Why takaful has not been successful

By: Humayon Dar Friday, 4 Nov 2011 12:44 am |

From: http://www.pakistantoday.com.pk/2011/11/why-takaful-has-not-been-successful/(accessed 5 November 2011)

Insurance is considered prohibited in Islam and some of the objections to conventional insurance are:

a)       The contract of insurance does not pass the criteria of validity as any valid contract in Islamic law must specify unambiguously the consideration, the object of sale and its delivery time and place. In the case of insurance, while price (premium) and schedule of payments are known with certainty, it is not known when the object of sale will be paid if at all. This is considered as an example of contractual uncertainty or what is more commonly known as gharar in Islamic law.

b)      Some scholars oppose conventional insurance because of its similarity with gambling. One feature of gambling is the fact that the gamblers pool their money so that one benefits from this pool at the expense of others, contingent upon the outcome of a stochastic process. The only difference is that the stochastic process to draw the “lucky” person is not a game but an event (like theft or loss of life).

c)      Some other scholars deem insurance as something equivalent to riba or interest. The contract of insurance can be seen as payment of unequal quantities of money by the insurer and insured, which is precisely riba. A simple riba-based transaction would involve payment of X pounds by a party A to another party B who repays party A either less or more than X pounds, whether on spot or deferred. In case of insurance, the amount of premium is normally significantly less than the value of the item insured.

Given these perceived issues, one must have thought that takaful – an Islamic alternative to conventional insurance – would have become an automatic choice for the Muslims who are looking for modern shari’a. The question arises as to why it is taking so long for the takaful industry to take off; why aren’t there enough investment vehicles for takaful companies to invest in? This is no longer an embryonic industry, yet it hasn’t grown as quickly as the Islamic bond industry.

Following are possible explanations;

1)      Takaful has not been able to attract an influential founder or champion as Islamic banking fortunately had. Starting right from the beginning, with Dr Ahmed El Naggar to Sheikh Saleh Kamel, Chairman of Dalla Al Baraka Group and the recipient of the first Royal Award in Islamic Finance, Islamic banking has received a lot of support from many influential figures in banking, academia and lately from governments as well.

2)      Insurance is a relatively small sector whereas Islamic banking & finance has flourished. Insurance is considered as a “luxury” good and hence is considered for purchase only by those who are in the upper-income and wealth brackets. As such families are already better off economically, they prefer not to opt for insurance and rather prefer to invest in property and family business as a form of insurance and life cycle risk management.

3)      This leads us to another related point – the effective market size. In the developing Muslim countries, only public sector employees are forced to save in the form of their pension and social security contributions. Public sector employment is only a fraction of the total employment in these countries, which rather restricts the market size for insurance and related products.

4)      A right takaful model has yet to emerge. Mudaraba, wakala and hybrid models are not entirely convincing. The over-blown trumpet for mutuality in support of takaful has not lured any significant number of users for takaful products. This has also kept a number of conventional players out of the market because mutuality is facing a downfall. This demand-supply double edge drag has not been helpful for the growth of the takaful industry.

5)      In absence of the right kind of assets for investment by takaful companies, takaful operators have found it difficult to generate impressive returns on their investment or endowment funds. This has obviously not been helpful for generating more demand for endowment policies by the Muslim masses.

The observed growth in takaful has not been as expected by many industry players. In countries such as the UK, where one Islamic insurance initiative has recently failed, immediate future of takaful business is rather bleak. However, there is significant potential in other countries including Pakistan. With the increase in availability of Islamic financial services, the demand for takaful profucts is bound to increase.

Awareness of takaful as a viable shari’a-compliant insurance solution is also on a rise, which should help future growth. The growth prospects are bright in the countries where Muslims live in great number and proportion. But it will take a few years for the industry to have the popularity enjoyed by Islamic banks.

The writer is a freelance journalist and economic researcher. He can be reached at rizmaqs@gmail.com

2 responses to “Why takaful has not been successful

  1. Respectfully there appears to be an erroneous comparison between “general and life” insurance (“insurance”) of the western capitalist model and Takaful (a guarantee and indemnity arising from a early Arabic customary practice).

    There is little in the operational differences between Takaful and insurance except for the use of words as guarantee and the so called uncertainty that general and life insurance provide in its products. The main difference being the interpretation of the type of contract that binds the insurer and the beneficiary.

    The criticism here that relates to the incompatibility between Takaful and western life and general insurance is that western general and life insurance contracts are uncertain. It is not the case.

    Thee contracts (western) are conditional but not uncertain. They are conditioned upon (in the case of life) the occurrence of an event that cannot be uncertain. Death is not uncertain. It will occur, but when cannot be specified. It nonetheless will.

    As for general insurance purposes the events may be said to be uncertain. A theft or burglary or accident may not occur. But that does not render the contract between the insurance company and the insured uncertain. The objects are certain. The time of the occurrence of the event insured against is not. That is clear. But in a good insurance contract, there is always the benefit and incentive to avoid claims with no claim bonuses and lower premiums for taking are and avoiding a claim situation.

    My understanding of Takaful is that Takaful operates in much the same way at the insurance company level except that it operates more on a mutual basis which many insurance companies still do to some extent. However the difference with the western model is that Takaful is founded on mutuality.

    In the western model insurance company shareholders are not necessarily its policyholders and vice versa. Therefore they the western insurance companies are profit driven and not welfare driven.

    Perhaps Takaful should be explored a little more in order that it is more attractive to not just Muslims but non Muslims alike. It certainly has numerous other benefits which can be explored and explained in greater detail to the non Muslim market in order that it become more attractive by being understood to the larger community and thus prosper as a new and more socially complaint product.

    In the end it is the quality of the product that we supply to the public that matters. Not the individual interpretations of the technicalities of the agreements that bind them, although these are important.

  2. Robert Hannah

    – a “donation” by an individual or company to obtain insurance coverage from a takaful is not a freewill offering without counterpart, it is the purchase of a service. Similarly, a “donation” by a takaful operator to compensate for an individual’s loss is not a freewill offering, it is the obligatory fulfillment of a contract. If you do not make the donation, you do not get the coverage. It is a quid pro quo.

    – The chains of reasoning used by scholars to link Koranic references to gharar and gambling to insurance are tenuous and fragile. There is no clear reference to gharar in the Koran. Hadith references are to such things as selling unborn animals in the womb and the results of a future harvest – things which have little relevance to modern insurance.

    – Scholars who link gambling to insurance show a poor understanding of risk management. In an important sense, the motives for gambling and insurance are opposites. Gamblers exhibit risk preference. Purchasers of insurance exhibit risk aversion. Insurance payoffs are contingent claims, which are not the same as random events, as the other commentator notes. It is clearly a mistake to equate gambling and insurance payoffs.

    Both conventional insurance and takaful minimize uncertainty. When the insured peril occurs – my house burns down – I suffer a great and unexpected disruption to my life and loss of wealth. Home insurance helps me replace my accommodation, thus greatly reducing the loss I have suffered. Similarly for life insurance – it reduces the risks for beneficiaries who would suffer great uncertainty in their lives if an income earner dies. The problem lies with some Islamic scholars’ myopic focus on the form of the insurance contract, rather than the full scope of its intention and operation when its triggering event occurs. This narrow focus on contract form has been discussed in depth by Mahmood el-Gamal, a professor of Islamic studies at Rice University; see his “Islamic Finance: Law, Economics, and Practice” 2009.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s