Takaful Progress and Challenges

From the perspective of Shari’a (Islamic Law), Takaful is a cooperative venture that involves a group of people who pledge to support one another through monetary compensation in the event of a catastrophe.   This is an old pre-Islamic concept that continued on in Arabia under the command of the Prophet Muhammad.  Amongst his sayings are:

“Indeed a believer is one who can give security and protection to the life and property of mankind”. (Prophet narration from Ibn Majah’s collection). “By God in Whose power I am under, one will not enter paradise unless he provides protection to a neighbor in difficulty.” (Prophet’s narration from the collection of Ahmad).

What’s Islamic about Takaful is the absence of interest. Islam, like many other religions prohibits usury in loan and other financial transactions. In Takaful, the insurer and the consumer are partners in risk-taking. Both parties agree to accept liabilities and the profits of the investments undertaken by the Takaful agency.  This model of Takaful operation is called Muradhaba or Profit Sharing.  Another model known as Wakalah or Agency, employs the insurer as a third party manager of the cooperative venture, for which the insurer or Takaful agency receives an agreed percentage of the premium and/or risk.  The investment projects undertaken must also be void of interest and speculation, rendering a fixed premium.   Takaful transforms the concept of Insurance from being a solely business service to a community-protection cooperative.   This moral and ethical character of Takaful increasingly attracts consumers outside the Muslim customer-base.

For the average practicing Muslims however, Takaful allows them to manage their investment and cushion their risks without risking their place in the Hereafter.   This is a good deal for those who are concerned about balancing worldly needs with divine commandments.  Muslims across the world have not kept up with the world’s pace in buying insurance. Ernst&Young, reported that insurance premiums amounted to 8 per cent and 9 per cent of GDP in the US and Western Europe respectively in 2006.  In the Middle East and Central Asia, the insurance premium made up only 1 per cent of their GDP. Takaful is expected to close that gap in the coming years. 

The engine that propels this development is the mushrooming of Takaful companies in numerous Muslim countries such as Malaysia, Brunei, Pakistan and the Gulf Cooperative Countries (GCC) such as Saudi Arabia, UAE and others.  In addition, conventional financial institutions in the West are also eager to take a slice of the pie.   AIA in the United States of America recently launched its Takaful subsidiary in Malaysia.  HSBC Amanah is currently playing an active role in financing Islamic financial products around the globe.  The future stars of Takaful might be today’s infants: the new Islamic banks and Takaful companies in Western countries.

The current financial crisis and consumers’ suspicion of the financial sector may boost the progress of Islamic finance in general, and Takaful in particular.  Risky times call for more protection -and what better protection can beat one that offers mutual security based on human compassion? The Prophet Muhammad reminded his followers that the owner of a camel should first tie his camel, and then rely upon the destiny ordained by God. [Al-Tirmidhi Collection Vol.4,p.668].  Taking steps to protect one’s assets and then seeking God’s protection is permissible in Islam.  The concept of Takaful can make a huge impact on the world, if nations were to cooperate with one another against the onslaught of nature and provide aids to nations that cannot help themselves.

However, a good idea is not without its challenges. In the current climate of Islamophobia, the word “Shari’ah” sparks lightning and raises tension and fear.  An insurance system that complies with the Shari’ah may not sound like a good thing to some people. The Islamic finance sector recently witnessed a hostile reaction towards AIA, whose participation in Islamic banking raised questions regarding its eligibility for stimulus funding.    The public needs more exposure to the Islamic financial institutions.  As more conventional banks invest in Islamic financial products, the profits will silent the naysayers. 

Education plays a major role in convincing potential consumers to participate in Takaful. Muslim consumers as a group are expected to show increased confidence in the permissibility of Takaful in their religion.  However, over time, Muslims’ confidence and financial successes might lure them to make a switch to conventional insurance instead.   The more savvy the consumers, the more sensitive they are to interest rate fluctuations and its effect on the insurance premium.   The constant comparison between Islamic finance and the conventional one is a challenge that financial players can’t expect to dissipate anytime soon. 

Still, the most dubious aspect of the Islamic Insurance sector is its identity crisis.  Takaful is a work-in-progress that begs participation from both Muslims and non-Muslims financial experts to fine-tune its parts.  There is no better time than today.  The world should stand up during its crisis with equality in mind. Over time, perhaps, Takaful can reach the perfect equilibrium of profit and piety.