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Role of Takaful in Islamic FinanceRole of Takaful in Islamic Finance
By:
Capt. M. Jamil Akhtar Khan ACII, MCIT, Master Mariner
Managing Director
The Universal Insurance Company Ltd.
4th International Conference on Islamic Banking & Takaful, Lahore
November 2, 2010.
Outline of PresentationOutline of Presentation
Takaful DefinedTakaful Defined Historical Perpective Historical Perpective Takaful today Takaful today Islamic Finance Versus Conventional Islamic Finance Versus Conventional
BankingBanking Exposures in Islamic FinanceExposures in Islamic Finance Coverage of exposures ― BancaTakafulCoverage of exposures ― BancaTakaful Cutting Edge…!Cutting Edge…! The Universal Insurance Company Ltd.The Universal Insurance Company Ltd. ConclusionConclusion
TakafulTakaful defineddefined
Takaful comes from the Arabic root-Takaful comes from the Arabic root-word word ‘kafala’‘kafala’ — guarantee. — guarantee.
Takaful means mutual protection and Takaful means mutual protection and joint guarantee.joint guarantee.
Operationally, takaful refers to Operationally, takaful refers to participants mutually contributing to a participants mutually contributing to a common fund with the purpose of common fund with the purpose of having mutual indemnity in the case of having mutual indemnity in the case of peril or loss.peril or loss.
Meaning of TakafulMeaning of Takaful
Reference — Al Quran:Reference — Al Quran:
““Help (ta’awan) one another in Help (ta’awan) one another in furthering virtue (birr) and Allah furthering virtue (birr) and Allah consciousness (taqwa) and do not consciousness (taqwa) and do not help one another in furthering evil help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2).and enmity”. Al Maidah: verse 2 (5:2).
Takaful is a form of mutual help (ta’awun) Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others in furthering good/virtue by helping others who are in need / in hardship .who are in need / in hardship .
Reference – Hadith:Reference – Hadith:
““tie the camel first, then submit tie the camel first, then submit (tawakkal) to the will of Allah”(tawakkal) to the will of Allah”
The hadith implied a strategy to The hadith implied a strategy to mitigate/reduce risk.mitigate/reduce risk.
Takaful provides a strategy of risk Takaful provides a strategy of risk mitigation/reduction by virtue of mitigation/reduction by virtue of collective risk taking that distributes collective risk taking that distributes risks and losses to a large number of risks and losses to a large number of participants. This mitigates the participants. This mitigates the otherwise very damaging losses, if borne otherwise very damaging losses, if borne individually. individually.
Takaful – Historical PerspectiveTakaful – Historical Perspective
Takaful through TimeTakaful through Time Origins in the First Constitution of Madina.Origins in the First Constitution of Madina.
It evolved and continued in one form or the It evolved and continued in one form or the other throughout the Abbaside period and other throughout the Abbaside period and even later during the Ottoman empire.even later during the Ottoman empire.
Serious efforts were made in modern times, Serious efforts were made in modern times, in 1970s to come up with an Islamic in 1970s to come up with an Islamic alternative to the conventional insurance.alternative to the conventional insurance.
The first Takaful company was set up in The first Takaful company was set up in Sudan in 1979, almost simultaneously Sudan in 1979, almost simultaneously followed by another followed by another
one set up in Bahrain.one set up in Bahrain.
Takaful TodayTakaful Today There are now around There are now around 180+180+ Takaful Takaful
companies in over 40 countries. companies in over 40 countries.
The The totaltotal insurance premium of OIC countries insurance premium of OIC countries for 2006 was USD 75 Billion; of this, Takaful for 2006 was USD 75 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 3.5 contribution accounts for 5% (i.e. USD 3.5 Billion). This is expected to increase to USD Billion). This is expected to increase to USD 12 Billion by 2015.12 Billion by 2015.
Poor Insurance penetration in the Muslim Poor Insurance penetration in the Muslim countries (<1% of GDP).countries (<1% of GDP).
Average growth rate higher than conventional Average growth rate higher than conventional insurance companies (around 25%).insurance companies (around 25%).
Non–Muslims increasingly opting for Takaful Non–Muslims increasingly opting for Takaful products for commercial benefits.products for commercial benefits.
Takaful Prospects in PakistanTakaful Prospects in Pakistan 97% Muslim population.97% Muslim population.
Demand for insurance shall increase with Demand for insurance shall increase with increase in per capita income.increase in per capita income.
Personal lines insurance business (leasing, Personal lines insurance business (leasing, health, Medicare) growing at a higher rate health, Medicare) growing at a higher rate than other conventional classes.than other conventional classes.
Islamic banking already on sound footing.Islamic banking already on sound footing.
People who do not insure due to People who do not insure due to religious reasons.religious reasons.
People who insure and are insensitive People who insure and are insensitive to religious reasons. to religious reasons.
People who currently do not insure at People who currently do not insure at all.all.
TakafulTakaful – Target Market– Target Market
Islamic Finance Versus Islamic Finance Versus ConventionalConventional BankingBanking
Conventional banking is money lending.Conventional banking is money lending.
Islamic finance is partnership in trading.Islamic finance is partnership in trading.
Ijara financing – Rental agreementIjara financing – Rental agreement
Musharaka/Mudaraba – Partnership Musharaka/Mudaraba – Partnership AgreementAgreement
Murabaha – Sale with profitMurabaha – Sale with profit
Salam – crop financing Salam – crop financing
Istasna – manufacturing financeIstasna – manufacturing finance
Exposures in Islamic FinanceExposures in Islamic Finance In Islamic finance, full or part ownership is In Islamic finance, full or part ownership is
retained by the bank.retained by the bank. This entails considerable exposures for the This entails considerable exposures for the
banker in the various forms of its trade banker in the various forms of its trade financing.financing.
The banker lacks hands-on expertise for several The banker lacks hands-on expertise for several of such trading exposures.of such trading exposures.
Takaful as a means for hedging such exposures.Takaful as a means for hedging such exposures.
Takaful exists even independently of Takaful exists even independently of IslamicIslamic
Finance but Islamic Finance depends Finance but Islamic Finance depends
upon Takaful…!upon Takaful…!
BancaTakaful and Coverage of BancaTakaful and Coverage of ExposuresExposures
BackgroundBackground Range of ProductsRange of Products
Savings Savings → → Personal Accident, Personal Accident, Homeowners’ Comprehensive, Credit Homeowners’ Comprehensive, Credit Cards, etc. Cards, etc.
Financing, Individuals Financing, Individuals → Car Ijarah, → Car Ijarah, Housing Musharika, Mortgage Housing Musharika, Mortgage Takaful.Takaful.
Financing, SMEs Financing, SMEs → Trade Credit → Trade Credit Takaful, Business, Office, Equipment, Takaful, Business, Office, Equipment, Assets.Assets.
E-CommerceE-Commerce
Bancatakaful (…Cont’d)Bancatakaful (…Cont’d)
Advantages of BancaTakaful:Advantages of BancaTakaful: Facilitation Desk / Equipment. Facilitation Desk / Equipment. Fast Turnaround Time.Fast Turnaround Time. One-Stop shop for Clients.One-Stop shop for Clients. Concept of Islamic Financial Concept of Islamic Financial
Supermarket.Supermarket. Value Added Services.Value Added Services. Law of Large Numbers.Law of Large Numbers.
Lower Contribution Rates.Lower Contribution Rates. Attraction for Depositors.Attraction for Depositors.
Synergy.Synergy.
CUTTING EDGE… !CuttingCutting Edge…!Edge…!
InvestmentIncome
Operational Cost of Takaful
/ ReTakaful
Claims &Reserves Surplus
(Balance)
P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)
Mudarib’s Share of PTF’s
Investment Income
Wakalah Fee
InvestmentIncome
Management Expense of
the Company
Profit/Loss
S H A R E H O L D E R S’ F U N D (S.H.F.)
Participant
WAQF
Takaful Operator
Share Holder
Wakala-Waqf Model
Investment by the Company
THE UNIVERSAL INSURANCE THE UNIVERSAL INSURANCE COMPANY LIMITEDCOMPANY LIMITED
The Company has entered The Company has entered 5050thth year of its operations. year of its operations.
Majority shares are held by the prestigious ‘BIBOJEE Group of Majority shares are held by the prestigious ‘BIBOJEE Group of Companies’.Companies’.
The Company is listed in all the stock exchanges of Pakistan.The Company is listed in all the stock exchanges of Pakistan.
It is an ‘A’ rated general insurance company.It is an ‘A’ rated general insurance company.
Duly certified as ISO 9001 compliant.Duly certified as ISO 9001 compliant.
Managed by dedicated insurance & finance professionals, the Managed by dedicated insurance & finance professionals, the Company has an extensive country-wide branch network.Company has an extensive country-wide branch network.
The Company is now planning to expand its operations by The Company is now planning to expand its operations by setting up Islamic insurance windows/branches in strategic setting up Islamic insurance windows/branches in strategic regions.regions.
In addition to dealing in all classes of general insurance In addition to dealing in all classes of general insurance business, business,
we are focusing on providing Micro-insurance we are focusing on providing Micro-insurance at grass-roots level.at grass-roots level.
ConclusionConclusion
Takaful introducedTakaful introduced Takaful through Time Takaful through Time Takaful – current perspectiveTakaful – current perspective Islamic Finance and Conventional Islamic Finance and Conventional
BankingBanking Exposures in Islamic FinanceExposures in Islamic Finance Cutting edge – The Takaful Cutting edge – The Takaful
advantage!advantage! The Universal Insurance Co. Ltd.The Universal Insurance Co. Ltd.
