“Consumers have greater interest in reliable and safe investments after the shock of the worldwide crisis. This has increased the demand for Takaful insurance, which has low risk exposure,” says Abdul Rahman Tolefat, former member of the Central Bank in Bahrain and now CEO with Allianz Takaful Bahrain. The market for Takaful could grow to $7.7 billion worldwide by the end of 2012, according to The World Takaful Report 2009 issued by Ernst & Young.

Takaful is a Shari’ah-law-compliant insurance in which members provide insurance for each other by contributing to a pool of funds. Money from this pool is used to indemnify participants against losses.

Growth rates in the Gulf Cooperation Countries (GCC) – United Arab Emirates, Saudi Arabia, Oman, Qatar and Kuwait – have been high in recent years, with Bahrain seeing a massive 98% increase in Takaful products between 2005 and 2007. Despite growth in areas such as India (52%), 58.8% of worldwide Takaful business is still found in Arab countries, followed by Malaysia (23.5%, source: The World Takaful Report 2009). Globally, the market share of Takaful is $3-4 billion.

INTERESTINGLY, A LARGE PERCENTAGE of Takaful buyers are not even Muslims. “Many people in Indonesia consider Shari’ah-compliant insurance socially responsible,” says Jens Reisch, CEO of Allianz Life Indonesia. Indonesia has experienced a 30% to 40% increase in the past five years. However, growth is set against the background of low insurance penetration in the country.

The concept of Takaful embraces mutual help and a sharing of risk based on the idea of “taawun” (mutual protection), whereby participants contribute to a joint pool of money. Different from a conventional insurance in which the issuing company takes on the risk, Takaful shares the risk among the participants, following the idea of helping those in need, which is encouraged under Shari’ah law. Conventional insurance is considered to be unlawful by many Shari’ah scholars because it involves uncertainty (“gharar”), speculation (“maisir”) and interest (“riba”).

In addition to these basic concepts, the operator – the insurer in a traditional contract – is obligated to distribute the surplus among the participants as well as contribute to charity. “Indonesia has repeatedly suffered from natural disasters. In the wake of such catastrophes, everybody from the office boy to the CEO donates money. Those who have less give less, but everybody gives something,” says Reisch. This idea of mutual responsibility is incorporated into Shari’ah insurances and is one of the reasons for its success.

In Arab countries, people previously relied on each other to cover expenses such as children’s education. “This system of mutual reliance is becoming weaker,” says Abdul Rahman Tolefat. Many families now turn to Shari’ah-compliant investments to save for their children’s education as “schooling and academic training become more important as well as more expensive,” Tolefat adds.

“The large share of adolescents in Gulf country societies further increases the demand for Takaful concepts,” says Tolefat. The percentage of the population aged 15-23 in 2009 ranges from 10.5% (United Arab Emirates) to 18.5% in Oman.*

AWARENESS OF FINANCIAL planning has increased both in the Gulf region and in Asia as governments cut back on pension benefits. However, not all that glitters is gold. Takaful companies have difficulties finding fixed-income Shari’ah-compliant assets, so-called “sukuks.” In addition, Shari’ah law does not allow interest to be charged, and investment in sectors like alcohol, tobacco, bio-technology and banking is equally prohibited.

“We have limited investment opportunities to manage our liabilities and liquidity,” says Tolefat. Mid-term Islamic bonds are available, but short- or long-term Islamic bonds are scarce. He believes Islamic and international banks, as well as governments in the Gulf region, need to encourage companies with a strong and stable rating to issue Shari’ah-compliant bonds. “Takaful companies should not sit and wait for the market to be developed. They need to be proactive and ask for long-term Islamic investment opportunities.”

Regardless of these issues, some experts expect Takaful to move to Europe soon. “Europe has approximately 20 million Muslims, and we are already seeing interest from clients in offering Takaful in various European countries,” says Mohammed Khan, UK leader of Islamic Finance with the London-based consulting firm PricewaterhouseCoopers. “The key question is: when is the right time to offer these products? First-mover advantage may be a benefit – especially for companies that can effectively communicate that they have a Shari’ah-compliant product for Muslim consumers and have an ethical insurance product for non-Muslims.”

ESTIMATES OF THE POTENTIAL of the Takaful market in Europe are scarce, “but in view of the significant Muslim population and the ethical basis of Takaful products and operations, it does hold great potential for growth,” a spokesperson for the London-based bank HSBC said.

However, Takaful is not only about sales and profits, warns a 2008 study by US-based research network Limra International. “Takaful operators are encouraged to ensure that their operations are in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealings.”

Values like these could have softened the financial crisis, argues Michael Saleh Gassner, financial certifier to the German Council of Muslims and co-author of Islamic Finance. “According to Islamic ethics, it would have been unthinkable for banks to push loans on people so they can buy houses that they cannot really afford. However, it is just as unethical for the client to agree to such a debt.”

* Figures provided by the United Nations Department of Economic and Social Affairs.

Published by PROJECT M in April 2010

(Photo: gettyimages/Horst Neumann)