Takaful Articles

Number 21: June 2010

CRITICAL ISSUES AND SUCCESS FACTORS FOR TAKAFUL

K.M. Mortuza Ali

Managing Director
Prime Islami Life Insurance Ltd
Bangladesh
www.primeislamilifebd.com

Takaful (Islamic insurance) has been designed to help and stabilize the financial situation
of individuals, families and organizations. A growing Takaful and retakaful market is an
instrument for economic growth in Islamic Countries
It is obvious that Takaful is a suitable alternative of conventional insurance for the
Muslims. But the pertinent question is that how best it can serve the needs of the
community? There is no doubt that Takaful has a vast potential for growth and this
potential will definitely increase in the years to come.
We have identified several success factors for Takaful. However, before narrating those
factors, we need to ask ourselves, how far we have succeeded in achieving the objectives
of Takaful during the last few decades.

Critical Issues

Are we Shariah compliant?

The most pertinent question for a Takaful operator is to ask itself whether it is operating
100% on the basis of Shariah. This is simply because the distinctive feature of Takaful
system is that it has to be operated in accordance with Shariah. If Shariah is absent from
the Takaful operation, Takaful does not exist. Unfortunately there are many issues in
Takaful where a uniform ruling of Shariah is still not available. Who should be blamed
for that? What I feel is that it is not a matter of blame, rather it is the responsibility of the
management team of a Takaful operator that all the issues which appear not very clear as

to its permissibility from Shariah point of view, should be placed before the Shariah
scholars for resolution, at the earliest possible time.
The main objective of Shariah is to construct human life on the basis of virtues (Marufat)
and cleanse it of the vices (Munkarat). Unless we clean the operative system of

Takaful from all or any of the vices, we can not claim that we have achieved
success.
Are we engaged in Ijtihad?
While we are talking about Shariah compliance we must make a vow that we engage
ourselves in Ijtihad. We are passing through a process of evolution in Takaful. Our
Shariah scholars must be made available to all the details of various modes of operation
and financial transaction in order to formulate Shariah based alternatives of conventional
financial transactions.
Because, Ijtihad is the everlasting tool of Islamic dynamism, Muslim jurists and Shariah
scholars need to exercise their legal reasoning to formulate new ideas and alternatives of
conventional financial transactions. Commercial and financial transactions are constantly
developing from one generation to another to meet the needs of society. Market practices
are different from country to country. There are also differences in laws, rules and
regulations.
Shariah law is not intended to resist to all the changes that take place in the society and in
the business world. We need to respond to these changes to sustain the relevance of
Islamic law. It must be remembered that there is a great demand for Shariah compliant
products to cover risks of life, property and liability. Takaful companies have been
established basically to meet the demand of the Muslim Ummah.
What is most important is to understand that insurance/Takaful in its present form was
not existing during the Prophets (peace be upon him) time . Therefore, Ijtihad is

necessary to shape the Takaful system purely as per Shariah ruling.

What about effective human resource?

Most of our management professionals in Takaful are brought from conventional

insurance companies. In the majority of cases their mindset are more tuned with the
conventional system.
Top management and executives of Takaful operators must be fit, proper, honest,
competent and capable to comply with Shariah, regulatory, legal, accounting and
underwriting matters. Furthermore, they ought to be committed and courageous to go
ahead with the edges of the Takaful system for the betterment of their customers and all
the stakeholders.

How transparent are we?

Transparency is a unique feature of the takaful system. Therefore, it is necessary that we

ask ourselves how transparent we have been in all aspects of Takaful operation. We must
remember that transparency and accountability can make Takaful more trustworthy and
can create confidence among the customers. Areas of extra clarity can include:

How participants contributions are separated from shareholders fund

How the Takaful fund is being managed
How the surplus amount is distributed
How karje-hasana from shareholders fund can help to overcome unexpected
financial difficulties
How the tabarru fund is being utilized

When we are transparent, we earn confidence; we become more conscious and efficient
in managing the peoples fund. Trustworthiness of the Takaful system, in comparison to
the conventional system ought to be very high. Generally people who are involved with
Shariah based financial systems are supposed to be more accountable to their conscience,
because they should feel that for any misdeeds and or negligence in managing the affairs
of Shahib ul Maal, (the customers) they will be held responsible on the final day of
judgment.

Are we ready to compete with the conventional counterpart?

Takaful operators need to create a deeper understanding and awareness among the policy
makers as well as amongst the general public. We shall have to make it very clear what
role takaful can play to improve the socio economic well being of the Ummah. In most
of the Muslim countries people are poor and cannot afford to save. Risk protection is
more required to those who are poor or ultra poor. Therefore, we shall have to promote
micro-takaful to popularize the Takaful system amongst the poor people. Micro-Takaful
has to operate on profitable basis, if we are to compete with conventional insurance.
Use of Information Technology is the prime requirement to make the Takaful system
dynamic, sound and transparent. Takaful operators must take advantage of Information
Technology and adapt themselves with the advancement in this sector. This will help
them to provide best quality services to the customers.
Regulatory authorities of respective countries need to frame appropriate laws, rules and
regulations for the day to day operation of Takaful operators. Takaful being a new
concept has to be brought under the prudential regulatory system.
Peoples trust and confidence in the Takaful system is one of the primary determinants of
soundness and stability. Therefore, Takaful operators must come up with product
innovation and ensure excellent customer service. In order to be competitive Takaful
operators must try best to fulfill these basic requirements. We cannot succeed, unless we
are competitive.

Critical Success Factors

Considering the realities and constraints on the way of growth in Takaful, we have
identified five critical success factors for Takaful as follows:

Government support

Governmental support is necessary to protect the policyholders who buy Takaful

products because they feel that it is 100% Shariah compliant. Governments must ensure
that Takaful system keeps its identity in line with Shariah otherwise the policyholders
will be deceived. Some Governments in the gulf and south-Asian countries are
encouraging its development by framing appropriate laws and regulations for Takaful.
Malaysia, Bahrain, Pakistan, and Sudan are now having a legal framework for Takaful. In
Bangladesh, the government is currently working on formulating appropriate regulations
for Takaful.
In most countries there is no legal framework for Takaful. There is also an absence of
standards on corporate governance, accounting and auditing guidelines for Takaful.

Conducive environment

Takaful will continue to grow along with the growth of the Islamic financial system. It
appears that the Islamic financial system has attracted many scholars and professionals
from the east & the west. This will grow further in the coming decades and, therefore,
Takaful will take its place in the Islamic financial map in a big way.
The Takaful industry has emerged as an important component of the Islamic financial
system. The development of other components has provided a conducive environment for
Takaful to grow. Islamic banking, Islamic capital market, Islamic bonds, Islamic assetbased securities together with a sound legal, regulatory and Shariah framework will
continue to facilitate the industry in sustaining its rapid growth.

Acceptability to non-Muslims

An interesting development in Takaful is that it has also attracted the non-Muslim

community. Therefore, the market for Takaful is not limited to 20% of the world
population. The horizon of the Takaful market will expand gradually throughout the
world because of its unique features of profit sharing, transparency & accountability to all
the stakeholders.
In Malaysia, Singapore, Sri Lanka, Bangladesh and in many other countries, we observe
that a large number of Takaful customers are non-Muslims. Furthermore, many of the
non-Muslim agents are now engaged in selling Takaful products. In Bangladesh, nonMuslims are members of the Board of Directors of the Takaful operator and Takaful is
acceptable to all communities and faith. This is because Islam does not forbid non-

Muslims to enjoy halal products and services. This is one of the key success factors for
Takaful. The universality of Islam and Shariah concepts make non-Muslims a

promising and potential market of Takaful.

Cost & benefit

An essential feature of all Takaful models is participants sharing of the underwriting

surpluses/deficits. While contributions are fixed on the basis of historical experience, risk
exposures, overhead expenses and estimates of return on investments etc, a portion or
entire underwriting surplus need to be given back to those who contribute to the Takaful
fund. It is likely that earlier participants will contribute more to stabilize underwriting
results for later participants. This is natural because while following the principles of
cooperation, some should sacrifice for the betterment of the other.
Apart from the underwriting surplus, the participants are paid back (for long-term
policies) a portion of investment profit. Thus the principles of equity, justice and fair play
are maintained in the Takaful system. There must be a general feeling among the
participants that their interests are well protected in the hands of the Takaful operator, as
they are required to ensure that the Takaful fund is properly managed within the accepted
risk management and Shariah framework.

Ethics and morality of the management team as a whole of any Takaful

operator ought to be very high. They must ensure maximum benefit for
customers at the least cost.

Trust & confidence

The general publics adoption is essential to achieve sustainable development. The

takaful system can facilitate such participation by making its services both acceptable and
accessible to the public. Peoples trust and confidence in the Takaful system serves as a
primary determinant of the systems soundness and stability. Therefore, Takaful
operators are now offering a wider range of products to meet the needs of the customers.
Product innovation and excellent customer service will remain key enablers for the future
growth of the industry. Naturally operators are keen to take on these efforts with the
recognition that public acceptance is the key to the success of Takaful.
It is necessary that all the players in Takaful market believe that they are engaged in
Takaful not because of worldly gains only but for getting rewards from Almighty Allah
and following the principles of Shariah. Trust and confidence of people can be gained
only through enhancing efficiency and the image of the corporate body engaged in
Takaful business.

Nota bene
The majority of the population in Islamic Countries suffers from the common attitude
that insurance is unacceptable due to the lack of awareness about Takaful. In most of the
Muslim dominated countries insurance still accounts for around one percent of the
countrys GDP. However various surveys have shown that the life and general insurance
market for Takaful has large potential to be exploited. This is only possible when this
innovative form of insurance will add equal and better values, as compared to the
conventional insurance offering.
Takaful operators need to ensure better products and services to all at the least cost. This
has to be the end result of Takaful operation. Even if, customers are ready to pay more
for benefits, the philosophy of Takaful is not to make more gain at the cost of
participants. Takaful is to play its role for a noble cause i.e. to provide aid and assistance
on the basis of cooperation, brotherhood and solidarity.

There is no substitute for sincerity in Takaful.

If you would like more information on ICMIF and its services to the takaful sector,
please contact Sabbir Patel (sabbir@icmif.org), or visit www.takaful.coop.
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Not to be reproduced in part or whole without express written permission.