Takaful industry in Pakistan,GCC & Malaysia: Growth Challenges & future Prospects

TAKAFUL INDUSTRY IN PAKISTAN, GCC & MALAYSIA GROWTH CHALENGES & FUTURE PROSPECTS Page 1
Chapter 1
Introduction of Takaful Islamic Insurance
1.1 Background:
We are exposed to some sort of risk in our lives. These risks may be expected or
unexpected, and may occur to our life, our assets or businesses etc. These risks affect
us to the extent that we may become destitute. Our religion, Islam encourages us to
take effective measures against these unexpected incidences. These measures are called
Ikhtiar. Its historic evidence is found when Hazrat Yousaf A.S. asked his fellow men to
build reserves of grain for seven years so that during the draught years these could be
made available.
The insurance mechanism is based upon the sharing of responsibilities of
cooperation and protection of members of society, against those risks which may occur
at any time. The institution of insurance has existed for a long time. Some historians
trace the origin of insurance to 215 BC during the Roman Empire. But the insurance
systems in its current form began in 16th century when British merchants used to
gather at a coffee house called Lloyd's in London, and developed an agreement to
mutually share in the profits and losses of their sea trade. The word “Takaful” has
come from the Arabic word Kafalah, which literally means "guaranteeing each other"
or "joint guarantee“. Takaful is commonly referred to as Islamic insurance even some
people claim it as not an insurance contract. Takaful, as practiced nowadays, is near to
investment contract compared to insurance or pooled fund contract.
1.2 Definitions and Mechanism of Conventional Insurance
Broadly it is defined as A contract in which an individual or entity receives financial

protection or reimbursement against losses from an insurance company. The company
pools client's risks to make payments more affordable for the insured.”( investopedia)
It is an agreement to share risk between two parties. One is the insured party
who is covered by the other party, the insurer, against a specific loss by paying an
agreed amount as premium. It may also be called as system of mutual help by the
people of each other.
Here it should be noted that risks are of two types i.e. pure and speculative. Under pure
risk there is only the probability of loss but in speculative risk there is also a chance of
gain. So under insurance mechanism, speculative risk is not covered and only pure risk
is covered.
Pure risk is transferred to the insurer by the insured person or company by paying a
certain amount as premium. The insurance company pools all the collected premiums
in a common pool and afterwards the claims are paid out of this fund. The company
also invests the collected amount in different investment avenues and earns profit.
1.3 The Prohibition of insurance in Islam
Insurance in its present form is not acceptable under Islamic Shariah. Following
are some of the factors for its prohibition:-
1.3.1 Gharar: A transaction should be free from uncertainty i-e Gharar. This
restriction in Islam is made to stop the exploitation of common man. This element is
present in conventional system of insurance as the insured party is liable to pay the
premium but its outcome or claim is uncertain to happen and also is the quantum of
loss. Similarly the insurance company is unaware of the future claim payments under
the specific policy / plan etc.
1.3.2 Maiser: Maiser or gambling is also strictly prohibited in Islamic Shariah. This
element is present in insurance system when the insured person wants to get a big claim
against the small premium. In this scenario the insurer company is at loss. However,

the specific event doesn’t happen than the policy holder loses his amount and the
company is in benefit. Similarly we observe that in case of cancelation or termination/
surrender of insurance contract the policy holder is at loss.
1.3.3 Riba/ Interest: In the insurance context, a fixed amount of profit given by the
insurer company to the policy holder and also to its share holders is called interest or
Riba, which is strictly prohibited. The investment portfolio of the companies is also
consisted of those areas which involve interest income.
1.4 Need of an insurance system based on Islamic Shariah:
As we have elaborated the basic reasons of prohibition of insurance system in
Shariah, naturally the question arises for its alternative based upon Islamic economic
principles. This need gives rise to development of Takaful Insurance system based
upon Islamic Shariah. Some of the basic elements that laid the foundations of Islamic
insurance system are following:-
1.4.1 Insurance with conventional form is an integral part of market economy, so it
also contains economic evils of interest, gambling and uncertainty. However, the
Islamic insurance system is based upon the universal principles of Takaful and Ta’awun
i.e. granting & cooperating with each other. Under this arrangement, a group of people
agree to protect each other from a specific event of loss. Participants of the group
willingly help and protect each other with sincerity.
1.4.2 Brotherhood and solidarity with each other are cornerstones of this system. The
participants of the group achieve collective rights and benefits for each other, whereas
the operator of this system who is called Takaful operator manages the takaful fund
which is created through the contributions of its participants. This contract is based
upon the universally accepted Islamic principle of Tabarru and Modarbah.
1.4.3 In the case of conventional insurance, the company income also includes
underwriting surplus. An underwriting surplus is basically the difference between total

amount of premium earned and total claims paid to the policyholders whereas,
investment income is also part of it. The company has the discretion over the profit
distribution, due to which there arises a conflict of interest between the policy holders
and company share holders. In contrast, under Islamic mode of insurance the operating
company has no rights to claim the underwriting surplus. The Takaful contract
specifies it in advance about the distribution of profit share.
1.4.4 Insurance in conventional form is basically profit oriented and company's primary
objective is to earn maximum revenue and profit for the owners / share holders.
Conversely, the Islamic mode of insurance is running on principles of collective welfare
and brother hood. It is basically a nonprofit oriented concept. The operator of the
company receives Wakalah fee or service charges etc only.
1.4.5 Under insurance contract, if no claim arises during the time period then the
premiums are lost. But in the case of Islamic insurance, if no claim arises then the
surplus of underwriting income is distributed to the policy holders, or with consent of
policy holders it is given to the charity.
1.4.6 Under the conventional life insurance contract, either the policy holder gets
maturity payment or the nominees of policy holder get the insurance claim in case of
his death, but in the life takaful policy there are two types of accounts, the participant
special account called PSA, and participant account called PA. In case of maturity of
policy contract, the takaful policy holder only receives the amount earned under the
participant's account (PA) and in case of death of policy holder; the beneficiary receives
the claim value from the participant special account (PSA) and also the accumulated
value of participant account (PA).
1.4.7 The investment portfolio is entirely the discretion of company in conventional
insurance but in the case of Islamic insurance the takaful contract specify in advance
about the mode of investment of the premium contribution which are strictly Shariah
compliant only.

1.4.8 The conventional insurance company has no obligation to pay Zakat but the
Islamic insurance company pays the Zakat on annual basis.
1.5: Principles, Types & Shariah Issues of Takaful System:
Takaful is an alternative insurance system based on the Islamic Shariah principles. It is
the type of Islamic insurance in which the members called participants contribute their
money into a common pool called takaful fund with the aim to compensate each other
against a specific and predetermined loss. ( investopedia)
The participants also contribute a certain amount in the Tabarru or donation
fund which is also managed by the takaful operator.
Takaful insurance is based upon the Islamic principles of Akhuwat, Ta’awun and
Tabarru, with the sole purpose to extend financial assistance to the participants of fund
in case of need and hardship.
The contributions are used to help the needy participants in the case of any
unfortunate incidence and the takaful operator acts on behalf of the participants. After
meeting all the obligations the surplus i.e. the underwriting surplus is paid back to the
participants as the takaful operator is only liable to charge its administration /Wakalah
fee.
1.5.1: Principles of Takaful
These are two basic principles:
Ta’awun, which is called mutual assistance among the people, &
Tabarru, the willingly donation/contribution for the benefits of weaker/poor.
Some of the Ayyatts and Ahadith in their context are presented for reference:-
“Help ye one another in righteousness and piety but help ye not one another in sin and
rancor” (Al- Maidah: 2).
“Allah will always help His servant for as long as he helps others”. (Narrated by Imam

Ahmad and Imam Abu Daud).
“The place of relationships and feelings of people with faith, between each other, is just
like the body; when one of its parts is afflicted with pain, then the rest of the body will
be affected”. (Narrated by Imam Al-Bukhari and Imam Muslim).
“One true Muslim and another true Muslim is just like a building whereby every part in
it strengthens the other part.” (Narrated by Imam Al-Bukhari and Imam Muslim).
1.5.2: The Key Elements:
The key elements which make takaful system a successful and feasible alternative
insurance system are following:-
Elimination of Gharar: The element of Gharar or uncertainty is avoided the tabarru
or voluntary donations that aim to mutually assist the participants in case of an
unfortunate incidence or loss.
Takaful Fund: A takaful fund is created by contributing donations of participants and
claim liability is spread among them.
Participants as Owner of Fund: This fund is owned by the participants and not by the
company as the company only acts as a takaful operator, not the owner.
Management: The fund is managed by the competent takaful management as per
Shariah allowed principles of Modarbah and Wakalah business model.
Investments: The investments are strictly made as per Shariah principles and avoiding
the elements of Riba/ interest income.
1.5.3: Types
Takaful products are basically of two types known as General Takaful and Family
Takaful.
General Takaful: General takaful is similar to conventional general insurance and
covers all aspects of life except life and health coverage. It is a short term in nature

usually from some days like Travel Takaful to a year like fire, home, car takaful etc.
Family Takaful: Family Takaful is an alternative saving scheme of life insurance in
accordance with Shariah with long term financial objectives. It gives protection to the
beneficiaries of the participant financially if any calamity or death happens in the future.
The main concern of the family Takaful plan is the distribution of Takaful benefits in
the event of the participant’s death. It is the alternative of the conventional life
insurance having long contract term of ten years or more. Some of the common &
popular takaful products are; Family Takaful; Health Benefit Takaful; Critical Illness
Coverage; Education Benefit takaful & Savings Benefit takaful.
1.6: Shariah issues in Takaful industry:
Although Takaful mechanism is derived from two primary sources i.e. the Holy Quran
and Sunnah of Hazrat Muhammad (SAW), no one can guarantee that its
implementation is fault-free. There are still certain Shariah issues surrounding the
implementation and operations of Takaful which have yet to be resolved. This is
because, Quranic verses and the Sunnah of Hazrat Muhammad (SAW), are interpreted
in different ways. The main issues surrounding takaful operational mechanism are as
follows:
1.6.1: Issues of Nomination and Hiba:
Nomination is the process of appointing a person or persons who are entitled to
receive the policy benefits in case of policyholder’s death during policy tenure.
Nomination is an important process that ensures that benefits to the nominated person
are paid promptly. There are two major views regarding the status of nominee. One
view holds that the takaful benefits are the wealth of the deceased and only his legal
heirs can be nominated. The other view holds that the participant can gift the takaful

benefits to anybody as a hiba and hence can nominate anybody. Hiba can be defined as
“a voluntary contract that results in uncompensated ownership transfer between living
individuals”. In other words, it can be referred to as giving ownership of one’s property
to another without any rewards in return. Some takaful operators also use the Hiba
concept for the nomination. Usually application of hiba in Takaful products leads to an
issue. The issue arises between the legal heirs and the donee regarding the Takaful
benefit. The reason may be due to lack of knowledge on the application of the concept
of hiba. There are different opinions regarding the application of hiba in nomination. It
can be best understood by looking into some of the issues in hiba. According to
Islamic concept of hiba, gifts can be given during the lifetime of an individual. But in
family Takaful, the Takaful benefits are given as a gift if the policy holder dies before
the maturity. Thus, it goes against the nature of hiba itself. Another point to be noted is
that if Takaful benefit is distributed after the death of the participant, it must be done
with following preconditions: First, the estate of policyholder should be distributed in a
manner that it should not exceed one third of estate excluding the expense & debts. It
should also be regarded as Wasiyah and not as Hiba. The Islamic financial institutions
including takaful industry are working over the concept of Hiba to customize it in the
structural framework.
1.6.2: Issues of distribution of surplus:
Mudarbah is the first operational model in the earlier day of takaful. Under the
Mudarbah contract, the distribution of surplus income between participants of takaful
fund and takaful operator is specifies. Participants of takaful fund are regarded as Rab
ul Maal( Fund provider) so any loss is to be borne by them only.. There are two
different views for the surplus distribution. The first one categorically prohibits the
sharing of the underwriting surplus, & other view validates the surplus sharing.

1.6.3: Issues related to Tabarru:
The Takaful industry is simply a mutual insurance. The takaful contract shows the
spirit of cooperation called Tabarru in Islam. Tabarru literally means Donation, grant
or contribution etc. in the takaful context; a voluntary amount donated by the
participants in the takaful fund is called Tabarru. This fund is then used to support the
unfortunate. There are two main Shariah issues related to Tabarru contract.
First, As the fund participants are owner of Tabarru fund, the company not entitled for
any profit derived from the fund. Thus, any surplus from the fund must be return back
to the fund, for the mutual benefit of the participants in the future. What is happening
right now is that, the Takaful operator also share the portion of the profit derived from
the fund.
Second, Under the Tabarru concept, a person is not entitled to get back what he has
contributed to Tabarru as it already belongs to the mutual fund of all participants. The
issue arises when the Takaful participants are entitled for the surplus derived from the
fund.
For the first issues, some scholars permit the Takaful operator to take portion of the
surplus as administration charge. On the second issue, some scholars permit the
participants to take surplus distribution as the Tabarru fund is meant to benefit the
contributors themselves. In addition, the practitioners argue that, the surplus must be
distributed to the participants in order to be competitive to insurance counterparts. If
Takaful operators do not distribute the surplus to the participants, they may run away
and subscribe insurance policy.

Chapter 2
Literature Review
There is not much published material available on subject under study. In this section
we will briefly mention the previous literary work conducted in the field of Takaful and
its practical application in different countries:-
Simon, Riffat and Volker in their book Takaful, concepts and regulatory issues have
discussed Business Models, Shariah Principles, Takaful Management Models, Corporate
Governance & Legal issues. Business environment in different markets, market
infrastructures and supervisory issues have also been discussed. A comparative study
and reinsurance sector and retakaful, capital adequacy and solvency requirements,
investment portfolio, shareholders fund and General funds and different transparency
and financial reports have also been discussed.
Principles of Takaful, published by CII London in collaboration with BIBF Bahrain,
discusses main features of Islamic contracts, prohibited aspects under Shariah
operational frame work of Takaful, underwriting policy and financial management
aspects.
Swartz and Coetzer in the article Takaful an Islamic Insurance Instrument have given
brief overview of Takaful origin, its development history, operational mechanism,
takaful share in global insurance market.
Annual Takaful reports in previous years have also been very useful.
Dedzaun in his research explained per capita increase in income is better predictor of
demand of family takaful.
In an article by Ismail and Basher (2001) it was indicated that insurance industry is far

efficient in technical aspects from Takaful.
Zaheer and Htay (2011) analyzed the motives for selecting the operational model of
Takaful by different companies and distribution of Takaful funds in Modarbah,
Wakalah and hybrid models.
Attiquzaffar Khan (2007) in his article "Takaful Objectives and Methodology" has
given detailed description, objectives, principles and operational mechanism of Takaful
system. He mentions pricing mechanism of Takaful in comparison to conventional
insurance.
Global Family Takaful Report (2007) has explored Takaful industry growth in GCC
and Far East. Family Takaful survey also gives detail on business growth in these
regions.
EY Global Takaful Insight (2014) has given details of Takaful growth and business
volume in global perspective.
Syed Salman in his article Takaful and Actuarial Practices gives description of Takaful
fund Management as per Islamic Shariah while Islamic financial of May 2012 discusses
retakaful industry growth in comparison to conventional reinsurance sector.
Sohail Jaffer (2010) in his article Takaful in GCC (World Commerce Review) has
described different aspects like new emerging GCC market, new distribution channels
like Bancatakaful and regulatory issues prevalent in GCC.

Research Methodology
In this research article, qualitative approach has been applied and available literature
on the subject has been consulted with. The two aspects that we focus of study
were:-
To know the current performance of Takaful industry in Islamic countries and,
To analyze future challenges and prospects of Takaful industry.
In selection process, only those literature and articles were selected which were
published in reputed and established journals and financial newspapers and total of
12 articles were pricked for further analysis.

Chapter 3
An Overview of Takaful Industry
3.1 TAKAFUL BUSINESS MODELS
Commonly known business models are following:
Modarbah Model
Wakalah Model
Mixed Model
3.1.1) Modarbah Model:
Courtesy: Insuranceinfo.com
Modarbah is a contract between two parties, one is called Rabul Maal (investor) and the

second is called Modarib (the manager). There is contract agreement regarding the
share and profit and looses etc between them. Two separate funds are created by
takaful operator, called Participant account and Participant special account. As the
above model describes, Participant account is related with the investment portfolio of
participant, whereas Participant special account deals with the claims and other
expenses plus any profit / loss arising out of investment fund.
The contract specifies the ratio of surplus and profits distribution and between
participant and takaful company. The Shariah principle of profit loss sharing is
foundation of the modarbah model. Predetermined share of under writing surplus and
profit on the investments is given to the takaful operator as it runs all core activities.
Profit is earned by investing the participant account funds in halal and Shariah
compliant business activities and surplus or profit is then shared in predetermined ratio.
The takaful operator is also entitled for service charges for doing all the activities
to run the company, but it does not share loss as it works as modarib only. These losses
are born by primarily the investment surplus and then by participants contributions (i.e.
tabarru) to meet the claims for general takaful fund.
3.1.2) Wakalah Model:

Courtesy: Insuranceinfo.com
It is a different model from modarbah as the takaful company charges a wakalah fee as
service charges. The Shariah advisory board of the company determines the amount of
fee. In this model the takaful fund the operator is considered a separate entity and the
company is considered as wakeel. The company charges a fee as service charges and it
is not sharing in any of the underwriting results. The operator provides services against
pre agreed wakalah fee. The net income of underwriting results and investments profits
pooled in participant special account after deduction of wakalah fee. This profit is then
distributed to all the participant policy holders proportionally after all claim liabilities
are paid. Besides that, a contingency reserve fund is also maintained.
The participant also has rights over the tabarru or donations so it is conditional
donation and not mandatory for the participants.
3.1.3) Mixed Model

Co
urtesy: Takaful growth opportunities- pricewatercoopers inc.
The GCC countries have mostly adopted the mixed model of Wakalah / Modarbah,
but it is also used by some operators in other countries. In principle, the takaful
contribution funds are segregated in two funds namely shareholder's fund and
participant fund.
In the case of mixed Wakalah / Modarbah model the company operates two
separate funds. The Wakalah contract is used for underwriting activities while
Mudarbah contract is used for investment portfolio. The shareholders takaful company
become wakeel or agent of participants/ policyholders and manage the activities of
company, and the operator charges a fee from each participant. This fee is normally a
percentage of the contributions of participant and is a major income source of
company. It is a fixed fee and it is already disclosed in the contract to the participants.
Under the Modarbah contract the company invests contributions of participants
in Shariah compliant investment avenues. A profit share is also allowed from the
investment income for the company.

3.2 Performance of Different Sectors of Takaful Industry
Although insurance sector in general has globally experienced a solid growth of 11% in
the last decade, the takaful industry growth is restricted to mainly in some parts of the
Muslim world. Insurance culture is not prevalent in Muslim world, so takaful growth is
also at a low pace. However it has a great potential being a large size of Muslim
population and it is expected that takaful growth and penetration may surpass
conventional insurance in future in Muslim countries. Key takaful markets are Malaysia
and Saudi Arabia. In other parts of world, takaful operators lack of scale. The main
business segments are following: Motor takaful, Property and Accident takaful, Marine
and Aviation takaful, Medical and Family takaful. Family and medical takaful are the
most popular segments in all the markets.

Model Diagram of Takaful Business in Volumes & %age in Islamic countries

3.2.1) Takaful Industry Financial performance:
It is estimated that total takaful market size is expected to reach 13 billion $ in 2015
with an expected 16% annual growth rate. Even it grew @ 24% annually in some
countries like Malaysia & UAE. The reason behind the growing demand was the
application of a mandatory National Health Insurance policy specifically in Saudi
Arabia and in Abu Dhabi, while Qatar is following the same way. In the South Asian
region Malaysia is leading the Takaful Industry. Family and Medical Takaful are the
most popular sectors. Globally, takaful forecast relies on large growth of emerging
markets such as Indonesia, and new markets such as Turkey. Although it is impressive
growth but profitability is low. In terms of ROE it is 4% in KSA and 0.4 % in rest of
GCC while in Malaysia; it has grown @13% annually. In Gulf region takaful companies
are paying more claims as compared to contributions received, while conventional
insurers are making underwriting profit. Malaysia is more focused on the family takaful
plans. Takaful operators are facing challenges in many markets. The industry has lack
of profitability, long-term sustainability, solvency and limited premiums as a
consequence of high level of competition.
3.2.2) Takaful Industry Products and Services:
Product development is the core of the Takaful industry survival. Customers are
knowledgeable and demand those products which are Shariah compliant and have
innovative features. These products should be of the level to compete with
conventional companies these should also be compatible for individual customers and
corporate sector clients. The Takaful operators need to develop products that follow
the Shariah principles. It shouldn’t be done by renaming the conventional products as
takaful products without really following the Shariah principles as it will also cause
customers to lose faith in Takaful. Although takaful is a young industry and a lot of

conventional practices are still used, it is time to phase it out and become more Shariah
compliant. Basically the market for Takaful products is vast and there is great potential.
To market the products to the potential clients needs to benchmark against successful
companies to look into their business model and marketing techniques.
3.2.3) Takaful Industry Regulations:
There is a need for standardized regulations for the takaful industry worldwide. These
regulations can help consumers decide which practices and models are acceptable to
them. There is also need for regulations to protect consumers against the bankruptcy of
established operators. In most countries, there is currently only limited Takaful specific
regulation. At the same time, there have been some initiatives launched recently to
expand the regulatory framework. One particular challenge is to take into consideration
the specifics of Islamic Takaful and Retakaful. An adequate regulatory framework will
have a positive effect on Takaful industry growth. Only Malaysia, Pakistan and Bahrain
have issued specific laws on takaful. Qatar issued Islamic Finance Amendments Rules
in 2012, whereas in Pakistan these rules were introduced in 2005. The other markets
suffer lack of regulations. The Industry suffers from absence of standardization that
affects their business especially companies with cross-border selling.
3.2.4) Takaful Industry Marketing:
Despite an increasing Islamic consciousness, awareness about Takaful is still low. There
have been cases of takaful companies that had to limit their customers and merge with
other takaful companies as they could not get enough funds to be able to compensate
the claims. Muslim & Non Muslim population should be offered with customized
needs. As takaful companies have been established few years back so they have tough
competition with conventional insurance companies and they have to differentiate on
the value proposition from other in the market. An equitable and transparent marketing

approach complying the Shariah rules and regulation should be adopted. For this, it is
paramount to have a distinctive branding strategy by the Takaful industry highlighting
the benefits of Takaful.
3.2.5) Takaful Industry Distribution channels:
Takaful companies are using a variety of distribution channels. The takaful business is
retail-based, and it has lack of identification of most effective forms of distribution. In
fact, the commonly used channels are branches, agents and Islamic Banks known as
Bancatakaful. In Malaysia takaful companies use following distribution channels: Retail
and corporate agencies, Bancatakaful, Corporate direct channels, Brokers & direct
marketing channels. Technology has been increasingly used in distribution of Takaful
products. Bancatakaful is considered the best instrument to distribute takaful products
in markets with very low penetration rate.
3.2.6) Takaful Industry Customer Service:
Most of business in Takaful or insurance sector comes through agents who have
personal contact with customers. Providing good customer service is highly important
to survive in the industry. The Takaful industry needs to build customer service levels
and develop best strategies to achieve higher service standards. Takaful companies need
to differentiate themselves by offering value added services that conventional insurance
cannot, that are widely accepted and with the potential to be developed further and to
be enhanced within the industry. Takaful Industry Human Resource: The Takaful
industry needs Shariah scholars who have expertise in both Islamic finance and Fiqah.
Due to shortage of these talents, many scholars sit in various boards. There is a need to
establish full time national Shariah boards which look after the Shariah issues of all
Takaful and re-Takaful operators. This will be an important step towards the
harmonization of practices. For Takaful and retakaful operators, it is also difficult to

find suitable employees with at least some background in Islamic finance especially if
they want to expand into new business.
3.2.7) Takaful Industry & Retakaful:
Reinsurance sector plays a pivotal role in the survival of insurance industry and
retakaful is basically an Islamic form of reinsurance. The conventional insurance
company manages its risk portfolio of big amount claim payment by ceding a portion
of its risk with another insurance company called reinsurer. In case of any loss like
natural disaster, riots or incidence like 9/11, due to which a large number of policy
holders are affected, only way of survival of an insurer is to transfer the risk portion to
a reinsurer.
A takaful operator also transfers risk and pays a portion of premium to retakaful
company and in return the retakaful company shares the risk. A takaful operator is
unable to bear the whole risk as in case of catastrophic loss, all reserves may be
depleted and company may become insolvent. All the share holders and participant
policy holders will be at loss in this situation. A retakaful arrangement gives stability to
the takaful industry. Operational mechanism of a retakaful company is same like a
takaful company with a difference that customers of retakaful company are fund
operators and others takaful companies, whereas customers of a takaful company are
general public, business owners and commercial entities.
It is mandatory for a retakaful company to operate business as per Shariah rules
especially in its investment portfolio. A retakaful contract is made for this purpose
between takaful operator and the retakaful company. The participant policy holders of
takaful are not involved in this agreement.
In case a takaful company becomes insolvent due to large no of catastrophic
claims then a Qard-e-Hasna is given by Retakaful Company to pay these claims. This
qard-e-hasna is interest free in nature, which is to be paid in coming years or it is

deducted from the surplus results of that company in following years.
The collections of Retakaful Company are invested as per Shariah laws and on
Mudarbah basis and profits etc are distributed as per retakaful contract. These
companies are developing innovative strategies & products for new markets and
investment avenues.
3.3 Family Takaful:
It is an alternative plan for life insurance designed as per Shariah regulations. It is a long
term plan having savings elements and fixed term of maturity. This plan provides
mutual financial support to its participant policyholder in case of any unforeseen event.
This plan helps the person in need of financial support in case of an untimely death /
injury or disability etc of the bread winner of the family. Following are salient features
of this plan:-
(1) Regular and compulsory savings.
(2) Investment in Shariah compliant avenues.
(3) In case of any misfortune, payment of accumulated proceeds to legal
heirs.
This plan gives its participants halal investment returns. Regular savings of the
participants provide necessary financial support to dependants, or provide reasonable
return at maturity of plan.
This plan is for a term of 10, 15 or 20 years. Participant’s age should be from 18
to 50 years and maturity age should be equal to or less than 60 years.
3.3.1 Mechanism.
This plan works on Mudarbah basis. The participant’s contributions are invested in
business avenues by the takaful company which acts as Modarib. The participant policy

holders may choose any of plans offered having defined maturity terms. The modarbah
based takaful contract mentions all the rights and obligations of both the takaful
company and the participants. The participants are obliged for regular payments of
their due installments. The installments premium amount is decided by the participant
against minimum sum assured as decided by the company. The company maintains two
types of account i-e Participant Account (PA) and Participant Special Account (PSA).
A major portion, i-e about 95% of contributions is paid in PA for the purpose of
savings and investment. But the percentage is also dependent on the age of participant
as with increase in age the risk premium also increases.
The PSA is operated on a mutual fund basis and a Tabarru or donation is
credited in this account for claims payments etc.
3.3.2 Products:
The various types of family takaful plans available in the market are: Family takaful plan
for Education Protection and Savings, Family takaful mortgage plan, Group family
takaful plan, & Group hospitalization and Medical benefit.
3.3.3 Benefits.
In case of an unfortunate incidence of death of the participant the legal heirs are gain
following compensations:-
All the installments paid by the participants from start date and the profit share
of the investment return of their installments paid. The outstanding installments
amount are paid through PSA as already mentioned in contract and agreed by other
participant of the plan.
In case of completion of takaful contract i-e maturity of contract, all the paid
installments along with profit share of investment are paid to him.
In case of premature withdrawal, the surrender amount payable as already agreed

upon the by the parties of contract, including the tabarru or donations amount credited
to PSA.
3.4 BancaTakaful
Most of the Islamic banks in the GCC region and Fareast prefer BancaTakaful
as compared to conventional insurance. It is an alternative to conventional
Bancassurance and especially family takaful products are being distributed through
Bancatakaful. as the relationship managers and financial advisers of Islamic Banks are
more inclined to offer family takaful products to their regular banks customers. Having
close business terms, they can offer better advice to their clients on family takaful
products according to their financial requirements and capacity, as the bank is
considered to provide better solution to their financial needs. The Malaysian example
shows the strength of Bancatakaful as it has made Malaysia the second largest takaful
market globally. There has been a positive growth in Bancatakaful and half of family
takaful contributions come through this channel in Malaysia.
Conversely takaful operators have also been able to reach the well established
and extensive network of these banks branches in different parts of the country and
they don’t have to bear the expenses of establishing their own offices. Customers of
banks are also accessible for them. Now Islamic banks are also integrating with takaful
companies as either they buy shares in these companies or setup their own subsidiaries.
The GCC region also has been catching up this trend & the takaful companies
here have also started promoting takaful products through bancatakaful. In Bahrain,
Allianz Takaful and Standard Chartered Bank have made an agreement for offering
takaful products through banking network. Similarly in KSA, the Alahlia Takaful and
National Commercial Bank have also made an agreement of bancatakaful. Some of the
efficiencies of regular banking channels are also supporting takaful companies in
offering better customer service in their region.

Chapter 4
Takaful Industry in Pakistan, GCC & Malaysia
In this chapter we will have an overview of takaful industry in major Islamic countries
including Pakistan, Gulf countries & Malaysia. The reason for limiting the study to
these countries is obviously takaful industry has flourished in these countries far better
than other parts of Islamic world.
4.1 Takaful Business Models & Opportunities in Pakistan
Currently following Takaful companies are working in Pakistan: Dawood Family
Takaful Limited, Pak Qatar Family Takaful, Pak Qatar General Takaful, Pak-Kuwait
Takaful Company Limited & Takaful Pakistan Limited.
There are different takaful models being implemented here. These include
Modarbah based model which has been adopted by Dawood Family Takaful Limited &
Pak Qatar Family Takaful etc & Wakalah Based Model which has been adopted by Pak-
Kuwait Takaful Company Limited.
A major share of General insurance business is written by the top ten companies
in Pakistan. If only 5% of the business is switched over to takaful companies, it would
mean a premium income of over Rs. 600 million rupees
The majority of Muslim population of Pakistan is a potential market for Shariah
compliant takaful companies. The financial sector of the country is more inclined
towards Islamic financial products, which in turn require that these assets should be
under Islamic insurance cover. Also people of Pakistan usually discourage to avail

insurance coverage on religious grounds. There is a vast scope for takaful companies in
Pakistan as all insurance companies are using conventional insurance features.
The takaful concept is relatively new and people are still unaware of its features
being the alternative system of conventional insurance. The takaful sector can become
an alternative of conventional insurance companies to cater the requirements financial
sector and also in developing the financial system based on Shariah regulations. The
Ijarah contracts of takaful companies are also very useful and viable alternative of
leasing companies.
The size of takaful market may reach 76 million $ during the year 2015 and there
is a need for more dedicated approach to achieve higher business targets in future.
Life insurance companies have considerably expended their business volume in
Pakistan over the last decade, when private sector was allowed to start operations here.
Currently 6 companies are operating here including group life business also. Group life
contracts through their employers are also available. As a very small number of people
are insured under individual policies, so there is a vast potential market
There is a vast potential for family takaful business in Pakistan as very small no
of people are insured under individual life policies. People are usually reluctant to
purchase insurance cover due to religious reasons so Shariah based takaful products
have great opportunity here.
People are investing their savings in Shariah compliant investment avenues
which shows that people prefer to avail Islamic financial products so takaful plans can
also be marketed being excellent investment avenue based on Islamic Shariah Rules.
Takaful rules have been introduced in 2005 in Pakistan. As per these rules,
“Takaful” means a scheme based on mutual assistance in compliance with the
provisions of Islamic Shariah, and which provides for mutual financial aid and
assistance to the participants in case of occurrence of certain contingencies and
whereby the participants mutually agree to contribute to the common fund for that

purpose. SECP and central Shariah Advisory Board are working in close collaboration
to provide assistance to Takaful companies to provide takaful services as per Islamic
Shariah.
4.2 Development of Takaful industry in Malaysia:
Model Diagram of Takaful Business in Volumes & %age in ASEAN countries
Takaful industry in Malaysia started to development in 80's as people were inspired to
avail alternative of conventional insurance schemes, base on the Shariah principles. A

special task force for this purpose was created by government in 1982 and
consequently Takaful Act was formed in 1984. First Takaful operator company was
established in Nov 84 and since then this sector has grown at a rapid pace and now 12
Takaful and 4 retakaful companies are working in Malaysia. Bank Negara, Malaysia the
central bank, has given continuous support to Takaful sector to establish and flourish.
Following Takaful companies are working in Malaysia:
AIA Public Takaful Berhad, AIA Takaful International Berhad (ATIB), Allied
Cooperative Insurance Group EC, AmIslamic Bank , AmMetlife Takaful, Etiqa
Takaful Berhad, Great Eastern Takaful, Hong Leong MSIG Takaful Berhad, MAA
Takaful, Prudential BSN Takaful Berhad, Sun Life Malaysia Takaful Bhd, Syarikat
Takaful, Malaysia Berhad & Takaful IKHLAS.
While following ReTakaful companies are working in Malaysia:
ACR Retakaful, Allianz SE Life Reinsurance, Asean Re-Takaful International, BEST
RE (L) Family Limited, Labuan Re, MNRB Retakaful Berhad, Munich Re ReTakaful &
Swiss ReTakaful
Almost two third of takaful volume of Far East is contributed by Malaysia only.
Foreign investors are also keenly interested to invest in takaful sector of Malaysia and
now both domestic and foreign currencies business is being written by these takaful
companies. Mergers and Acquisition have also taken place by foreign insurers.
Progress
The Central Bank of Malaysia called Bank Negara has introduced separate
takaful regulations for takaful companies to expand takaful business. Other far eastern
countries including Indonesia, Singapore and Brunei, have also made efforts to develop
takaful business.
Takaful industry in Malaysia has seen annual growth of nearly 25% over the last decade.
Mainly takaful business is based on Modarbah contracts. Currently family takaful

market is growing @ 15% per annum here.
Malaysian Takaful sector is well positioned in south east origin as well as other parts of
world, due to regulatory support by government authorities, and continuous people
involvement in these schemes.
By establishing partnerships and alliances with global companies, Malaysian takaful
companies are able to reach new markets of Africa, Europe and Gulf.
4.3 Growth Momentum & key Challenges for Takaful Industry in the GCC:

Model Diagram of Takaful Business in Volumes & %age in GCC countries
Currently total Takaful companies working in Gulf Cooperation Council (GCC)
Countries are 66. The detail is as under: Takaful companies working in Saudi Arabia:
39, Takaful companies working in Bahrain: 07, Takaful companies working in Oman:
02, Takaful companies working in Qatar: 06, Takaful companies working in UAE: 12.
While total ReTakaful companies working in Gulf Cooperation Council (GCC)
Countries are 12. The detail is as under: ReTakaful companies working in Saudi Arabia:
05, ReTakaful companies working in Bahrain: 02, ReTakaful companies working in
Qatar: 01, ReTakaful companies working in UAE: 04.
Business Growth & Performance:
Total volume of global Islamic Financial Markets is estimated at US$2 trillion Takaful
industry is expected to reach US$20 billion by the year 2017 worldwide whereas in Gulf
countries it is expected to be at 09 billion $ in 2013.
Takaful market in this region is likely to maintain its growth pace in near future.
Individually speaking, KSA only has more than 3/4th share of total takaful business in
GCC. UAE is 2nd largest share holder with 15% share of total takaful market. While,
remaining Gulf States have just 8% share in takaful sector of GCC. Qatar & Oman also
are the countries that are striving to build takaful sector on sound footage.
Turkey is a new entry in takaful area, while African markets like Sudan also have
great potential for future takaful growth in the region. Takaful industry in GCC needs
to address key challenges like market opportunities, competitions and regulatory
reforms. Their profitability is threatened due to lack of uniform regulations. Also the
poor performing companies are squeezing out due to competitive environment and in
medium term these are likely to merge
As we see in other countries, here also the competition with conventional sector,

regulatory concerns & qualified human resource are major issues. Structural reforms
and efficient & effective control system is need of time for these companies.
Emerging consumer trends in takaful sector need to be focused by the
companies for future growth and sustainability. Big players may develop those
strategies and products that match policy holder buying power, while smaller
companies might focus on improvement in marketing capabilities and customer
retention through better services to achieve operational efficiencies.
Due to general economic growth, a sizable middle class has emerged in these
countries having awareness of future financial planning, family protection and
compulsory savings etc. Now takaful companies have started developing such
alternative products for those customers. Although there has been an economic
slowdown in world economy & also in takaful sector globally, but GCC countries still
hold major contributing share in 08 billion $ global takaful market.
GCC countries have immense growth opportunity in family takaful sector also as
younger people are more increasingly taking interest in purchasing family takaful
products for their family protection. This is also because takaful products are now
preferably being considered as an alternative of conventional insurance companies,
bearing Shariah compliant business and investment avenues. Family takaful has
remained only at 5% of total takaful contributions although takaful industry has
improved market share of the GCC insurance market
Takaful companies of this region also have opportunities to expand their
business in other parts of Islamic world like South Asian countries including Pakistan,
India, Bangladesh etc and African countries including Egypt, South Africa, Tunisia etc
and EU countries like Turkey, England, France etc.
In Gulf countries, takaful products have been predominantly marketed through
baking channels i-e Bancatakaful, which has been effective distribution channel
specifically in family takaful products. Specific plans for business personnel, working

ladies, health covers and child protection have been introduced by these companies and
have been very popular in the market. These companies usually place their own trained
staff in selected branches of banks to control wrong selling practices.
Individual Gulf countries have different regulatory frame work and companies
have to abide by these rules while operating there. Takaful and retakaful companies
who are in direct competition with conventional companies have to fulfill capitalization
requirements and bear the higher running cost to conduct business in these countries.
Investment opportunities that are compliant with Shariah rules are limited here.
Common issues like qualified human resource, trained marketing personnel and
affective marketing campaign, all are challenging being faced by takaful sector of Gulf
countries.

Chapter 5
Conclusion:
There are certain challenges for the takaful companies to tap their full potential. Some
of the recurring challenges are following:-
(1) Takaful companies in different regions are practicing different operational,
regulatory and accounting strategies. Only some of the countries have passed laws and
regulations for takaful companies. So the takaful industry has still to cover a large
distance to build globally acceptable operational and regulatory standards.
Capable human resource in the insurance and takaful industry is vital for industry to
flourish. The experts of different departments like underwriting and actuaries are only
found in conventional insurance companies. Shariah Rules competency is also a
concern for takaful companies. It is therefore, necessary for these companies to
promote a pool of trained professionals of these fields.
The status of conventional insurance and takaful industry is still confusing for the
majority of Muslim population around the world. The operational models different
products are also being questioned. Muslims in general are reluctant to adopt the idea
of life insurance either through conventional or takaful companies. It is important to
bring awareness in general people about how takaful features are different from
conventional insurance products.
Currently, takaful companies are relying on reinsurance companies for ceding their risk
and increase their risk apatite to future expand their risk profile, so there is a need to
establish a financially credible and strong re-takaful setup. The situation has improved

as now some of giants in reinsurance like Swiss Re and Munich Re etc have entered the
retakaful market.
(2) As the family takaful is considered a viable alternative of life insurance it has solid
growth prospects. A very small percentage of only 2% Muslim population is covered
with insurance facility which is a very low penetration rate as compared to western
population. A rise in general awareness and better income prospects, present an
excellent opportunity for these companies to grow in future.
Health Takaful is fast growing segment in GCC countries being compulsory in these
countries. Family Takaful is also increasing its share in these countries. Total family
takaful premiums in 2010 was at 1.7 billion $ worldwide, which counts for 20% of total
takaful contributions. About three fourth of family takaful business is written in Far
East and remaining 25% is written in Middle East. A very small portion is written in
South Asian and African countries.
Future prospects of family takaful business are very bright as young population of the
Muslim world is inclined towards financial planning etc.
(3) Conventional insurance companies here are naturally trying to protect their business
from being switched over to takaful companies. Takaful operators in Pakistan need to
develop guidelines and operational standards so that people might get takaful coverage
by avoiding any risk. For takaful companies there is limited choice of Shariah compliant
investment avenues, which is also a concern for them.
People have a mind set in general, to attempt to get false claims in order to recover the
premium paid by them, which is a major concern of the life takaful and insurance
companies. This can be achieved through strict underwriting standards and strict
operational measures like scrutiny of claims etc. Due to malpractices from customers as
well as by the companies, the cost of protection ultimately becomes more expensive.

Growth & performance of Takaful operators in Pakistan is a challenge, as currently the
industry has lack of profitability, long-term sustainability, solvency and limited
premiums due to economic and political uncertainty coupled with lowering buying
power of customers. Therefore, if they will not be able to differentiate themselves from
the conventional insurers as well as among themselves they would be hard to survive.
In spite of all challenges, Takaful industry here has high potential to grow and to
develop in order to differentiate itself and create a brand that it is not only Halal, but
also, it is a unique product and a unique experience. Population of the country is
crossing 200 million at present and having 95% Muslim population, Takaful industry
has vast potential in general as well as family takaful sectors.
(4) Most of takaful business is coming from large cities and middle class people and
rural areas are yet to be approached effectively, so takaful companies need to reach
rural population to improve business base in micro takaful products.
Another issue is, like other parts of world, Malaysian companies also have shortage of
skilled, professional and knowledgeable human resource.
Takaful companies need to introduce innovative takaful products in order to compete
with conventional insurance companies which are also attractive for non Muslim
customers as well.
The retakaful industry here also has to establish itself on solid financial grounds. Most
of the takaful operators are doing business with conventional reinsurance companies
and retakaful companies have to perform significantly well to attract their takaful
companies to transact business with them. Takaful companies present themselves as
alternative to the conventional insurance so they have to make affective, strong and
transparent measures to avoid the elements of Riba, Maiser and Gharar in their
business transactions.
The central bank needs to way establish a separate regulatory institution which may be

responsible to regulate and monitor the takaful industry.
(5) Some of the key challenges for the future prospects and growth of Takaful
business in GCC are as follows: Competition among takaful companies is intensifying
intensifies as more players are entering the market. Competition with conventional
companies is also hindering their future growth also due to lack of product innovations.
There is a lack of standard regulatory framework in GCC countries. There are also
some unresolved technical and Shariah issues. Lack of awareness for family takaful
products in certain GCC markets is also a concern. Investment growth has also been
hampered. Investment funds poor performance is also hampering the growth. Shortage
of trained sales force is also a challenge to overcome by these companies. Regulatory
framework is also to be worked out in many countries. Shortage of experienced HR
talent e.g underwriters & actuaries is also a concern. There are many plays in the market
which means that many smaller companies may be merged with others. Shariah Boards
of these companies have difficulty in understanding technical details. Takaful awareness
among people remains low. Surplus distribution has to be made rationally between
company share holders and participants (policyholders).
(6) Some of the key opportunities & the future prospects for growth of Takaful
business in GCC are as follows: Growth of takaful industry is here to stay in the GCC
region due to multiple factors like improved financial conditions and fund market
performance. There is an increased appetite for Shariah compliant products. High
growth of family Takaful within the growing middle class has been seen in past years.
Banca-Takaful is also a way forward for effective family Takaful distribution. Low
penetration of family Takaful in GCC markets also creates opportunities for growth.
Innovative products like availability of retirement products & launch of saving plans
has also been encouraged by the people.

(7) Takaful industry is both general and family sectors will boost further in coming
years with entry of new players in Takaful market and with due to increasing awareness
of Muslim population about Islamic Takaful System. With the improved regulatory and
supervisory control of Takaful institutions by regulatory authorities in these countries,
the growth of takaful sector will be suitable and under Shariah framework. Retakaful
industry is going to play critical and supportive role in the growth of takaful industry in
coming years. Family Takaful has a wider scope to improve its business share as
Muslim population has reached 16 billion. Tax relief to participants of Takaful fund
and investors fund may also follow in improving Takaful growth. Innovative and
affordable retakaful scheme may be launched by these companies to cater poor class
also retirement plans and pensions schemes are also helpful in this regard.

References:
1 Factors Influencing Market Penetration of Takāful Industry in Malaysia: (1985-
2008) by Omaima El Tahir Babikir Mohamed, Syed Othman Alhabshi &
Kamaruddin Sharif
2 Islamic Finance News- May 2012
3 The Performance of Insurance Industry in Malaysia By Muhamad Abduh, Mohd
Azmi Omar and Raudhah Mohd Tarmizi
4 Takaful Business Models, Opportunities, Obstacles and Practical
Recommendations for Islamisation of Insurance System in Pakistan By
Abdul Rahim Abdul Wahab
5 The Global Family Takaful Report 2011
6 Takaful- Regulations Shape the Industry ( Libre)
7 Takaful: An Islamic insurance instrument Nico P. Swartz and Pieter Coetzer
8 www.investpedia.com
9 www.insuranceinfo.com

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