ISLAMIC CONCEPT OF INSURANCE
Future Potentials of Takaful
Takaful is an alternative form of conventional insurance based on the concept of
shariah principles. Muslim societies in different parts of the world are now
practising Takaul scheme as their own way of sharing financial responsibilities
to assist each other. They have invented an Islamic way of mutual assistance to
deal with uncertainties of life.
Takaful is a social scheme based on the principles of brotherhood, solidarity
and mutual assistance. It provides mutual financial aids and assistance to those
who are members of the takaful scheme and voluntarily agree to contribute a
certain amount of money for that purpose. It is a mutual agreement among the
participants of the scheme. This has its origin from the concept of collective
sharing of individual’s loss. Takaful, is being practised now as an alternate of
conventional insurance system and is bounded by Islamic principles, rules and
the law of Islam (Shariah).
Takaful is an Arabic word stemming from the verb “kafal” which means to take
care of ones needs. Under this scheme, the members or the participants in a
group agree to jointly guarantee themselves against loss or damage caused by
specified perils. The entire group would assist the incumbent person from the
fund they have created to alleviate (indemnify) his loss and or to provide him
with financial help. Takaful is a legally binding agreement between all the
participants of the scheme to pay any of the members who suffer a loss as
specified in the takaful certificate (policy). Takaful scheme has been evolved
from the teachings of Islam i.e. on the basis of the Quaran and the Sunnah
Takaful, generally means joint guarantee. It is understandings among a group of
people (called the participants) who agree to reciprocally guarantee each other
financially should any event (as defined in the contract) occur. The basic
objective of a Takaful contract is to pay from a common fund, which is set up by
the participants of the scheme. The fund thus created may be managed by the
participants themselves or through professionals or by a registered Takaful
Operator. The fund is created by the equitable contributions of the
participants.. In order to ensure that a Takaful scheme operates within the
principles of Islamic teachings, the transactional aspects of the system is
subjected to Islamic contractual laws. Hence, Takaful contracts are based on the
principles of Mudarabah, (limited partnerships) which means profit and loss
sharing. The fundamental basis of Takaful scheme is that its operations do not
involve any element which is not approved by the Shariah (Laws of Islam).
Historic Nexus
In some sense we can say that insurance appears simultaneously with the
appearance of human society. We know of two types of economies in human
societies: in ancient times, we can see insurance in the form of people helping
each other. For example, if a house burns down, the members of the community
help build a new one. Should the same thing happen to one's neighbour, the other
neighbours must help. Otherwise, neighbours will not receive help in the future.
Takaful/ Islamic Insurance is not something new to the Islamic world. It has
been going on for centuries, ever since the days of the Holy Prophet Muhammad
(Peace Be Upon Him) and the early Caliphs. We know that in those days there were
ships and trade caravans and they used to be exposed to the same risks that we
face today. Ships could be sunk, caravans could be raided or catch fire etc.
Given these dangers to trading activity, the early pioneers of Takaful were wise
enough to formulate a system of mutual protection so that the members of a
particular caravan or trade delegation could be assured of recovery in case they
suffered a loss due to unavoidable circumstances. Thus the members of these
trading enterprises would enter into a formal pact stipulating that in case of
loss to one party, the others would contribute to make up that loss.
The only essential difference between Takaful at that time and Takaful today is
that whereas they used to pay only after the loss, we today charge a considerate
amount of what is known as a contribution before the loss, and at the end of the
year after all the claims have been settled, it is returned back to the
participants.
This early practice of Takaful or mutual indemnification even found expression
in the first Constitution of Medina (Mithaq al-Madina) in the days of the
Prophet and was the second system that was formally institutionalized by the
Caliph Umar, the first being the Baitul Mal or Public Treasury. These
developments at the state level meant that Takaful came to be formalized into a
more secure system, with more accountability and more checks and balances.
During this period, a number of Takaful products were evolved based not only
around diya or blood money, but also dawaniya which was a sort of professional
indemnity to governors and state functionaries.
Thus the system of Takaful became an integral part of trade and commerce in
those days and this situation continued for several centuries upto the end of
the First World War. The fall of the Ottoman Caliphate shortly thereafter meant
that Takaful, along with the other state institutions that had safeguarded
Muslim interests fell on bad times. While Takaful receded to the background,
conventional insurance imposed by the western colonial powers took its place,
and this continued for several decades. It was only in the 1970s with the
revival of Islamic banking modes in the Middle East that modern-day Takaful also
developed. The first Takaful company was set up in Sudan in 1979 which was
almost simultaneously followed by another set up in Bahrain. The rapid growth of
Takaful ever since, even in the non-Muslim world, only goes on to prove that it
has withstood the test of time and is a viable alternative to conventional
insurance.
What is Takaful?
The word Takaful is derived from the Arabic verb Kafala, which means to
guarantee; to help; to take care of one’s needs. Takaful is a system of Islamic
insurance based on the principle of Ta’awun (mutual assistance) and Tabarru
(voluntary contribution), where risk is shared collectively by a group of
participants, who by paying contributions to a common fund, agree to jointly
guarantee themselves against loss or damage to any one of them as defined in the
pact. Takaful is operated on the basis of shared responsibility, brotherhood,
solidarity and mutual cooperation.
Essence of Insurance in Islamic Society
Ibn Abidin (1784-1836) was the first scholar in the Muslim world to discuss the
meaning and legal character of insurance Islamic aspect of insurance has been
under discussion since then. Opinions regarding legitimacy, adoption, and
adaptability of insurance are numerous. Recently, however, a consensus was
emerging for adapting insurance in the name of takaful and solidarity. As a
result, several Islamic takaful and solidarity companies have been established
since 1979.
As the essence of insurance could be seen in the system of mutual help in
relation to the custom of blood money under the Arab tribal custom, Muslim
jurists generally accepted that the concept of insurance does not contradict
with the Shariah. In fact, the principle of compensation and group
responsibility was accepted by Islam and the Holy Prophet. Muslim jurists
acknowledged that the basis of shared responsibility in the system of `aqila',
as practiced between Muslims of Mecca (muhajirin) and Medina (ansar) laid the
foundation of mutual insurance.
As a complete religion, the teaching of Islam encompasses the essence of peace,
economic well-being and development of the Muslim at the individual, family,
social, state and `ummah' levels. To illustrate the importance of this
relationship in a life of a Muslim, Islam calls for the protection of certain
basic rights, viz.: - The right to protect the Religion, The right to protect
the life, The right to protect dignity/honor, The right to protect the property
and The right to protect the mind. It is also a generally accepted view that
Islamic insurance was first established in the early second century of the
Islamic era. This was the time when Muslim Arabs started to expand their trade
to India, Malay Archipelago and other countries in Asia. Due to long
journeys/voyages, they often had to incur huge losses because of mishaps and
misfortunes or robberies along the way. Based on the Islamic principle of mutual
help and cooperation in good and virtuous acts, they got together and mutually
agreed to contribute to a fund before they started their long journey. The fund
was used to compensate anyone in the group who suffered losses through any
mishap. In fact the Europeans copied this, which was later known as marine
insurance. But here question may arise in the mind that whether Risk Protection
(insurance) against Tawakkul (total dependence upon ALLAH? It is fact that
none of human actions will change the Will of ALLAH for our destiny. Whether a
person has insurance/Takaful or not has no effect on future events. However, we
are instructed to take precautions and then fully trust and depend upon Almighty
ALLAH : In a Hadith narrated by Anas bin Malik, one day Prophet Muhammad (PBUH)
noticed a Bedouin leaving his camel without tying it. He (PBUH) asked the
Bedouin, “Why don’t you tie down your camel”? The Bedouin answered, “I put my
trust in ALLAH”. The Prophet (PBUH) then said, “Tie your camel first, then put
your trust in ALLAH”
Role of Takaful in Islamic Economic system.
In the recent past, the Muslim world is being stirred with an endless enthusiasm
and impetus to occupy its real place among the community of nations and
contribute its due share and to its duties to humanity. Takaful is a service to
Muslim Ummah (community) as a welfare scheme. Introduction of Takful is an
example as to how the principles of Islamic Shariah can help to create new
socio-economic mechanism based on equity, justice and fair play.
The objective of Islamic Economy is to create an exploitation free society and
upliftment of the entire society as a whole. The Takaful system, which has been
working for the welfare of the mankind is not in contradiction with Islam. The
objective of Islamic Economic system is the promotion of welfare of people which
lies in safeguarding their faith, their life, their posterity and their
property. By ensuring and safeguarding these elements of the people, Takaful
serves public interest and, therefore, can play the most important role.
An exploitation free society as Islam envisaged have provisions for adequate
capital formation. The Prophet of Islam disapproved begging and encouraged
capital formation. He advised a poor companion to sell all his belongings for
purchasing an axe for collecting firewood and sell those in the market. The
Takaful system will facilitate capital formation of individual households. This
will motivate every individual for savings under Family Takaful (Islamic Life
Insurance) and the collective surplus funds will be invested in the capital
market. This will facilitate further utilization of resource and greater
employments.
Islam is the second largest religion in the world with one and quarter billion
followers. In all, Muslims form a majority of the population in over forty
countries. Muslims live in 184 countries comprising about 20% of world
population. Islamic countries and other countries with a significant Muslims in
the recent past have encouraged the provision of financial services, including
insurance, under Islamic principles. As a result many Takaful/Islamic Insurance
companies have been established for providing insurance coverage both in the
life and non-life sectors. These insurers generally known as Takaful operators
are found not only in Islamic countries but also in Europe, North America and
Australia. This type of modified insurance mechanism is expected to further
influence the supply of and demand for insurance in the Muslim community.
Takaful has grown not only as an innovative financial instrument, but also on
religious principles. The purpose of religion is the well being of mankind.
Islam as a religion seeks to order human life so as to make it actualise the
pattern intended for it by its Creator. Islam is not only a religion but an
ideology in the sense that the Shariah, its law has given the Muslims a pattern
of life with which to order their lives.
The Shariah is comprehensive, embracing all human activities, defining man’s
relations with God and with his fellow men. The Shariah grew out of the attempts
made by early Muslims as they confronted immediate social and political problems
to devise a legal system in keeping with the code of behaviour called for by the
Quran and the Hadith. The purpose of Islam is always to inject morality into the
fabric of human relations. How the Muslims earn its livehood, how he spends his
wealth and how his wealth is to be disposed of after his death all these are the
stuff of Islam. In Islam, the human aspect is more important than the material
one. It relies more on moral, ethical and human aspects than on the material
aspects. This is something unique in the Islamic Economic system.
Prophet Mohammad (P.B.U.H) said,
“ One who eats to his hearts contents, while his neighbor starves, is not a
Mumin“ (faithful)
Helping neighbours, poor relations and the distressed contribute to an
exploitation free society based on the principle of brotherhood .
Understanding fundamental principles of Islamic Economic System is necessary in
order to have a better understanding of the role of Takaful and its suitability
in the Islamic Economy. For example, right of private ownership accorded by
Islam is not absolute and unconditional. The ownership is a kind of trust only.
An individual may privately own and manage any kind of wealth, but he can not do
with them whatever he likes. He is to regulate the uses of wealth as per the
Shariah Law. An individual can make joint investment to earn profit from his
investment. Takaful is a means whereby investments of surplus funds are made by
the Operators and profits are distributed to the Participants i.e. to the owners
of the capital.
Another fundamental principle of the economic system of Islam is that it stands
for equitable distribution of wealth. Islam encourage people to be selfless
helpers for one another by arousing in them feelings of sympathy. Takaful is a
system where people are encouraged to contribute money for mutual help in times
of need. Thus Takaful comes in for help of distressed fellow by means of mutual
cooperation and joint guarantee.
The Islamic Economic system combats the accumulation of wealth and its
concentration in the hands of a small minority. The Islamic Law of inheritance
provide for the shifting and distribution of wealth in a manner unknown in other
legal and economic systems. It divides the estate of the deceased over a wide
range of beneficiaries and not on a single heir to the exclusion of other. The
nominee in a family takaful scheme is only a trustee and the policy money need
to be distributed to all the heirs.
The Islamic system requires that wealth should be utilized as an instrument to
serve the interest of the community at large. In the Islamic way of life, some
special kind of levies are imposed. The objective behind them is to provide
financial assistance to the people of lower income bracket from the money of the
relatively better off people. In Islam, there are a various kinds of compulsory
levies ranging from very high rate of 20% of the income to the minimum of 2.5%
of income. This is an automatic mechanism of balancing income in the society.
Islam makes it obligatory on every Muslim who possesses a certain limit of
income upto one year to pay a certain percentage of it for the destitute and
needy. This is called Zakah. It is so important part of Islam that the
instruction of the payment of Zakah always comes next to Salat (prayer). The
prophet described Zakah to be one of the five pillars of Islam.
Zakah is of course not a substitute of income tax. It is imposed on capital.
Zakat has to be levied annually whether it is invested or not. Therefore, it is
prudent for the owners and managers of the Takaful fund to invest it in
production purposes. As a result, it induces that all the resources and wealth
of the economy are employed continuously in the productive activities. By
implementing Zakah system within the mechanism of Takaful, it helps to develop
the economy towards balanced growth and prosperity.
Shariah Issues in Takaful and Conventional Insurance
Takaful is a shariah compliance mutual risk transfer arrangement which involves
participants and operators. Shariah is based on the Qur’an and Sunah. Takaful as
a concept that some extent is similar to conventional mutual risk sharing such
as Mutual Insurance and Protection and Indemnity Club ( P and I Club ). It is a
mutual sharing of risk based on the concept of Taawun (Mutual Protection).The
difference between Takaful and conventional insurance rests in the way the risk
is assessed and handled, as well as how the Takaful fund is managed. Further
differences are also present in the relationship between the operator (under
conventional insurance using the term: insurer) and the participants (under
conventional it is the insured or the assured. In risk assessment (underwriting)
and handling, Takaful do not allow what is called Gharar (uncertainty or
speculation) and Maisir (i.e. gambling). In investment or fund management Riba
(i.e. usury) is also not allowed.
These three Gharar, Maisir and Riba are the areas that must be totally avoided
by the Takaful operation, and where it differs with the conventional insurance
In order to avoid Gharar, there must be a complete clarity or full disclosure of
any Takaful contract. Full disclosure is applicable on both sides, i.e. on both
the subject matter and terms of the contract (scope of cover, etc). Its not
allowable in to enter into a takaful contract if there is any unknown element on
the subject matter and/or unknown exposure to the extent of the contract itself.
As this ideal situation is hardly exist, the Takaful contract then need to be
made in a way that there is no exchange of Gharar from one party to another.
Maisir (gambling) is regarded as the excessive side of the Gharar. Whilst the
participants (insured) may have an insurable interest in the subject matter, if
the risk transfer (risk sharing in Takaful) contains any speculative element,
the it is prohibited under the Takaful.
Riba (usury) is totally prohibited under the shariah law and under a Takaful
arrangement. In order to avoid the Riba, Takaful treats participants’
contribution to the risk sharing scheme not as a premium in the way conventional
insurance does. In Takaful terms it is treated as being a contribution (Mushahamah)
in the form of donation with a condition of compensation (Tabarru). Furthermore,
the pool of funds secured from those participants’ contributions or donations
must be managed and invested in accordance with the Shariah. In the same way
that Gharar and Maisir represent a continuous challenge for Takaful operators to
ensure that pure Takaful arrangements are free of them, Riba free investment and
fund management is also becoming a specialist discipline which requires more in
depth elaboration.
Whilst risk is nature of human life, it is impossible to eliminate this nature
from human life. What is not allowed in Islam is not the risk or uncertainty
itself (so it need to be eliminated) - but selling or exchange of risk or risk
transfer to the third party using sales/exchange contract that is not allowable.
On the other hand helping each other in any situation including in the event
misfortune is highly encouraged in Islamic teaching as ALLAH mentioned in the
Qur’an.
“….Help you one another in Al Birr and At Taqwa (virtue, righteousness and
piety); but do not help one another in sin and transgression….’(Al-Maidah : 2).
Sharing the risk with the purpose to help each other is therefore recommendable.
Shariah Issues in contract of Takaful and Conventional Insurance
As I mentioned above that word Takaful is derived from the Arabic root word
kafala ‘mutual guarantee or protection’ and this drives home the basic
difference between Takaful and Conventional Insurance. This difference is
two-fold. One is the difference in concept and the other is the difference in
contract.
The conceptual difference is that conventional insurance by its very definition
is a risk-transfer mechanism. Takaful on the other hand does not entail risk
transfer, but rather the socially more responsible task of risk-sharing. As for
the contractual difference, if one looks at any insurance policy, it is a
contract because it fulfils the ingredients of a contract and there exist two
parties to the contract. There is an insurable interest involved and there is a
consideration by way of premium. Therefore it is a contract of sale. In
consideration of premium, the risk is transferred to the insurance company and
in case of loss the insurance company pays cash in compensation for such loss
the value of the item concerned. It is also a contract of exchange where money
is exchanged for money.
Takaful on the other hand is not a risk transfer mechanism. The contract of
Takaful is not a contract of sale or of exchange, but is rather a membership
contract. One pays a contribution to become a member of a common pool and by
virtue of becoming a member of that fund such a person is entitled to certain
benefits under the rules of that fund. By this means Takaful distributes risks
and losses to a larger number of participants which could mitigate the otherwise
very damaging losses if borne individually. When we compare these two forms of
insurance, conventional insurance and Takaful, we would soon come to realize why
one is prohibited and the other permitted. In Islam, money for money exchange is
prohibited because there is an element of direct interest that comes into play
since there is always a lesser or greater amount on one side of the balance
sheet.
Thus if you were to pay a premium of 10 Euros and get a claim for 10,000 Euros,
you are getting far more than you have given and in the same currency that you
exchange. So it is an exchange of the same species and it is getting more than
what you have given. Hence it is direct Riba. There is also indirect riba in
case of investments where conventional players can invest in riba-bearing
instruments, while Takaful companies can only invest in Shari’ah-compliant,
non-interest-bearing instruments.
Different Models of Takaful
There are basically three different types of Takaful models, namely, the
Mudaraba model, the Wakala model and the Wakala-Waqf model. The Mudaraba model
is based on Mudaraba, an Islamic mode of equity partnership and is basically a
risk-sharing mechanism where the surplus is shared between the Takaful company
and the participants in a predetermined manner. The sharing of such surplus and
the profit so generated may be in a ratio of 5:5, 6:4 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. This model
started off in Malaysia, the reason being that in Malaysia they started with
Life Takaful and the Mudaraba model was more appropriate for life investments.
This same model was continued when they entered general Takaful.
Meanwhile, the scholars in the Middle East formulated the Wakala or Agency model
which is still the predominant form of Takaful in that part of the world. The
Wakala model is a fee-based mechanism where the Takaful operator is only
entitled to take out a fee upfront as the contribution, though it may also
charge a fund management fee and performance incentive fee. Unlike in the
Mudaraba model, it is not entitled to any part of the surplus, all of which
belongs to the participants. It does not participate or share in any
underwriting results as these belong to the participants as surplus or deficit.
In Pakistan, one benefit of being a late starter is that its scholars have been
able to have a close look at both models and have refined these further to
constitute what is known as the Wakala-Waqf model. The scholars who formulated
this model felt that there should be a separate legal entity on whose behalf the
Takaful operator should act as an agent (Wakil) and were inspired by the Islamic
institution of Waqf or Perpetual Endowment to serve the purpose.
The Waqf is created by the shareholders of the Takaful company who would put in
the seed money. Such seed money must remain as Waqf and cannot be used for
claims, though it could be utilized for investments. The contributions received
would also be a part of this fund and the combined amount would be used for
investment, with the profits so earned being deposited into the same fund.
Losses to the participants are paid by the company from the same fund while
operational expenses incurred for providing the service are also met from it.
Here, both the Takaful operator and the participants share a relationship
through the Waqf. Since the Takaful operator will manage the enterprise on
behalf of the Waqf it is entitled to a Wakala or agency fee. The participants
are also governed by the Waqf rules, so that whatever claims they have, they get
by virtue of being a member of that Waqf.
Although these various models are peculiar to certain countries or regions due
to the historical developments we have outlined above, we also see some
significant shifts of late. For instance, in Malaysia, a new player, Takaful
Ikhlas works on the Wakala model, showing that they are flexible and are moving
from a Mudaraba-based to Wakala model as they find it is more viable, and there
is no reason why they would not be able to effect further refinements to this
model as the Pakistani experience has shown.
Growth Potential & Future of Takaful
As we know, Takaful industry is still in its early stages of development. While
the number of takaful operators has risen and more are expanding into new
territories, currently, there are about 133 “Takaful” operators world-wide,
while it’s doubled than in 2006. During last twenty seven years Islamic
Insurance (takaful) has developed mainly in Sudan, Egypt, Saudi Arabia, Iran,
Kuwait, Lebanon, Malaysia, Brunei, Indonesia, Singapore, U.A.E., Bahrain,
Bangladesh, Nigeria, Tunisia, Bahamas, Belgium, South Africa, Switzerland,
Australia and in the USA. Interestingly takaful is seen in the non-Muslim world
as well. For example, in Singapore there are less than half a million (15% of
total population) Muslims but at least two operators are now providing takaful
scheme in Singapore. In non-Muslim countries, the scheme is also likely to grow
if the operators can prove their worth in comparison to conventional insurance
products. In Muslim countries, Malaysia seems to be the single most successful
country in terms of takaful. In Singapore, about 22% of the present takaful
policy holders are non-Muslims.
Most of the Islamic countries suffer from the common attitude that insurance is
undesirable. There are mass non-awareness among the Muslims about risk
management and insurance not to speak about takaful. In most of the Muslim
dominated countries of the world insurance still accounts for less than only one
percent of the country’s G.D.P. However various surveys have shown that the life
and general insurance market has large potential to be exploited in Muslim
countries, and in countries where Muslim are at-least 10% to 15% of total
population . Takaful is likely to grow along with the conventional insurance
schemes. But this is only when this new form of insurance should provide
at-least equal, and better value, as compared to the existing conventional
insurance policies.
By now Takaful like Islamic Banking has become a viable reality. Due to inherent
Shariah principles which are universal in character, the Takaful business would
be more appealing in the coming years for both the Muslim and non-Muslim
communities.
Takaful (Islamic Insurance) has bright prospects and potentialities as a
financially viable and competitive alternative insurance for the Muslim
Countries, because most of the Muslim Countries having Islamic Banks have also
welcomed takaful as a necessary complementary to Islamic Banking. Islamic
Banking can not be fully Shariah based unless there is Takaful to take their
insurance business. Therefore, Takaful like Islamic Banks have proved its viable
reality and having its strides of expansion in almost all the Muslim Countries.
The confidence and faith of Muslim Countries in Islamic economic system is
gaining solid ground. Recently the Heads of States and Governments of
Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey met
in Dhaka on 1-2 March, 1999 for the Second Developing-8 (D-8) Summit with the
objectives of implementing projects and programmes of co-operation that are of
vital interest to their peoples. Among other issues, the heads of the State
endorsed the proposal to enhance the capacity of existing retakaful company of
Malaysia to meet the needs of member countries of Developing-8 (D-8). It was
further agreed that the experts of these countries will meet to draw-up the
modus-operandi and formulate the appropriate strategies to promote takaful and
retakaful. It is heartening to note that takaful operators are organizing
seminars and conferences on a regular basis and exchanging ideas and
information’s to make takaful viable.
In July 2004, the regulators of Developing-8 (D-8) countries met in Malaysia and
mechanism for cooperation among the Takaful regulatory authorities was evolved
and it was decided that two working groups on the areas of education and
training as well as financial infrastructure development to be framed and to be
led by Malaysia and Egypt respectively. In June 2004 a memorandum of
understanding was signed by the Islamic Development Bank with Bank Negara,
Malaysia, which among others sought to promote and expand Takaful and retakaful
business among Organization of Islamic Conference member countries. In June
2005, a twelve member Committee was established comprising regulators and
Takaful practitioners of the Organization Islamic Countries (OIC) member
countries. Recently the committee has identified and proposed action plans to
address the gaps in the development of Takaful and Retakaful. The action plans
have been divided in to following eight main areas:
1. To provide customized support for establishing Takaful companies in targeted
jurisdictions.
2. To faster development of sound legal, Regulatory and Shariah framework for
Takaful companies throughout the world.
3. To provide development of existing Takaful markets and investment overseas.
4. To promote development of basic and full range of Takaful products to meet
wider expectations of customers.
5. To promote human capital support by way of education, training and research
in the field of Takaful operation.
6. To create awareness among the Muslim Ummah regarding benefits of Takaful in
socio-economic development.
7. To increase capacity and support for Retakaful arrangements in OIC countries.
8. To optimize existing framework of dispute resolution, in respect of Shariah
and technical aspects of Takaful Industry.
Role of Government.
Government is to perform an active role in Islamization of insurance in the
country. Islamization may take place in two ways. The first way is to
restructure the whole insurance sector on Islamic foundations and the second is
to allow some Islamic insurance companies or some old firms to transform their
business on Islamic lines keeping the existing set-up as it is. These two
approaches require different strategies on part of the government.
In the former case, the government may promulgate a regular detailed and
codified law to reorganise the insurance industry in line with Shari’ah
principles. This law should reflect the true spirit of mutual help and
co-operation. All the elements making the present insurance practices un-Islamic
(e.g. interest, gambling, gharar) should not be allowed in any circumstances.
Some Islamic countries such as Malaysia, Bahrain and Sudan, have already enacted
such laws which can be used as guiding examples.
However if the government opts the later approach, then it must make suitable
changes in the existing Insurance Act to create favourable environment to new
companies to be established on Islamic principles. Some laws are hurdle for
running the business according to Islamic principles. Moreover the government
must facilitate and encourage these companies providing them incentives such as
tax exemptions in early period of establishment. This may help the existing
conventional insurance companies to restructure their business on Islamic lines.
A time frame may also be decided by the government for complete transformation
of conventional Insurance business into Islamic Insurance.
Another function which the government should perform is reinsurance arrangement.
Presently insurance companies, are having two kinds of re-insurance arrangement,
(I) with the National Re-insurance Corporation, (ii) with foreign insurance
companies. In both of these arrangement, the insurance company enters into a
similar type of contract with the re-insurer, as one between an individual and
the insurance company, including all un-Islamic element of insurance. For
extending re-insurance service to the Islamic insurance companies government may
establish a Fund, and all Islamic insurance companies should contribute a
proportion of their written premium in this Fund. This proportion may be
different for different policies. The objective of this fund should be to help
the insurance companies in paying the claims. A proportion of this fund may be
invested in profitable ventures according to Islamic principles and profit can
be shared between the fund and the insurance companies.
Conclusion
A dramatic rise in the demand for Takaful Insurance is being predicted by market
observers, as the population of Islamic countries becomes more financially
sophisticated and more determined to invest in Shariah compliant products.
Moreover, due to the ethical nature of the products Takaful ought to be
attractive to both muslim and non-muslims. It is obvious that the potential
demand for Takaful products is very large and the Takaful Industry is now poised
for a Global take off.
The Global Takaful Industry is small in comparison to Conventional Insurance
counterpart. Therefore, the market needs to gain worldwide brand recognition and
exceed performance standard set by the Conventional Insurance Industry. It is
nice to note that takaful operators are increasingly starting to realize that
the ethical guidelines and transparency of their products underpin their
offering appeal to both the muslims and more importantly the larger non-muslims
communities.
The Takaful Industry is fast evolving and entering a stable development phase.
However, only a few National Regulators have enacted a Takaful framework for the
industry. Malaysia & Bahrain are leading examples of having progressive Takaful
Regulation. Recently, Saudi Arabia & Pakistan have also established Regulatory
Framework for Takaful business.