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An Overview of the Takaful Industry

By Dato' 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 combined total assets and contributions (premium) of these operators stand at around USD1 billion 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 less than 5% for most Muslim countries, compared to the established markets of Singapore, Japan and most European countries with rates ranging from 65% to 150%. The co-relation to the relatively high market penetration 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 Asean 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 operators.

Opportunities and Challenges

The pro-active stance as afore-mentioned obviously presents boundless opportunities for takaful. Coupled with the sheer size of the ummah totalling 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 below:-

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 business 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 and absorb more of the risks would be virtually impossible. Although adequacy of capital is viewed differently from one country to another, it should however have an acceptable minimum requirement reflecting the minimum level accepted internationally. In Asean, the figure is between USD12 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 Asean 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 overlapping 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 allowing 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 determining 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 business.

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 management expenses. Any balance therefrom is declared as profit of the operator and dividends are distributed therefrom. 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 benefits.

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 is 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 operation grow into a viable and profitable business venture.

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