Prospects for Evolution of Takaful in the 21st Century by Omar Fisher and Dawood Y.Taylor
  (Copyright and reserved by Fellows and President of Havard University, Mass , USA . April 2000)
  According to the world Bank Development Report 2000, the earth's human population is approaching 6 billion, of which upwards of 25% are practicing Muslims who adhere to one of the ancient Abrahamic faiths-Islam. Pressures from rapidly expanding air travel, globalization of industry and trade, 24/7 news media and global 'chat" are compounded by instantaneous satellite telecommunications via the worldwide web to forge a collective consciousness that all peoples are part of "global village". Yet paradoxically, these same contemporary pressures are revealing ethic diversity as never before and this revelation serves to empower affinity groups worldwide.
  In the burgeoning field of financial services, the fastest growing segment is Islamic Banking - particularly because it seeks to address needs of an underserved affinity group. Individuals and business in +40 countries with Muslim-majority population and another + 15 countries with Muslim-minority communities share a common value system. reports that as of June 2001, the global Islamic Banking sector manages USD$200 Billion in ways that conform to Islamic principles (called the Shariah) with a growth rate of 15% annually. While no definitive data exists, it is believed that this represents 10% to 15% of Muslim-owned fungible assets worldwide. Islamic banking and financial products are attractive for Muslims precisely because of their combination of financial efficacy, religious correctness and spiritual rewards. Every Muslim is held accountable for how s/he manages wealth, invests or borrows funds and cleanses profits by giving a portion for any gains annually to charity (Zakat).
  How Do Muslims Save for the Future?  
  Origins of Takaful  
  What are the Crucial Elements that define a Takaful System?  
  Proliferation of Takaful Programs  
  Retakaful or Reinsurance  
  How does a Conventional Insurer Make Money?  
  Three Types of Takaful Models  
  Brief Comparison of Conventional Insurance and Takaful  
  Debate between Al Mudharaba and Al Wakala Takaful Models?  
  Profile of Insurance Industry Worldwide  
  Acceptance Rates of Insurance  
  Emergence of Takaful Industry  
  Projected Future Demand for Takaful  
  Challenges and Obstacles to Future Growth  
  How Do Muslims Save for the Future : Today's Muslims share similar challenges with non-Muslims as they progress through life phases how to finance education, marriage and the demands of family formation, as well as how to save for retirement or an emergency fund to defray expenses that may arise from prolonged illness, or tragic misfortune. Such important yet mundane needs are typically addressed by conventional life insurance and associated long-tem savings instruments that commonly contain elements that are not permissible for practicing Muslims. Islamic scholars declared conventional life insurance unlawful many decades ago and reconfirmed as such in:  
  • Fatwa issued in Judicial Conference held in Mekkah in Shaban 1398 AH
  • Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972
  • Fatwa issued by National Religious Council of Malaysia in 1972
  • Verdict of the Supreme Court of Egypt on Dec.27, 1926
  • Unanimous resolutions and fatwa by Ulama in the Muslim League Conference in Cairo in 1965.
  Among the elements that makes life insurance, as presently practiced, prohibited are:  
  • Severance of a balanced risk-sharing relationship between policyholders and shareholders.
  • Presence of prohibited elements (a) Al Riba (excess or interest on loans), (b) Al Maisir (wagering, speculation) and (c) Al Gharar (uncertainty), deception and unclear terms) and
  • Investment of premiums by insurers into non-Shariah compliant securities
  For several hundred years, Muslims around the world were taught the common idea that insurance programs (especially Life insurance) are prohibited because they violate Islamic principles. The adherence to such misinformation has contributed to retardation in natural growth of Islamic societies by restricting capital formation and the spectrum of available long-term investment and savings vehicles. Even the advent of Islamic Banking in 1972 has accomplished but a blunt impact to redress the popularized views about insurance and risk-taking generally. In fact, some 80% of Islamic banking assets are managed in short-term instruments such as Murabaha (cost-plus financing) and virtually risk-free time deposits. This prevalent aversion to investing funds long-term is partly a result of the Islamic banker's lack of familiarity with acceptable risk hedging mechanisms, including Takaful schemes.  
  Financing or investing beyond short-term clearly involves risk whereby both the return to capital as well as the return of capital is uncertain. Clearly, one dominant method by which conventional investors choose to hedge risk and/or transfer risk is through the purchase of insurance. What options are open to a practicing Muslim to properly confront such risks and engage in longer-term financial transactions? To address this question fully, we should first revisit the origins of cooperative risk sharing in Islam.  

Origins of Takaful : Upon close examination of the primary sources of guidance for Muslims (Holy Quran Sunnah and Hadith), it becomes apparent that members of the first Islamic community 14 centuries ago practiced successful schemes of cooperative risks sharing that originated even before the advent of Takaful. Early precursors were developed in response to perils and risks associated with long-distance trade via caravans or sea voyage and included: hilf (confederation), aqila (pooling of resources), and daman al tarik (surety) that gradually evolved into a system of community self-help and financial assistance, which Prophet Muhammad (PBUH) validated as Takaful. In the early period of community building in Medinah (Hijrah 1 thru 20) there were three instances in which Prophet Muhammad (PBUH) employed an insurance mechanism to solve daily societal issues. In the first constitution in Medinah of 622 BC, there were codified references to social insurance replying upon practices such as al-diyah and al-aqila (wergild or blood-money to rescue an accused in accidental killings), fidyah (ransom of prisoners of war) and cooperative schemes to aid the needy, ill and poor.

  Founded upon these and other findings within primary Islamic sources, religious scholars have issued numerous judicial opinions and Fatwas confirming that Takaful as cooperative risk sharing is acceptable for Muslims. For example:  
  • Fatwa issued by Higher Council of Saudi arabia in 1397 AH (1976 CE) in favor of Islamic model
  • Fatwa issued by the Fiqh Council of Muslim World League in 1398 AH in favor of Islamic insurance
  • Fatwa issued by the Fiqh Council of the Organization of the Islamic Conference in 1405 AH in favor of insurance under Islamic model
  • The Grand Counsel of Islamic Scholars in Mekkah, Maja Al-Fiqh, approved the Takaful system in 1985 as the correct alternative to conventional insurance in full compliance with Shariah.
  • Takaful Act of 1984 authorized by the Ulama and Government of Malaysia

What are the Crucial Elements that define a Takaful System :

  At bottom, there are five (5) elements that must co-exist to establish a proper framework for a Takaful system; namely:
  • Ne'aa or utmost sincerity of Intention for knowingly following the guidance and adhering to the rule and purposes of Takaful - cooperative risk sharing and mutual assistance.
  • Integration of Sharia conditions, namely risk sharing under Ta'awuni principles, coincidence of ownership, participation in management by policyholders, avoidance of Riba and prohibited investments, and inclusion of al Mudharaba and/or al Wakalah principles for management practices .
  • Presence of Moral Value and Ethics whereby business is conducted openly in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealings.
  • No Unlawful Element, that contravenes Sharia and strict adherence to Islamic rules for commercial contract, namely:
    o Parties have legal capacity and are mentally fit
    o Insurable interest
    o Principle of indemnity prevails
    o Payment of premium is consideration (offer and acceptance)
    o Mutual consent which includes voluntary purification
    o Specific time period of policy and underlying agreement
  • Appointment of Sharia Advisory Council or Committee to oversee the development and Islamic auditing of the takaful operation
  The bedrock differences between conventional insurance as currently practiced and Islamic cooperative risk-sharing can be briefly summarized in three points: (A) Takaful is an ethical system with absolute rather than normative values revealed by God (Allah - swt) that are not subject to periodic reinterpretations, (B) Takaful's main drivers are:  
o Piety {meaning individual purification};
o Brotherhood {via Ta'awun or mutual assistance};
o Charity {Tabarru or donation};
o Mutual Guarantee; and
o Self-sustaining Operations as opposed to profit maximization.

And (C) Cooperative risk-sharing and profit-sharing prevails throughout in the primary insurance level as well as in any Re-Takaful arrangements, as opposed to using a brokerage fee-based relationship common in re-insurance.

It should be understood that one fundamental motivating factor for Muslims to utilize a Takaful system is to perform acts of piety… using Tabarru (donation) and Ta'awun (mutual assistance ) to promote community well being as well as achieve individual purification.


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:
  o Sudan (1968), General United Insurance Co.
  o Sudan (1973), National Reinsurance Company of Sudan
  o Sudan (1979), The Islamic Insurance Company
  o Saudi Arabia (1979), The Islamic Arab Insurance Company
  o UAE (1980), The Islamic Arab Insurance Company (Dallah)
  o Switzerland (1981), and UK (1982) Dar Al Mal Al Islami
  o Bahrain (1983), Bahrain Islamic Insurance Company {recapitalized and renamed Takaful International in 1999}
  o Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company
  o Luxembourg (1983), Islamic Takaful Company
  o Sudan (1984), Al Barakah Insurance company
  o Saudi Arabia (1983), Takaful Islamic Insurance Co. / Bahrain
  o Bahrain and Saudi Arabia(1985), Islamic Insurance and Reinsurance Company
  o Malaysia (1984), Sayrikat Takaful Malaysia
  o Saudi Arabia (1986), National Company for Cooperative Insurance
  o Turkey, Uluslarais Sigorta ve Reasurar
  o Saudi Arabia (1992), Al Rajhi Islamic Company for Cooperative Insurance
o Bahrian (1992), Al -Salam Islamic Takaful Co.
  o Brunei (1993), Takaful IBB Berhad
  o Brunei (1993), Takaful TAIB Berhad
o Brunei , Tabung Amanah Islam
  o Iran, Alborz Insurance Company*
  o Iran, Beimeh Iran Insurance Company*
  o Indonesia (1994), PT Sayarikat Takaful Indonesia
o Indonesia (1994) , PT Asuransi Takaful Keluarga
  o Indonesia (1994), Asuransi Takaful Umum
  o Singapore (1995), Syarikat Takaful Singapore
  o Singapore (1997), Keppel Insurance Co. Ltd
  o Singapore Ampro Holding , Pte.
  o Malaysia (1993), Malaysia National Insurance Takaful Company
  o Qatar (1995), Islamic Insurance Company of Qatar
  o UAE/Dubai (1997), Dubai Takaful Insurance Co.
  o Trinidad-Tobago Takaful Friendly Society (1999)
  o USA (1997-2000), First Takaful USA*
Note* Operates under Takaful/cooperative principles while evolving into full accordance with Takaful model.
  Additional recent initiatives include: 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 Retakful operators, latitude has been granted by Shariah Advisors to cede primary Takaful premiums to conventional re-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:  
  o Sudan (1979) - National Reinsurance
  o Sudan (1983) Sheikan Takaful Company
  o Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company
  o Bahrain/Saudi Arabia (1985) , Islamic Insurance and Reinsurance Company
  o Malaysia (1996), ASEAN Takaful Group which evolved into ASEAN Retakaful International (ARIL) in 1997, Labuan
  o Tunisia (1985), Beit Ladat Ettamine, Sauodi Takafol, Ltd. (BEST Re)
  o Malaysia (1993) - Takaful Nasional, part of the Malaysian National Insurance (MNI) Group.
  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
  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 reinsurer 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).

  How does a Conventional Insurer Make Money?  
  There are five ways that a traditional risk-sharing/insurance operation makes money and profits:  
  • Bearing risk - acceptance of risk exposures on behalf of or alongside policyholders and keeping the result from premium revenues less underwriting losses (claims) less operating expenses (ie. Surplus).
  • Managing a spread - surplus/profit comes from the difference between the cost of funds and the uses to which they can be put.
  • Processing information - processing transactions, administering financial products and programs for a fee.
  • Aggregating money - funds under management long term without acceptance of investment risk, where the magnitude of funds magnifies the management fees and/or the performance fees as a share of positive returns.
  • Distribution - selling financial services at a mark-up or brokerage fee.
  Given the above baseline principles, then what are the allowable ways that Takaful Operators can make money? In contrast to the conventional insurers, Takaful operators do not directly Bear Risk (a), which falls uniquely on the Participants (Policyholders ). Takaful Operators charge a fee for their management services on behalf of the Participants and will make profits by (a) managing their expenses within the fee/profit sharing structure and (b) Aggregating Money under management fee and/or performance or profit sharing arrangements.Although we can see in the next section some takaful operators using the Mudharaba model in addition to charging for recovery of management expenses also share in the underwriting results/surplus along with participants in accordance with a profit sharing arrangement .  
  Three Types of 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) Non-Profit Model, includes social-governmental owned enterprises and programs operated on a non-profit basis (such as Al Sheikhan Takaful Company - Sudan), which utilize a contribution that is 100% Tabarru (donation) from Participants who willingly give to the less fortunate members of their community. (B) Al Mudharaba 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 Wakala 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).  
  Again it must be stressed that the overriding purpose of the Takaful system is cooperative risk sharing for community well being and not profit maximization. Of course, there exists a realization that for Takaful programs to be spread widely there must be a degree of "commercialization" and marketeering using proven sales and marketing techniques.Moreover the necessity for operators to develop and promulgate Takaful programs to provide Muslims with alternatives to conventional "haram" insurance, demands that these operators be rewarded justly for their efforts proir investments, and business risk exposures. Yet profits perse are not the end goal.  
  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 Sharia
  • Dissolution - who ends up with any surplus capital
  • Regulations, Taxation and Auditing
  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 Quran 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 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 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 Sharia Advisory oversight.
  Debate between Al Mudharaba and Al Wakala Takaful Models ?  
  Until recently, the dominant companies pursuing application of Takaful in various classes of risk have successfully employed the Al Mudharaba Model. As explained by Takaful Malaysia the "al Mudharib (Takaful operator) accepts payment of (a) the takaful installments or Takaful contributions (premium) termed as Ra's-ul-Mal from investors or providers of capital and (b) investment funds from takaful Participants acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the Takaful operator is to be shared, in accordance with the principle of al-Mudharaba, between the Participants as the providers of capital and the takaful operator as the entrepreneur . The sharing of such profit (surplus) may be in a ratio of 5:5, 6:4, 7:3, etc. as mutually agreed between the contracting parties." Generally, these risk-sharing arrangements allow the Takaful operator to share in the underwriting results from operations as well as the favorable performance returns on invested premiums. Proponents of the Al Mudharabah Model mention that this provides an incentive for the Operator to perform careful underwriting, to manage claims judiciously and to limit selling expenses so as to increase its return on management/shareholder capital and efforts.  
  However, some Islamic scholars have noted that the conditions precedent for al Mudharaba in commercial transactions render it inappropriate for application to mutual risk-sharing or cooperative insurance. Objections to application on Al Mudharaba mode to insurance focus three areas:  
  • Definition of profit means "return after recovery of invested capital" whereas in insurance no profit occurs - rather a surplus results by not fully exhausting original premiums (capital ) rather than by generating excess capital.
  • Provider of initial capital (Rabb al Mal) in Al Mudharaba is liable for all losses from the commercial transactions or business but only up to its share capital contributed. This contrasts to insurance where by mutual assessment Participants (providers of capital) are obligated to unlimited losses from claims. Such losses in a Takaful Model are usually covered by a Qard al Hassan (free loan) from Participants of the Takafulpool.
  • Mudharib (agent/operator) in Family Takaful is not free to invest the funds as in a typical Al Mudharabah commercial arrangement. Regulatory authorities determine the degree of freedom that the Takaful Operator may have for investing the contributions - in Malaysia there is a pooled invest funds strategy. In Saudi Arabia, regulations allow for separation of risk protection and investment funds whereby Participants can choose themselves in the later case how to invest premiums into a range of unitized funds.
  • Contribution of premium cannot be simultaneously both a premium contribution and a Tabarru (donation) as the participant may claim returns on these funds, a rebate such as No Claims Bonus and a portion of the pool may benefit himself in case of need. A donation must be gift (Hibbah) freely given with no intent for self-gain.
  • The Takaful pool should bear all expenses related to risk protection and re-insurance while the Operator should be responsible for all expenses pertaining to imagining operations and investment of premium funds in its capacity as Al Mudhareb. In some Al Mudharabah models, marketing expenses and selling commissions are not strictly company/Operator expenses (i.e. Not salaried employees) and are yet charged to the Participant's Takaful pool.
  By contrast the Alwakala model :  
  • Consists of contribution (eshtirak) by Participants (mushtarik)that includes payments of fees and charges and a portion for donation (Tabarru) to a community Takaful fund. All risks are borne by the Takaful fund and the annual operating results (Surplus/Loss) belong solely to the Participants. The Takaful Operator (Wakeel) does not share directly in either the risk, deficit or Surplus.
  • All installment contributions flow into an Individual Investment Reserve Account (IIRA) where a specified portion is "dripped" out monthly as a donation (Tabarru) into the Takaful pool for mutual benefit of all other Participants.
  • Participants agree to pay specified Direct expenses (such a Retakaful costs, medical expenses, legal fees, etc.) and to pay the Takaful Operator a set fee (Wakala fees) to manage the operations on their behalf,which may include a performance fee as incentive that is charged to the surplus, if any. If the Takaful Operator is to generate a profit from its efforts, it must manage the operations (including salaries, overhead, selling commissions, sales and marketing expenses, etc.) entirely within the disclosed Wakala fees.
  • Since there is no other benefit to the Takaful Operator other than the declared Wakala fees, the Al Wakala model "demands" that all other charges/costs to the program be provided to the Participants at the lowest possible cost level that can be negotiated by the operator on their behalf.
  • The AlWakala model can be viewed as transparent as fees are clearly related to operator's operational costs.
  It is noteworthy that AAOIFI (Bahrain) issued accounting regulations in year 2000 as guidance for Takaful Operators in which Al Mudharaba practices were preferred for investment aspects of Takaful while al Wakala practices were preferred for risk sharing/underwriting aspects of the operation.  
  However, it is admitted here that the AlWakala Model is yet to be implemented fully and proven commercially viable. Bank Aljazira, a premier private Islamic bank in Saudi Arabia, introduced the first Takaful Ta'awuni program in the Middle East in fall 2001 based upon the Al Wakala model.  
  Profile of Insurance Industry Worldwide :  
  Worldwide insurance industry premiums written in 1999 were USD$ 2,324 Billion, an increase of 7.3% over the prior year. Of this total, $0.9 Billion (40%) was generated as Non-Life premiums (an increase of 1.2%), while $1.0 Billion (60%) was written as Life premiums (an increase of 7%). Industrialized and OECD countries account for 91% of these global premiums, as compared with their 15% population and 75% of GDP. On average 7.5% of GDP is consumed worldwide on insurance.  
  Turning our attention specifically to Middle East and Central Asia, with a population of 260 million this region represents 4.4% of wold population and wrote just over $3.5 Billion in Life business (0.3% of global) and $7.9 Billion of Non-Life business (0.9% of global). In comparison, the region of North America (slightly more population) wrote $425 Billion (or 30% of global) Life premiums and $ 447 Billion (or 49% of global) Non-Life premiums, whereas Japan alone (126 million population) wrote $392 Billion (or 28% of global) Life and $ 102 Billion (or 11% of global) Non-Life premiums.  
  Acceptance Rates of Insurance  
  Acceptance 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 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% ($16) for Life, respectively  
  Emergence of Takaful Industry  
  As we have seen, there are currently some 30 registered companies in the Takaful industry worldwide writing cover directly, another 10 Islamic "windows" through which Takaful is brokered and seven (7) companies performing Retakaful (reinsurance) operations.  
Total Takaful Premiums US$
% of Total
143 Million
Other Asia Pacific
50 Million
6 Million
Arab Countries
340 Million
538 Million
  Projected Future Demand for Takaful  
  The following table of economic and social date describes a profile of the Muslim world. Using data on per capita income, Muslim population and Saving rates per capita, an estimate can be constructed of the potential future demand for Takaful cover (Life and Non-Life). Assuming that (A) the Penetration Rates for insurance increase substantially to an average of 1.25% to 2.5% per capita (yet still would be approximately one-behalf of those rates in developed economies) and (B) 10% to 15% of the per capita savings available were allocated to cooperative risk-sharing schemes (Takaful), then the forecast demand worldwide for Takaful cover both Non-Life and Life in year 2011 could be USD $ 10.1 Billion. Of this estimated amount, nearly $2 Billion in annual premiums would be written in GCC countries, $3.1 Billion written in Asia Pacific region and an additional $2.6 Billion in Europe, turkey, china, India and USA.  
  Approximately, 52% of the projected total annual Takaful premiums would be Non-Life with an impressive gain Life/Family Takaful up to $4.9 Billion. These figures are by no means inevitable, however, such figures do display the magnitude of the business opportunity in Takful still to be realized.  
  This rough forecast is based upon an additional assumption that Takaful Operators augment capital commitments to their primary Takaful operations so that significantly higher volumes of Non-Life and Life premiums written can be achieved.  
  Challenges and Obstacles to Future Growth:  

The array of challenges that confront the primary writers of Takaful cover can be segmented and grouped into four categories: (a) Internal Factors-skilled staff, management style, level of capitalization, (b) External Factors-regulatory framework, competitive environment, treatment of Takaful vs. conventional insurers, role of government, maturation level of insurance industry (conditioning/mandates), etc., (c) Muslim client profile - attitude towards risk and response, savings rates and discipline, access to capital markets and investment options (mutual funds, bonds, etc.), Islamic awareness and habits, majority vs. minority position in country and (d) Sharia issues - co-existence of various Sharia rulings on Takaful practices, controversy between al Mudharabah and al Wakalah models and a gradual consensus building around a set of Takaful "norms".

We will highlight now the challenges that comprise each category.

  Internal Factors: There are traditional and cultural reasons why Muslims have not generally chosen insurance as a career. It remains for esteemed training organizations such as MII, BIRT, and BIBF (Bahrain) to reshape attitudes about insurance and inculcate the youth to seek out promising careers in Takaful, including professional areas of actuarial sciences, treasury management, investment funds management, underwriting etc.  
  There appears to be at present a severe shortage of skilled personnel who are also dedicated Muslims to enable Takaful operators to strike an important balance between insurance industry expertise and Islamic values. For example, there are less than six (6) trained Muslim actuaries worldwide working with Takaful companies. There are only a handful of accountants knowledgeable about insurance statutory accounting as well as Takaful accounting. Perhaps globally there are only a score of Muslim underwriters and fund managers expert in Islamic finance. Clearly the reservoir of human capital and trained personnel available to Takaful operators must be expanded as well as the number of non-Muslims insurance personnel who are knowledgeable about Takaful operations. While there is no definitive data available on the Takaful Industry worldwide, the authors estimate that the primary Takaful operators employ approximately 2,000 personnel worldwide whereas the seven (7) Retakaful companies employ upwards of 100-150 staff in total. This compares with 250,000 conventional insurance personnel in the USA, along with the + 150,000 conventional insurance agents and brokers, and some 86,000 insurance staff, agents and brokers in Malaysia.  
  The rate of new product development and innovation is not keeping pace with the insurance industry overall. Takaful management must strive to be proactive in designing cooperative savings and risk protection products for a broad range of client needs. For example, to date a Takaful savings product for Hajj and/or Umrah, Takaful Product Purchase Warranties and specialized property and liability coverage for religious buildings and organizations have yet to be developed.  
  Another area of import is development of operational and accounting standards for Takaful. The two pioneering companies in Malaysia, Takaful Malaysia and Takaful Nasional, joined forces in 2000 to develop a Code of Ethics for the industry. With the encouragement of Bank Negara (Central Bank), they launched an initiative in 2001 with the Life Insurance Association of Malaysia to promote best practices and greater professionalism in the industry. Other takaful operators are urged to likewisae implement locally the "best practices" gleaned from the industry worldwide.
  As we have seen, the level of capitalization for Takaful operators and Retakaful companies is relatively modes and should be augmented to enable them to accept higher volumes of premiums or retain greater level of risk exposure. Inadequate levels of capitalization or capital reserves results in excessive ceding of primary risks by Takaful companies to conventional insurers. The under capitalization of Retakaful companies only serves to compound this trend whereby Takaful operators today typically retain a mere 15% - 40% of the primary Takaful risk.  
  External Factors:  
  There are narrow options currently available for Takaful operators to invest premiums on a Sharia compliant basis. Only Malaysia has a special law that recognizes and regulates Takaful Operators separately from conventional insurers. Other Takaful operators must conform with investment restrictions that violate Islamic values; namely placing investment in interest-based (Riba) securities such as bonds, T-bills, treasury notes, etc. Prudent risk management would dictate that a Takaful Operator diversify its portfolio in secure, liquid and long term instruments - which are rare in Islamic finance offerings. Islamic bankers have yet to develop a Sharia compliant money-market fund that is sanctioned by a central bank. Although these are under development presently in Bahrain and Malaysia. It is urgently needed to create leasing funds as bond substitutes, REITS and other securitizable assets which are publicly traded to broaden the investment options for Takaful operators and assist them to overcome competitive disadvantage where conventional insurers gain interest returns on "idle" and short-term funds.  
  In Muslim-Majority countries, government and insurance regulatory bodies could elect to follow the worthy example of Malaysia and authorize a special legislation for Takaful companies. Such an Act would recognize the primacy of the Shariah and balance its guidance with secular laws generally geared to assure solvency of insurers and to protect consumers. A special Takaful Act could also address the requirement of Takaful Operators to invest funds in accordance with Shariah principles. In addition, the Act would address the critical issue of how to rate the Takaful Operators (eg. AM Best or S&P) which will require them to adopt a transparent operations and standardize their accounting claim-paying and reserves practices. At this time, it is difficult to see how Takaful Operators can be rated internationally with a modest capital structure and the absence of internationally rated Islamic securities.  
  Lastly, the Muslim client profile and attitude towards risk along with the Sharia Issues can only be redressed by education and consensus-building. While it is undeniable that most Muslims follow the sage advice of contemporary Islamic scholars, many practicing Muslims still keep their own counsel. A recent survey by Islamic Business and Finance Network (IBF Net) concluded that 55% of respondents if facing "conflicting fatwas" would study the different opinions and develop my own opinion." Islam is ultimately a religion of conscience, a deep matter between the individual believer and his Creator. Therefore, prevailing customs and popular understandings about risk and risk-taking can only be modified by sustained dialogue between individuals and Takaful Operators. They must clearly state their case to prospective consumers substantiated with historical and religious evidence. As explained herein, the Takaful position as a viable alternative to conventional insurance is certainly a strong one. Takaful programs offered with competitive protection features and prices that likewise offer spiritual benefits are being truly welcomed by Muslims; witness the 60% annual growth in applications even in a mature market like Malaysia.
  The specific merits of Takaful models will be passionately debated publicly in Takaful forums and in a private Shariah Advisory consultations. We are confident that eventually, a scholarly consensus will emerge that can guide the further evolution of the global Takaful industry.  
  To summarize, there are seven(7) main obstacles to rapid evolution and expansion of a global Takaful industry.  
  • How will takaful operators react to the sweeping changes impacting the conventional (re)insurance sector such as global consolidation, demutualizations and the Internet revolution.
  • How to respond to advancing disintermediation whereby customers are redefining distribution channels and their information needs.
  • Massive scale is required today in order to compete.. How to attract capital needed into the local Takaful sector.
  • Product innovation is accelerating.. forward-thinking not imitation is required
  • How to widen the scope of Shari'ah dialogue , both to include risk securitizations and other innovations as well as to help focus Islamic scholarly research and reflection on such issues.
  • Emergence of scholarly consensus for models of Takaful Operations that is sensitive to regional differences and local governmental regulations yet adhere strictly to the fundamental cooperative principles of Takaful.
  • Establishment of a global Retakaful facility in order to increase underwriting capacity and expertise available to indigenous Takaful operators.
  One should remember that a major mechanism for wealth and capital creation in emerging markets worldwide is insurance - both as an important source of funding and to address risk mitigation in human activities from family formation to launching new enterprises. Hence, to expand Takaful and Retakaful business is to nurture indigenous capital and wealth formation.  
  In conclusion, Islamic Finance and Islamic Takaful are ethical financing and cooperative risk protection methods that are superior alternatives precisely because they reinvigorate human capital, emphasize personal dignity, community self-help, and economic self-development.. generating manifold benefits for all participants. Islam is an integrated way of life. Thus, interest-free financing and Takaful are mutually reinforcing systems that promote at once economic efficiency, communal risk-sharing and individual rewards through self-purification. In as much as the Takaful system resolves around active participation by members of the community, it is imperative that public awareness be enhanced. As Muslims and non-Muslims alike come to understand the real benefits of Takaful and cooperative risk sharing, the evolution of the Takaful industry will accelerate making the projections described herein overly conservative.  
  Dr. Mohd Ma'sum Bilah, Principles and Practices of Takaful and Insurance Compared, International Islamic University, Malaysia, 2001  
  Dr. M.M. Billah, "Life Insurance-an Islamic View". Arab Quartely, Vol. 8 part 4. 1993 Institute of Islamic Banking and Insurance, Directory of Takaful Companies 2000, London.  
  Aziz Zulkify, "Takaful-What Differentiates it from Conventional Insurance" speech at Islamic Banking & Finance Forum, Dubai, 1996.  
  M.N. Siddiqi, Insurance in an Islamic Economy, The Islamic Foundation, London, 1985  
  Yusof, M. Fadzil, "Brief Outline on the Concept and Operational System of Takaful Business" Kuala Lumpur, Malaysia, BIRT, 1997.  
  Zulkifly, Ahmad Mazlan, "The Origin of Takaful and Evolution" Malaysia, speech at Rediscovery of Takaful and Retakaful Forum, New York, April 2000.  
  Annual Report 2000, Takaful Malaysia, KL Malaysia  
  World Bank Economic Review, Vol. 13, No.2, 1999  
  World bank Atlas and Development Indicators, 2001  
  Yaquby, Sheikh Nizam "Possibilities of Global Uniformity amongst Takaful Operators in light of the Shariah Norms", speech International Summit on Takaful, KL Malaysia, June 2001.  
  Yaqubu, Sheikh Nizam, "Role of Sharia Board in Islamic Insurance" International Conference on Takaful, KL Malaysia, June 1999.  
  Bhatty, Ajmal, "Takaful Industry: Global Profile and Trends, 2001" , New Horizon, Institute of Islamic Banking & Insurance, London, April 2001.  
  Taylor, Dawood, "Developing Takaful Taawuni in Saudi Arabia" speech International Takaful Conference, KL. Malaysia, June 2000.  
  Fisher, Omar, "Awakening of a Community - Rediscovery of Takaful Worldwide", Institute of Business Administration speech, Karachi, Pakistan, April 1999.  
  Fisher, Omar, "Growth of Islamic Finance and Scope for Retakaful", speech International Takaful Conference, KL Malaysia, June 2000.  
  Islamic Banker, April 2001, Vol. 63, p. 4.  
  Bank Negara Takaful Industry Report 2000, Kuala Lumpur, Malaysia, p. 7-17.  
Date Last Modified: 13/01/2003 © Bank Aljazira , All Rights Reserved
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