7/31/2019 Artical Final

1/4

1

An Alternate System of Insurance in an Islamic Economy

IntroductionInsurance is a type of risk management and in Islam risk management is named as Takaful. Inpractical implementation of Takaful, individuals pay some money collectively or partiallytabarru as a common fund, which would be used equally to support the members against anydamage or need.

Takaful is an Arabic word. It means unity, that a group of individuals had an agreement tosupport the whole community against any loss.

Takaful is a technique to decrease the financial risk of damage due to accident and disasters.Takaful means common promise and unity. So, this is a financial deal of a joint co-operationbetween two parties to protect one of them from unexpected damage or loss.

The beginning of Takaful was detected in many practices of earliest Arab tribal traditions and thefriends of the Prophet. Such as there was a tradition named al-aqilah , it was a mutualagreement among the tribes that if, a person would be killed accidentally by a person of anyother tribe, Whole tribe will collect money mutually for the victim family against the blood of that person. Collection of fund mutually from a group of people to support whole community inneed was common and under practice in early Islamic age.

In modern era first Takaful model was prepared and used in Sudan, Which was grounded on asupportive model. Othermoney-making models of Takaful were introduced later in differentcountries, mainly in Saudi Arabia and Malaysia. Takaful has accepted into a sustainable

alternative to traditional insurance and capable to attract a number of customers beyond thelimitations of Muslim or non-Muslim. Such as in Sri Lanka only 10 percent population isMuslim and almost 15 percent Non-Muslims are taking the policy of Takaful.

Takaful has its importance in Islamic finance and becoming popular now days, because its abilityto collect and utilize funds for any purpose is in a same way of conventional insurance. Takafulis beingpracticedinmore than 60 companies of 23 countries and is introducing asa newalternative and becoming a fast growing business. Currently, in Malaysia retakaful, the same asof conventional reinsurance has been introduced. Most recently, most Takafuloperatorstransferred to conventional reinsurers, and this is being takenas acceptablestagebecause, there is no possible Sharia acquiescent substitute yet.

Takaful is very attractive for common public because it has some unique features such asTakaful contract make responsible the insurer to give back the premium if the insured person isnot interested or not in a condition to continue the policy. Second important thing is that Takafulis free from interest. It is based on prot sharing plan named as Al Mudarebah . Insurer hadcontracted to share both profit and loss. In conventional insurance bonus is only paid after deathor loss but in Takaful profit is being paid to the insured person according to the money invested.Another important feature of Takaful is that commission is being paid to the agent by insurerinstead of insured. So, insured person has his/her money safe. In conventional insurance

7/31/2019 Artical Final

2/4

2

customer bear the advertising cost but in case of Takaful insurer bears the cost of advertising,which is good attraction for the customers.

In recent era the Takaful business is in hands of minority of states, especially Malaysia, NorthAfrica and the Middle East has businesswith Saudi Arabia and United Arab Emirates. Alongwith these countries Sudan, Bangladesh, Egypt, and Pakistan also has good market of Takaful.

Takaful is not only popular in Muslim community but also being popular in Non-Muslimcommunity due to its ethical values. Susan Ding wall, partner at Norton Rose said The Takafulmodel can also be marketed to non-Muslims as a green or ethical product,

Anyhow, there is need to regulate Takaful Market. Abdul Rahman Mohammed Al Baker,executive director for financial institutions supervision at the Central Bank of Bahrain said that itwasnt possible to apply existing regulation to meet the needs of Takaful companies.Takafulbusinesses need to establish themselves and work profitably.

2. World updatesInternationally Takaful Started from establishment of Madina. It grew and sustained in one formor the other through the Abbasside time. Great efforts were done in recent times. The firstTakaful Company was started in Sudan in 1979, almost instantaneously charted by another set upin Bahrain. Currently more than 84 Takaful companies in more than 25 countries are working. Itwas reported that average growth rate of Takaful companies are almost 25 per centhigher thanconventional insurance companies.

According to figure 1 there is continuous progress in Takaful business since 2007 to 2009 in differentregions as Africa, Sub-continent, Far East, GCC, Levant and Middle East. But GCC is leading Takafulbusiness and Middle East has great progress than other regions. GCC and Middle East has muchdifference from other regions.

Figure: 1

7/31/2019 Artical Final

3/4

3

3. Domestic updatesIn Pakistan Takaful companies start work almost 23 years later than other countries and the progress of work is very slow. It takes almost 20 years to make Takaful in regulatory form. At last in 2005 theregulatory framework for Takaful was settled in the form of Takaful Rules - 2005. Figure 2 isshowing the Takaful progress in Sub-continent. Bangladesh is leading with a great difference

while Pakistan and Sri Lanka is much behind yet.Anyhow, continuous progress was recorded inTakaful business in Sub- Continent since 2007 to 2009.

Figure: 2

4. Identifying problemsEven Takaful is best for long time investment and to compensate loss or damage but still there are fewchallenges being faced by Takaful industries. Such as some Muslims consider that insurance is not strongand they put Takaful in same place of conventional insurance. Takaful industry lacks the strong legal

framework or Act to register or regulate the procedures. Some states have special laws leading Takaful,for example Malaysia has passed Takaful Act 1984 to facilitate procedure for the registrationof Takaful companies and to establish the rules and regulationsfor proper operation. On the other handin Bahrain no specific Takaful law is enacted but the Bahrain Central Bank has formulated specialconditions for Takaful companies. Takaful industry needed to have a strong structure to facecompetition with conventional insurance. In Takaful insurance both insured and insurers bear mutualbenefit or loss, because the whole system is based on mutuality which demands high level of equityamong all members.

5. SuggestionsExcept above mentionedproblems Takaful companies lack the specialized staff to run the business.Skilled and qualitative staff is necessary to make Takaful industry progressive. Strong advertising andawareness programs showing good practices and experiences of Takafulparticipants are required toattract the customers both from Muslim and Non-Muslim community. The exclusive features of Takafulproducts to encourage transparency, fairness and profit sharing technique can appeal to all potentialcustomers.

6. ConclusionThere are many opportunities for progress of Takaful industry all over the world. This business isbeneficial for Takaful companies themselves as well as for insurers. Currently Takaful industry is very

7/31/2019 Artical Final

4/4

4

small in size with relative to conventional insurance. Recent market size of Takaful globally is assessedbetween USD$2.5 billion to USD$3.5 billion of annual premium. Anyhow, only genuine efforts to flourishthe Takaful business can lead towards prosperity but to enter in market just for soaking up will limit thevalue.