Takaful insurance: an alternative to the insurance business

Takaful insurance

Takaful insurance practices existed in the Arab world before the era of Islam, and they were not
objected to in Islam. The recent practice of takaful emerged in 1979, and there
are now more than 300 takaful operators across the globe. The objections to
riba al-Hadith, maysir, and gharar are valid when a contract is commutative, as
it is in conventional insurance. Therefore, the objections of riba al-Hadith,
gharar, and maysir do not exist about takaful.

The word
Takaful is derived from the Arabic root word kafala, which means a guarantee.
Takaful means mutual protection and joint guarantee. Takaful is a
Shariah-compliant arrangement whereby individuals in the community jointly
guarantee to protect themselves against future loss or damage. There are three
key parties involved in any takaful arrangement are, the participants, the
takaful fund, and, the takaful operator (the company or professional managing
the fund).

What
distinguishes Takaful Insurance from Insurance?

Insurance is a
sale and purchase agreement in which a client pays a premium to the insurance
company in exchange for coverage. The sum assured could be the value of a car,
a house, or a piece of equipment. It could also be the contractual amount that
a company is required to pay to the client’s family if the
client dies. There is a contract of tabarru, which means the donation, in takaful.
As a result, we can say that takaful is a tabarru-based contract, whereas
traditional insurance is a compensation contract.

For example,
suppose a company has 100 employees, all of whom own a car. For example, the
premium for an insured car is $20,000 per year. Instead of paying the insurance
company $ 2 million (100 x 20,000), the employee established their own takaful
fund and invested its money. They agree that if any of their vehicles are
damaged or stolen, the takaful fund will compensate the vehicle’s owner. The
risk has not been transferred to any person or legal entity in this case (as is
the case when transferring risk to an insurance company). Instead, the risk is shared by all of the employees, who each contributed USD 20,000 to the takaful
fund. As the number of takaful participants grows from 100 to 1000, 10,000,
100,000, or more, the task of collecting contributions from participants and
paying compensation from the takaful fund grows in size, necessitating the use
of experts. As a result, the takaful fund participants decide to hire a company
that has experience collecting contributions to takaful funds and arranging
compensation payments. In exchange for the company’s services, the participants
agree to pay a fee. They hire the company to pay compensation from the takaful
fund and, if the fund is depleted, to solicit additional contributions from the
participants. As a result, the takaful fund is owned by the participants, while
the company only manages it.

Takaful and
insurance differences

Potential of
Takaful Market

The takaful
market is currently concentrated in Malaysia and the Middle East, where it is
experiencing rapid growth. There are currently more than 130 takaful companies
operating globally, with nearly half of them based in the GCC countries of
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. The growth rate of
takaful in these countries outpaces that of the region’s conventional insurance
market. In terms of takaful, the market is expected to be worth $4 billion in
the next few years at the current rate of growth, up from about $170 million
today.

In some
Muslim-majority countries, such as Nigeria, Pakistan, Egypt, and Bangladesh,
the takaful market is still in its infancy. These are almost entirely untapped
markets, with insurance penetration hovering around 2% of GDP. Some estimate
that the global takaful industry is growing at a rate of 20% per year, far
outpacing the 2.5 percent annual growth rate of conventional insurance premiums.
According to Moody, global takaful premiums will reach $7 billion or more in the coming years.

No insurer can
afford to ignore the world’s 1.5 billion Muslims as a potential customer base.
In contrast to most Western countries, the majority of the world’s Muslim
population is young. In fact, 60 percent of the world’s Muslim population is
under the age of 25. This young population is beginning to attain a certain
level of affluence, and if captured early, it has the potential to be a
customer base that can be retained for 40 years or more. The fact that most
Muslims are uninsured is also a significant draw for potential takaful
operators. Premiums in the developed world, including Japan and the Asian
“Tiger Economies,” average 9.3 percent of GDP Premiums account for
only 3% of GDP in the Middle East, Africa, South, and East Asia. Takaful growth
forecasts vary, but most market forecasters expect the current level of
worldwide contributions written by takaful insurers, estimated at roughly $2.0
to $2.6 billion in 2006, to skyrocket to $7.0 billion or more by coming years.