Introduction to Takaful

The concept of takaful, or Islamic insurance, where resources are pooled to help the needy does not contradict Shariah. The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

Conventional insurance involves the elements of uncertainity (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes.

The insurance providers in year 2001 and beyond should find Takaful sector an exciting sector of insurance to be in. This presentation focuses on growth potential that exists in Takaful with great many opportunities for innovative development of unique products, techniques and systems needed to fill gaps in insurance penetration in many of the markets around the globe. This paper presents an insight into the size of the current takaful industry worldwide and sketches the signs of change that may lead to realization of the potential that exists in this sector.

Overview of takaful

The takaful brand of insurance is a classic example of consumer-driven response to their needs. For generations, Muslims around the world have grown with a mind set that insurance (especially life insurance) is taboo because it contravenes some of the Islamic tenets. Life insurance as sold in conventional way was declared unacceptable in 1903 by some prominent Islamic scholars in the Arab countries. The search was on for an acceptable alternative ever since, and not until the 1970’s the debate took sufficient momentum to reach a consensus. In 1985, the Grand Counsel of Islamic scholars in Makkah, Saudi Arabia, Majma al-Fiqh, approved takaful system as the alternative form of insurance written in compliance with Islamic Sharia. It is outside the scope of this presentation to explain how the takaful system works except to say that it is a concept of protection for the good of society, a concept that was never an issue in Islam in the first place. The Grand Counsel approved this system as a system of co-operation and mutual help but the exact method and operation was left to Islamic scholars and insurance practitioners to resolve, develop and implement.

Takaful industry is still not past its formative years and there are many areas unresolved, especially in life insurance. The key areas to resolve are the global standardization of takaful terminology, the development of an acceptable form of life insurance (family takaful) especially for countries in the Arab regions and a common consensus for a system to determine profits (or surplus) distributable to participants and shareholders.

The very first Takaful company was established in 1979 – the Islamic Insurance Company of Sudan. Today there are some 28 registered Takaful companies worldwide writing takaful directly and 10 more as Islamic windows or marketing agencies placing insurance risk with conventional and takaful companies. In fact the number of takaful companies is higher as all insurance companies in Sudan are deemed to operate in accordance with Islamic Sharia principles. In addition, new takaful companies have been established recently in Sri Lanka and Tunisia. At least four more Takaful companies are under formation in the Middle East (viz. Kuwait, UAE and Egypt). Several other Takaful companies are being contemplated in various countries such as Pakistan, Australia and Lebanon. It is also understood that interest is shown in Takaful in South Africa, Nigeria, and some of the former states of the Soviet Union.

Takaful industry in the Middle East is under-developed compared to other markets such as Malaysia. The more successful companies in the Middle East have grown at 10% p.a. whereas in Malaysia the rate of growth has been 60% p.a.