Takaful: The Way of Islamic Risk Management

Takaful: The Islamic Way Of Risk Management

Takaful (Islamic Insurance) word basically originates from the arabic word Kafalah which means to guarantee someone. In simply, Takaful means Mutual Guarantee or Mutual Benefits. Takaful is a Halal Risk Mitigation tool based on the principles of brotherhood, mutal co-operation. It serves as an alternative of Conventional Insurance...

Best Regards, Wasim Hanif

By: Wasim Hanif

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Takaful: The Way of Islamic Risk Management

Table of Contents

Particulars Abstract Introduction Characteristics of Takaful Why Conventional Insurance is Haram Operating Models for Takaful Types of Takaful Comparison b/w Insurance & Takaful Re Takaful Arrangements Types of Risk In Takaful Business Growth of Takaful in Asia Growth of Takaful in Pakistan References

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Abstract: The concern for safety and security is very basic and fundamental to human nature. Insurance evolved arising out of this basic human need. In todays, world one cannot think of trade and commerce without insurance support. On individual level also no financial planning and risk management can be complete without life insurance. The concept of insurance as it evolved initially was more in the nature of an arrangement of mutual help in times of need and distress rather than a business proposition for profit making as practiced today. With very fast technological developments taking place and with growing complexity of business operations and risk profile and the high stakes involved, the insurance sector has to be necessarily very dynamic and responsive in nature. The changing social norms and expectation of people have their own impact on insurance sector. All indications are that insurance sector will show healthy growth in the days to come. The idea of having Shariah based insurance system (Takaful) stems from the earnest desire of the followers of Islam to conduct their affairs in day to day life according to the teachings of Islam and within the framework of Islamic Law. Takaful is based on the concept of cooperation, brotherhood and solidarity of the members of the society who voluntarily agree to contribute money to support a common goal of providing mutual financial aid to the members of the group under certain terms and conditions. Takaful has emerged as a complementary and supportive system of Islamic Banking movement throughout the world. Islamic Insurance (Takaful) like Islamic Banking has become a viable reality. Due to inherent Sharia principles which are universal in character, the Takaful business would be more appealing in the coming years both for the Muslim and non Muslim communities. Most of the Muslim countries having Islamic Banks have established Islamic Insurance companies as necessary complements to Islamic Banking. The growth of Islamic Insurance companies would serve as the vehicle of risk pooling. It will also provide means of investment. It has been estimated that the growth of Takaful industry during last decade bad been very impressive. The consumers demand for Shariah compliant products is increasing and a high level of demand for Takaful is being predicted by market observers. The Takaful industry is fast evolving and entering a stable development phase. It is now right time for the national regulators to provide supportive Takaful laws, rules & guidelines.

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Takaful: The Way of Islamic Risk Management

Introduction Takaful It originates from Islamic word kafalah which means guaranteeing each other or joint guarantee. In principle Takaful system is based on mutual co operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance. 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. The basic fundamentals underlying the Takaful concept are very similar to cooperative and mutual principles to the extent that the cooperative and mutual model is one that is accepted under Islamic law. In view of the above as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists this concept of insurance is acceptable in Islam. Following principles make takaful Shariah compliant:

Policyholders co-operate among themselves for their common good. Every policyholder pays his subscription to help those that need assistance. Losses are divided and liabilities spread according to the community pooling system Uncertainty is eliminated in respect of subscription and compensation It does not derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one anothers burden. Characteristics of Takaful: Takaful insurers have some unique characteristics that recognize the key principles of Takaful and fundamental Islamic beliefs. 1. The establishment of two separate funds: A takaful (or policyholders) fund and an operators (or shareholders) fund. The takaful fund operates under pure cooperative principles, in a very similar way to conventional mutual insurance entities. Underwriting deficits and surpluses are accrued over time within this fund, to which the operator has no direct recourse. As a result, the takaful fund

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effectively is ring fenced and protected from default of the operators fund. Management expenses and seed capital are borne by the operators fund, where the main income takes the form of either a predefined management fee (to cover costs) or a share of investment returns and underwriting results (or a combination of both). Solidarity principle and equal surplus distribution: Given the fact that the takaful fund is seen as a pool of risks managed under solidarity principles, it is not meant to accumulate surpluses at levels excessively higher than those strictly needed to protect the fund from volatile results and to support further growth. Likewise, any fees or profit shares received by the operator should be just sufficient to cover management and capital cost while keeping the company running as an ongoing concern. In case of financial distress for the takaful fund, the operator is committed to provide it with an interest free loan, Qard Hasan, for however long it is deemed necessary providing an additional layer of financial security to the participants. The surplus distribution structure is expected to be managed carefully and in a balanced way, so that neither policyholders nor operator make excessive profits at the expense of the other party. Restricted Investments: Shariah compliance refers not only to the operational structure of the company, but also to its investment policy. Takaful companies must avoid investing in traditional fixed income securities (due to the coupon interest payment attached). Instead, they are allowed to invest in sukuk (or islamic bonds, where coupon payments take the form of a profit share on a particular enterprise). Moreover, investments in stocks (in principle allowed) should avoid activities (such as alcohol or gambling). Establishment of a Sharia Board: An essential component in a takaful companys corporate governance is the establishment of a Shari'a b oard, in addition to the conventional board of directors. The Sharia board is made up of recognized Islamic scholars, who ensure the companys operational model, profit distribution policies, product design and investment guidelines comply with Islamic principles. Nature of Contract: Takaful companies face additional risks as compared to conventional insurance. Conventional insurance companies invest large amount in fixed income securities on their balance sheet in order to minimize the risks and the variability associated with the equity. But in Takaful under Shariah law, interest is forbidden, which rules out the investment in fixed income securities. In conventional insurance the contract is based on the principles of exchange of interest. The relationship is designed in such a way that the insured buys protection by payment of premium, and insurer provides protection against the insured risk. Under Islamic law insurance transaction cannot be concluded on this basis of buy and sale contract. Under Takaful contract every policyholder has the right to know how their money is used, how the surrender value is calculated, and Takaful policyholders must be certain that neither returns nor funds paid out in claim settlements, originate from unlawful means such as investments in stocks of companies producing non-halal goods but in conventional insurance policyholder have no right to know about this

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Why Conventional Insurance is Unacceptable in Islam? "Commercial insurance is prohibited for Muslims as agreed upon by most contemporary scholars. The generally accepted views of the Muslim Jurists are that the operation of the conventional insurance as an exchange transaction under a buy and sell agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements: 1. 2. 3. 4. 5. Al-Gharar (Uncertainty) Al Maisir (Gambling) Riba (Interest) Contract Risk Transfering

Gharar, Maisir and Riba are the Issues that must be considered and completely eliminated by the Takaful operators to make Takaful acceptable to the Muslims. These issues have been discussed below in the light of shariah and contemporary economic environment. On the one hand it has to be understood whether actually these elements are present in real sense in conventional insurance operations if yes how to make it Shariah compliant. 1. Gharar (Uncertainty), 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 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 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. The transaction of uncertainty is not allowed in islam. The Gharar sale is a deal to sell what ever a pregnant animal will produce before it is actually borne or to sell whatever will be caught in a fishermans net or whatever a pearl divers will bring up in his next dive or to sell the fruits of trees at the beginning of the season when their quality cannot be established yet. All such sales are forbidden in Islam because they involve risk to the buyer. 1. 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, then it is prohibited under the Takaful. Moreover, the nature of conventional insurance is such where whatever you pay as premium is not returned and goes to the insurer, whereas contributions paid in Takaful belongs to the member. 1. Riba (Usury, Interest) is another area and is considered to be 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 in the form of donation with a condition of compensation.

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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. OPERATING MODELS FOR TAKAFUL Conventional Insurance is unacceptable because of presence of Uncertainty, Gambling & Interest. The Islamic Scholars developed an alternate model for the Islamic Insurance Companies. There are basically two models for implementing Takaful. 1. Mudharabah Model 2. Wakalah Model The Mudharabah Model (Profit Sharing) The term refers to a form of business contract in which one party brings capital and the other personal effort. The proportionate share in profits is determined by mutual agreement. But the loss if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. The financier is known as rab -al-maal and the entrepreneur as mudarib. As a financing technique adopted by Islamic bank while the business is managed by the other party. The profit is shared in pre-agreed ratios, and loss, if any, unless caused by negligence or violation of terms of the contract by the mudarib is borne by Islamic bank. The bank passes on this loss to the depositors. This model is essentially a basis for sharing profit and loss between the takaful operator and the policyholders. The takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment. Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other while Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them. By this principle, the entrepreneur or al-Mudarib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra's-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the takaful operator is to be shared, in accordance with the principle of al-Mudharabah, between the participants as the providers of capital and

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the takaful operator as the entrepreneur. The sharing of such profit may be in a ratio 5:5, 6:4, 7:3, etc. as mutually agreed between the contracting parties. Under the principle of Mudharabah, the operator as the mudarib or entrepreneur cannot charge its management expenses from the takaful fund. 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. Under the 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 there from is declared as profit of the operator and dividends are distributed there from.

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The Wakalah, Waqf Model (Opertor) This model is a contract of agency, which replaces surplus sharing with performance fee. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful fund in return for a defined fee. Under the Wakalah principle the operator being the agent of the participants can part of the fund to cover its management costs. Under the Al Wakalah underwriting surplus of the takaful fund, if any, shall be distributed back to participants only, based on the premise that the funds actually belong to participants. use too, the the

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Takaful Types Takaful similarly Insurance has two main parts. General Takaful Family Takful (Non-Living Things) (Living Things)

General Takaful Model

Family Takaful Model

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Takful Vs Insurance Takaful Companies Takaful is based on mutual cooperation. Takaful is free from interest (Riba), gambling, (Maysir), and uncertainty (Gharar). All or part of the contribution paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing protection against potential risks. Takaful companies are subject to the governing law as well as a Sharia Supervisory Board. There is a full segregation between the Participants Takaful Fund account and the shareholders' accounts. Any surplus in the Takaful Fund is shared among Participants only, and the investment profits are distributed among Participants and shareholders on the basis of Mudaraba or Wakala models. In case of the deficit of a Participants Takaful Fund, the Takaful operator (Wakeel) provides free interest loan (Qard Hasan) to the Participants. The Plan Owners and shareholders capital is invested in investment funds that are Sharia compliant. Takaful companies have re-insurance with Re-Takaful companies or with conventional re-insurance companies that adhere to certain conditions of Sharia. Conventional Insurance Companies Conventional insurance is based solely on commercial factors. Conventional insurance includes elements of interest, gambling, and uncertainty. The premium is paid to conventional insurance companies and is owned by them in exchange for bearing all expected risks. Conventional companies are subject to the governing laws. only

Premium paid by the Policyholder is considered as income to the company, belonging to the shareholders. All surpluses and profits belong to the shareholders only.

In case of deficit, the conventional insurance company covers the risks.

The capital of the premium is invested in funds and investment channels that are not necessarily Sharia compliant. Conventional insurance companies do not necessarily have re-insurance with re-insurance companies that abide by Sharia principles.

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Explanation and Need of Re-Takaful Retakaful of Takaful business on Islamic principles is known as Retakaful. Retakaful is a form of Takaful whereby a Takaful Operator can transfer to another Takaful Operator (the ReTakaful Operator) all or part of its liabilities in respect of claims arising under the contracts of Takaful that it writes. This enables a Takaful Operator to protect itself against the risk that its total claims costs in any one year maybe so large wiping out its profits, or even cause it to be insolvent. This is the essence of the concept of social solidarity, cooperation and mutual indemnification of losses of members whereby there is joint indemnification of the loss or damage that may occur, out of the fund that is collectively contributed to. The main problem worldwide is the lack of Retakaful Operators that are capitalized to the levels required by Takaful Operators and more particularly the lack of A rated Retakaful Operators. This has resulted in Takaful Operators having to reinsure on a conventional basis, contrary to the preferred option of seeking cover on Islamic principles. The Shariah scholars have allowed dispensation to Takaful Operators to reinsure on conventional basis so long as there are no Retakaful alternatives available. Takaful Operators therefore actively promote co-takaful. A number of large conventional ReTakaful Operators from Muslim countries take on retrocession. Therefore a large proportion of risk is placed with international ReTakaful Operators that operate on conventional basis. The retrocession from Takaful Operators ranges from some 10% in the Far East where Takaful Operators have relatively smaller commercial risks (so far), to the Middle East where up to 80% of risk is reinsured on conventional basis. Retakaful Operators need to ensure that they are capitalized sufficiently to enable them to: Protect the financial stability of takaful Operators from adverse underwriting results Stabilize claims ratios from one year to the next Minimize claims accumulation from losses within and between different classes Geographically spread risk Increase capacity Increase the profitability of insurers through permitting greater flexibility in the Size and type of risks accepted Secure technical support and help

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Types of Risks in Takful Business Business industry is prone to a number of risks. Five types of risks in business) have been identified that are relevant to Takful business. First two types of risks (underwriting and operational risks) are directly related to operations of Takful company while remaining three (credit, liquidity and market risks) are associated with the investment activities of the company. i. Underwriting Risk: Underwriting risk is pertinent to insurance and Takful. It occurs due to adverse selection of applicants or due to re-Takful risk as a result of inability of re-Takful operator to meet the obligation towards ceded company under re-Takful agreement. Adverse selection refers to the tendency of selecting applicants that result in higher than average chance of loss. The risk of adverse selection arises when applicants with higher than average chance of loss succeed in obtaining Takful coverage at standard rates e.g. high risk drivers or persons with serious health problems. It results in higher claim ratio and put the firm on high liquidity constraints. Re-Takful risk occurs as the ceded company remains liable for a portion of outstanding claim to the extent re-Takful operator fails to provide financial protection to Takful operator in accordance with agreed terms. Both adverse selection and re-Takful risk hamper the firms underwriting capacity disturb the cash flow pattern and hence affect the stability of the profits of the company. ii. Operational Risk: Operational risk is not a well defined concept, defines it as a loss that occurs as a result of inadequate or failed internal processes, people, technology or from external events. Internal processes failure occurs as a result of inaccurate processing of transactions, inefficient record keeping, violating operational control limits, non-compliance of regulations etc. People risk may occur due to incompetence of employees, fraud and failure to perform the duties. Technology risk may arise as a result of telecommunication system or computer network breakdown. Risks from external events include unenforceability of regulatory policies, legislation and regulations that affect the fulfillment of contracts and transactions in the organizations. These risks are also called legal risks and are considered a part of operational risks. iii. Credit Risk: Credit risk occurs a result of default of counterparty when it fails to meet its obligations in time and in accordance with agreed terms. In case of insurance, credit risk may be treated as default risk, migration risk, spread risk or concentration risk. Default risk occurs when Takful operator does not receive or partially receive cash flows or assets to which it is entitled because the other party fails to meet the obligations of the contract. Migration risk occurs when probability of a future default of an obligator adversely affect the contract today. Spread risk occurs due to market perception of increased risk on either macro or micro basis. Concentration risk is the result of increased exposure to losses due to concentration of investments in a particular geographical area or economic or industrial sector. Takful industry is also exposed to these risks. iv. Liquidity Risk: Liquidity risk is the risk resulting from Takful Companys inability to meet its obligations (i.e. claims payments and maturity price of policy) when they fall due. This risk occurs
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because the company has insufficient liquid assets or high level of liabilities. Liquidity risk includes liquidation risk, affiliation investment risk and capital funding risk. Liquidation value risk is the risk under circumstance when assets are liquidated below their real (market) value. Affiliated investment risk is the risk that investment in an affiliated or member company might result in drain of financial or operating resources. Capital fund risk is the risk that insurance company will not be able to outsource funds in case of large claims. Takful industry, just like conventional insurance company, faces similar types of liquidity risks. v. Market Risk: Market risk is the volatility of prices in instruments and assets of Takful Company in the market. It can be classified as equity price risk, interest rate risk, currency risk and commodity price risk. Equity price risk is the risk of loss resulting from changes in market price of equities or other assets. Interest rate risk is the risk of loss resulting from changes in interest rates that adversely affect the cash flows of the insurance company. Currency risk is the risk of loss resulting from volatility of exchange rates that adversely affect the operations of insurance company. For a Takful company, it does not include interest rate risk, however Takful operators are exposed to mark up price risk as avoidance of interest based transactions is distinctive feature of Sharah compliance.

Management Of Risks
All types of risks in Takful require specific risk management strategy and need to be managed on individual basis. i. Underwriting Risk Management: Underwriting risk can be managed by establishing standard selection procedure consistent with the companys objectives. Most of the Takful operators require physical inspection or medical reports of the applicants that have serious health problems or prone to higher than average risk. Some have introduced computerized underwriting system to standardized underwriting procedure and minimizing the chance of adverse selection. For example, Takful Ikhlas Sdn. Bhd. of Malaysia uses computerized underwriting procedure for motor Takful where applicants who meet standard requirements are automatically selected for Takful. Others are rejected or alternatively are offered higher contribution rates for the extra risk. To minimize re-Takful risk, Takful operator can evaluate the financial strength of re-Takful operators in the region and diversify the risk geographically by making arrangements with more than one re-Takful operator. ii. Operational Risk Management: Management of this risk is more complex as it arises from failure of internal processes, people, information system breakdown and non-compliance with regulatory standards. Senior management and board of directors of Takful Company should devise policies and develop strategies to manage and reduce operational risks. Sources of operational risk (i.e. people, processes and technology) should be handled carefully. This raises the importance of corporate governance culture in the organization. Given the newness of Takful industry, computer software available for conventional insurance might not be appropriate for Takful industry. This calls for recruiting talented professionals in the field of informational technology so that they could develop software to meet peculiar needs of Takful industry. Independent external auditors can also play an important role in mitigating operational risk as they point out flaws in internal processes of the organization. This calls for proper disclosure of activities and independent and secure
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reporting system. iii. Credit Risk Management: Under conventional insurance system, credit exposure limits are established within companys investment policies to mitigate and manage default risk, migration risk, spread risk and concentration risk as discussed under credit risk. Usually, following credit exposure limits can be established for insurance company investment and credit activities. Internal and external rating of counterparties Limit on maturity of credit facility (prefer short term credit over long term credit) Limit on maximum investment amount or a certain percentage of investment exposure to a single issuer, industry, geographical region or some other risk classification. Prohibition of interest does not allow Takful companies to investment in interest-based instruments. Moreover, Takful companies do not have access to credit derivatives that are considered effective instruments for credit risk mitigation. Yet Al-Suwailem argues that futures and Option contracts result in losses for more than 70% of the time and hence such instruments are considered as factors of loss, not of gain. The non-availability of Islamic derivatives raises the importance of internal control mechanism for Takful operators which ensures that credit risk exposure s are maintained within limits of prudential standards defined by internal controls. iv. Liquidity Risk Management: IAIS Report (2004, p.20) identifies two approaches in order to hedge liquidity risk that are also applicable to Takful industry. These are: i. Cash flow modeling ii. Liquidity ratios Cash flow modeling is done in order to assess the amount of deficit, surpluses or liquidation value risk in order to meet the needs of Takful industry. Takful operator should make sure that it has sufficient liquid assets in order to meet liquidity risk and unexpected liquidity requirements. Use of liquidity ratios will help Takful operator to set the amount of liquid assets required to meet demands of liability portfolio, desired level of liquidity ratio will also help in determining Takful operators investment policies. Capital funding risk could be mitigated by setting contingency plans and drawing Cash from re-Takful policies. This form of liquidity hedging could be recognized by knowing current level of liquid assets in hand to meet Takful operators investment policies. In order to identify and evaluate liquidity risks, emphasize the need of adequate internal control and proper disclosure of information in the organization. Towards this end, it is essential to have regular independent reports and internal audit function should periodically review the liquidity risk management process. v. Market Risk Management: In conventional insurance, management of market risk includes devising strategies to manage interest rate risk, exchange rate, and commodity price risk as well as equity price fluctuations. Takful operators are not involved in interest based transactions so they do not face this risk. However, KIBOR (Karachi Inter Bank Offered Rate) can be used as bench mark for markup in Islamic financial institutions in their financing activities. Conventional institutions manage the market risk using financial derivatives such as futures, forward, option or swap contracts (Chapra & Khan, 2000; p.55). Takful operators face difficulty in managing market risk as these financial derivatives are not compatible with Sharah in the eyes of Islamic scholars. However, according to Al-Suwailem, cooperative hedging and bi-lateral mutual adjustment are acceptable instruments under Sharah to mitigate currency risk and interest rate risk respectively.

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Additionally, Takful operators could apply stress tests and Value at Risk techniques to mitigate commodity price risk and equity risk. Stress testing is one of the risk management tools that can be employed to assess the vulnerability of portfolios to abnormal shocks and market conditions. Value at Risk is the probability of portfolio losses exceeding some specified proportion. Growth of takaful in Asia

The size of takaful contribution in the Asia region has been growing at a relatively high growth rate in the past few years, with some reports showing past five years compounded annual growth rate of between 30% and 40%. Growth rates, while expected to moderate downwards going forward due to the bigger base effect compared to previously, will still be significantly higher than the conventional insurance industry growth rates. There are a few key drivers of growth which includes increase in awareness and accessibility of takaful, growing affluence of the Muslim population and greater regulatory focus on takaful. One particular market in the region, which is ripe for rapid expansion in the immediate term, is Indonesia. In addition to favorable economic conditions, which is important for sustained growth of takaful, the regulator has increased its focus on takaful by gradually introducing rules that are specific for takaful operations. Going forward, the regulator has indicated that takaful operations need to be carried out as a separate entity instead of mainly via windows currently. While this may spur consolidation in the near term, it will result in bigger and more focused takaful operators to penetrate the market. There are of course challenges, such as evolving regulations, talent shortage and capital market development, in the Indonesian takaful market, but it is too big of an opportunity to miss for any company which wants to make a serious in-road into takaful. Growth of takaful has been robust in the past few years. There are challenges and issues that need to be addressed to ensure that growth momentum is sustained in the medium term. Key challenges are increase level of competition, shortage of talent and on-going development of takaful regulations. However, these issues are not insurmountable and once addressed will put the takaful industry on a stronger footing for better growth years ahead.

Takaful growth on the rise in Pakistan

Staff Report ISLAMABAD: The practice of Islamic insurance known as Takaful is on the rise in Pakistan and the indicators allude that the phenomenon is on the upward swing in terms of
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performance and efficiency. The five companies working in Pakistan have been making notable progress with the 12 percent growth rate. This was stated during a seminar on Takaful: Evolution and Current Status in Pakistan held at Institute of Policy Studies (IPS), Islamabad by Riphah International University, Islamabad Head of Riphah Centre for Islamic Business Professor Atiq-uz-Zafar while delivering his presentation. International Islamic Universitys Shariah Academy Director General Dr Mohammad Tahir Mansoori chaired the seminar, which was also addressed by IPS DG Khalid Rahman. The seminar was also attended by a group of insurance professionals and Ministry of Finance apart from a large number of finance professionals, Islamic scholars and students. Quoting verses from the Quran and referring the verdict of Federal Shariat Court regarding the prohibition of interest, Prof Zafar said that interest (riba) widened the gap between the rich and the poor and created parasites in societies. It is ironic that while we all try to avoid trivial social evils, we pay much less attention to this serious issue plaguing our society, he deplored. Prof Zafar deliberated upon the principles and contracts of Islamic system of finance, which provided sound basis to avoid such crisis. He said that Islamic financial contracts prohibit riba (interest), Gharar (uncertain, unknown, doubtful and high risk) and qimar (gambling), maysir (game of chance), sale of debt with debt, and combination of two mutually inconsistent contracts. He also apprised the participants about the major financial contracts in Islamic banking which included muajjal/murabaha and musawama, salam, istisnaa, musharakah, mudarabah and Islamic insurance system known as Takaful. Dr Mansoori dispersed the impression that there was some controversy regarding the Shariah legitimacy of the conventional insurance practices. He said that Islamic scholars across the world have settled this issue in the decade of 1990s declaring conventional insurance as against Shariah. Responding to a question he noted that it (Takaful) is basically a question of being Shariah compliant, not necessarily Shariah based. Dr Mansoori opined that despite the tremendous progress and proliferation of Takaful practice in the country there were some areas that need to be addressed to make it more effective and beneficial. IPS DG Khalid Rahman, while concluding the session, drew the attention of the audience towards the emerging trends among people especially in Muslim societies including Pakistan towards adopting Islamic alternatives to the current capitalist economic system. He said that though in todays capitalist world it was not possible to provide Islamic alternatives in the ideal sense without establishing the Islamic system, however Islamic financial institutions were providing a window into it. He urged the Islamic finance professionals and scholars to continue striving for the ideal and do not be satisfied with the

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Takaful: The Way of Islamic Risk Management

present Islamic financial solutions, which may be fulfilling the minimum requirements of Shariah and hence may be compliant to it but were not ideally Shariah-based. The Daily Times. Site Edition 30-09-2012

Reference 1. Takaful (Shariah Compliant) Insurance Companies, Bests Rating Methodology, www.ambest.com/ratings/methodology 2. Islam and Insurance, www.islamonline.net 3. Premium or contribution and Donation in Takaful Practices, by Prof. Dr. Mohd. Masum Billah, www.icmif.org 4. www.wikipedia.org/wiki/takaful 5. Mohd Tarmidzi Bin Ahmad, Strengths and Opportunities of Takaful: the spiritual dimension 6. Khan L. Ali, How does Takaful Differ from Insurance. 7. Jones E. Harriet & Dani L. Long, Principles of Insurance Life, Health and Annuity, Second Edition, LOMA Information. 8. Rejda E. George, Principles of Risk Management and Insurance, Ninth Edition, Pearson Edition,2005. 9. Fisher Clark Omar, Policy holders, Governance and Takaful Key Issues, The Takaful Report, Issue 1, Feb 2008. 10. Takaful (Shariah Compliant) Insurance Companies, 11. www.ambest.com/ratings/methodology. 12. Islamic Finance http://www.learnislamicfinance.com/Free-Study-Notes.html 13. www.pakqatar.com.pk 14. www.google.com/images 15. Takaful Ki Shaari Hesiyat by (Mufti Rafi Usmani) 16. http://www.islamicfinancenews.com/2012_supplement/2012takaful/Takaful.p df 17. http://www.ambest.com/resources/takaful_review.pdf

By: Wasim Hanif

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