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Islamic Insurance


Takaful is a noun stemming from the Arabic Verb "Kafala" meaning to


Takaful is an alternative for the contemporary insurance contract.

A group of persons agree to share certain risk (for example, damage by fire) by
collecting a specified sum from each. In case of loss to anyone of the group,
the loss is met from the collected funds Thus it can be visualized as a pact
among a group of members or participants who agree to jointly guarantee
among themselves against loss or damage that may inflict upon any of them as
defined in the pact. Should any member or participant suffer a catastrophe or
disaster he would receive a certain sum of money or financial benefit from a
fund, as also defined in the pact, to help him meet the loss or damage.

In other words, the basic objective of Takaful is to pay for a defined loss from
a defined fund. Each member of the group pools effort to support the needy. It
means mutual help among the group.

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Islam & Insurance

Precedents for Islamic Insurance (Takaful)

An Islamic alternative to contemporary insurance is known as Takaful, and is

based on the concept of Ta'awun, or mutual assistance. Ta'awun forms the
basis of many Islamic practices. The teaching of Islam in regard to the equality
and brotherhood of believers, and their responsibilities toward one another and
all humanity led to several forms of mutual assistance both social and
economic. Takaful as practiced in the sixth century (Christian era A.D. and +50
Hijrah) actually evolved from tribal practices of mutual assistance dating back
to pre Islamic times. There are several examples in pre-Islamic history whereby
families, tribes or related members throughout the Arabia peninsula pooled
their resources as a mean to help the needy on a voluntary and gratuitous
basis. There practices were validated by Prophet Muhammad (PBUH) and
incorporated into the institutions of the early Islamic State in Arabia around
650 C.E.

Examples of these early Islamic practices include the following:

 Merchants of Mecca formed funds to assist victims of natural disasters or

hazards of trade journeys.
 Surety called Daman khatr al-tariq was placed on traders against losses
suffered during a journey due to hazards on trade routes.
 Assistance was provided to captives and the families of murder victims
through a grouping known as a'qila.
 Contracts, called 'aqd muwalat, were entered into for bringing about an
end to mutual amity or revenge.

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 Confederation was brought about by means of a hilf, or an agreement
for mutual assistance among people.

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.
 The right to protect the mind.

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 because,

 the policyholders would cooperate among themselves for their common

 every policyholder would pay his subscription in order to assist those of
them who need assistance;
 it falls under the donation contract which is intended to divide losses
and spread liability according to the community pooling system;
 the element of uncertainty will be eliminated insofar as subscription and
compensation are concerned;
 it does not aim at deriving advantage at the cost of other individuals.

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Takaful Referenced with the Qura'an and Sunnah

Although the word Takaful does not appear in the Holy Qura’an, it is derived
from the term Ta'awun, or mutual assistance and connotes the same meaning.
The second verse of Surah 5 in the Holy Qura’an exhorts the individual to assist

"Assist one another in the doing of good and righteousness. Assist not
one another in sin and transgression, but keep your duty to Allah"

In addition, many of the virtuous customs from the pre-Islamic period of

Jahiliyya were declared "Islamic" by the Prophet Muhammad (PBUH) when he
said: “the virtues of the Jahiliyya are acted upon in Islam." He further clarified
this point in the constitution written in Medina.

 They {Muslims of the Quraysh and Yathrib tribes} are one community
(ummah) to exclusion of all men. The Quraysh emigrants according to
their personal custom shall pay the blood-rite {aqila} within their
number and shall redeem their prisoners with the kindness and
justice common among believers."
 Believers are to other believers like parts of a structure that tighten
and reinforce each other." Al-Bukhari and Muslim.
 The Believer, in their affection, mercy and sympathy towards each
other, are like the body- if one of its organs suffers and complains,
the entire body responds with insomnia and fever." Muslim.

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Given the Qura’anic admonition to "assist one another" and the words of the
Prophet Muhammad (PBUH) regarding mutual assistance, Takaful may be
understood as an imperative upon Muslim believers:

• "… a system based on solidarity, peace of mind and mutual protection

which provides mutual financial and other forms of aid to Members {of
the group} in case of specific need, whereby Members mutually agree to
contribute monies to support this common goal." O.Fisher

Finally, although a believing Muslim is required to accept (destiny or pre-

ordainment) which can incorporate misfortune, s/he is not a passive "victim of
Conversely, the believing Muslim is exhorted by the injunctions of the Holy
Qura'an to proactively take precautions in order to minimize potential
misfortune, losses or injury from unfortunate events. One specific such
instruction appears in Hadith to the owner of the camel to first tie your
camel then rely upon the destiny ordained by Allah (swt).[Al Tirmidhi

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Main Objections against Conventional Insurance

While there a number of objectionable elements existing with conventional

insurance, three main ones stand out.

Qard Al Hassan

According to Islamic principles, only one type of loan, Qard el Hasan (lit. good
or benevolent loan) is allowable. Under the concept of Qard el Hassan, the
lender may not charge interest or any premium above the actual loan amount.
Some Muslim jurists state that this restriction includes directly or indirectly any
benefits associated with the loan: "…this prohibition applies to any advantage
or benefits that a lender might secure out of the qard (loan), such as riding the
borrower's mule, eating at his table, or even taking advantage of the shade of
his wall."

Muslims are encouraged to invest actively in ventures with an intent to share

profits or losses that may result, rather than becoming a passive creditor.
Unlike conventional commercial banking (largely based upon fixed, guaranteed
rates of return-interest), this mutual sharing of risk promotes communal
enterprises, risk-taking and productive activities. Monies are not sitting idle or
invested at nominal, fixed rates of return. Instead, monies are applied to
commercial transactions or agrarian cultivation where risks and rates of return
are balanced. A higher degree of risk in investment attracts a concomitant high
rate of return to investors, provides stimulus to an economy and creates an
environment for entrepreneurs to maximize their productive efforts.

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By contrast, most conventional insurers invest premiums in bonds/loans
(corporate and municipal) as well as other interest generating investments
(involving Riba from Islamic perspective).

Riba (Interest/Premium/Usury)

The single most important aspect that differentiates Islamic finance from
conventional finance and banking is the absence of interest. As discussed
earlier, the Shariah prohibits both the taking and paying of interest (Riba) no
matter what the purpose of the transaction, or the amount of interest charged.
Apart from a minority interpretation of Shariah by a few Scholars, the
consensus among Islamic jurists is that Riba and interest are the same.

There are four occasions in the Holy Qura’an where Riba is clearly prohibited.
Refer to V.30:39; V.4:161; V.3:130 and V.2:275-276.
The use of Riba is clearly prohibited by Prophet Muhammad (PBUH) in a
Hadith, where the Prophet (PBUH) condemned those who accept interest, as
well as those who pay it or are witness to such a transaction.

Riba, however, circumscribes other aspects that make commercial transactions

suspect as well: "The Prophet (PBUH) forbade indeterminist, doubtful or
speculative transactions or selling something before having possession of it."
"The Prophet (PBUH) forbade purchases from needy people and purchases
involving uncertainty such as the sale of fruit before its maturity. "

Al Gharar (Uncertainty)

All commercial transactions must contain full disclosure. In other words, any
transaction entered into should be free of uncertainty, deception and unknown

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elements or speculation. Al parties involved should have "full disclosure" or
knowledge of the "counter values intended to be exchanged as a result" of the
transaction, including the fact that "profits" cannot be guaranteed. The
purpose of this prohibition is to avoid exploitation and injustice, especially on
the part of the holder of capital.

Examples of prohibited transactions include: options, futures, derivatives,

short sales and forward foreign exchange transactions (rates are determined by
interest differentials). A number of transactions are treated as exceptions to
the rule of Gharar. Such commercial transactions contain special treatments to
assure they are organized to minimize harm and risk to both parties. Such
transactions are:

a. Sales with payment in advance (bai'bithaman ajil)

b. Contract to manufacture (Istisna)
c. Hire contract (Ijara).

Specifically, Takaful transactions are design to minimize Al Gharar since the

risk of future events can neither be known in advance nor influenced in any
way. Note that the mere fact of purchase of a Takaful Contract in no manner
affects future events nor does it guarantee that any specific outcome will/will
not occur. Obviously, nothing in Takaful operations can influence Al Qadar
(Allah's swt destiny).

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Principles & Models of Takaful
Origins and Operations of Takaful System

Background Elements to Takaful

Four fundamental factors must co-exist to establish the proper framework for a
Takaful system:

A. Nea’a or utmost sincerity of intention for knowingly following guidance and

adhering to the rules of a Takaful system.

B. Integration of Shariah Conditions, namely: risk protection sharing under

ta'awuni principle, coincidence of ownership, participation in management by
policyholders, avoidance of Riba and prohibited investments, and inclusion of
al Mudharabah or Wakalah principles for Takaful management.

C. Presence of Moral Values and Ethics, business is conducted openly in

accordance with utmost good faith, honesty, full disclosure, truthfulness and
fairness in all dealings.

D. No Unlawful Element that contravenes Shariah and strict adherence to

Islamic rules for commercial contracts; namely the key elements present are:

 Parties have Legal Capacity (i.e. +18 years old) and are mental fit
 Insurable Interest
 Principle of Indemnity prevails
 Payment of Premium is consideration (offer and acceptance)
 Mutual Consent (which includes voluntary purification)

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 Specific Time Period of Policy and underlying Agreement

The Principles of Takaful Insurance

 Uncertainty is eliminated in respect of

subscription and compensation.
 It does not derive advantage at the cost of
 Solidarity and joint guarantee
 Self reliance and self sustaining for
community well being
 Assist those that need assistance
 Community pooling system
 Halal investments

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Takaful Models
As a matter of deep faith, Muslims believe that there is unity in diversity. One
expression of this is that no single "best" model exists for Takaful. Shariah
scholars worldwide concur on fundamental components that characterize a
Takaful scheme, yet in their judicial opinions (fatwas) operational differences
are tolerated that do not contradict essential religious tenets.

As such, Takaful Models may be separated into three categories:

(A) Ta’awuni Takaful Non-Profit Model, includes social-governmental owned

enterprises and programs operated on a non-profit basis (such as Al Sheikhan
Takaful Company - Sudan), which utilize a contribution that is 100% Tabarru
(donation) from Participants who willingly give to the less fortunate members
of their community.

(B) Al Mudharabah Model, whereby cooperative risk-sharing occurs among

Participants yet the Takaful Operator shares also in any operating surplus as a
reward for its careful underwriting on behalf of Participants. Examples of this
Model include Takaful Malaysia (STM - Malaysia), Takaful Nasional (Malaysia)
and Takaful International (Bahrain).

(C) Al Wakalah Model, whereby cooperative risk-sharing occurs among

participants with a Takaful Operator earns a fee for services {as a Wakeel or
Agent} and does not participate or a share in any underwriting results as these
belong to Participants as Surplus or Deficit, under the Al Wakala Model, the
operator may also charge a funds management fee and a performance
incentive fee (as Bank Aljazira does).

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Ta’awuni model

Ta'awuni is a system of mutual cooperation for financial assistance and

protection based upon the Qura’anic principles of "Ta'awuni, or mutual

In the context of takaful, Ta’awun meaning mutual help allows participants

make donations with the intention of helping one another within the takaful
group. The elements underpinning the Ta’awun concept as applied in takaful,
can be broken down into the following:

1) Mutual responsibility
2) Mutual cooperation
3) Mutual protection

Benefits of Takaful Ta'awuni?

 Fulfils the social obligations towards community and family.

 Enables financial assistance for the unfortunate and needy.
 Avoidance of Al-Riba, Al Maysir and Al Ghirar and similar prohibited
elements within financial dealings.
 Promotes moral values, ethical dealings and full disclosure in all its
business activities and operations.
 Protection of lifestyle.
 Security for the family and the group against misfortune.

Through "Tabarru" donations it allows Participants to achieve self-purification

and peace of mind

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Mudharabah-A Profit Sharing Islamic contract

Points to consider with Non-Surplus Sharing Mudharabah Model

• Excellent and laudable model
• In many ways exceeds a Mutual insurance model as no expenses are
charged to the participants funds
• Operator does not share in surplus therefore no Mudharabah issue to
• Very difficult business model as a stand-alone Family/Individual Life
Takaful operation (especially where no charging of expenses to
participants fund envisaged)
• Possibly only potentially viable where a composite Takaful operation is
being considered.
• Could take many years to realize a commercial profit from such a
business model as it relies on the build up of reserves and savings funds
• As a stand-alone model, would lend itself to a philanthropic, state
sponsored or participants providing capital, business operation.
• Points to consider with a Mudharabah Surplus Sharing Model
• First and foremost, this is a Shariah issue, not an issue between
• Surplus is what remains of capital/contributions after the deduction of
claims and direct expenses.
• Profit is the creation of a value in excess of the capital provided.
• As no profit (only surplus) is generated in the Takaful underwriting
operations , the application of a Mudharabah contract is being debated
by Shariah scholars

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• Applying a Mudharabah contract to the investment profits however, is
Wakalah-A fee driven Islamic contract

Points to consider with the BAJ Wakalah Model

• Fees only taken if a product is sold
• No charging of expenses to the participants fund
• Operator alone totally responsible for all start up expenses and
operational costs
• No issue of agency or commission sales
• Clear separation between participant and operator
• Wakalah Fee on Surplus accepted by Shariah advisors
• Total transparency on all aspects of the operation and fee structure
• Wakalah Model-1
• Same Wakalah model for all plans, Group or Individual
• A single Wakalah contract throughout for both underwriting and
investment operations.
• Contribution is clearly broken down into Tabar’ru, Fees and where
applicable, individual investments.
• Tabar’ru is only applied when the cost of risk is due.
• Total transparency and clear breakdown of costs and Wakalah fees
stated in contract schedule.
• Participants therefore only pay actually costs plus declared Wakalah
fees. No unknown loadings.

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Takaful vs. Conventional Insurance

“Commercial insurance is originally haram as agreed upon by most contemporary

scholars. It is well known that in most non-Islamic countries there are cooperative
and mutual insurance companies. There is no harm from the Shariah point of view
to participate in these services. So, it is unlawful for a Muslim living in a country
where there is such a cooperative insurance company to make an agreement with
a commercial insurance company. But, if a cooperative insurance company is not
found one may enter into a contract with a commercial insurance company only
by way of necessity. If a person is forced by law to insurance or by way of need,
it is obligatory for him to be content with the minimum proportion of insurance
that covers his need or to the minimum of such transaction he’s being forced to
carry out.”

European Council for Fatwa and Research

Brief Comparison of Conventional Insurance and Takaful

It is beyond the scope of this paper to present the features of each model and
the Shariah arguments for or against. However, the key structural issues to be
examined and understood - especially to fully appreciate differences between
conventional insurance and Takaful - are the following items:

 Sources of Capital and Returns to Capital

 Organizing principle; i.e. Relationship among participants themselves
and between Participants and the Takaful Operator.
 Treatment of Expenses and Liability for Claims

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 Zakat and Charitable features - how to cleanse profits
 Funds management - pooled or unitized
 Investment of Premiums in accordance to Shariah
 Dissolution - who ends up with any surplus capital
 Regulations, Taxation and Auditing

A comparison is made below to highlight the salient differences between

conventional insurance (excluding mutual companies that share many aspects
in common with Takaful companies) and Takaful companies:

Conventional Insurers Takaful Operators

Sources of laws & regulations are set bySources of laws are based upon Divine
state and man-made. revelations (Holy Qura’an and Hadith)

Profit-motive, maximizing returns toCommunity well-being optimizing

shareholders. operations for affordable risk
protection as well as fair profits for
the operator.

Profits and/or Bonus units to be returnedTakaful contract specifies in advance

to policyholders as determined byhow and when profit/surplus and/or
managers and Board of insurer. Bonus units will be distributed.

Initial capital supplied by shareholders. Initial capital supplied by Rabb al Mal

(Agent) or paid in via premiums from

Separation of policyholder and insurerCoincidence of interests between

with differing interests. policyholder and operator as

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appointed by participants.

Transfer of losses among insurance poolsLosses retained within classes of

and from policyholders to shareholders. business written and sole obligation
of Participants.

Right of insurable interest is vested in theRight of insurable interest is

Nominee absolutely in Life insurance. determined by Islamic principles of
Faraid (inheritance).

Insured may elect cost or replacementInsured may not "profit" from

cost valuation and claim accordinglyinsurance and entitled to
whether or not they chose to rebuildcompensation only for repair or
property. rebuild or replacement.

Agents and Brokers are typicallyAgents are employees of the Takaful

independent from insurer and paid a feeand any sales commission should be
from the premium charged todisclosed.
policyholders that is not disclosed that is
not disclosed.

Investment of premiums conducted byTakaful contract specified under

insurer with no involvement byprinciples of al Mudharabah how
policyholders. premiums will be invested and how
results are shared. Under al Wakalah,
similar practice plus Participant can
direct his investments into a range of
unitized funds.

Insurer invests premiums consistent withTakaful invests premiums in

profit-motive with no moral guidelines;accordance with Islamic values and

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hence co-existence of Al Riba and AlShariah guidelines.

Dissolution - reserves and excess/surplusDissolution - reserves and

belong to the shareholders. excess/surplus could be returned to
Participants, although consensus
opinion prefers donation to charity.

Taxes - subject to local, state and federalTaxes - subject to local, state and
taxes. federal taxes (if any) plus obligated
to arrange annual tithe (Zakat)
donations to charity.
Benefits paid from contributions (Al
Benefits paid from general insurance
tabarru) made by participants as
account owned by insurer.
mutual indemnification.
Accounting standards consistent with
national rules (with may be GAAP)
Accounting consistent with GAAP and
plus prevailing statutory rules.
prevailing statutory rules Auditing for
Auditing same standards plus
uniform application of accounting
conformance with Islamic rules;
typically with Shariah Advisory

Part II Profile of Global Takaful Industry & Trends


The Takaful industry is roughly 30 years young as the first Takaful company was
established in 1979 - the Islamic Insurance Company of Sudan. Today there are
some 28 registered Takaful companies worldwide writing General Takaful

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(commercial property/liability) and Family Takaful (Life) on a direct basis. In
addition, there are 10 more Takaful programs either as Islamic "Windows" or
marketing agencies that place insurance risk with conventional insurers or with
takaful operators. In fact, the total number of takaful companies could be
higher because all insurance companies in Sudan are deemed to operate in
accordance with Islamic Shariah guidelines.

More takaful companies are under formation in Sri Lanka and in Singapore. At
least four more takaful companies will likely be established in the Middle East
(viz. Bahrain, Kuwait, U.A.E. and Egypt). Several others are being
contemplated in various countries such as Saudi Arabia, Pakistan, Australia and
Lebanon. It is also understood that interest is shown in Takaful in the
Philippines, South Africa, Nigeria, and some of the former states of the Soviet

Overall, the Takaful industry in the Middle East region is newly emerging when
compared to other relatively developed markets such as Malaysia. The more
successful companies in the Middle East (Bahrain/UAE) have grown at 10%
annually whereas in Malaysia the rate of growth has been 60% annually.

Proliferation of Takaful Programs

Spurred on by such re-confirmations by Islamic scholars and their own person

discomfort with existing insurance schemes, Muslims began in 1973 a
rediscovery of the Takaful models and to pioneer their implementation. In
rapid succession, groundbreaking efforts to introduce Takaful schemes as

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Islamic alternatives to conventional insurance produced outcroppings in many

• Sudan (1968), General United Insurance Co.

• Sudan (1973), National Reinsurance Company of Sudan

• Sudan (1979), The Islamic Insurance Company

• Saudi Arabia (1979), The Islamic Arab Insurance Company

• UAE (1980), The Islamic Arab Insurance Company (Dallah)

• Switzerland (1981), and UK (1982) Dar Al Mal Al Islami

• Bahrain (1983), Bahrain Islamic Insurance Company {recapitalized and

renamed Takaful International in 1999}

• Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company

• Luxembourg (1983), Islamic Takaful Company

• Sudan (1984), Al Barakah Insurance company

• Saudi Arabia (1983), Takaful Islamic Insurance Co. / Bahrain

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• Bahrain and Saudi Arabia(1985), Islamic Insurance and Reinsurance

• Malaysia (1984), Sayrikat Takaful Malaysia

• Saudi Arabia (1986), National Company for Cooperative Insurance

• Turkey, Uluslarais Sigorta ve Reasurar

• Saudi Arabia (1992), Al Rajhi Islamic Company for Cooperative Insurance

• Bahrian (1992), Al -Salam Islamic Takaful Co.

• Brunei (1993), Takaful IBB Berhad

• Brunei (1993), Takaful TAIB Berhad

• Brunei , Tabung Amanah Islam

• Iran, Alborz Insurance Company*

• Iran, Beimeh Iran Insurance Company*

• Indonesia (1994), PT Sayarikat Takaful Indonesia

• Indonesia (1994) , PT Asuransi Takaful Keluarga

• Indonesia (1994), Asuransi Takaful Umum

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• Singapore (1995), Syarikat Takaful Singapore

• Singapore (1997), Keppel Insurance Co. Ltd

• Singapore Ampro Holding , Pte.

• Malaysia (1993), Malaysia National Insurance Takaful Company

• Qatar (1995), Islamic Insurance Company of Qatar

• UAE/Dubai (1997), Dubai Takaful Insurance Co.

• Trinidad-Tobago Takaful Friendly Society (1999)

• USA (1997-2000), First Takaful USA*

• Pakistan (2005-06), Pak-Kuwait Takaful Company.

Note* Operates under Takaful/cooperative principles while evolving into full

accordance with Takaful model.

Additional recent initiatives

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Soar Al-amane, Senegal (1998), Amana Takaful Ltd., Sri Lanka (1999), the
Bangladesh Islamic Insurance Co. (1999), plus 3 new Takaful licenses approved
in Kuwait (2000), a Takaful Taawuni (Family/Life) program sponsored by Bank
Aljazira in Saudi Arabia to be launched in early fall 2001 and at least one
license under review in Egypt. Further takaful licenses are being considered in

Retakaful or Reinsurance

As more progress occurred and primary Takaful operators aggregated risks on

commercial property (General Takaful) and on persons (Life/Family Takaful),
there emerged a concomitant need to share these risks with other insurers,
commonly called reinsurance. However, Islamic insurance companies are
required to reinsure their risks on a Re-Takaful basis. According to the Islamic
Banking and Insurance Encyclopedia (IIBI, London 1998) due to the meager
reinsurance capacity of Retakaful operators, latitude has been granted by
Shariah Advisors to cede primary Takaful premiums to conventional re-insurers.
Such dispensation is understood to be for a temporary period and lay down the
challenge to Takaful and Retakaful operators alike to work towards for a swift
resolution of these anomalies.

The evolution of primary Takaful operators has naturally spawned creation of

Retakaful entities:

• Sudan (1979) - National Reinsurance

• Sudan (1983) Sheikan Takaful Company

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• Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company

• Bahrain/Saudi Arabia (1985) , Islamic Insurance and Reinsurance


• Malaysia (1996), ASEAN Takaful Group which evolved into ASEAN

Retakaful International (ARIL) in 1997, Labuan

• Tunisia (1985), Beit Ladat Ettamine, Sauodi Takafol, Ltd. (BEST Re)

• Malaysia (1993) - Takaful Nasional, part of the Malaysian National

Insurance (MNI) Group.

Launch of Takaful in Pakistan

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Pak-Kuwait Takaful Company Limited (PKTCL) is pioneer and multinational

joint venture partnership between Pakistan, Kuwait, Malaysia, Saudi Arabia and
Sri Lanka. With an Initial Paid up capital of Rs.250 million and an authorized
capital of Rs.500 million, along with the financial strength and backing of
equity partners. PKTCL is well poised to launch operations in an environment of
trust and reliability.

The Takaful way of Insurance in Pakistan is greatly needed and much awaited
as a significant segment of population desire Shariah-Compliance in all their
financial dealings.
A parallel can be drawn from the immense success of the Islamic Banking in

PKTCL, emerging in this backdrop, is well positioned to assist all such

individuals and organizations. Equipped with the repute and financial standing
of its local and foreign sponsor.

Shariah Advisors Profile

• Justice (Retd.) Mufti Muhammad Taqi Usmani

• Dr. Muhammad Imran Ashraf Usmani
• Moulvi Muhammad Hassan Kaleem


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Local Shareholder:
• Pakistan Kuwait Investment Company (Private Limited, Pakistan.
• Meezan Bank Limited, Pakistan
• Saudi Pak Industrial and Agricultural Investment Company (Pvt) Ltd,

Foreign Shareholders:
• TN Overseas Investments Pte Ltd, Malaysia (Representing Takaful
Nasional of Malaysia, the largest Takaful Company in the world).
• Noor Financial Investment Company, Kuwait.
• Takaful Holdings Limited, Dubai (representing Amanah Takaful of Sri

Part III Financial Profile of Takaful Industry

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Takaful Industry Statistics

A broad estimate of the total Gross Premiums Written (GPW) within the Takaful
industry in 1998 is approximately US$500m for both Life and Non-Life business,
of which around $200m pertains to Asia Pacific region. Malaysia is one of the
largest markets outside the Arab region for Takaful, writing 78% of the non-
Arab takaful business. A geographical spread of takaful business is shown

The growth in Takaful business had indeed been very impressive. As the
following Table illustrate, the annualized average growth since 1994 has been
92% in Family Takaful and 34% in General. Most growth appears to be in the
Family and group Family Takaful (68% and 11% respectively) of GPW as
compared to General Takaful (4-6%). In Family Takaful the products sold were
individual and Group Term as well as savings products, mortgage policies and
pension plans. In General Takaful, all classes of commercial business were sold.


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Collectively, these Retakaful operators write approximately $35 - $75 million of

premiums annually. Their staff is estimated to be about 750 and their paid-up
capital ranges between $80 - $100 million. A thumbnail sketch of the
reinsurance industry may assist us to become more familiar with their
traditional counterparts. Global reinsurance premiums in 1998 grew 10% to $76
Billion. Five OECD nations dominate this sector with 77% of worldwide

 Germany
 Switzerland
 UK
 Japan

The reinsurance business overall was profitable in 1988 with Pre-Tax profits of
$3.9 Billion {vs. $7.0 Bil. in 1997}. The industry Loss Ratio was 73.6% vs. 71%
{1997 was the lowest in 10 years}.

A quotation from the Journal of Commerce, USA(September 19, 1999) is very

informative: "At the beginning of the decade (1990) a rein surer was consider
strong if it had capital and /or surplus of $50 Million. Today, capital of 10 times
that is considered barely adequate with several companies having many
billions." Examples are: Gen RE, $505 Bil; Employers RE,$4.0 Bil; American RE
$1.8 Bil. There are massive stock corporations with substantial capital assets
and a global reach.

Taking the 15 countries with dominant Muslim populations

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Bahrain, Brunei, Egypt, Indonesia, Jordan, Kuwait, Morocco, Pakistan, Qatar,
Singapore, Tunisia, Turkey, Saudi Arabia and UAE.

There are today Life and Non-Life insurance premiums written annually of
$24.5 Billion (of these 50% is in ASEAN countries). Assuming that over the next
ten years, the Insurance Penetration Rates (i.e., Per Capita usage increases -
refer to the section following in this paper) and the local market share of
Takaful coverage rises to approximately 15% then the Gross Premiums Written
could climb to $3.75 Billion. Further, if 33% of this were to be ceded to
Retakaful operators, then $1.2 Billion of Retakaful revenues could result as
reinsurance business, which would require a capital base of between $600
Million and $1 billion. This compares with the existing (estimated) global
capital base for Retakaful companies of less than $100 Million (1999).

Acceptance Rates of Insurance

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Acceptances of insurance, so called Penetration Rates, are measured as an
average percentage of per capita expenditures. In 1999, industrialized nations
enjoyed Penetration Rates of 8.8% of Net Domestic Product, or $2,285.
Switzerland was the highest overall at $4,643 per capita, with 5% Penetration
Rate ($1,729) in Life per capita premiums. Japan's 10% Penetration Rate
($3,103) for Life per capita alone is the highest in the world.

From these charts it is quite clear that the traditional cultural perspective on
risk and risk protection throughout the Central Asia, Pacific and Middle East
regions has curtailed the development of an insurance industry and limited the
penetration, especially for Life insurance, as a percentage of per capita
income. The highest rates of penetration exists in mature markets of Asia
Pacific region, 1.72% ($62/year) for Non-Life and 2.16% ($78/yr) for Life in
Malaysia and 1.03% ($271) for Non-Life and 3.15% ($828) for Life in Singapore,
respectively. By contrast, the lowest penetration rates are in Saudi Arabia with
0.55% ($37) for Non-Life and 0.01% ($0.60) for Life and in Kuwait with 0.50%
($77) for Non-Life and 0.11% ($16) for Life, respectively

Part IV Products & Services

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Executive Overview

The ranges of Takaful Products offered are categorized into two areas:

A. Risk type products. These products are provided for the protection of the
Participants. There is little, if any, maturity benefits payable at the end of the
contracted term. There is no Participant investment component involved,
therefore, such products are marked risk only.

B. Investment type products with an element of Risk. These products are

generally regular savings plans where a Participant indicates his need to
achieve a target savings lump sum through saving on a regular basis, by a
certain time in future. The risk element under such products reduces over time
as the accumulated savings increase, or can be maintained at a fixed level,
depending on the type of cover chosen by the Participant at plan inception .

Savings plans are offered under different 'labels', e.g. as a Retirement plan (to
save for retirement) or as an Education plan (to save for the children's college

Investment Products

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The theme for each product is that the takaful cover is to provide for a target
savings amount at a future date and to also provide protection for the
possibility that the participant does not survive the term of the savings

Retirement Plan

Under this plan the participant contracts to contribute a monthly amount under
a Retirement Takaful Plan. The term of the plan will be the difference
between the targeted retirement age and his current age.

The death benefit under this plan will reflect the various options available to
the client (i.e. escalating, level or reducing) and the value of his accumulated
savings under the plan at the date of death.

Ladies Flexible Savings Plan

It is appreciated that ladies could have certain targeted savings at particular

points in their lifetime. For example, to provide for their children's education.
This product is basically the same as the Retirement Plan in its features but is
repackaged to appeal to the female population.

Ladies Single Contribution Plan

This is the Ladies Plan above but where the contribution is a single lump sum.
Under this plan death benefit choices will be available.

Capital Plan

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This is a regular savings plan where the executive chooses a certain level of
death cover (which remains unchanged over the period) and fixes the annual
contribution over a chosen term.

This product has been designed to compete with similar mutual

funds/conventional insurance combinations available in KSA .

Capital Plan

This is the Single Premium version of the previous plan. As with the ladies
single premium plan the death cover is equal to the single lump sum
contribution. The participant determines the term of the plan.

Education Plan

This plan will be marketed as a savings plan for the breadwinner of the family
for his children's university education.

Based on a targeted savings amount at the point of time the child is expected
to attain university entry age, a monthly contribution is determined. The
benefit on death or disability will be premium waiver for the balance of the
contract period

Marriage Plan

This plan is identical to the Education Plan except that the target expense here
is the expected marriage expenses of the child and the maturity age is the
expected age at marriage of the child.

Savings for Awqaf Plan

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This is a plan to save towards a Waqf contribution. The proceeds of this plan
will go to the selected charities chosen from a list provided by the Shariah
Advisory Council of BAJ and administered by the same.

Term with Return of Contribution Plan

Under this plan the contribution to the takaful plan is returned to the
participant if he survives the term of the contract. On death during that period
the contracted level death benefit is payable.

Risk Only Products

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Level Term (Risk Only)

Under this variation of the preceding plan, the contribution to the takaful plan
is not returned to the participant if he survives the term of the contract. On
death during that period the contracted level death benefit will be payable.

Key man Takaful (Risk Only)

The bank disburses significant amounts of loans to businesses for working

capital and the purchase of capital goods. These businesses are usually
controlled and/or run by certain key individuals. Under Key man Takaful these
individuals are covered for an amount equal to the loan taken up, over the
duration of the loan. On death or total permanent disability during this period
an amount equal to the loan taken up is payable. This amount is then available
to repay the loan from the Bank thus protecting the partners in the business,
the deceased's immediate family and the Bank.

Decreasing Term (Risk Only)

This variation of level term pays a decreasing level of cover throughout the
contract period, allowing for a high level of cover at inception reducing to zero
at contract maturity.

Increasing Premium/Limited Payment (Risk Only)

Commonly known as a "low start premium” plan, it allows an individual to take

a high level of cover at a low initial premium with the premium increasing
throughout the term of the contract but ceasing a number of years prior to the
cover under the contract terminating.

Group Products

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Group Takaful Products

These are Takaful Ta'awuni products where many participants are grouped
under one contract. These products provide for a death and total permanent
disability cover determined by the relationship between the contract holder
and the participants as explained below:

1) Group Loan Repayment Plan

The Takaful Ta'awuni Group Loan Repayment Plan is designed to repay

outstanding loans/leases/financing upon death or total permanent disability of
the Borrower/Lessee.

Benefits to Employer/Company

 Raises esteem of company when covered by Islamic Insurance.

 Eliminates bad debts and write-offs of Loans, Leases and Installment
 Guarantees that financing/leasing will be repaid upon death or total
permanent disability of Borrower/Lessee.
 Avoids expense and time of repossessing Assets upon default.
 Protects company's Principal and Profit in asset financing and leasing.

2) Group Retirement Plan

The Takaful Ta'awuni Group Retirement Plan enables the employer to provide
its employees with retirement benefits, in form of either a lump sum payment
at retirement, or a lump sum used to purchase an annuity, i.e.
monthly,quaterly,half yearly, yearly income during employee's retirement.
Upon maturity of the plan, the benefit payable is the final maturity value in
the investment plan.

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Benefits to Employer/Company

 Powerful Incentive to reward and to retain Key Employees.

 Depending upon employer/company, the Group Retirement Plan can
be designed to be Contributory or Non Contributory.
 Depending upon employer/company, Plan can have a flexible period
of "Vesting" whereby ownership of retirement benefits passes from
employer to employee. If an employee resigns prior to retirement,
either no benefits, or a proportion of the accumulated saving could
be paid to employee with balance returned to the
 Reduced employee turn-over and saving for company in less training
costs, less down time, less disruption to staff productivity.
 Staff loyalty is enhanced resulting in better retention of key staff.
 Added Financial Incentive/Reward for Key Employees.
 Encourages higher Productivity from Key Employees.
 Expands the company's Compensation Package and Benefits to be
more competitive.
 Enhanced Benefits can help attract better talent from job market.

3) Group Term Protection Plan

The Takaful Ta'awuni Group Term Protection Plan is level risk protection
coverage that protects employees in the event of death or disability, so that a
multitude of that employee's yearly salary can be paid to his family or
dependants to ease their financial burden in a sad time of loss. This multiple is
typically two or three times annual salary in the year of death. Minimum
protection is 12 months salary or SR 50,000, whichever is greater. Maximum
level of protection is five (5) to eight (8) times annual salary, depending upon
underwriting considerations.

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The Plan is sponsored by the employer/company on a yearly renewable
contract. Additional Riders are available for coverage of Total and Permanent
Disability; Permanent and Partial Disability.

Benefits to Employer/Company

 Shows Caring attitude towards employees.

 Peace of mind for employees.
 Added Financial Security for employees and family.
 Reduced Employee Turnover and saving for company in less training
costs, less down time, less disruption to staff productivity.
 Staff loyalty is enhanced resulting in better retention of staff.
 Happier staff means higher Productivity.
 Better compensation package with Takaful Benefits helps attract
qualified staff.
 Many employees do not accept coverage on a conventional insurance
basis; Takaful coverage would raise the esteem employees have for
their employer.
 Avoids Lump Sum Payment by employer/company from its own funds
to deceased employees family (typical moral obligation)
 Enhances Image of employer/company in local community.

4) Key Man Protection Plan

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The Takaful Ta'awuni Key Man Protection Plan is term protection coverage on
Key management staff or technical personnel critical to operations of an
employer/company in order to protect the interests and the core business of
the company.

Benefits to Employer/Company

 Protects primary Partners in business from serious losses due to death

of a Key Owner or Personnel.
 Provides payment of benefits to a company to assist in finding a
replacement or temporary staff for the job performed by deceased
 Covers any financial obligation from Key Employee to company (i.e.
Executive Loans etc)
 Reduces downtime and lost productivity that weakens business
 Resource for the business to compensate beneficiaries of deceased
where it is agreed that upon death the owner's shares will be bought
out (buy-sell agreement).

Riders Products

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Riders or Supplements (All Risk Only)

As well as the base products identified in the foregoing, a number of riders will
be offered as either standalone products to be attached to the base product at
the participant's request or as a bundled attachment to a base product. The
riders to be made available to the participants are as follows

1. Total Permanent Disability

2. Partial Permanent Disability
3. Premium Waiver on either Disability or Death
4. Critical Illness
5. Family Income Benefit
6. Term Rider
7. Top-Up Rider

Concise Profile of Takaful Products

Property Takaful

 Fire & Allied Perils Policy

 Householder’s Comprehensive Policy
 Shop Owner’s Policy
 Contractor’s All risk Policy
 Erection All risks Policy
 Machinery Breakdown Policy
 Contractor’s Plant and Machinery Policy

Motor Takaful

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 Private Car
 Motor Cycle
 Commercial Vehicle

Marine Takaful

 Imports
 Exports
 Inland Transit

Miscellaneous Takaful

 Accident Takaful Policy

 Money Takaful Policy
 Fidelity Takaful Policy
 All Risk Takaful Policy
 Third Party Liability Takaful Policy
 Product Liability
 Burglary
 Work’s men Compensation
 Public Liability
 Plate Glass
 Travel Takaful
 Umrah & Hajj Travel Takaful

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Part V Strengths, Weaknesses, Opportunities and Threats

In this section we will show and analyze the overall strengths, weaknesses,
opportunities and threats facing the Takaful Industry. Understanding these
issues will allow a better understanding of the goals and objectives of the
master plan.


1. Takaful life insurance is in its infancy. This is a major gap in the

provision of an Islamic financial service to the Muslim community
worldwide. Significant opportunities exist to develop this market
2. Offering a Shariah compliant Takaful product to a Muslim provides him
with both a financial product required in everyday life plus the added
benefit of adhering to Islamic principles as well as potentially assisting
brother Muslims within the cooperative Takaful pool
3. Takaful allows the avoidance of “haram” elements associated with
conventional insurance products.
4. Conventional insurance operators are showing a great interest in
Takaful. Adoption by one or two international players will see an
immediate global development of Takaful.
5. Islamic and conventional banks have the opportunity to create and
develop Banctakaful programmes which will greatly enhance the ability
to introduce Takaful to the Muslim communities worldwide
The synergy between life insurance and the asset management industries is
well known. It is no different for the Takaful and Islamic asset management
industries. The development of Takaful will greatly enhance the ability of
Islamic fund managers to significantly increase assets under management as
well as the number of clients in a fund

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1. The lack of a “supreme” Shariah judicial authority and the uniform

Shariah decisions such an authority would provide, or endorse where
decisions are referred to them from “national” or company Shariah
boards, will continue to undermine the Takaful industry, both now and
the immediate future. The industry will be weakened in the eyes of
many until this matter is resolved.
2. To this day many Shariah scholars refuse to accept the concept of
insurance, whether it be Islamic or conventional. Worse some scholars
cause confusion amongst the Islamic community by declaring there is no
difference between commercial and Takaful insurance, thus undermining
the industry’s attempts to both distinguish itself from conventional
insurance and the “haram” elements contained therein
3. The lack of a uniform Corporate Governance standard and Shariah audit
guidelines, which the industry can follow, leaves the industry open to
criticism when companies fail or fail to protect the consumer. The
potential to utilize participant’s funds in a way, which contradicts good
corporate governance within the Takaful industry, is a very real threat
going into the future.
4. Because of the very nature of Takaful and the Islamic elements making it
Shariah compliant, other than Malaysia (and Sudan) where a separate
Takaful law has been introduced, nowhere else in the world is there an
insurance regulation, which embraces Takaful. This causes difficulties in
establishing Takaful in specific areas such as the European and USA
markets. This is also a problem, albeit less of a one, in predominantly
Muslim countries.
5. Within many Muslim countries, especially those in the Middle East where
conventional life insurance has also taken hold, the concept of long term

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savings is an alien concept to many Muslims who rely on the state or
state pension, as well as family ties for security in their old age or time
of crisis.
6. This also applies to the concept of risk protection, again be it one of
conventional or Takaful. The concept is alien to many in the Middle East
7. Having no rated Retakaful company causes consternation amongst many,
both inside and outside of the Takaful industry. Although the problem is
really one of “a chicken and an egg”, in that you cannot have retakaful
unless and until you have built up a sufficient pool of Takaful business,
this necessitates the use of conventional reinsurance. Critics do rightly
point out that even with Shariah dispensation in supporting the use of
conventional reinsurance, that the Takaful industry is a “cocktail” of
conventional and Islamic. ARIL, at this time, is the only Islamic retakaful
operator providing life retakaful support, but unfortunately does not
have a rating. This situation will continue to dog the industry until
8. As many of the new life Takaful operators are adopting a unit-linked
rather than a pooled investment strategy, the range of unit linked funds
open to a Takaful participant is somewhat limited and ranges from
Equity to Murabaha but at this moment in time is quite weak in the areas
in between i.e. Islamic property funds, Islamic Leasing funds, Islamic
Sukuk funds. More effort is needed by the Islamic asset industry to
introduce a broader range of Islamic unit-linked funds for the Takaful
9. Unfortunately in some areas of the Islamic world, government agencies
and leading Islamic institutions, although praising the development of
Takaful and in many ways supporting this development, are not
supporting it in a commercial sense by either changing from

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conventional life insurance to Takaful or adopting Takaful where the use
of conventional life insurance is quite rightly prohibited.
10. In many ways the Takaful life industry does not help itself when
promoting and selling Takaful products. The very essence of Takaful is
mutual risk protection between members on a cooperative basis, under
Shariah compliant principles. The adoption of a savings element for
individual participants is to be lauded and welcomed but as in
conventional insurance, such funds are not mutual or cooperative but
belong exclusively to the member making the contribution. It is
therefore unfortunate that as an industry we market Shariah compliant
investment products, with very little or no Takaful coverage included, as
Takaful. To move away from the very essence of Takaful and what it
means is to lean too far towards a conventional insurance model,
mimicking the tax advantages of products which are significantly more
investment and tax avoidance vehicles than they are protection or
Takaful products. The industry is open to criticism if we do not
recognize the roots of our Takaful concept as being mutual risk
protection under Shariah law.


1. Takaful is being driven by the vast untapped Islamic market, which can
be introduced to the Takaful concept. Whether such potential
participants are part of a Muslim majority in markets such as the Middle
East, or part of a minority in European countries, the potential for
Takaful life insurance is enormous.

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2. Although many of the potential Takaful markets are familiar with an
insurance concept, many more, specifically in the Middle East are not,
resulting in a very low penetration level for the insurance industry in
3. Potential sales to government and leading Islamic agencies is enormous,
where such agencies presently either do not utilize life insurance or
perhaps do accept conventional life insurance because of a lack of
Takaful in the past.
4. Regions of low insurance penetration can jump direct to a Takaful
concept leaving the insurance industry little choice but to move directly
to Takaful as a solution. As such there is little or no opportunity for the
conventional life insurance industry in such a situation. Saudi Arabia is a
prime example of such a development with nearly all of the new life
insurance licenses issued being for Takaful operators.
5. Many “virgin” Takaful regions have high income levels resulting in the
opportunity for significantly higher levels of premiums than possible in
either existing Takaful regions such a Malaysia or even potential Takaful
regions such as Europe
6. Many Takaful opportunities are in regions with very large populations
i.e. Pakistan, India, Egypt, Iran etc. although contributions may be
smaller, the market size is significant
7. The Muslim minorities in the west are a vast untapped potential
8. Banctakaful and the relationship with Islamic banks, or, where
permitted, conventional banks with Islamic windows, opens up yet again
significant potential for development.
9. Although many Takaful markets still remain untapped the fact of the
matter is that the Muslim population worldwide is growing with some
populations predicted to double by 2020 i.e. Saudi Arabia

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1. As a repeated theme in this paper, the lack of a Shariah consensus is not

just a weakness but is a very real threat to the development of Takaful.
If the industry is to be taken seriously, this issue needs to be resolved
2. Again, a perceived weakness also becomes a threat where potential
participants are subjected to conflicting arguments between scholars on
their beliefs concerning conventional and Islamic insurance. We cannot
afford to have a perceived weakness turn into a threat because of a lack
of action on the part of the industry to resolve such issues.
3. Unless a movement, presently underway between the IFSB and the ISIS,
meets in success whereby the conventional insurance industry embraces
Takaful at the highest level, thus leading the way in resolving the many
difficulties faced by the industry in its dealing with national regulators,
such potential failure to resolve such issues would result in Takaful not
developing beyond the borders of predominantly Muslim countries
4. WTO developments, in many of the countries in the Middle East, sees the
breaking down of traditional protectionism practices, which is to be
welcomed. What must also be clearly understood though is that such
practices should not lead to an unwelcome competitive advantage for
the conventional insurance industry.
5. The 9/11 events still remain, to many, an obstacle to Takaful even
starting the development process in the USA and possibly some European
countries. This may be a perceived rather than an actual threat but
clouds still hang over many potential Islamic financial developments in
the USA.
6. Pending any developments recommended in this paper as essential to
the development of Takaful over the next ten years, one final threat to
this industry does remain. Unless the Takaful operators can unite in a

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cause to jointly develop Takaful worldwide, albeit via their own possibly
small contribution within their own borders, with the adoption of
uniform standards even before such may become compulsory, then the
threat of fragmentation looms over the industry moving forward over
this next decade.

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 Strengths  Weaknesses

 Significant gap in Islamic  No uniform Shariah authority

Financial Services industry  Divisions within Shariah
 Shariah compliant means scholars on many issues relating
products conform with Islamic to Takaful
principles  No significant Corporate
 Provides an ethical alternative Governance or Shariah audit
to conventional life insurance guidelines
 Of significant interest to  Lack of uniform
conventional insurance insurance/Takaful regulatory
operators arrangements
 Typical for the industry is the  Lack of a long term saving
synergy with Islamic banking culture in many Muslim
 Synergy with the Islamic Asset communities creates a
Management industry challenge to persuade Muslims
to save long term.
 Lack of awareness in Muslim
communities on Takaful
insurance and risk protection
inhibits demands for insurance
 Lack of Retakaful. So far there
is no retakaful company rated
with BBB and above.
 Lacking in broad range of
Shariah compliant investment
vehicles for investors

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Opportunities Threats
 Vast untapped market outside  No Shariah consensus could
the Far East undermine Takaful development
 Low level of insurance  Anti insurance beliefs by some
penetration in most markets Islamic scholars
 Sales to government and Islamic  Conventional insurance
agencies regulators could hold up Takaful
 Even lower levels of life Takaful development
penetration  WTO could dilute the benefits
 Affluent markets in many of protectionism enjoyed by
Muslim countries, resulting in local companies
high premium/contributions  9/11 and perceived anti Islamic
 Large Muslim populations in feelings in the west
many countries  Lack of consensus amongst
 Muslim minorities in western Takaful operators
countries i.e. France, Germany,
 Banctakaful
 In general the Muslim
population is growing
significantly worldwide.

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