a
business opportunity.
Although a Takaful operation provides sharia compliant cooperative risk protection
and savings programs for their clients, the development of takaful, as an industry would
not be where it is today unless takaful operators took the business risk and invested
the significant amount of capital required to open new takaful operations worldwide.
Profit in Islam is both acceptable and encouraged where it also provides an excellent
Islamic financial service to the Muslim community. There is no fault or criticism in
viewing Takaful as a business, where takaful products are offered on a competitive basis
with conventional products and Takaful businesses are regulated for best practices in
conformance with international standards.
In the Middle East there is the Accounting and Auditing Organization of Islamic
Financial Institutions (AAOIFI) in Bahrain, which must be singled out as leader in the
development of Takaful best practices. In the Kingdom of Saudi Arabia, the Saudi Arabian
Monetary Agency (SAMA) is the lead agency for insurance regulations and presently only
banks in the Kingdom may sell individual protection and savings insurance products
with Bank Aljazira the only Sharia compliant and SAMA approved Takaful Ta’awuni
life operator offering a full range of such products to the general public i.e. retirement,
marriage, education, protection, for both individuals and corporate clients.
SAMA will also be the sole regulator for all other insurance products, takaful and
conventional, as the new regulations for medical, motor and general insurance are rolled
out over the next few years. This raises an interesting dilemma, as it is understood that
the new regulations will be based on cooperative principles. Such principles are the basis
of both takaful and mutual insurance in the conventional insurance industry. Whether
cooperative insurance can be defined, as Islamic or takaful insurance is the dilemma. The
Fiqh Academy ruling made clear the three basic elements required, as stated earlier, for
an Islamic or Takaful operation. Add to this the need to have a permanent Sharia Advisory
Board (SAB), a sharia compliant investment strategy, and all contracts to based on Islamic
principles i.e. Mudarabah (profit sharing) or Wakala (agency), or perhaps another type
of Islamic contract approved by the SAB and it can be clearly seen that the possibility
could exist that Takaful may have to compete with both conventional and cooperative
insurance principles and operations, if the new cooperative insurance laws do not
include such provisions. This is a watershed for the takaful/Islamic insurance industry
in the Kingdom and the opportunity to provide a boost to the industry is apparent, if
takaful principles are adopted. A strong and healthy takaful/Islamic insurance industry
in the Kingdom would be a tremendous boost for the industry worldwide.
With the advent of the new Islamic Financial Services Board (IFSB), recently and
very successfully inaugurated in Malaysia and with Saudi Arabia as one of the founder
members, the IFSB will be at the forefront of developing the International Islamic
Financial Services regulations for banking, investments and Takaful. A great deal of
interest awaits any future publication on takaful regulations.
The Islamic Development Bank, based in Jeddah, is also actively promoting takaful
developments through its educational department and should also be singled out for
praise for this support to the takaful industry.
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With this overview of the takaful industry in the Middle East, how does this compare
to the development of takaful in the Far East?
There is no doubt that the development of the Takaful Act and regulations in Malaysia
has allowed the very successful development of the two major composite takaful
operators in that country, Takaful Malaysia and Takaful Nasional. Their success can, in
part, be attributed to their development of both general and life products, as long term
business success in this industry is achieved more on the back of life, rather than general
takaful products, as witnessed by the two successful Malaysian business models.
This raises the issue of the takaful model adopted by a takaful operator. Traditionally,
a Mudarabah or “profit sharing” model has been the model of choice over the past two
decades. For a number of reasons, many sharia scholars, notably Sheik Nizam Yacoubi
and Dr Abdulsatar Abu Ghuddah, as well as AAOIFI, have brought into question the use
of a Mudarabah contract in a certain takaful operations. The two main objections for
its use have been the intermingling of the participant’s contribution from a Taba’aru
and Mudarabah capital perspective and the fact that a takaful or insurance operation
creates surplus not profits and therefore the use of a profit sharing contract may
not be appropriate. The solution under consideration is to adopt a Wakala or agency
contract, with a performance fee element to replace surplus sharing. Bank Aljazira
Takaful Ta’awuni has been at the forefront of the Wakala contract development over the
last four years, working very closely with its permanent Sharia Advisory Board and it
is hoped a consensus can be reached internationally which would resolve one of the
ongoing dilemmas for the takaful industry, the many and varied sharia rulings under
which takaful operators presently conduct their business. Pluralism in Islam is one of its
beauties and cannot be faulted, but from an industry perspective, a more standardized
approach is required if takaful is to be developed nationally as well as internationally
where different takaful models could create an uneven or perhaps unfair business
environment to operate.
A coming together of the Takaful industry internationally to help and assist both
new takaful operators enter the market as well as to advise the various organizations
mentioned earlier, tasked with the responsibility to regulate the Takaful industry both
within their own countries as well as internationally, is a challenge facing us all in the
Takaful industry
Where the Muslim community worldwide can be given the opportunity to both satisfy
their financial requirements as well as their spiritual needs, through a Takful program
for retirement, education and marriage savings plans, motor and health insurance, or
many of the other takaful products offered through the takaful programs available,
should be the ultimate goal that all of in the Takaful industry are striving to achieve.
If you would like more information on ICMIF and its services to the takaful sector,
please contact Sabbir Patel ([email protected]), or visit www.takaful.coop.
© 2007 ICMIF. All Rights Reserved.
Not to be reproduced in part or whole without express written permission.
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