4.

Discussion

4.1 Takaful prospect and challenge

Since its origin in 1984, the takaful has been enjoying relatively robust growth. Takaful has
become an important component in the overall Shariah compliant financial system in Malaysia.
However, takaful industry continues to face numerous challenges and issues in many aspects,
notably low penetration rate, shortage of human capital, inadequate technology capabilities,
ineffective governance practices, and lack of innovation in business model for new market
niches.

What is the issue or challenge faced by Takaful industry in Malaysia?

Regarding the question on the issue or challenges facing/faced by the takaful industry in
Malaysia is stated as the following challenges:

Rivalry with the takaful business is massive. The focused components are as gatherings of
experienced players that are resolved to support their piece of the pie and new players with
solid budgetary support, upheld with existing assets and universal system. On the one hand,
the passage of more players implies that rivalry will be more extreme, yet then again clients
could appreciate better operator and valuing for the takaful items.

Furthermore, the lack of awareness of the presence of takaful and they do not understand its
concept and principles. as takaful operator must have the capacity to viably react to clients'
needs and requests as customers have progressively turning out to be more observing and
requesting better item decisions, more effective conveyance channels and more client well
disposed practices from takaful operator.

In addition, the Malaysian government is committed to promote takaful and to make Malaysia
a takaful and retakaful hub in South-east Asia. Efforts are in place including the establishment
of strong legal, regulatory and shari’ah framework governing the industry and the International
Centre for Education in Islamic Finance or INCEIF to enhance capacity building. The takaful
industry must chart clear strategic direction in order to achieve and sustain success especially
on the enhancement of human capital, collaboration among operators in order to achieve
common objectives of further enhancing the resilient and expansion of the industry including
venturing overseas.
What is your prospect regarding Takaful industry in Malaysia?

On the prospect regarding Takaful industry in Malaysia he said there is favorable growth
potential in the Malaysian takaful industry, particularly due to encouraging demographics and
government support. Mergers and acquisitions in the takaful and insurance sector are expected
to continue owing to attractive growth prospects and new regulatory pressure.

Consolidation of Takaful companies in the future may boost growth prospects by instilling
greater confidence among customers. Fewer and larger Takaful companies, with larger
financial resources will lead to greater financial stability and better ability to compete while
focusing on improved risk pricing. In addition, customer trust must be promoted by focusing
on corporate governance and ensuring adherence to new regulatory standards. For example,
with the recent regulatory changes, new opportunities to demonstrate customer value are
opening up, such as mandatory medical insurance and better customer service and response
times, all of which point to prospects for greater growth for Takaful companies.

The recent regulatory reforms extended to the takaful sector in Malaysia, including the
introduction of internal capital adequacy assessment process, the Financial Services Act and
gradual deregulation of tariff rates, as a positive development that could cement the region as
a takaful hub, and expects the Malaysian takaful and insurance sector M&A activities to
continue, due to attractive growth prospects and new regulatory pressure.

According to BNM, Malaysia is the leading regional takaful market within ASEAN. Family
takaful, or long-term life policies, represents approximately two-thirds of the takaful industry
in Malaysia, and the rest is general takaful. Growth potential for the segment is favourable,
particularly due to encouraging demographics.
Why is conventional insurance prohibited?

Takaful is a new spectrum of insurance products that has emerged in recent decades. These
products are based on principles, features, and structures that set them apart from conventional
insurance. Before takaful appeared on the market, many people in the Muslim community
believed that trying to reduce risk went against Islam. Their perception was that because every
worldly action comes from Allah’s will, people shouldn’t try to reduce or avoid the results of
those actions.

Although Islam does prohibit attempting to avoid risk altogether, it doesn’t prohibit reducing
risk. The elements of uncertainty (gharar), gambling (maysir), and interest (riba) make
conventional insurance products prohibited risk-sharing instruments for Muslims.

Uncertainty (gharar)

Conventional insurance is a contract between the insurer and the insured, but this contract
doesn’t explicitly describe its outcome for either the insurer or the insured. And sharia doesn’t
allow the sale of contracts that are based on uncertainty. The conventional insurer has the
assurance of receiving a premium each month but faces uncertainty regarding when and
whether the insured will make a claim. Likewise, the insured may or may not incur losses or
damages to prompt a claim.

In addition, when an insurance claim does occur, neither party knows in advance how much
may be paid to the insured (or even whether the insurer will pay a cent). The insurer considers
many variables when documenting an insurance claim, so predicting what the outcome may be
for either party is impossible.

Gambling (maysir)

Going hand-in-hand with uncertainty is the fact that conventional insurance has characteristics
of gambling. The conventional insurer receives huge amounts of money from the insured in
the form of premium payments. Will the insurer be able to hold onto that money? Or will some
sort of disaster strike (tornado, wildfire, flood . . . pick a weather event) that results in the
insurer paying out every dime of the premiums and then some?
When few claims are filed, the insurer wins (and the insured lose their premiums). When loads
of claims are filed, the insured get some payback for their premiums (and the insurer may be
in trouble). Most Islamic scholars generally agree that conventional insurance products involve
gambling and aren’t sharia-compliant.

Interest (riba)

Another reason that Islamic law prohibits conventional insurance products is that their
transactions involve interest. Interest generally comes into play in two ways:

 Insurance companies need to make sure they can pay their customers’ potential future
claims, so they rarely let the premiums they collect sit in a cash account. Instead, they
invest the premiums in interest-bearing fixed income instruments such as conventional
bonds.

 If the insured files a substantial claim, she may receive an amount from the insurer that
totals more than the premiums she has paid. Most Islamic scholars consider any excess
amount paid by a conventional insurer to be interest.

 Keep in mind that someone who purchases a takaful product can also receive an amount
that exceeds the total contributions she pays in. In that case, the excess amount is not
considered interest.

The difference is not just semantics; the difference lies in the structure of a takaful fund
and the transfer of risk (which is quite distinct from a conventional insurance product).