TAKAFUL THE

EMERGING
CONCEPT
Takaful concept has brought a new
dimension to the expanding insurance market.
The aim of this article is to portray
how the concept is spreading to various other
regions, suggestions for rapid growth and
challenges for growth.
This paper will conclude as to how the
concept will post a challenge to the
monopolistic traditional insurance concept.

WHITE PAPER
KRISHNA NANDAGOPAL

TABLE OF CONTENTS
INTRODUCTION ................................................................................................................................. 3
WHO SHOULD READ THIS PAPER? ................................................................................................ 4
WHAT AND WHY?............................................................................................................................... 4
BRANDING ............................................................................................................................................ 5
CURRENT GROWTH ............................................................................................................................ 5
Did you know..? .................................................................................................................................. 6
Benefits galore. .............................................................................................................................. 6
INITIATIVES SO-FAR (The 5 Es) .................................................................................................. 7
FURTHER GROWTH PROSPECTS...................................................................................................... 8
CHALLENGES IN RAPID GROWTH .................................................................................................. 9
CONCLUSION..................................................................................................................................... 12
WIPROS OPPORTUNITY ................................................................................................................. 12
APPENDIX basics of Takaful......................................................................................................... 13
REFERENCES ...................................................................................................................................... 15
ABOUT THE AUTHOR....................................................................................................................... 15
ABOUT WIPRO TECHNOLOGIES................................................................................................... 15
WIPRO IN INSURANCE................................................................................................................... 16

Takaful - the emerging market

INTRODUCTION
Takaful, a concept from the emerging and dynamic Islamic insurance has brought a new
growth path to the insurance market. Considering the flair for Takaful concept and in the
wake of globalization and consolidation in the insurance market one will wonder how rapidly
will Takaful concept grow and can pose a challenge to conventional (traditional) insurance.
The aim of the author is to analyze how Takaful is penetrating and various ways and means
it can grow faster in the current market and can pose a threat for conventional insurance,
despite significant challenges and stumbling blocks.
The objective of this document is not to explain why Takaful has emerged or its various
models. For readers information details about Takaful models are listed in Appendix.

Takaful - the emerging market

WHO SHOULD READ THIS PAPER?

Companies intending to adapt Takaful concept either through mergers or acquisitions, would
be more interested to understand how better Takaful spread can be navigated through.
Also insurance companies practicing Takaful would be interested to know how to spread
their areas of operation based on the suggestions provided.
It would also be of interest to other individuals in the firm who are involved in risk analysis
and assessment process (e.g. Industry and risk analysts, investment advisors and financial
consultants)
Of interest would be for software consultants and solution design companies, which aim at
providing solutions for the insurance companies.

WHAT AND WHY?

Takaful is an Islamic insurance concept which is based on Islamic Muamalat (banking
transactions), observing the rules and regulations of Islamic law being practiced in various
forms for over 1400 years.
Takaful is defined as a mutual arrangement between parties in which they agree to provide
material assistance among the group, at times of misfortune
One might wonder as to why only Takaful is being projected as a growth factory, in
comparison with other products/concepts which evolved during the same time. It is because
of the various benefits it provides to contributors that it is accepted and projected on high
stakes.
Takaful system is based on mutual co-operation, responsibility, assurance, protection and
assistance between groups of participants and is treated as a form of mutual insurance.
This is in response to the commonly accepted incompatibility between Islamic belief and the
conventional insurance model, and is considered an alternative to conventional insurance
among the Muslim world.

Takaful - the emerging market

BRANDING
Considering the acceptance and spread of Takaful in the burgeoning world market, why
should one brand Takaful as an Islamic Insurance concept or Islamic alternative to
insurance? It would be wise to stamp it as just Takaful.

CURRENT GROWTH
Statistics depict Takaful market growth @ 20% per year currently. Considering the current
market crises (consolidation and unstable capital among conventional players), and the
disbelief among the public on the conventional players will the Takaful market win over an
edge and grow @ 30% or 40% per year or even more? If public can have an alternative to
conventional insurance will they try or want to explore it further to see the benefits? Lets
analyze further the facts and arrive at a conclusion.
Statistics further depicts that only 5% of the world Muslim population is being covered and
the remaining 95% untapped. Various significant steps are underway in the Muslim countries
to spread the knowledge and awareness of General, Group, Family and various other new
Takaful products.
According to Ernst & Youngs recently-launched World Takaful Report 2008, accepted
contributions are expected to rise to more than $4.3 billion in 2010 and that a 20% growth
rate of the industry would be maintained, going forward.
Ithmaar Banking Group and Islamic Banking and Finance Institute Malaysia (IBFIM), Global
Islamic Finance Forum predicts that by 2015 the expected potential is $7.4 up to $14
billion, with a growth of 15% to 20% per annum.

Takaful - the emerging market

Did you know..?

Sudan, an African region, introduced the first general Takaful product in 1979. General
perception is that it is an effective, fair and transparent measure of risk mitigation, set to
have an exponential growth across the world.
A religiously triggered and motivated goal of Takaful is community well being which does not
aim in high profit making.

Benefits galore.
The inherent attraction of Takaful as an ethics-based product is always going to appeal
more to individuals than organizations, which may be profit driven.
In the current civilized market of transparency and knowledge among public the mass is
being pulled towards Takaful concept. An assured return on their hard earned money (which
is paid as premium) even if there is no eventuality, acts as a double burger (insurance
coverage and profit dividend)
The concept facilitates participants to obtain two forms of benefit, firstly the monetary
profits through this protection scheme, and secondly the profit in the spiritual senses
whereby participants can exercise their religious and social responsibilities through the
'Tabarru method which would be handed to those who suffer losses and misfortune.
The system is not only for the benefit of Muslim but also for the prosperity of all
participants, irrespective of their religious beliefs.
One of the ultimate benefits in Takaful, unlike conventional insurance is it allows
policyholders who have not lodged any claims during the period of their policy coverage to a
profit dividend (mudharabah), even up to 30%.
Apart from Muslim countries where the concept is rapidly growing at the rate of 20% each
year, with Malaysia the largest Muslim populated country in the world leading the pack,
awareness is spreading in regions like Asia and European countries with United Kingdom,
France and Germany leading the band wagon.

Pictorial representation of Muslim population around the world:

Source: Freerepublic.com

The backbone of every business plan is assessment of the market potential. The potential is
enormous considering the huge size of untapped market and more specifically the young
urbanized Muslim population across the world whose preference is more towards Takaful.
Customers expect Takaful operators to be on par with conventional insurers in respect of
product offering, service level, financial security and value-for-money.

INITIATIVES SO-FAR (The 5 Es)

Early bird: The first branded Micro Takaful policy named Navodaya, (dawn of a new era)
catering to the lower income groups was launched in Sri Lanka in April 2008.
Education: The Bahrain Institute of Banking and Finance (BIBF) have introduced the worlds
first qualification in Takaful, accredited by UK's Chartered Insurance Institute (CII).
Encouragement: Every year in the World Takaful Conference a Takaful leader is awarded
with WTC Takaful Leader of the Year award, which add as a motivational factor.
Envy: Many countries are amending their existing country laws to cater to Takaful insurance
companies in order not to be left behind in the race.
Excogitate: Takaful specific brokers associations are thinking in lines of innovative products
for untapped sectors.

Not to miss the boat many countries and its interested organizations are taking multiple
rapid actions to create their own foot print.

FURTHER GROWTH PROSPECTS

Organizations targeting Takaful to penetrate the lucrative market rapidly can try to adapt
below enforcements:
Takaful operators adhering to the standards of AAOIFIs (the Accounting and
Auditing Organization for Islamic Financial Institutions) rigorous regimes whose
products can be rolled out across the world
Adopting world class standard in Underwriting, Claims Management, Risk
Management and Capital Efficiency
Forward thinking, not imitation, will succeed
Value-for-money offerings in combination of customer service and standards
Introduce new innovative and culturally sensitive products and/or solutions focused
on local market conditions
Penetrate through Bancassurance (Banc Takaful)
Initially target Micro Takaful an ice-breaker to enter any hard market
Use 5i framework of risk mitigation (Insight, Information flow, Incentives,
Investment and Institution)
Importance to Takaful education (e-learning)
Harmonization is important for facilitating growth on a global scale

Takaful - the emerging market

CHALLENGES IN RAPID GROWTH

- Competition with established traditional players:
- This is a real challenge as Takaful players have to get an edge over conventional
players, with a convincing answer for the customers.
- Regulatory and legal framework
- Lengthy process to set up a new company filled with red tape activities which can
be tiresome and disheartening.
- Shariah requirements differ between jurisdictions making it difficult to come up
with products that can be offered internationally
- Conflict between Federal and State laws, if applicable, which dilute the interest of
operators
- Takaful rating approach, catering to the local and international market:
- Since the initial concentration would be to capture the local market, rating
approach should accommodate the local market conditions, at the same time should
strike a balance for international market.
- Awareness and education:
- Reaching and educating the lower-end of the population is a significant challenge.
- Research and Innovation:
- In the current market meltdown the organizations should be willing to spend more
on deriving new innovative Takaful products
- Capital efficiency and risk based solvency regimes (EU):
- Not many new entrants will step forward to take the risk of investing, considering
the current imbalanced trend.
- Scalability:
- Takaful concept and its products should be capable enough to scale to greater
heights in terms of risk coverage and spread, which it is not capable now.
- Re-Takaful (like reinsurance) capacity
- Applications catering to Takaful products
- Software applications suitable to Takaful products to be developed
The final challenge lies not only in tapping extrinsic demand but also in developing their
capacity and expertise to provide a competitive alternative to conventional insurance.
In practice analyst say, Takaful can be a substitute of mutual insurance only which can be
used for a limited type of risk like personal insurance, but commercial and complicated risk
is difficult to insure on mutual basis. To accommodate complicated risks Takaful can go in
for ReTakaful, which is taking shape with Munich Re, Allianz, AIG and GIC taking a step
forward to reinsure Takaful business.
Peter Hodgins, a senior legal consultant in the Islamic finance group at the DLA Piper
Middle East, says that the opportunity here for the Takaful industry is enormous, but its a

question of whether it has the capacity and the experience at this stage to write completion
risk in the construction industry, since there are billions of dollars of projects currently
underway. I think that will come in time, but there is a clear opportunity.
It is accepted that American and European market is untapped, for which the Takaful
players have to really think very hard to try entering the market with their innovative and
competitive products.
Despite the significant challenges the outlook for the Takaful industry has entrusted the
Islamic finance world to underwrite risk through Takaful.

Highlights of Takaful spread for your eyes:

Global Takaful Group, successor of ASEAN Takaful Group has more than 23
members from Asia and Middle East, and continues to receive enquiries from
across the globe for its membership.
A new Pakistans government policy says conventional insurers that wish to
write Takaful business can do so now through "window operations"
(operations affiliated with conventional insurers)
Pakistan government is likely to announce tax incentives for those who buy
life insurance and Takaful in the 2008/09 fiscal Budget.
According to Dr Malaikah, in 2007 alone 21 operators joined the market and
at the end of the year, the insurance business stood at $2.2 billion. This is
predicted to more than double in three years. Joining in soon will be Takaful
giant SALAMA, which is in the process of establishing a $300-million
reTakaful outt
Bahrain-based Solidarity to launch US$148 million Takaful Unit in Saudi
Arabia, for which a preliminary approval from SAMA (Saudi Arabian
Monetary Agency)
Baharins Takaful International awarded a 4 yr contract, one of the biggestever insurance signings in the Gulf and the first shariah-compliant model of
its kind in Bahrain, to insure Bahrain Ministry of Electricity and Water
properties which includes a catalogue of power plants, sewers and water
treatment plants worth BHD1.6 billion (US$4.2 billion).
Bangladesh Takaful market looks to outplace conventional market, with 6
players already having a full fledged Takaful operation. Under the new
ordinance law insured can now choose between conventional or Takaful
insurance.
As always taking the lead Allianz has become the first major insurance
company to offer Micro-Takaful insurance
According to Moodys report the actual depth of Shariah-compliant financial
intermediation was only $18 billion at the end of 2007, equal to a market
share of less than 8% of its potential size
The Gulf Cooperation Council (GCC) is the heart of the global Takaful
market, with accepted contributions in excess of US$1 billion as compared

to global contributions of $2 billion in 2006. According to Ernst & Young, of

the world total of 133 Takaful operators, 59 are within the GCC.
Takaful IPO in UAE and Saudi Arabia was oversubscribed many times.
Qatar now has 5 Takaful companies, following Qatar General Insurance &
Reinsurance Cos launch of its Takaful subsidiary.
Syrias 3 Takaful companies intend to launch operations this year.
Omans 1st Takaful Company operates under the name of Al Madina Gulf
Insurance Co.
Kuwait already has 11, Egypt has 6 and many more in South Africa, Gambia,
Thailand, Brunei, Indonesia, Australia, Lebanon
Spread in non Muslim area
Michael Bradford in the 4th Annual Middle Eastern Insurance Forum in
Manama says that by 2015, the Takaful market will attract from $7.4 billion
to $14 billion in gross writings, with 27% of it originating in Europe and the
United States. Asia will be the biggest producer in Takaful.
India will have one shortly if Insurance Regulatory & Development Authority
(IRDA) approves the association of Bajaj Allianz Life Insurance and the
broking firm Parsoli Insurance Broking Ltd
Sri Lankas Amana Takaful Insurance's gross written premiums grew by 41%
year-on-year to LKR412 million (US$3.6 million) in the first half of 2007.
Surprisingly the Takaful will grow along with conventional insurers.
In UK Principle Insurance, formerly known as British Islamic Insurance
Holdings, became Britain's first independent Takaful provider after
receiving regulatory approval from the Financial Services Authority (FSA).
It will offer Shariah compliant home and car insurance later this year
Malaysia launched its first Takaful policy (BAI Takaful) through British
American Insurance Co. (BA Insurance)
ReOrient Legal Limited completed the legal work for the launch of the first
Takaful Syndicate in Lloyd's of London

CONCLUSION
Even though the Takaful market is premature in itself, but still if all the above
challenges can be handled professionally and tactfully it will grow and emerge as a
winner by the year 2025 or at least will take away a major pie from the conventional
insurance.
The current global market turbulence, at par with 1930 market collapse, is one of the
major challenge for Takaful. Besides it is also a major opportunity to enter the
cyclonic sweep across the world using the sub prime mess.
In the market of mergers, acquisitions and consolidation in the insurance and banking
industry market, it would be a global opportunity for the Takaful aspirants to initiate
and introduce market favoring products so as to penetrate the market quickly.
The strong belief is that Takaful can and has the capacity to replace the monopoly
conventional insurance market in the coming decades, considering the vigor with which
it is being adopted by different countries and the speed in which it is spreading across
world community.
Lets watch the tussle between the muscles!

WIPROS OPPORTUNITY
Wipros strong domain capabilities coupled with training on the Takaful concepts can
proactively start to explore the market in which this concept is emerging or spreading and
use its existing client base to move ahead. Wipro can help to provide solutions and/or
suggestions based on its experience in various geographies.
Wipro can analyze the insurance solutions/products being currently used by the insurance
companies and provide value-add proactive suggestions, to help how to handle the new
market situation.
Wipro can also look into using its existing partnership with product based companies to see
how the product can be customized for the new emerging market segment.

Takaful - the emerging market

APPENDIX basics of Takaful

Source: World Takaful Report 2008

Source: World Takaful Report 2008

Basic terms in Takaful market:

Aaqilah: Mutual help.

Gharar: Uncertainty, hazard, chance or risk, sale of a thing, which is not
present at hand.
Hadith: Report of a Sunnah.
Halal: Permissible.
Hanafi: An Islamic School of Law founded by Imam Abu Hanifa. Followers
of this school are known as Hanafis.
Haram: Not permissible.
Maisir: Gambling, any form of business in which monetary gains come
from mere chance, speculation and conjecture or not from work or real
sector business.
Mudarabah: A form of a business contracts in which one part brings
capital and the other personal effort. The proportionate share in profit
is determined by mutual agreement. But the loss, of any, is borne only by
the owner of the capital, in which case the entrepreneur gets nothing for
his labor. The financier is known ad rab-al-maal and the entrepreneur as
mudarib. As a financing technique adopted by Islamic bank it is a
contract in which all the capital is provided by the Islamic bank while the
business is managed by the other party. The profit is shared in preagreed ratios, and loss, if any, unless caused by negligence or violation of
terms of the contract by the mudarib is borne by the Islamic bank. The
bank passes on this loss to the depositors.
Quran: Devine Book of Islam.
Riba: An excess or increase. It covers interest both on commercial and
consumer loans.
Ryals: Saudi Currency.
Sharia: The way of Allah as shown by the Quran and the Sunnah of the
Prophet Muhammad (PBUH). The term is used to refer to the Islamic law.
Tabarru: To donate for benefits of others.
Takaful: Mutual support which is the basis of the concept of insurance or
solidarity among Muslims.
Takaful Taawani: Mutual Insurance.
Wakalah: Agency.

REFERENCES
www.insurancereview.com
www.arabianbusiness.com
www.asiainsurancereview.com
www.icmif.org
www.wikipedia.org
www.ikhlas4u.com

ABOUT THE AUTHOR

The author is an Insurance Consultant with Wipro Technologies, Chennai, India.
e-mail: krishna.nandagopal@wipro.com

ABOUT WIPRO TECHNOLOGIES

Wipro is the first PCMM Level 5 and SEI CMMi Level 5 certified IT Services Company
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Takaful - the emerging market

WIPRO IN INSURANCE
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