Improving the Takaful Sector In Islamic Countries

Abstract

EXECUTIVE SUMMARY Modern insurance had attracted the attention of Muslim scholars and economists, since the the 19th century, when the majority of Muslim countries were subjected to colonisation and therefore to illiteracy, ignorance, suppression and division by western colonisation and lost their civilizational lead. In the early Islamic societies, every member of the community was automatically insured by his relatives, neighbours and by the Islamic state against any misfortune that may happen to him. That is why some of the contemporary Muslim scholars, like Abdullah Al-Qalqeeli (1961), Shawkat Al-Ulayyan (1981), Suleyman Al-Thenayan (1993) and others think that there is no need for commercial or even Takaful insurance companies to exist. However, given the complexity of life and the need for organised insurance, contemporary Muslim scholars agree that solidarity and cooperation among the people are not only recognised but encouraged in any form possible, including organised insurance (Chachi, 2017). In this continuation, the demand for Takaful has been augmenting along with the demand for Islamic finance. Verily, the rapid development of Islamic finance has necessitated the need for Takaful or Islamic Insurance. Takaful operates in line with Shari'ah principles and, at the same time, offers the benefits and services equivalent to its conventional counterpart. Therefore, it has evolved in response to the ever-increasing for an insurance system that is Islamic and provides risk coverage for individuals and Islamic financial institutions (IFIs). For this reason, the study focuses, in particular, on the Takaful industry. The main objective of this study is to provide an analysis on the (i) theoretical and legal natures of Takaful, including the interpretation of various schools of thought on the comparison of conventional and Islamic insurance; (ii) detailed analysis on the current size and trends, structures, modes, and instruments of Takaful; (iii) operational aspects of Takaful business, a comprehensive and detailed analysis on types of Takaful structures, structural, regulatory and technical challenges facing Takaful sector; (iv) country analysis for the selected countries on Takaful market. Based on the analysis of Takaful, the study also provides policy recommendations on Improving the Takaful Sector in the Islamic Countries, members of the Organization of Islamic Cooperation (OIC) and related issues by taking into consideration case studies of three selected OIC member countries and one non-OIC country. The study applies various approaches to collect data and analyse the Takaful industry in the four case studies. This includes literature review, surveys with semi-structured interviews and structured questionnaires. The literature review is used to set up a framework for Takaful industry analysis for deriving the best practices. Surveys include both structured questionnaires and semi-structured interviews. The survey questions include the following sections: background information, challenges facing the Takaful industry, and company-level SWOT analysis. Four countries have been selected as sample countries to analyse the improvement of the Takaful sector. The sample includes three OIC countries: 1) Saudi Arabia with 100 per cent Takaful -based economy, 2) Malaysia with the dual banking and Takaful systems, and 3) Turkey with its emerging Islamic finance industry. The study also includes the United Kingdom (UK) as a non-OIC country – an economy with IFIs for more than thirty years. According to Thomson Reuters Report (2018), there are more than 1,389 full-fledged IFIs and windows worldwide. From 2012 until 2017, the Islamic finance industry has been recording a compound annual average rate of growth of 6%. It is also reported that Iran, Saudi Arabia, and Malaysia remained the most significant market contributors to top global Islamic banking markets in 2017. Consequently, with the fast growth of the Islamic financial industry, the Takaful market has gained a high momentum, even though Takaful contribution is still too small compared to other markets in the Islamic finance industry. Thomson Reuters Report (2018) also reported that the total assets of global Takaful industry grew up to US$ 46 billion in 2017 with 324 number of Takaful operating companies, including more than 112 General TakafulOperators (TOs) and 76 life TOs around the world. For composite Takaful, there are 113 composite Takaful and 21 Re-Takaful Operators (RTOs) around the world — the number of operators based on the total assets in the global Takaful market of 2017. With this significant number of existing Takaful companies, the insurance market is embracing new Takaful operators along with a huge customer demand for this sector in many countries. In this context, the study has analysed the performance and potentiality of four countries – three OIC member countries (Malaysia, Saudi Arabia and Turkey) and one non-OIC member country (UK) – regarding the economic and legal aspects, in order to comprehend the current development and position of this sector. A brief exposition of these countries’ Takaful sectors is summarized below: ...