Paper 18
TAKAFUL – AN OPTION TO CONVENTIONAL INSURANCE:
A MALAYSIAN MODEL
By
Assoc. Prof. Yon Bahiah Wan Aris
Faculty of Business Management
Universiti Teknologi MARA
40450 Shah Alam
Selangor
Malaysia
Tel : 603- 55444666 / 4729
Fax : 603 – 55444693
e-mail : [email protected]
TAKAFUL – AN OPTION TO CONVENTIONAL INSURANCE:
A MALAYSIAN MODEL
Abstract
The Takaful industry in Malaysia is relatively a new industry as compared to its
conventional counterparts. The first takaful company was established in 1984; shortly
after the setting up of the first Islamic Bank in 1983. The idea to set up an Islamic
Financial system was mooted by the former Prime Minister, Tun Mahathir
Mohammad and it was intended to provide financial services that comply with the
Islamic principles. Today, there are 4 takaful operators and the takaful business
Malaysia has emerged to be an important financial player globally and is seen as the
leading takaful center in the ASEAN region. This conceptual paper attempts to
contribute to the dearth of literature on this subject matter and examines the concepts,
principles and mechanisms of the takaful operations and how it differs from the
conventional insurance. Challenges and opportunities of the takaful business are
carefully outlined and finally, this paper will also highlight empiral evidences
supporting the performance of takaful business as measured by Syarikat takaful
Malaysia Berhad (STMB) for the period 1990-2003.
Key words : takaful, al-mudharabah, conventional insurance.
2
I.
Historical Development and Origins of Takaful
Although, it is not clear when takaful practices actually started, evidence
proved that activities akin to insurance practices were actually practiced before
the era of the Holy Prophet Muhammad S.A.W. A common practice during
the Arab tribal system, known as the ‘Aqilah’ was said to resemble insurance
practices. In the Aqilah practice, if any member of a tribe was killed by a
member of another tribe, the heir of the victim has a right to demand from the
tribe of the killer compensation known as the ‘diyat’ or blood money.
Therefore, the main idea of the Aqilah was that, the members of the ancient
tribes have to be ready to make financial contributions on the part of the killer
to compensate the heir of the victims. The obligation to make regular
financial payments to the tribal fund is similar to the payment of premiums in
the insurance practice, while the compensation paid by the tribal members of
the killer could be similar to the indemnity or sum insured in the present
insurance practices. A Hanafi lawyer Ibu Abidin (1784-1936) is the first
Islamic scholar to come up with the meaning, concept and legal basis of an
Islamic insurance contract. (Klingmuller, 1969).
3
II.
Insurance And Takaful In Malaysia
Up until 1963, there was no specific legislation in Malaysia regulating the
insurance practices. The insurance industry in Malaysia was mainly based on
the British system because of the advent of colonialism and at that time, the
existing law on insurance was drawn from the legislation in the United
Kingdom in 1909. (Billah, 2003)
Shortly after Malaysia received its independence in 1957, nationalistic
sentiments created a zest amongst locals to set up and manage their own
insurance companies. Most of these companies could not survive since they
lacked the required expertise and capital.
To safeguard the situation, the Government had to step in and this led to the
introduction of the Insurance Act 1963 (now replaced by Insurance Act 1996)
to monitor and supervise the insurance industry. In 1972, the National Fatwa
Committee of the Malaysian Islamic Affairs Council declared that the
conventional life insurance business contradicted with the Islamic principles
and subsequently in 1985, the Fiqh Academy of the OIC made a declaration
that all forms of conventional insurance do not conform with the Islamic
principles.
Since the majority of the Malaysian population are Muslims, the government
realized that there was an urgent need to devise a comprehensive system to
solve the economic problems facing the Muslim community. The first Islamic
Bank was set up in 1983 and subsequently in the following year, the first
takaful operator, Syarikat Takaful Malaysia Sdn. Bhd. was incorporated with a
paid up capital of RM 10 million. Since the Insurance Act could not be
applied to the takaful business, the Takaful Act 1984 was introduced to
supervise the takaful activities in the country (Yusof, 1996).
III
Basic Concepts
Certain concepts are specific to the Takaful business. They are the concepts
of:
4
i)
ii)
iii)
IV.
Al-Mudharabah – which literally means ‘profit sharing’. The takaful
operator accepts and invests the takaful contributions (premiums)
received from the takaful participants. The contract will specify how
the profit will be shared between the participants and the takaful
operator. For example ratio may be, on a 60:40 basis (see chart 1 and
2)
Al-Takaful – this means ‘joint guarantee whereby the participants
jointly guarantee amongst themselves. Any member faced with a
calamity will be financially compensated from funds contributed bythe
participants.
Tabarru – this refers to the element of ‘donation’. Each participant
agrees to relinquish a portion of the takaful contribution to a common
fund that is used to pay a member that suffers a loss. (See Chart 1 and
Chart 2)
Fundamental Guidelines of Takaful
According to Omar Fisher and Dawood Taylor (2000), when drafting the
framework of takaful, the Muslim jurists must be aware of certain fundamental
guidelines. The guidelines are outlined as follows:
i)
ii)
iii)
iv)
V.
the practice must adhere strictly to the Islamic principles of business or
commerce;
business must be conducted openly in accordance with utmost good
faith, honesty, full disclosure, truthfulness and fairness in all aspects;
co-operative risk sharing and mutual assistance amongst the
participants in the group; and
awareness amongst the group members that they are facing similar
risks and are willing to contribute to any unfortunate member.
Comparisons Between Takaful And Conventional Insurance
In essence, Islam does not reject the concepts of insurance. Many Muslim
jurists agree that insurance which is based on the concept of pooling of losses
does not contradict with the Shariah. The compensation to the unfortunate
member and group responsibility is not only accepted but encouraged in Islam.
Although the modus operandi of takaful must comply with the Shariah, in
5
takaful business the basic elements of a contract as well as the insurance
principles (utmost good faith, proximate cause, indemnity and insurable
interest) also apply.
There are three elements present in the conventional insurance that do not
conform with the requirements of the Shariah. They are:-
VI
i)
Al-Gharar
This referes to ‘unknown’ or ‘uncertain’ factors in a conventional
insurance contract. In conventional insurance, it is not made known to
the policyholders on how profits are distributed and in what the funds
are invested in. In a takaful operations which is based on the
mudharabah concept, the distribution of profits to the operators and the
participants in the contract are clearly outlined.
ii)
Al-Maisir
This is the ‘gambling’ element and is said to derive from the ‘gharar’
element. In conventional insurance, the policyholders stands to lose all
the premiums paid if the risk does not occur. On the otherhand, he
stands to get more should a misfortune happens whilst paying small
amount of premium. In takaful, eventhough the risk does not occur,
the participant is entitle to get back the contributions that he has paid.
Should the risk occurs, he will be paid from his amount of premium
fund plus the pool of funds from the ‘donation’ of other participants.
iii)
Riba
This refers to the interest factor present in the investment activities of
conventional insurance companies. The policy loan in conventional
life insurance is infact a riba based transaction. Islam prohibits any
investment activities which is interest based, in alcoholic beverages
and non-halal products.
Takaful Models
There are basically three types of takaful models:i)
Non-profit model
6
This refers to social governmental owned enterprises and programs
operating on a non-profit basis. The contributions paid by the
participants are wholly for tabarru (donation) to unfortunate members.
The Al-Sheikhan Takaful Company in Sudan, SOCSO in Malaysia are
examples of this kind of business.
ii)
Al-Mudharabah Model
This refers to the co-operative risk sharing where participants and
operators share in the distribution profit. An example of this model the
Syarikat Takaful Malaysia Berhad (STMB)
iii)
Al-Wakala Model
In this model, the co-operative risk sharing occur among participants
with a takaful operator whereby a fee is agreed to be paid to the
operators for the services rendered. The operator shall not participate
in the underwriting results. An example of this model is Takaful Ikhlas
Malaysia.
Presently, there are more than 30 takaful operators worldwide, including in
certain non-Islamic countries such as Luxembourg, UK, USA, Singapore and
Australia. Most of the takaful operators are found in the Arab countries
(Bahrain, Saudi Arabia, Sudan, Tunisia, UAE), whilst Non-Arab Muslim
states such as Brunei, Bangladesh, Indonesia, Turkey and Malaysia also have
their respective takaful business. (Billah, 2003).
VII.
Operational System Of Takaful
Besides the 3 elements of gharar maisir and riba that separates conventional
insurance from takaful, most of the activities in both these businesses are very
much similar (e.g. underwriting, claims, marketing etc). Two classes of
business i.e the Family Takaful (life insurance) and the general Takaful are
transacted in a takaful operation. These businesses must first be approved by
the Shariah Council (Religious Supervisory Council).
i)
Family Takaful (See Chart 1)
The plans available is somewhat similar to the endowment policy in
conventional insurance practice in which participants may choose a
fixed period of coverage (e.g. 10, 15, 20 years). Instead of deciding on
7
the sum assured, the participant decides how much installment he is
willing to pay either on a monthly, quarterly or yearly basis. The
installment payment is up to the participant although subject to a
minimum amount.
Each installment is divided and credited into two separate accounts i.e.
the Participants Account (PA) and the Participants Special Account
(PSA). The portion of the installment that goes into the PA is for
savings and investments whilst the balance of the installment is
credited into the PSA as the tabarru contribution (donation). Should
death occurs, the money payable will be from the participants account
(PA) and also from the PSA accounts the amount of installments that
he would have paid had he survived up till the maturity date. The
sharing of profits is on the investment portion.
If a participant survives the duration he would receive the whole
amount he has contributed to the PA accounts inclusive of his portion
of profits from investment activities of this fund. A participant who
decides to surrender his policy is entitled to receive the installment
payments and any investment profit from his PA account.
ii)
General Takaful Operation (See Chart 2)
The general takaful is for protection on a short-term basis i.e. 12
months. The participants contribution is wholly on the basis of tabarru
(donation); and the sharing of profits is on the underwriting surplus and
the investment income. Surplus is derived after deducting company’s
expenses from this fund.
8
9
VIII. Challenges and Opportunities
The takaful industry represents an important component in the overall Islamic
financial system. Its ability to mobilize long-term funds and in providing risk
protection and at the same time as an institutional investor is sufficient to say
that it has risen to become a major player in the global financial system.
The future prospects of the takaful business depend heavily on its ability to
convert challenges into opportunities. Challenges that the industry face
include the lack of uniform terminology, Shariah interpretation, human
resource development, product innovation, retakaful, promotional and
marketing strategies are but a few.
Since retakaful (reinsurance) is vital in the sustenance of takaful business,
more retakaful operators should be established. At present, the Asean
Retakaful International (Ltd) is catering to the retakaful needs of the operators
within the ASEAN region.
Although the takaful industry in Malaysia has emerged into a robust and
dynamic segment of the financial industry since its inception about 18years
ago, the level of market penetration in terms of takaful policies in force over
the total population remains rather low at 3.8 percent compared to that for
conventional insurance which stands at 34.7 percent (Insurance Annual
Report, 2003). A large market remains untapped and takaful operators need to
keep pace with their conventional counter parts in coming up with a
comprehensive range of products that are innovative and Shariah compliant.
Takaful operators need also to be creative in introducing new marketing
strategies in promoting their products. Besides opening more outlets, within
Malaysia and beyond ASEAN, new distribution channels such as telemarketing, direct marketing, e-marketing should also be aggressively
employed. Looking at the global Muslim market, it is quite clear that
insurance penetration is lagging behind, averaging around US$17 per person
(Yusof, 1996). It is obvious that if new and innovative marketing strategies
are used, then it is possible to reach this market.
10
Another priority area to be addressed by the operators is the development of
human resource. Besides ensuring that the companies are managed by capable
and skilled personnel, they must also be equipped with the technical knowhow in the insurance and takaful disciplines.
IX
Empirical Model
To provide an insight on the performance of Syarikat Takaful Malaysia
Berhad (STMB) during the period of analysis (1990-2003), we employ the
Multiple Regression Analysis based on the following Empirical Models:
PGF = α0 + α1 EMP + α3 GDP + α4 ZKT + α5 INFLATION + µ
(1.1)
PG = α0 + α1 EMP + α3 GDP + α4 ZKT + α5 INFLATION + µ
(1.2)
PF = α0 + α1 EMP + α3 GDP + α4 ZKT + α5 INFLATION + µ
(1.3)
Where
PGF =
Profit generated from general and family takaful distributed to takaful participants
PG =
PF =
Profit generated from general takaful distributed to takaful participants
Profit generated from family takaful distributed to takaful participants
Here we attempt to empirically investigate the link between the profitability of
STMB and macro economic variables as well as business variables. The
macro economic variable that we have chosen are the Gross Domestic Product
(GDP) with base year = 1987 and inflation rate while the business variables
are the zakat contribution by STMB and employment opportunities created
during the period of analysis.
As observed in Appendix 1 (Figures 1.1, 1.2 and 1.3), there seems to be an
upward trend for profit generated from both the family and general takaful
businesses during the period of analysis.
11
We shall now look at the significance of each of the explanatory variable in
explaining the profits generated by the two businesses.
Table 1.1
Model Summary
Model
CPI
Employment
GDP
Zakat
R2
DurbinWatson
Model 1
-0.529502
(-0.281715)
0.498585
(3.301915)
0.343391
(0.697219)
0.692670
(8.594750)
0.982622
2.797960
-0.258080
(-0.147943)
0.421671
(3.008825)
0.216230
(0.473035)
0.493671
(6.599958)
0.973161
2.194763
-1.056781
(-0.227202)
0.225820
(0.604328)
0.603506
(0.495161)
1.137205
(5.702029)
0.945895
2.509197
Model 2
Model 3
Figures in parentheses represent t-statistics
As indicated in Table 1.1, the results from the Multiple Regression Analysis
suggest that both employment and zakat contributions in STMB may be
potential variables explaining the profitability of both general and family
takaful businesses. Although the serial correlation analysis indicates the
presence multicollinearity in the model, this is expected as zakat contribution
of STMB is directly related to the profits generated. However, as stressed by
Gujarati (2001), even if the multicollinearity is very high, as in the case of
near multicollinearity (correlation of 0.8 or greater), the OLS estimator still
retain the BLUE (Best Linear Unbiased Estimator) property. Generally, we
can conclude that the three models do not suffer from autocorrelation as
indicated in the Durbin Watson statistics. To check for robustness we employ
the RESET and ARCG LM to test misspecification and as well as for second
moment auto correlation (The results for the diagnostic tests are not presented
but are available upon request).
It is also interesting to note that the macroeconomic variables namely the GDP
and inflation rate do not significantly affect the profitability of STMB (both
general, family as well as combined profits). Perhaps, one may infer that
12
insurance services are no longer perceived as a luxury food but instead, a
necessity. Despite the changes in the macroeconomic variables, the demand
for takaful services are still needed. This further suggests the resilieance of
STMB for instance a steady growth of the profits generated although the
economy is exposed to the recent 1997 financial crisis. From the Central Bank
of Malaysia’s point of view, this could also be due to its role in monitoring
and supervising of the industry.
X
Conclusion
From an industry striving to fulfill the religious obligations of the Muslim
community, the takaful industry is now a multibillion dollar industry guided
by well-defined business considerations and profit maximization, whilst
steadfastly upholding the Islamic principles. (Keynote of Governor of Central
Bank of Malaysia, International Conference on Islamic Insurance, London
2003).
Eventhough the population of Malaysia is multiracial, the
implementation of an Islamic financial system has been well accepted by the
other races. The profit sharing principle is seen as transparent and the angers
well with the interests of other racial communities.
Malaysia has also taken the lead in introducing and developing the takaful
business in the ASEAN region. In line with Malaysia’s Prosper Thy
Neighbour policy with neighbouring countries, the takaful operators here have
expanded their services to other muslim and non-muslim countries within this
region. With the co-operation of the Malaysian takaful operators, other Asean
member contries (Brunei, Indonesia, Singapore) has also followed suit in
setting up their respective takaful operators.
References
1.
Billah, M. Ma’sum 2003. Islamic and Modern Insurance : Selangor: Ilmiah
Publishers.
13
2.
Insurance Annual Report 2001 Central Bank of Malaysia.
3.
Insurance Annual Report 2002.
4
Keynote note of Governor, Central Bank on Malaysia at International
Conference on Islamic Insurance, 2003, London, U.K.
5.
Klingmuller, Ernest 1969. The Concept and Development of Insurance In
Islamic Countries. Islamic Culture Vol. 43, January.
6.
Syarikat Takaful Malaysia Bhd. Anuual Reports, 1990-2000 (Various Issues).
7.
Takaful (Islamic Insurance) Cencept Operational System 1996.
Institute of Research and Training Sdn. Bhd.
8.
Takaful Annual Report 2002. Central Bank of Malaysia.
9.
Seminar text: by M. Fazli Yusof, CEO of STMB ‘Development and Success
of Takaful Business World Wide at International Seminar on Takaful, 1996.
10.
Yusof, Mohd Fadzli 1996. The Concept and Operational System of Takaful
Business (Islamic Insurance, Kuala Lumpur, BIRT)
14
BIMB
APPENDIX A
Figure 1.1 : Combined Contributions to Participants
Profit Beginning
Of The Year
(General Takaful)
Profit Beginning
Of The Year
(Family Takaful)
Total
Profit Beginning
Of The Year
(General
Takaful)
Profit Beginning
Of The Year
(Family Takaful)
Total
Profit End Of The
Year (General
Takaful)
Profit End Of The
Year (Family
Takaful)
Total
Profit End Of
The Year
(General
Takaful)
Profit End Of
The Year (Family
Takaful)
Total
1990
1991
1992
1993
1994
1995
1996
$2,142,218
$1,927,582
$2,333,541
$3,579,484
$5,983,336
$6,110,106
$8,958,138
$76,961
$122,611
$1,294,693
$2,324,919
$5,983,336
$7,636,083
$10,058,948
$2,219,179
$2,050,193
$3,628,234
$5,904,403
$11,966,672
$13,746,189
$19,017,086
1997
1998
1999
2000
2001
2002
2003
$11,139,557
$12,174,140
$16,808,929
$25,614,083
$28,475,078
$34,447,959
$33,313,178
$15,812,531
$23,606,454
$31,762,210
$40,744,956
$45,864,262
$61,709,584
$91,750,098
$26,952,088
$35,780,594
$48,571,139
$66,359,039
$74,339,340
$96,157,543
$125,063,276
1990
1991
1992
1993
1994
1995
1996
$1,927,582
$2,333,541
$3,579,484
$5,983,336
$6,110,106
$8,958,138
$11,139,557
$122,611
$1,294,693
$2,324,919
$5,983,336
$7,636,083
$10,058,948
$15,812,531
$2,050,193
$3,628,234
$5,904,403
$11,966,672
$13,746,189
$19,017,086
$26,952,088
1997
1998
1999
2000
2001
2002
2003
$12,174,140
$16,808,929
$25,614,083
$28,475,078
$34,447,959
$33,313,178
35521155
$23,606,454
$31,762,210
$40,744,956
$45,864,262
$61,709,584
$91,750,098
$125,550,970
$35,780,594
$48,571,139
$66,359,039
$74,339,340
$96,157,543
$125,063,276
$161,072,125
15
GRAPH 1.1
Combined Contributions to Participants
Profit (RM)
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Profit Beginning of The Year
Profit End of The Year
Source : STMB Annual Report
16
APPENDIX B
Figure 1.2 : Profit Contributions to Participants
GENERAL TAKAFUL
1990
1991
1992
1993
1994
1995
1996
Profit
Beginning Of
The Year
$2,142,218
$1,927,582
$2,333,541
$3,579,484
$5,983,336
$6,110,106
$8,958,138
Profit End Of
The Year
$1,927,582
$2,333,541
$3,579,484
$5,983,336
$6,110,106
$8,958,138
$11,139,557
Profit
Beginning Of
The Year
Profit End Of
The Year
1997
1998
1999
2000
2001
2002
2003
$11,139,557
$12,174,140
$16,808,929
$25,614,083
$28,475,078
$34,447,959
$33,313,178
$12,174,140
$16,808,929
$25,614,083
$28,475,078
$34,447,959
$33,313,178
35521155
17
GRAPH 1.2
Profit Contributions to Participants
$40,000,000
$35,000,000
Profit (RM)
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Profit Beginning Of The Year
Profit End Of The Year
Source : STMB Annual Report
18
APPENDIX C
Figure 1.3 : Profit Contributions to Participants
FAMILY TAKAFUL
1990
1991
1992
1993
1994
1995
1996
Profit
Beginning Of
The Year
$76,961
$122,611
$1,294,693
$2,324,919
$5,983,336
$7,636,083
$10,058,948
Profit End Of
The Year
$122,611
$1,294,693
$2,324,919
$5,983,336
$7,636,083
$10,058,948
$15,812,531
1997
1998
1999
2000
2001
2002
2003
Profit
Beginning Of
The Year
$15,812,531
$23,606,454
$31,762,210
$40,744,956
$45,864,262
$61,709,584
$91,750,098
Profit End Of
The Year
$23,606,454
$31,762,210
$40,744,956
$45,864,262
$61,709,584
$91,750,098
$125,550,970
19
GRAPH 1.3
Profit Contributions to Participants
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Ye a r
Pr of it Beginning Of The Year
Pr of it End Of The Year
Source : STMB Annual Report
20
APPENDIX D
Figure 1.4 : Zakat Factor
1990
$13,347
Zakat
1997
Zakat
1991
$20,559
1998
1992
$65,411
1993
$149,853
1999
$622,804 $500,248 $1,124,100
1994
$185,126
2000
2001
$668,906
$652,220
1995
$233,362
1996
$264,500
2002
2003
$1,083,542 $1,305,425
GRAPH 1.4
Zakat (From Consolidated Incom e Statem ent)
$1,400,000
$1,305,425
$1,124,100
$1,200,000
$1,083,542
$1,000,000
$800,000
$668,906 $652,220
$622,804
$600,000
$500,248
$400,000
$149,853
$200,000
$13,347 $20,559
$185,126
$233,362
$264,500
$65,411
$0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Ye a r
Zakat
Source : STMB Annual Report
21
APPENDIX E
Figure 1.5 : Employment at Syarikat Takaful Malaysia
Total Staff
Total Staff
1990
260
1997
380
1991
228
1998
470
1992
214
1999
651
1993
198
2000
861
1994
176
1995
146
1996
285
2001
1,072
2002
1,130
2003
1,368
GRAPH 1.5
Employment at Syarikat Takaful Malaysia
1,600
1,400
Total Staff
1,200
1,000
800
600
400
200
0
1990 1991
1992
1993 1994
1995
1996 1997
1998
1999 2000
2001
2002 2003
Year
Total Staff
Source : STMB Annual Report
22
23