After attaining critical mass over the last few years, Takaful industry in the is poised for a big leap in 2010, despite subdued market sentiments. There are several drivers to the continued rapid expansion of Takaful – acceptance byShariah scholars of the concept of Takaful , regulatory initiatives to make insurance mandatory and discomfort of Islamic population with conventionalinsurance industry. The insurance industry as a whole in the Gulf has low penetration, so the only way is rapid expansion. Compared to insurance premium to GDP ratio of 7.5 per cent globally,Islamic insurance penetration was 1.9per cent in UAE, 0.6 per cent in Saudi Arabia and 0.9 per cent in Qatar. So, basically there is only one way, the way up. Dedicated regulatory framework is emerging in the Gulf countries and bahrain is already considered a hub of islamic insurance.
Concept of Takaful
It may be useful to explain the concept. The Arabic work for insurance is Ta’mein , meaning indemnity against losses- the Shariah does not consider this favourably. The concept which is gaiinng prominance is Takaful – where the main insurance contract is cnverted into a contributory arrangement in a cooperativeike pool- the Takaful pool. Takaful members contribute to the pool , which covers the losses of its members. The basis of the pool is mutual help and sacrifice and is permissible under the Shariah.
Members may be either of same family or group , or individuals and they normally put their premium in individual investment accounts ( IIA). The individual accounts are then pooled in Taawuni Taawuni Account ( TTA). A bank manages the fund as an agent ( under Wakala) or in a profit and loss sharing arrangement ( mudarabah). The concept of interest ( Riba) prohibited by Shariah does not come into the picture.
Business Process
Typically the agent bank will carry out the following
a) invite participation to Takaful b) look after registration of members c) develop products d) invest the pooled fund to earn returns e) determine contributions f) balance sheet management g) surplus determination h) surplus distribution.
Risks to the Takaful industry
While the industry has robust growth prospects, it is not immune to financial risks. Although the cooperative particiatory structure sets itself apart from the conventional isurance, the investment model is similar, but narrowed down by the limitation of not investing in interest bearing securities.It also faces the risks ciommon to Islamic financial institutions, concentration risk, lack of developed capital markets for Shariah compliant investments and the consequential dependence on western markets. Regulatory transformation is underway and the industry must keep pace with the regulatory activism.
On thew whole,Takaful is a viable model poised for robust growth in 2010 and beyond.
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