FACULTY OF BUSINESS AND MANAGEMENT  

BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE 

INS510 
INTRODUCTION TO TAKAFUL 
 
INDIVIDUAL ASSIGNMENT
ISSUES IN TAKAFUL/TAKAFUL INDUSTRIES:
“LOW NUMBER OF CONSUMER WHO OBTAIN TAKAFUL
PRODUCT”
& 
“PREFERENCES TOWARDS CONVENTIONAL INSURANCES
COMPARE TO TAKAFUL PRODUCT”

PREPARED BY: 

        LUQMANUL HAKIM BIN JOHARI

2020977427 

JBC2424B 
 
PREPARED FOR: 

MADAM NURUL AIEN BINTI ABD AZIZ 
 
  
 
TABLE OF CONTENT

NO. TITLE PAGE

1.0 1-2
INTRODUCTION / BACKGROUND OF STUDY
1.1 Concept of Takaful
1.2 Comparison between Takaful and Conventional Insurance

2.0 ISSUE IN TAKAFUL : LOW NUMBER OF CONSUMER 3-6

WHO OBTAIN TAKAFUL PRODUCT

2.1 The causes, evidence of the problem and the solutions

3.0 7-10
ISSUE IN TAKAFUL: PREFERENCES TOWARDS
CONVENTIONAL INSURANCES COMPARE TO TKAFUL
PRODUCT

3.1 The causes, evidence of the problem and the solutions

4.0 CONCLUSION 11

REFERENCES / BIBLIOGRAPHY

 
 

 
1.0 INTRODUCTION / BACKGROUND OF STUDY

1.1 Concept of Takaful

Takaful is an Islamic insurance based on the principles of "taawuni," which means "mutual
assistance," and "tabarru," which means "donation." Takaful is derived from an Arabic
expression. It is also a term that refers to a group of people from the same community who
agree to jointly guarantee each other in the event of a failure or injury, implying that the
participants in the arrangement are both insured and insurers.

It is a financial assistance scheme focused on brotherhood, unity, and mutual aid that offers
financial assistance to participants in exchange for cooperation and assistance. It is also
collective arrangement among a community or tribe of people living in the same society who
agreed to compensate each other for the loss or harm to one's life, property, or other
valuables. The agreement also states that each group member must agree on the type of
donation that will be used for mutual benefit later from the start.

These ideas are based on the Holy Quran and the words of Prophet Muhammad S.A.W. The
foundation of cooperation is one of the principles. It means that Allah will continue to assist
His servant as long as he helps others.

Takaful practise incorporates two main ‘Aqad (contracts): the Tabarru' (donation) contract and
the Wakalah (agency) contract, both of which are free of (riba) usury, wager or Maisir
(gambling), and Gharar (interest) (uncertainty).

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1.2 Comparison between Takaful and Conventional Insurance

A. The Concept of Participation and Purchases

The takaful contract, experts participating in the scheme instead of buying takaful. In other
words, no elements of buying and selling going on in those contracts. The contract also is
element of genuine cooperation and shared savings approach or a special fund under the
concept 'tabarru’. The development of a fund in takaful operations based on the 'tabarru'
concept is crucial because it will be used to channel financial assistance or reimbursement to
unfortunate participants.

The insurance contract is not based on the concept of participation. It is a term states that
when an insurance policy is purchased and a premium is paid, the insured will be covered by
the insurance provider if anything bad happens to it. Protected person would buy a policy and
pay the premium charged either through a lump sum or in installments. This premium will be
collected insurance funds and the insurance company will use the accumulated amount of
insurance funds to pay claims, management expenses and other expenses.

B. Concept of Justice

In takaful, there is justice because there are no elements that can make the participants or the
takaful operator feel marginalised. The takaful, for example, is mentioned in the contract.
Participants may terminate the deal at any time, and money from their account, as well as any
benefits, will be returned to them.

If a policyholder stops paying premiums before a certain time span, the money paid in annual
premium payments will not be refunded. as well as the profit-sharing principle.

C. Elements of Riba

The absence of a Syariah advisory body in the insurance institutions that monitors the handling
of the money received from the premium payer is one of the key reasons for this insurance
contract being questioned.

This condition does not arise in the takaful industry because of the Shariah Advisory Council
at the national level, as well as the organisation that advises and monitors the conduct of the
affairs of takaful funds to ensure that they are only invested in syariah-compliant instruments.

2 
2.0 ISSUE 1: Low number of consumer who obtain takaful product.

The Islamic financial institutions play a significant role in developing and implementing Takaful
concept through the entire world. But currently, it seems like that Islamic financial institutions
are not putting too much effort in developing Takaful. Actually ,one of the biggest challenges
is creating customer awareness. Many Muslims live under the misconception that insurance
and takaful is eligible to the principles of Islam, yet people often confuses insurance and
takaful product as the same thing.

People have to be made aware that takaful provides an acceptable religiously validated
solution. Similarly, non-Muslims need to be made aware of why takaful is ethical. Despite all
these efforts of Islamic financial markets, many consumers are still unaware the concept of
Takaful. Some of them they even do not know that there is Takaful. Many consumers are still
stick to conventional insurance, and they adopt more than Takaful which is Islamic insurance.
In order to decrease this challenge, it is mainly important to address educational issues
surrounding Takaful and also to develop consumer awareness.

According to research conducted, 70% of Malaysian people aware about the existence of
takaful product but only 34 percent acquired takaful product compare to 46% who acquire
conventional insurance product. The aim of this report is to expose the reason of low number
of consumer who obtain takaful product.

3 
2.1 Causes, Evidence of the Problem and the Solutions to Low number of consumer who
obtain takaful product.

First cause : Shortage of talent in takaful industry.

Shortage of talent and manpower is a long time issue in Malaysian takaful market. Shortage
of talent in takaful industry affect takaful company to attract customer to obtain takaful
products.

Evidence : According to PwC (2008), takaful industry is facing a severe shortage of qualified
staff who are able to understand both technical insurance principles and have an adequate
awareness of Islamic law and finance. Ernst and Young (2015) further reported that getting
people with the right skills is a challenge, especially those with financial reporting, analytical
and business acumen skill.

Solution : Takaful products should trained their agents with basic skills such as communication
and marketing skills to ensure their agents could deliver their message as takaful agency and
attract customer to purchased their products. Another possible effort that should be taken to
minimize the shortage of talent is to ensure graduates from the certified programs such as the
Chartered Professional in Islamic Finance, Certified Shari’ah Advisor and Certified Shari’ah
Practitioner is ready and able to join the takaful workforce.

Second cause : Limitation of takaful product.

People are afraid to participate in Takaful plans because they believe they will be unable to
locate things that satisfy their demands. Furthermore, the lack of affordable Takaful products
for low-income earners appears to influence and dissuade people from entering the Takaful
sector.

Evidence : The evidence for the above statement can be found in the BNM financial stability
report 2010, where the net income from Takaful policies or products amounted to RM4.03
billion, which is significantly lower than the net profit of conventional insurance, which was RM
31.92 billion, due to a lack of product variety.

Solution : The solution for this issue is to widen takaful product and create new product that
may cover risk problem to increase their product.

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Third cause : Lack of awareness

Low levels of public awareness is a number one challenge facing takaful operators. In
Malaysia, various literature have been documented that lack of awareness is one of the factors
that hinders further development of takaful market.  Many consumers are still unaware of
Takaful as an alternative, and some view Takaful as commercialisation of conventional
insurance into the Islamic world and reject the notion that it is a Shariah-compliant instrument.

Evidence : According to a study conducted by Hamid et al (2001) on Malaysian consumer

awareness and understanding of Islamic banks, the majority of Malaysian clients were
unaware of the differences between Islamic and conventional bank products, although the
plurality were aware of the presence of Islamic banks in Malaysia and their products. Despite
the fact that half of the respondents worked with Islamic banks, they had little knowledge of
the Islamic financial products.

Solution : To build market awareness, Various campaigns and programmes like a

collaboration with other organization have been initiated with the aim to increase public
awareness on takaful. For example, under community engagement, Malaysian Takaful
Association and Etiqa Takaful Berhad have jointly organized the Jalinan Takaful Iftar
Ramadhan event on 12 June 2017 with the aim of engaging the targeted communities to
create takaful awareness within their locality. Further, The education program should work
quite effectively with a strong disclosure mechanism that have such a proper tools (effective
IT system, effective social communications, listening to participants expectations, and
educated sales personnel and intermediaries) to disseminate the required information to
participants. For instance, Universiti Teknologi Mara (UiTM) introduce and provided course
related to takaful, Introduction to Takaful (INS510) to introduce the concept and application of
Islamic Insurance and expose the importance of takaful compared to conventional insurance
to the students.

Fourth Causes : Lack of people knowledge about takaful.

Even though Takaful business started in 1984 in Malaysia, the percentage of Malaysians
buying. Takaful products is quite low compared with the conventional insurance. Many
promotions of Takaful products via the electronic media just started in recent years. Takaful
Operators still have a slow pacing in getting to growth compared with their conventional
insurance counterpart. One of the reason people still confuse and thought conventional
insurance.

5 
Evidence : Only 60 % Malaysians acknowledge about the existence of takaful according to
research made by Institute of Islamic Banking and Financial academic, the article of
Awareness and Knowledge of Takaful in Malaysia: A Survey of Malaysian Consumers.

Solution : Because necessary information has not been properly transmitted to the public, the
problem can be rectified by teaching the public on Takaful activities, product qualities, and a
range of other elements through constant advertising and education.

Fifth Causes : Financial problem

Most of Malaysia are middled income and low income person. Lack of financial surplus to
obtain takaful product lead to low number of takaful holder among Malaysians.

Evidence : World bank group research indicated that The percentage of adults surveyed who
indicated that they purchased a life insurance or takaful policy declined from 18 percent to 16
percent. These findings show that while financial inclusion has increased significantly since
2011, certain gaps remain, particularly among the low-income segment, where affordability
remains a challenge.

Solution : Malaysia should emphasized their financial management by prioritizing essential

element such as obtaining takaful product

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3.0 Issue 2 : Preferences Towards Conventional Insurances Compare To Takaful Product.

Takaful had established in Malaysia since 2007. Currently, the Takaful industry in Malaysia
faces strong competition from the established conventional insurance industry in several key
areas. The lack of an adequate secondary market for Shariah compliant investment uniform
regulatory infrastructure and a lack of research are some of the key issues hindering effective
product development in the industry.

Takaful products also can provide an alternative source of insurance cover for Muslims, with
offering same benefit, goals and protection just like conventional insurance offer to non –
Muslim.

Although the establishment of takaful industry offer Muslim to have Takaful product, yet people
still prefer to choose conventional insurance due to several reasons. Confusions of Muslim
people toward similarities and difference between Takaful and conventional product still
emerge due to lack of knowledge and exposure toward both industry.

7 
3.1 Causes, Evidence of the Problem and the Solutions to Preferences Towards Conventional
Insurances Compare To Takaful Product.

First cause : Misconceptions that Takaful is only for Muslim.

Takaful, despite its long history in Malaysia and throughout the world, is often perceived in a
jaundiced light, largely due to its religious connotations. More often than not, many non-
Muslims dispel the notion of even exploring Takaful because they think it is religion-exclusive.
This could not be further from the truth; Islamic financial institutions would never turn away
someone of a different creed.

Evidence : According to research made by Institute of Islamic Banking and Financial

academic, the article of Awareness and Knowledge of Takaful in Malaysia: A Survey of
Malaysian Consumers. They found that only 60% of Malaysian aware that takaful is for
everyone regardless of their religion or races.

Solution : To truly understand what sets Takaful apart from conventional insurance for the
non-Muslim, one must understand its origin. The concept of Takaful dates back to even before
the establishment of Islam, when Arabic traders pooled their funds to hedge one another
against risks during trade voyages. Today, the system has evolved while adhering to its moral
principles to become a financial tool alongside conventional insurance. The major difference
is that it utilises applied Islamic principles such as the avoidance of gambling and usury in its
investment portfolios. In other words, it functions the same as conventional insurance, in that
it provides financial protection, but is a more socially conscientious alternative due to its origin
and moral elements.

Second cause : The objective of Takaful is different from conventional insurance

One common perception of Takaful among Malaysians is that it loses out to conventional
insurance in protecting our interests, since it has difference objectives, and is not governed by
the same bodies.

Evidence : Takaful operator faced difficulty to offer product because consumer wrong
perception about takaful product that differ from conventional insurance.

Solution : People should know the truth is that Takaful aims to do the exact same thing as
conventional insurance that the aim is to insure us. Just like conventional insurance, we pay
premiums in to manage our risk in the event something happens to us.

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Third cause : Perception that conventional insurance was Syariah compliance product.

Many Malaysians thought conventional insurance is Syariah compliance and free from non-
Islamic element such as gharar and riba. Life insurance product was one of the non-Syariah
product that was acquire by many Muslims in Malaysia.

Evidence : Around 10% of conventional insurance customer recorded as muslim.

Solutions : The problem can be solved by educating the public about Takaful activities, product
characteristics, and a variety of other factors through constant advertising and education, as
the relevant information has not been properly circulated to the public

Fourth cause : Unavailability of takaful product to cover certain risk.

Takaful company still offer lack of product compare to conventional insurance. The
unavailability of takaful product such as aviation risk product for aviation forced airlines
company to choose conventional insurance product.

Evidence : According to IATA, the body who govern aviation sector. It states that there was
no takaful product that offer by takaful company.

Solutions : Introducing new takaful product for certain risk such as aviation. In 2018, Malaysia
Airlines, Etiqa and Cover-More have today announced the launch of MHinsure Travel Takaful,
the first Takaful travel protection product in Malaysia to be offered by an airline.

Fifth issue : Lack of trust from customer due to short duration of takaful industry

The establishment takaful industry has only been around for 15 years in Malaysia, while the
insurance industry has been around for over 50 years. This will undoubtedly impact the degree
of penetration into the local market.

Evidence : The evidence to support the above statement is due to the fact that there has
takaful operator only start-up in 2000 and they were monopolising the market fully with no
other competitors and this lead to the failure of anticipating a high penetration rate. In fact, the
count should start in 2007, when the local market had eight Takaful operators at one time.

Solutions : The solution for the issue is that in order to boost overall Takaful penetration, the
government should increase more players in the Takaful market to provide better potential for
increased penetration among Malaysians as well as for Malaysia to lead Takaful globally. They

9 
should also increase Takaful promotion work among non-Muslims to show that Takaful goods
are for everyone and not just Muslims

10 
4.0 Conclusion

In conclusion, Takaful is the means of bringing the social and economic benefits of modern
insurance coverage, in a form consistent with their religious beliefs, to Muslims and to the
emerging economies of many predominantly Muslim countries. Takaful is essential if
insurance provision is to support the development of Muslim economies of Asia, Africa & the
Middle East and lift millions of people out of poverty.

Few issues have been highlighted and discussed along with providing solutions for the benefit
of the Takaful industry. One of the issues is low number of consumer who obtain takaful
product.. The problems that being debated including lack of knowledge of Takaful industry,
financial problem, Shortage of talent in takaful industry, limitation of takaful product and lack
of awareness

Another issue that highlighted is Preferences Towards Conventional Insurances Compare To

Takaful Product.. The problems that being emphasised are Misconceptions that Takaful is
only for Muslim, The objective of Takaful is different from conventional insurance, Perception
that conventional insurance was Syariah compliance product, Unavailability of takaful product
to cover certain risk, Lack of trust from customer due to short duration of takaful industry

The takaful sector promises to continue its rapid expansion. However, the sector should not
ignore the dangers this growth presents. It is therefore vital that address all this issue and
make few effort to tackle it. Funds must also expand their size and capital base, develop their
human resources and expand distribution networks if they are to facilitate continued
sustainable growth.

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 References

Salman, S. A. (2018, November). Awareness and Knowledge of Takaful in Malaysia: A

Survey of Malaysian Consumers. Researchgate.

https://www.researchgate.net/publication/329798114_Awareness_and_Knowledge_of

_Takaful_in_Malaysia_A_Survey_of_Malaysian_Consumers

H.A.A. (2014, August 19). A comparative study of Takaful and conventional insurance:

Empirical evidence from the Malaysian market January 2014. Researchgate.

https://www.researchgate.net/publication/262791369_A_comparative_study_of_Taka

ful_and_conventional_insurance_Empirical_evidence_from_the_Malaysian_market

Husin, M. M. (2019, June 18). The Dynamics of Malaysian Takaful Market: Challenges and

Future Prospects | Journal of Islamic Finance. Journals.Iium.Edu.m.

https://journals.iium.edu.my/iiibf-journal/index.php/jif/article/view/352

M.C.M.S. (2016, January). The Significant Contribution of Islamic Relationship Marketing

Practice in Malaysian Takaful Industry Towards Determining Customer Gratitude, Trust, and
Commitment. Researcgate.
https://www.researchgate.net/publication/311988790_The_Significant_Contribution_of_Islam
ic_Relationship_Marketing_Practice_in_Malaysian_Takaful_Industry_Towards_Determining
_Customer_Gratitude_Trust_and_Commitment

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