The problem is that only a small percentage of people among the market’s potential customers and distributors understand the concept or its product offering.
The term Takaful refers to Islamic insurance, although those wishing to promote it to a wider global audience prefer to call it cooperative insurance. It covers the full spectrum of insurance products, from life insurance to home, business and automotive policies. What distinguishes this body of insurance products from more conventional policies is its adherence to fundamental principles governing risk and reward enshrined in Shari’ah law. These principles include the avoidance of uncertainty, gambling and the charging or receiving of interest.
Changing social needs
The basic Takaful concept of pooling the resources of the many to help victims of adversity has been practiced in Muslim society for over 1,400 years. However, until very recently, many Muslims believed that since society had an obligation to support its less fortunate members, individual insurance was unnecessary. This ambivalence was reinforced in the early 1900s when Islamic scholars in the Arab countries reviewed conventional insurance products and declared them unacceptable under Shari’ah law, which meant that even those who wanted to plan for their future capital accumulation and risk protection needs had limited or no options available.
Over the ensuing decades, society in traditionally Muslim countries changed alongside the rest of the world. Growing affluence and a younger population, combined with a break-up of extended families as younger members gravitated to urban areas, challenged traditional community-based support systems and stimulated demand for wealth accumulation opportunities. As these demographics and life styles evolved, the hunt was on for banking and insurance products that would meet the modern needs of the estimated 1.5 billion Muslims in the world. It was not until 1985, however, that the Grand Council of Islamic scholars in Mecca approved Takaful as an insurance system that complied with Islamic law.
“As consumers become increasingly aware of the availability of Takaful, the industry has shown very robust growth,” says Jaffer. “According to the World Takaful Report 2009, recently published by Ernst & Young, Takaful contributions posted an average compound annual growth rate of 30 percent between 2005 and 2007.”
The main countries showing this impressive growth rate are the countries of the GCC (Bahrain, Qatar, UAE, Kuwait and Saudi Arabia), with accelerated growth rates also being experienced in Malaysia, where an estimated 50 to 60 percent of the population is Muslim. The trend in Malaysia is of particular interest to industry experts forecasting the growth potential in non-Muslim countries, because a staggering 60 percent of Takaful customers in that country are non-Muslims. “This demonstrates that the market potential for Takaful in Europe goes well beyond the 16 million Muslims living there,” comments Jaffer.
Takaful allows Muslims to avail themselves of the protection offered through an insurance contract without violating their religious beliefs, but it also provides compelling benefits to both religious and secular customers. The main benefit is the provision for the sharing of any retakaful (reinsurance) surplus in case claims do not exceed the amount of money policy holders have put into the Takaful fund for investment. In conventional insurance, this surplus is generally shared between the insurance company and the reinsurer, with nothing returning to the policy holders. “For Takaful, depending on the model chosen, 100 percent of the surplus is shared among the policy holders,” says Jaffer. “For example, FWU group has redistributed over $200,000 of surplus from the pool to its policy holders in the last three years alone.”
Takaful is also gaining in popularity among both Muslim and secular customers who have an interest in supporting socially responsible investment (SRI). Islamic law precludes investment in companies which have activities that are considered unlawful or unethical, and that includes most of the business practices and activities that SRI funds would avoid: military, tobacco, alcohol and gambling. Both SRI and Takaful aim at greater transparency regarding the companies selected for investment, and both types of funds have seen performance improvements despite the recent recession in which conventional funds have shrunk. “The combination of an ethical investment policy, significant growth potential and price competitiveness could make for a compelling business proposition to non-Muslims,” Jaffer notes.
Challenges ahead
Despite this vast market potential, Takaful operators have some significant challenges to overcome before these products enter the mainstream in European markets. First and foremost is the lack of a standardised interpretation of what constitutes Takaful. “Currently,” says Jaffer, “each market has its own set of rules and regulations for Takaful and industry experts recognise the need to make them more uniform. The Islamic Financial Services Board has recently published an exposure draft in which it makes recommendations for common governance of the Takaful industry worldwide.”
The absence of an organisation to regulate Takaful also makes its implementation more challenging in European countries, where regulations form the backbone of the financial industry. Takaful’s adherence to Shari’ah laws and its different approach to accounting practices such as the distribution of surplus, will require analysis within both the legal and tax structures of each jurisdiction.
One help in this process is the number of major European insurance companies and banks that have a high degree of familiarity with Islamic financing practices and the cultural mandates behind them as a consequence of having large operations in predominantly Muslim countries. AXA in France, Zurich in Switzerland and Allianz in Germany all have high Takaful exposure, and banks such as HSBC, Crédit Agricole or BNP Paribas understand the huge potential of Islamic finance, as they all have operations in the Middle East and Asia.
However, in the majority of cases, Takaful remains deeply embedded within the overall financial operations of these global financial institutions, which typically offer the full range of conventional as well as Islamic banking services in non-Muslim regions. “Conflicts arise because very few of the leaders in the Bancatakaful sector have stand-alone sales forces able or willing to dedicate all their resources to the promotion and distribution of Takaful,” notes Jaffer. “Instead, we see distribution of Takaful through generalist sales teams that may also be promoting credit cards and current accounts, or Takaful-linked products through investment teams that are also responsible for the sale of mutual funds and other structured investments. In those situations, we need to level the playing field by offering sales incentives that are similar to those offered for conventional products.”
Perhaps more important is the need for training. The recent Ernst & Young report noted that “as with the wider Islamic financial services industry, Takaful continues to suffer from a shortage of human resources with the requisite expertise.” Progress is being made in some regions: the Islamic Banking and Finance Institute Malaysia offers a comprehensive training programme which looks at Islamic banking, Takaful and Islamic capital markets; and Bahrain’s Islamic Finance and Banking Training offers courses targeted at financial industry experts, which cover the applications of key Islamic banking and financial instruments. However, despite the success being demonstrated by these regionalised efforts, what is needed, Jaffer believes, is a recognised institute for Takaful and accreditation for Takaful professionals.
Strategic alliances
Meeting demand for Takaful requires a complex mix of liquidity, access to capital markets, established distribution channels and local cultural understanding, which is giving rise to a growing number of strategic alliances between regional and international organisations. Successful ventures are already operating in Malaysia (ING and Public Bank; Aviva and CIMB), the UAE (Zurich Financial Services with Abu Dhabi National Takaful; AXA with Salama) and Saudi Arabia (FWU Group and National Commercial Bank have established the Al Ahli Takaful Company).
“Global players benefit by widening their offering and tailoring it to the customer base in each region they operate in,” notes Jaffer. “The local providers are benefiting from the global outreach and expertise their international partners can give them. Both parties can then realise economies of scale without compromising the offering, which must always be structured to respect the Shari’ah standards.”
Customer awareness remains low, however, and this is often attributed to a limited understanding of Islamic finance in the banking and insurance world, an issue that is beginning to receive wider attention within the industry. Nearly 100 industry experts attended a recent seminar in Paris organised by the Institut de Formation de la Profession de Assurances (IFPASS) on the introduction of Islamic finance in France. Similar events are being held in most of the major Muslim finance centres, while in the UK, the Institute of Banking and Insurance has begun publishing a quarterly magazine called New Horizon, which keeps readers abreast of changes and developments in the Islamic finance industry. Several universities around Europe are also beginning to offer degree courses in Islamic banking and finance. And it is easy to see why the industry is waking up to this sleeping giant: based on calculations in the Ernst & Young report, if growth continues at the rate observed since 2004, the global Takaful market will reach a total value of $7.7bn by 2012.
