The Islamic insurance system or Takaful is the natural continuation of early experiments in Islamic finance by countries such as Egypt and Malaysia. Takaful is very much like conventional insurance systems but differentiates itself in several aspects. For example, Takaful operators do not invest in industries or companies that are related to vice or usury (interests). This makes Takaful extremely appealing to many Muslims as it complies with Islamic law or the Shariah as it is called.
Indeed, Takaful has continued to grow quite steadily despite the ups and downs of conventional markets and have proven surprisingly resilient to the extent of attracting non-Muslim scholars to study it in detail. In countries such as Malaysia, Takaful is very much thriving due to the primarily Muslim population as well as its own focus on steady growth.
Despite the progress of Takaful in Muslim countries, however, Takaful still bears the Islamic label. Many non-Muslims and especially foreigners may look at Takaful with some suspicion simply due to its connection with Islam. Others may view its compliance and focus on ethics as limiting factors. The refusal of Takaful operators to engage in conventional interests can be especially bewildering to those who do not understand the drawbacks of conventional interests. These concerns must be addressed before Takaful can expand beyond Muslim countries into the global arena. It is also worth noting that Takaful and Islamic finances in general are relatively new and are primarily regulated by their respective countries. This means that standards and “best practices” are only beginning to emerge that can be adhered to internationally.
Another challenge that faces Takaful operators is the Muslims’ perception of banking. For example, Takaful still has low penetration in Pakistan as of 2010 despite the Muslim majority in that country. This challenge, however, has been overcome to some degree as many Muslims now acknowledge the difference between Takaful and conventional insurance. Yet, this can prove to be a challenge in itself. While juggling the banner of ethics on one hand and attracting non-Muslim funds on the other, Takaful operators themselves are under scrutiny. They are on the moral high ground and must do their utmost to maintain that position and not betray the trust of their customers. To that end, the money entrusted must be very carefully managed and invested wisely and creatively and they must not be tempted to stray from the original spirit of their enterprise. They must not strive to merely mimick conventional insurance and be swerved to pursuing profits at all costs. If they were to achieve this, they will require talented employees who can offer exceptional service to their clients as well as convince Muslims and non-Muslims alike of the benefits of Takaful. New and innovative products will also need to be developed without going against the Shariah or Islamic law. The Takaful operators need to ensure that the non-Muslims understand that these products can be had by both non-Muslims and Muslims alike and that they have no religious implications beyond the avoidance of usury and vice.
These are some of the concerns, challenges and progress of Takaful as it stands. Islamic finance and banking will likely grow in the future along with Takaful, but it will take a lot of effort to ensure their eventual success not only in the Muslim world, but also in the global arena.
Takaful Operations: Issues and Recommendations
Low penetration of Takaful in Pakistan