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An Overview of the Takaful Industry

New Horizon, No. 107, March 2001, pg. 9-11

- By Mohd Fadzli Yusof- Chief Executive Officer, Sharikat Takaful, Malaysia

Currently, it is understood that there are around 40 takaful operators worldwide,

mostly providing general business. It is at the same time estimated that the com-

bined total assets and contributions (premium) of these operators stand at

around USD1billion and USD500 million respectively. Obviously, this amount is

negligible and very insignificant compared with the total number of Muslim

population of Islamic countries, estimated at around 800 million people.

According to data compiled by Carpenter Bowring London, a company under the

Marsh Mc Lennon Group, the world largest reinsurance broker, insurance

penetration particularly for the life sector in premium terms in Muslims countries

is less than 1% of GDP. It is therefore clear that takaful has immense potential to

be developed with its sheer market size hitherto remained untapped.

For this reason, existing as well as would be operators must intelligently position

themselves in terms of product design that can satisfy the needs of the market. In

this regard, products that would help to improve savings among the masses,

such as family takaful plans which are essential components for ensuring

economic growth should be actively promoted.

As for the penetration of life insurance, perhaps Malaysia is relatively ahead

among most Islamic and developing countries. At present, Malaysia has attained

penetration rate of 28% as against than 5% for most Muslim countries, compared

to the established of Singapore, Japan and most European countries with rates

ranging from 65% to 150%. The co-relation to the relatively high market penetra-

tion is further reflected from the savings rate of Malaysia, considered

comparatively high at 39% of GDP.

Countries with high savings rate would generally be able to sustain economic

growth and would not have to depend upon assistance or aid from outside. Thus

from the economic standpoint, takaful would be useful not only as a means to

inculcate good savings habit and cultivate thrift at the individual level, but also

help to accelerate investment potential for the ummah as whole. This in turn

would be beneficial for the economic development and well being of Muslim

countries themselves.

As demonstrated from the small activities undertaken by Takaful Malaysia,

Malaysia has taken the lead in bringing takaful to the international playing field.

Asides the advancement within the Asian region, Malaysia has helped other

parties outside the region to introduce and promote takaful in their respective

countries. For this purpose Takaful Malaysia has established joint-venture

programmes in Sri Lanka, Saudi Arabia and has also provided technical

assistance for takaful operators in Australia. Request for similar assistance has

been sought from Lebanon, Bangladesh and Algeria.

In another interesting development, the 'Developing-8 (D-8)', at its Second

Heads of State Summit in Dhaka, Bangladesh on 1st and 2nd March 1999,

issued a declaration which amongst others agreed to introduce, promote and

develop takaful in all D-8 countries. In relation to this it was also resolved that

Malaysia be given the task to assume the lead role in planning, coordinating and

providing technical expertise and other related resources for this purpose.

As a follow-up action, an "International Workshop On Retakaful" was held in

Kuala Lumpur on 31st May and 1st June 1999, whereby a similar declaration

was issued strengthening the earlier commitment of the D-8 Summit to hasten

the pace of the introduction and development of takaful amongst D-8 and other

OIC countries. At the same time it was also agreed that the status of ARIL be

transformed as the retakaful operator for the D-8, whose capital shall be

expanded and to be subscribed by the member countries. In line with this move,

ARIL has come out with a five-year strategic plan to increase its paid capital to

USD50 million by 2006. Obviously, this development augurs well for takaful as a

whole and it opens up new opportunities as well challenges for the takaful


Opportunities and Challenges

The pro-active stance as afore-mentioned obviously presents boundless

opportunities for takaful. Coupled with the sheer size of the ummah totaling to

more than 1.2 billion people, takaful therefore has no frontiers. Indeed the world

is a colossal market for takaful products. With its generally superior features

compared with conventional insurance policies, it is almost impossible for takaful

to be out of the mainstream. For example, in Malaysia apart from individuals,

more and more corporations and multinationals are using takaful products

including among the non-Muslims community.

Nevertheless, opportunities do not come by a flick of a finger. A number of

crucial issues have to be addressed to ensure credibility and acceptability and

hence brighter future for takaful. Some of these issues may be summarised as


Financial Capability

Operators should be adequately capitalised in order to have a meaningful

financial strength, so that they would be able to meet the demand of the market

conveniently. A relatively weak operator may not only hamper its development

but may have to depend heavily on the support of re-takaful operators, meaning

relying presently on the mercy of conventional re-insurers. Without sufficient

financial capacity the ability to retain absorb more of the risks would be virtually

impossible. Although adequacy of capital is viewed differently one country to

another, it should however have an acceptable minimum requirement reflecting

the minimum level accepted internationally. In Asian, the figure is between USD

12 million to USD15 million. In this regard, authorities would have an influence on

this matter; as for example in Malaysia, through the enforcement of the Act, the

requirement for solvency margin and the compliance of minimum capitalisation

can be effectively legislated.

Manpower and Expertise

Being a service industry, the pace of progression for takaful would to a greater

extent depend upon its manpower and competency of its human resources.

Lacking of trained and experienced manpower would hinder the development of

takaful. At present, developing countries in general, of which most of the Islamic

countries are in this category, are facing scarcity of qualified and trained

personnel in the field of insurance. For this reason, takaful is also affected in view

that experienced insurance personnel are at present form the core staff for most

takaful operators. Special programmes therefore should be initiated to train the

manpower not only on the technical aspect of insurance but also in areas

covering finance and investment as well as appreciation of Shariah. Towards this

end, Malaysia has begun to play its leading role by organising and conducting

special educational programmes for takaful personnel in the Asian region-as-well

as others through the formation of Bank Islam Research and Training Institute

(BIRT). It is also felt that bodies like Islamic Research and Training Institute

(IRTI) of the Islamic Development Bank (IDB) would be able to assume similar

role. Coordination of these various bodies is essential to avoid wastage and over-

lapping of functions.


The issue of retakaful or reinsurance in accordance with the requirements and

practices of Shariah will occupy the takaful operators for sometime. Like

insurance, sound retakaful arrangement is a necessity. Although in a situation

where retakaful is still inadequate to meet the needs of takaful operators, Shariah

allows them to deal with conventional reinsurers.

Nevertheless at the same time, serious efforts ought to be undertaken, in

particular by the takaful operators themselves to establish their own retakaful

facility. A proper way obviously would be establishing special retakaful operator

as in the case of ARIL. But without sufficient number of players, it would perhaps

be rather difficult for such retakaful operator to survive in terms of business

support. Ideally, retakaful should solely depend on the cessions from takaful

operators. Practical commitment of the various Islamic countries and their

political willingness are urgently needed to demonstrate their readiness in allow-

ing takaful operators to be incorporated in their respective countries which then

would create the necessary playing field for retakaful operation.


As custodian of public fund, takaful operators must ensure that the takaful funds

are not only soundly but more importantly safely managed. The fact that the

takaful operation is essentially based on profit sharing, investment of the funds

becomes fundamentally important as underwriting. However in the case of

takaful, there is another essential dimension to be considered in that avenues of

Investment must be in accordance with Shariah principles. At present, these

avenues are relatively limited. It is therefore highly timely for all relevant parties,

such as government authorities in Islamic countries, financiers, bankers including

central bankers, takaful operators, economists and Shariah scholars to study,

develop and promote the diversity of investment instruments and products

acceptable to Shariah.

Legislative Framework

For takaful to thrive in an orderly and proper manner, a necessary infrastructure

which would enable the authority to regulate and supervise its operation must be

in place. A form of legislative framework is therefore essential for the authority to

exercise its supervisory function both in terms of business operation as well as

Shariah compliance. In most Islamic countries there exists a dual financial

system side by side. What is therefore statutorily required of the conventional

financial system such as good governance, compliance of regulations and other

provisions should also be applicable to the Islamic financial system.

In the case of takaful for example, the legislative requirement for minimum

solvency margin imposed on conventional insurers should also be applied to

takaful. Such requirement can only be effected by law. With a proper legislative

framework, it would also enable the authority to regulate whole gamut.

The ability to comply with the above issues would ensure a strong and stable

footing for takaful. In the wake of open market and globalisation under the WTO

agreement, takaful, like other financial sectors would have no alternative but to

face competition. At present, the market for takaful thrives essentially in Muslim

countries with the expertise still in the hands of the Muslims. But what has

happened to Islamic banking may also happen to takaful. Through the process of

globalisation and the pressure of competition with expertise can be easily

acquired it would be possible that international insurance companies from the

Western world will one day introduce takaful to both Muslims and non-Muslims.

Therefore to be ready, the performance standard used in the conventional

insurance should also be used for takaful. In this respect, the generally accepted

key indicators or benchmarks, such as the CAMEL test, normally used in deter-

mining such standard for conventional companies ought to be similarly applicable

to takaful operators.

Harmonisation of Practice

As generally agreed by Shariah scholars, the form of insurance business

acceptable to Islam in essence must contain the virtues of cooperation, solidarity

and brotherhood. However, these are mere concepts that cannot simply be

equated and therefore cannot be applied as a basis of legal principles in a

contract. In fact the scholars further agreed that the contract of takaful must be

based on certain 'tijari' principles that conform to the basic characteristics of

Islamic business transaction. Towards this end, the scholars concluded that the

contract may be based either on the principles of Al-Mudharabah or Al-Wakalah.

Although basically under both principles, the sharing of profit between

participants and operators is an entitlement embedded in the contract, there is

however a structural difference in the way such profit (surplus) is determined.

The difference lies in the fact that under the principle of Al-Mudharabah, the

operator as the mudharib or entrepreneur, cannot charge its management

expenses from the takaful fund. Whereas under the Al-Wakalah, the operator

being the agent of the participants, can use part of the fund to cover its

management costs. Under the Al-Wakalah too, underwriting surplus of the takaful

fund, if any, shall be distributed back to the participants only, based on the

premise that the funds, actually belong to the participants.

On the contrary, under the Al-Mudharabah principle, the profit as universally

defined by conventional insurance companies, which in the case of general

business is taken to mean returns on investment plus underwriting surplus, is

then shared according to a mutually agreed ratio, such as 50:50, 60:40 or 70:30

between the participants and the operators. Management expenses of the

operator including agency remuneration, if any, shall be borne by the

shareholders’ fund and not from the takaful funds. Hence, there is a distinct

separation between takaful funds and shareholders' fund.

Under the Al-Wakalah principle, the paid-up capital is contributed as donation by

the shareholders. Therefore, under this principle the shareholders do not expect

and probably do not mind for not receiving any returns on the capital donated.

However, it is understood this standpoint has changed in view of opinion

expressed by certain scholars that the shareholders (operator) in their capacity

as managers should also be entitled to share the profit arising from the takaful


From the observation on the performance of takaful operators using the Al-

Wakalah principle it was found that their returns to the participants have been

comparatively low. On average their rate of profit declared to their participants

below 10% p.a. On the other hand, it is also understood that there are even

operators, especially newly established ones have not been able to declare any

profit to its participants.

Under the Al Mudharabah principle, shareholders as owners of the operator have

equal opportunity to enjoy a similarly fair return on their capital. The profit portion

attributable to the shareholders is transferred to the shareholders' fund and

together with returns on investment of the fund itself shall pay for the manage-

ment expenses. Any balance there from is declared as profit of the operator and

dividends are distributed there from. Adopting the Al-Mudharabah principle for

takaful operation as experienced by Takaful Malaysia would ensure that the

cardinal principles of 'al-adl' and 'al-ihsan' under Islamic contractual obligations

are constantly upheld as both participants and shareholders are enjoying similar


As both principles are acceptable to Shariah and currently being used by various

operators all over the world, serious efforts should be taken to harmonise the

practice. By this harmonisation, there would be unity in diversity, and equally

important would remove the confusion, if any, among the ummah of a common

system but with two different modes of practice. It also paves for convenient

practical cooperation among these operators. Towards this end, moves towards

establishing an accounting standard for takaful operators that at the same time

will harmonise the two practices initiated and undertaken by the 'Accounting &

Auditing Organisation For Islamic Financial Institutions (AAOIFI)' should be

lauded and strongly supported.


What has been attained so far is comparatively small, but as shown from the

performance of takaful operators generally, is growing rapidly. Considering only a

tiny percentage of the ummah have some form of life insurance cover, the

potential for takaful to penetrate deeper into the market is tremendous. In this

context family takaful products would have a strong chance to grow and expand.

Therefore takaful is here to stay.

However, the future of takaful would depend on the ummah. Whether takaful

would develop into an industry and eventually become the real insurance

alternative for the ummah would depend on the commitment and political

willingness of the Muslims at the individual, community, national and international

levels. What is urgently needed is the practical translation of these commitment

and political willingness by all.

The time for polemic is past; it if no more discoursing on the basic issue of 'halal'

or 'haram'. The way forward is on improving, correcting and developing the

existing operational structure, which has been generally accepted to be

essentially based on either the principles of Al Mudharabah or Al-Wakalah. It is

clearly demonstrated that in countries where there is commitment and strong

political willingness plus the application of modern management practices in its

approach, countries have seen their takaful operations grow into a viable and

profitable business venture.