Takaful: An Emerging Industry in the Middle East
By Shivangi Muttoo
Takaful or Islamic insurance is becoming increasingly popular in the Middle East particularly in GCC nations because it is suited to the principles of Islam. The region has a large untapped insurance market because conventional insurance has certain elements like gambling, uncertainty and interest which are prohibited by Islam. This is one of the reasons for the almost negligible growth of the conventional insurance sector. Since takaful accounts for Islamic principles, it has enormous potential to emerge as a suitable alternative to conventional insurance in the Middle East.
Takaful is an insurance scheme based on mutual co-operation, solidarity and brotherhood where the risk is shared collectively by the group. The insured or the policy holder contributes to the takaful fund and in case of a catastrophe or an adversity; the policy holder receives compensation from the takaful fund. There are two types of takaful: family (medical-health, education, retirement) and general (property, car/motor, accident).
Takaful is conceptually different from conventional insurance. In general insurance, the risk is transferred to the insurance company whereas Islamic insurance is based on risk sharing among the participants. The conventional insurance operator charges interest and the surplus generated is the profit earned by the company. The takaful scheme is free of interest and the profit is shared between members and insurance operator after the claims are settled and is based on a pre-agreed profit sharing ratio. The general insurance contract binds the ‘insured’ to pay certain number of premiums in a year. Islamic insurance is not a contract but a membership, therefore the operator returns the premiums if the ‘insured’ is unwilling to participate.
Takaful originates from the Arabic word ‘kafala’ which means ‘guaranteeing each other. It evolved from the ancient methods of risk protection in the Arab region. The Arab sailors contributed to a fund which would compensate any sailor who suffered loss due to accident or mishap. Modern takaful originated in the late 1970s in Sudan where the first Takaful fund was created. In the 1980s, takaful emerged as a profit sharing model of insurance in South East Asia. In recent years, a combination of risk and profit sharing form of insurance is increasingly becoming an acceptable model of insurance in the Middle East.
The annual growth rate of the takaful industry is 39%. In the GCC it is growing at the rate of 45%. The GCC accounts for 39.7% of the total takaful contributions, while the Far-East accounts for 12.2% and Africa for 3.2%. UAE is the fastest growing Islamic insurance market and Saudi Arabia is the largest takaful market in the region. The non-GCC countries such as Egypt, Lebanon and Yemen are also experiencing a rise in the takaful sector. In 2002, when it was introduced in Egypt, the total contributions amounted to EP 1 million. By 2005, the figure rose to EP 15 million. In the next few years, it is estimated that Islamic insurance companies will spring up in Jordan and Syria
The Takaful market in the Middle East is set for a boom over the next few years. The takaful industry in the region, collected close to USD 1 billion contributions in 2005, is likely to cross USD 4 billion or even more by 2015. The region will remain the largest takaful market globally. The rise of Takaful as a suitable alternative to conventional insurance will likely create a full fledged insurance industry in the region which will certainly boost economic growth in terms of rise in savings, investments, and job opportunities in the banking- insurance sector. Itcould play a significant role in alleviating poverty in the region as the profit sharing aspect makes Takaful extremely beneficial for the poor and the low-income families.
Once the Islamic insurance industry establishes itself in the coming years, it will be interesting to ask if Takaful will venture beyond Muslim nations. Since the takaful fund accepts contributions from non-Muslims, the conventional insurance sector is showing great interest in Islamic insurance. If one or two international banks and insurance companies offer Takaful, it will lead to a substantial increase worldwide. Moreover, only 70 million of the total 1.3 billion poor in the developing countries are covered through microfinance which is mostly funded by donor agencies. Therefore, Takaful may emerge as the global insurance for the poor in the future.