Implementing Takaful in India: Prospects, Challenges, and Solutions 9811662800, 9789811662805

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Syed Ahmed Salman

Implementing Takaful in India Prospects, Challenges, and Solutions

Implementing Takaful in India

Syed Ahmed Salman

Implementing Takaful in India Prospects, Challenges, and Solutions

Syed Ahmed Salman Faculty of Business and Accountancy Lincoln University College Petaling Jaya, Selangor, Malaysia

ISBN 978-981-16-6280-5 ISBN 978-981-16-6281-2 (eBook) https://doi.org/10.1007/978-981-16-6281-2 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

This book is dedicated to Badrudduja Munawari, my brother, mentor, teacher, and friend; I would be nothing without his assistance. And Tahniyath, Hanzalah, and Hamdah, my excellent, lovely, and sweet family

Foreword

The concept of an “Islamic financial system” has grown significantly in scope during the last four decades. Islamic finance establishes a Shariah-compliant financial system. It recognizes human dignity and justice, endowing all humanity with privileges. The problem of “interest” is the primary feature that differentiates the Islamic financial system from the conventional financial system. Islam justifies its viewpoint by claiming that the interest-based financial system is a type of economic slavery in which the rich get richer, and the poor stay poor. Eventually, the economic system as a whole will deflate. Islamic finance is the fastest expanding segment of the financial sector, not just in Muslim nations but also globally. India is home to the world’s third-largest Muslim population. However, there are few Islamic financial institutions. The operation, socio-economic performance, and potential of Islamic financial institutions in India are all unknown. Takaful is founded on the principles of ethics and justice and the concepts of Tabarru’ and Ta a¯ wun (cooperation). For a Takaful policyholder, this entails the common sharing of risk. It involves the communal sharing of risk by members of the Takaful insurance. Thus, Takaful is not just for Muslims, it is for anyone who recognizes its superior benefits. Apart from providing the same level of security and protection as conventional insurance, Takaful has the extra advantage of being free of risk, usury, and gambling. When compared to its competitor, this gives Takaful an advantage. Additionally, Takaful provides access to a pool of Muslim customers who avoid traditional insurance due to its prohibition of certain elements. Takaful, on the other hand, is certified halal and is considered permissible in Islam. Another fascinating aspect of Takaful is that if a surplus exists, all parties, including the insured, must share it with the Takaful operators. This feature does not present in conventional finance. To my mind, there is a shortage of material on Takaful in India. Hence, this book will contribute significantly to knowledge in the Islamic insurance field, particularly in India. This book discusses the importance of Takaful in India, as well as its possibilities and potentials. The most intriguing section of this book examines the advantages, disadvantages, opportunities, and threats associated with implementing Takaful in vii

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India. Additionally, the author conducts interviews with insurance companies to ascertain how to overcome the inherent vulnerabilities and dangers to Takaful establishment in India. It is an excellent resource for researchers, regulators, and academic institutions. This book provides an in-depth examination of the feasibility of Takaful in India and, as such, will be of interest to operators, investors, regulators, as well as present and prospective participants. Dr. Syed Ahmed Salman’s participation in this effort has been immensely appreciated, and I would like to convey my gratitude to him on this occasion. I believe that he has made a significant contribution, particularly in the light of the potential of Takaful in India. Hyderabad, India July 2021

Syed Badrudduja

Preface

In the name of Allah Subhanahu Wataala, The Most Compassionate and the Most Merciful, all praises due to Allah SWT and peace and blessings be upon his beloved Prophet Mohammed Sallallahu Wa Aalihi Wassallam. Alhumdulilah, from the depth of my heart, I express my deep, sincere gratitude to the Almighty Allah for the strength, patience, robustness, capability, and endurance bestowed upon me to complete this book. The Islamic financial markets are based on certain core principles that are clearly outlined in the sources of Shari’ah. The Quran and Sunnah prescribe avoidance of interest and investing in non-Shari’ah compliant businesses. In addition, uncertainty, gambling, and other elements are prohibited. The primary reason Islam prohibits these elements is to avoid any party suffering from injustice at the hand of others. The practice of interest puts the borrower in a difficult position while favouring the rich lender whose money acts as an asset and helps him to accumulate more and more money. Regardless of the borrower’s financial situation, the rich lender expects him to pay the principal and some additional amount as interest over and above it. This practice uses money as a commodity that guarantees the principal’s return but secures interest when it is due. There is a flip side to this. The lenders will have no right to share the profit earned by the borrower except the predetermined interest. Islam does not rule out risk as far as a business activity is concerned. However, it does prohibit when one party creates uncertainty for the other to gain an advantage. For example, conventional insurance practice is based on the same ground of uncertainty. Firstly, the subscribers are not sure of the intent of the premium. Secondly, the companies cannot predict if the future will hold gain or loss for them. It depends on whether the policyholders make a claim or not. If they do, the insurance company will treat it as an expense, and, otherwise, the company makes a profit. The gain or loss is itself a matter of chance. Consequently, the existence of uncertainty in the insurance leads to gambling. The companies usually have the upper hand in deciding the premiums they use to their full advantage. They plan and charge a premium that is sufficient to cover any losses that the company anticipates and makes profits. Takaful is not something novice, but instead, it goes back to the time of the Prophet (Peace be upon him). Nevertheless, a different term known as ‘Aq¯ılah was used to ix

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refer to this concept, where it was practised as a payment by a murderer’s kin to the victim’s heir. There were many instances where the Arab tribes, the Prophet, and his companions implemented ‘Aq¯ılah. When the concept and practice of Takaful are examined, it is free from interest, uncertainty, and gambling. These are the main elements prohibited in Islam. However, it has been evidenced that these elements are also banned in teaching other religions believed by the Indians. The following are some of the shreds of evidence for the prohibition of the above-said aspects in the religious teachings: Prohibition of interest in Islam, “O Believers fear Allah and give up that interest which is still due to you if you are true believers, but if you do not do so, then you are warned of the declaration of war against you by Allah and His Messenger. If, however, you repent even now, you are entitled to your principal…” (Surah al-Baqarah, 278–279). Prohibition of interest in Christianity, “Take thou no usury of him or increase but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase” (Leviticus 25:36–37). Prohibition of gambling in Hinduism, “A Gamester/gambler says, ‘My wife holds me aloof, my mother hates me.’ The wretched man finds none to comfort him” (Rigveda 10: 34:3). Prohibition of gambling in Sikhism referring to the saying of the first Guru Nanak Dev Ji, “The thief, adulterer, and gambler are pressed like the mustard seed in the millstone.” Prohibition of gambling in Buddhism by referring to Sigalovada Sutta’s “The Layman’s Code of Discipline,” “There are six evil consequences of gambling which are the hate by the loser towards the winner, lost wealth by the loser, unreliable character, hate by friends and associates, not caring for a wife.” Prohibition of uncertainty due to its consequence of social injustice can be found in the teaching of Judaism, “God has shown you, O man, what is good; and what does the Lord require of you but to do justly, and to love mercy, and to walk humbly with your God?” (Micah 6:8) India is one of the most ethnically, linguistically, and religiously diverse nations in the world. The majority of the Muslims are isolated from insurance, and the inability of this coverage to attract Muslim investments has been due to the lack of Takaful companies in India. Even though India is a multi-religious country, but the fact that Takaful concepts and principles that are highly embedded with good values and ethics are undoubtedly attractive to other religions since all religions demand a certain standard of ethicality. This book paves the way to the introduction of Takaful in India by examining the perception of insurance operators on its viability. The insurance operators have better knowledge about the market demand and issues the operators face to sell the insurance

Preface

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products. Thus, their opinions are essential since they are also the potential suppliers of Takaful if it is offered in India. This book encourages insurance companies and regulators to explore this new market segment, i.e. offering Islamic insurance to boost the insurance industry. Since India is a very diverse country with many religions and cultural backgrounds, accepting Islamic insurance is a reasonable step towards realizing a truly free multicultural society. Petaling Jaya, Malaysia September 2020

Syed Ahmed Salman

Acknowledgements

Alhumdulilah, as I complete the writing of this book, I express my heartfelt appreciation to the Almighty Allah for providing me with the resources such as strength, patience, robustness, capability, and endurance that have enabled me to finish. No words can adequately express my sincere thanks to Dr. Sandeep Poddar, Deputy Vice Chancellor (Research and Innovation) at Lincoln University College, Malaysia, who has helped me tremendously. He guided me through the writing of my book, showing tolerance and knowledge along the way. Also, My special thanks must go to Prof. Dr. Abhijit Ghosh, Dean, Faculty of Business and Accountancy at Lincoln University College, for his assistance, guidance, and moral support for being meticulous to work harder and do my best. Finally, I would like to convey my gratitude to Tahniyath, Hanzalah, and Hamdah, my wife, wonderful son, and lovely daughter, for their support and praise. Tahniyath has been my best friend and most important companion throughout this excruciating period; she has loved, supported, encouraged, sacrificed for, and entertained me daily.

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Contents

1 Introduction of Takaful in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Appraisal of Indian Insurance Market . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Research Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Motivation and Significance of the Study . . . . . . . . . . . . . . . . . . . . . 1.5 Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Risk, Risk Management and Insurance: Conventional and Islamic Dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Definition and Classification of Risk . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Risk in Islam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Islamic Dimension of Risk Management . . . . . . . . . . . . . . . 2.4 Dimension of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 Prohibited Elements of Conventional Insurance in the Sources of Shari’ah . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Takaful: Concept, Principles, Types, and Models . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Overview of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Concept of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Definitions of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Shari’ah Framework of Takaful . . . . . . . . . . . . . . . . . . . . . . . 3.2.4 Takaful: Shari’ah Scholar Point of View . . . . . . . . . . . . . . . . 3.2.5 Fundamental Differences Between Takaful and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Development of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Main Types of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 General Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Family Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 5 9 10 11 12 15 15 15 16 17 18 19 24 24 27 27 28 28 28 29 31 32 32 35 35 36 xv

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3.5

Takaful Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 General Takaful Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 Comparison of General Takaful Models . . . . . . . . . . . . . . . . 3.5.3 Family Takaful Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.4 Comparison of Family Takaful Models . . . . . . . . . . . . . . . . . 3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37 37 39 40 47 51 51

4 Takaful in Non-Muslim Countries: A Way Forward . . . . . . . . . . . . . . . 4.1 Takaful in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.2 The Authorization Process in the UK . . . . . . . . . . . . . . . . . . 4.1.3 Legal Issues and Challenges Facing Takaful Industry in the UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.4 Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Takaful in Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Potential for Establishing Takaful . . . . . . . . . . . . . . . . . . . . . 4.3 Takaful in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Amana Takaful PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Ceylinco Takaful Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 HNB Assurance Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 Takaful Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Takaful in Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Takaful in Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Globalization of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Challenges in Establishing Takaful and Re-Takaful in Non-Muslim Countries and Solutions: What Needs to Be Done and Ways Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 What Needs to Be Done by the Start-Up Takaful or Re-Takaful Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55 55 56 57

5 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Theoretical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 New Product Adoption Theory . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 New Product Diffusion Theory . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Samples, Sampling Method, and Data Collection Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Questionnaire Development . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Interview Technique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Statistical Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58 60 61 61 62 62 63 63 64 64 65 65

67 69 70 71 73 73 73 74 74 75 75 76 77 77 78 78

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6 Findings from Interviews with Insurance Operators . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Profile of Interviewees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Awareness and Knowledge of Conventional Insurance . . . . . . . . . . 6.4 Knowledge of Takaful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Interviewee’s Opinion on Determinants to Offer Takaful . . . . . . . . 6.6 Interviewee’s Opinion on Future Takaful . . . . . . . . . . . . . . . . . . . . . . 6.7 Interviewees’ Opinions on the Level of Difficulty to Promote Takaful in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 Strengths of Introducing Takaful in India . . . . . . . . . . . . . . . . . . . . . 6.9 Weaknesses of Introducing Takaful in India . . . . . . . . . . . . . . . . . . . 6.10 Opportunities to Introduce Takaful in India . . . . . . . . . . . . . . . . . . . . 6.11 Threats to Introduce Takaful in India . . . . . . . . . . . . . . . . . . . . . . . . . 6.12 Overcoming Weaknesses to Offer Takaful in India . . . . . . . . . . . . . 6.13 Overcoming Threats Related to Offering Takaful in India . . . . . . . 6.14 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

83 83 84 84 87 88 89 91 96 99 103 106 109 110 112 113

7 Conclusion, Suggestions, and Recommendations . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Summary of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Contribution of the Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Suggestions for Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115 115 115 116 116 117

About the Author

Dr. Syed Ahmed Salman is Senior Lecturer (Assistant Professor) at the Faculty of Business and Accountancy, Lincoln University College, Malaysia. He brings with him over seven years of experience in teaching and research. He is a Ph.D. holder in Islamic Banking and Finance from the Institute of Islamic Banking and Finance, International Islamic University Malaysia, and Researcher in Islamic finance, especially Takaful. He has done post-doctorate from the IIUM Institute of Islamic Banking and Finance. He has completed his Master of Science in Islamic Banking and Finance from IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia. He has completed his bachelor’s degree in Shari’ah and Jurisprudence from Darul-Uloom Nadwatul Ulama Lucknow, India. He actively participates in research and has received several research grants. He has published more than eighty research papers in scholarly journals and co-authored Financial Accounting and Reporting for Islamic banks. Among the published documents, forty-five of them are published under Scopus, ERA, and WOS. He has presented more than seventy papers at local and international conferences. He has been the chairperson of some conference sections and keynote speakers in the 18th International Conference on Islamic Accounting and Finance ICIAF. He has received several awards for his research excellence: Best Paper Award for “Simultaneous Relationship among Market Performance, Risk and Disclosure Quality: Empirical Evidence from Malaysian Listed Banks” at International Islamic Accounting and Finance Conference Organized by Universiti Teknologi Mara in 2012 in Malaysia, “Proposed Best Practices of Financial Information Disclosure for Zakat Institutions: A Case Study of Malaysia” at the International Conference on Innovation Challenges in Multidisciplinary Research and Practice (ICMRP) in 2013 in Malaysia, and “Insurance as the Backbone of Risk Management at the International Conference on “Trends in Multidisciplinary Business and Economic Research” in 2014 in Thailand. Moreover, he received the second Winner for “Integrating Zakat, Waqf and Sadaqah: Myint Myat Phu Zin Clinic Model in Myanmar” at the first International Conference on Islamic Wealth Management ICIWM Tazkia Institute for Research and Community Empowerment in 2013 in Indonesia. He is actively involved in professional organizations. He is Shari’ah Complaint Officer at Eco-Ethics Business Consultancy in Canada, and he has been providing xix

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his service to Global Illuminators as a scientific review committee member. Also, he was Programme Committee Member at the 27th and 30th International Business Information Management Association (IBIMA) Conference 2016, and he has been providing his services to few journals as Reviewer. He has actively participated in the research projects and research grants since studying at IIUM Institute of Islamic Banking Finance. Currently, he is Co-principal Researcher for “Determining Factors of Adoption and Rejection of Takaful by Malaysian Youths”. Also, he was Co-principal for “Towards Providing the Innovative Takaful Products in Malaysia: The Perception of Consumers, Shari’ah Advisors, and Takaful Operators.” Furthermore, he has participated in many research grants such as “Invisible Hands behind the Corporate Governance Practices in Malaysia, Critical Review of Shariah Screening Guidelines for Islamic Equity Market”, “Financial Accounting and Reporting for Islamic Banks, Integrating Zakat, Waqf and Sadaqah: Myint Myat Phu Zin Clinic Model in Myanmar”, and “Takaful in India: Prospects and Potentials, Enhancing independency of takaful operators from retakaful operators in Malaysia: A Critical Approach, Shariah governance framework in the capital market”. Moreover, he was involved in several projects and events, namely Industry research commissioned project for the Centre for Entrepreneur Development and Research at SME Bank Berhad, Islamic financial Institutions, Auditing and Risk, Module Writing “Introduction to Financial Accounting and Reporting for Islamic Financial Institutions”, Implementation of Shari’ah Auditing in Islamic-Based Business Model: A Study of the Malaysian, Shari’ah Advisors’ Opinions on the need of Shari’ah Governance Framework for Islamic Capital Market in Malaysia and Towards Providing the Innovation Takaful Products in Malaysia: The perspective of Consumers, Shari’ah Advisors, and Takaful Operators.

Abbreviations

AAOIFI AC AD APRA BC BIIH CAA CSSF CTIL DFSA DIFC FSA GCC GIC GTF GTG IFSA IFSB IO IRDAI LIC MAS MTA OIC PA PBUH PSA SAMA SAW SECP

Accounting and Auditing Organization for Islamic Financial Institutions After Christ Anno Domini Australian Prudential Regulation Authority Before Christ British Islamic Insurance Holdings Commissariat Aux Assurances Commission de Surveillance du Secteur financier Ceylinco Takaful Ltd Dubai Financial Services Authority Dubai International Finance Centre Financial Services Authority Gulf Cooperation Council General Insurance Corporation General Takaful Fund Global Takaful Group Islamic Financial Services Act Islamic Financial Services Board Insurance Operator Insurance Regulatory and Development Authority of India Life Insurance Corporation Monetary Authority of Singapore Malaysian Takaful Association Organization of Islamic Conference Participant Account Peace Be Upon Him Participant Special Account Saudi Arabia Monetary Authority Sallahu Alhi Wassallam Securities and Exchange Commission Pakistan

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SICCI TO WF

Abbreviations

Saudi Indian Company for Cooperative Insurance Takaful Operator Wakalah Fee

Chapter 1

Introduction of Takaful in India

Financial security has become a basic need in contemporary human societies. Since ancient times, it is a clear development where food, clothing, and shelter were the only real basic human needs. Due to our lifestyle changes, we have more significant basic needs, including health and financial security. Insurance has been used as an innovative and creative tool for our protection. This chapter aims to provide the reasons behind the prohibition of insurance from Islam and other religious perspectives and show that the suitability and acceptability of Takaful as ethical insurance in India. Takaful is a cooperative, mutual, and solidarity product used as a risk management tool. The main advantage of Takaful over conventional insurance is that it is free from religiously forbidden elements and promotes a spirit of caring and sharing in society. This knowledge should be disseminated to ensure that Takaful becomes the universal ethical insurance product.

1.1 Introduction Insurance can be traced back to the time of Babylonians around 1750 BC. During this time, Mediterranean sailing merchants in Babylon sought protection from the money lenders by paying the extra amount and the borrowed principal in the event of loss from the ship’s sinking and loss of goods from robbery and lousy weather. The Code of Hammurabi was introduced, and it was the first basic insurance policy. Around 1600–1000 BC, the Phoenicians adopted the bottomry contract. The Greeks also adopted the bottomry contract for sea trade around 4 B.C., followed by the Romans. The Rhodian Sea Law and the principle of contribution can be traced back to 1000 BC. During this time, the contribution’s purpose is to help if the ship caught a storm and the cargo gets damaged. The Rhodian Sea Law is the most ancient principle governing commerce by sea. Around 3000 BC, property insurance became popular in China. At that time, the agreement that the insuring partner reimburses the ship and goods owner in the case of loss. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_1

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In ensuring the people, Achaemenian monarchs of Ancient Persia started to insure their people, and the insuring process was registered with government notary offices. The insured person would get compensation when he gets in trouble. If the written amount exceeds 10,000 Derrik, he will receive twice the registered amount. During A.D. 133, the idea of life insurance seems to have begun from the Romans who created the first burial insurance for the members who joined burial clubs called Fratres. The funeral expenses are paid to surviving family members. Also, during AD 220, the Mutual Benefit Life Insurance Company came out with “Roman Life Table.“ During A.D. 600, the Greeks and Romans introduced health and life insurance origins while organizing guilds called “benevolent societies.“ This society aims to care for the families and pay funeral expenses of members upon death. Nowadays, various insurance products are offered worldwide, and regulators know the importance of insurance for individuals and businesses. And it has been recognized as one of the critical financial sectors which supports the development of a country’s economy. Government regulations force the public to engage with insurance in mandatory general insurance for road tax in some countries such as Malaysia, Canada, the United Kingdom, and the United States of America. The primary purpose of insurance is to provide coverage to the policyholders in case of misfortune. This noble objective behind insurance is much appreciated since it reduces the financial burden, especially in times of need. However, the inherited elements in insurance practices such as interest, uncertainty, and gambling are prohibited in Islam. It has forced Muslim scholars to think of an alternative insurance structure that is not forbidden in Islam. In 1972, the Malaysian National Fatwa Council, and in 1985, Islamic Fiqh Academy, under the Organisation of Islamic Conference (OIC) patronage in its resolution no. 9 (2\9), declared that insurance is prohibited an Islamic perspective. Insurance is prohibited because; insurers are involved in interest, especially in life insurance products. Interest is not permitted as it is an unjust practice. The engagement in interest will favor one party at the expense of the other. For instance, the borrower needs to return the interest and principal regardless of the business performance. Even if the loss is incurred, the borrower still needs to pay the interest and the principal he borrowed. If the business is profitable, the lender cannot get more than the predetermined interest rate. If the company incurs a loss, it is not fair for the borrower, and when the business profits, the lender cannot enjoy more than the stipulated interest rate, thus being unfair for the lender. However, if the profit and loss sharing concept is applied, both situations will be fair. If the loss is not due to the borrower’s negligence, the lender’s loss can be borne, and the borrower will lose his time and effort in the business. If there is a profit, they will share the profit. If the concept of profit and loss sharing is applied, it will create social harmony and enhance brotherhood and mutual understanding. Religious teachings and lawmakers forbid interest. In Hinduism, Vasishtha, a wellknown Hindu lawmaker, made a special law that banned Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders of interest. Also, in the Jatakas, interest is referred to in a demeaning manner: “hypocritical ascetics are accused of

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practicing it” (Najmul, 2013). Besides, “interest is termed as defiling and selling one’s wife or child" (Manu Smriti: 11:62). In Buddhism, the oldest reference related to interest can be found in India’s religious manuscripts, dating back to 2000–1400 BC., where the usurer is associated with any interest lender. In the Buddhist Jatakas (600–400 BC), there are many references to interest payment, along with expressions of disdain for the practice. In Islam, the practice of interest is prohibited, as evidenced by the verse: O Believers fear Allah and give up that interest that is still due to you if you are true believers, but if you do not do so, you are warned of the declaration of war against you by Allah and His Messenger. However, if you repent even now, you are entitled to your principal. (Surah al- Baqarah, 278-279).

In Christianity, interest has always been viewed negatively by the Roman Catholic Church. St. Thomas Aquinas, the leading theologian of the Catholic Church, argued that the charging of interest is wrong (Najmul, 2013). Also, according to the Bible: Take thou no usury of him or increase but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase (Leviticus 25:36-37).

Moreover, Ezekiel (18:8) mentions: He that hath not given forth upon usury, neither hath taken any increase that hath withdrawn his hand from iniquity, hath executed proper judgment between man and man.

Furthermore, Psalms (15:5) states that: In Judaism, criticism of interest has its roots in several Biblical passages. The Hebrew word for interest is neshekh, literally meaning “a bite1 "(Najmul, 2013; Htay et al., 2013; Salman & Htay, 2014). The criticisms of usury are rooted in several passages of the Old Testament in which charging interest is scorned, discouraged, and prohibited. It refers to the charging of often exorbitant interest (from the debtor’s perspective). In the Hebrew books of Exodus and Leviticus, an interest-based loan relates to the loans given to the poor and the sick, while in Deuteronomy, it extends to all loans. It can be concluded that interest is not an acceptable practice from any religious perspective. Albeit beneficial, elements such as gambling, usury, and uncertainty are entwined into the fabric of conventional insurance, which is deemed unethical and prohibited under specific belief systems, including Islam. As noted by Billah (2007), specialists in Islamic finance proposed unconventional alternative insurance, known as Takaful, based on ethics and fairness, mainly since contemporary Islamic scholars concluded that conventional insurance is Islamically prohibited. Acknowledging its great benefits, Takaful is not exclusively for Muslims. Besides offering the assurance and protection that conventional insurance does, Takaful includes additional attractive features, particularly Takaful, free from uncertainty, 1

In Leviticus, tarbit and marbit are also used.

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usury, and gambling. It makes Takaful more attractive compared to traditional insurance. Furthermore, Takaful opens the door to potential Muslim customers because some Muslims steer away from conventional insurance due to the prohibited elements. In contrast, Takaful is halal-certified, making it acceptable in Islam. Another unique feature of Takaful compared to traditional insurance is that when there is a surplus, all parties, including the insured, are expected to share it with the Takaful operators. Htay and Salman (2013) reckoned that this additional benefit is a Takaful and conventional insurance criterion. Takaful is based on the principle of Ta’awun (cooperation) and Tabarru (Donation), where the risk is shared collectively by members of a policy (Billah, 2002; Faruk & Rahaman, 2015; Htay & Salman, 2013, 2015; Maysami & Williams, 2006; Usmani, 2007). Takaful’s contract differs entirely from conventional insurance because the former is based on risk-sharing while the latter is based on risk exchange. The policyholders in Takaful are helping one another by mutually giving protection when someone becomes a misfortune victim. Takaful will promote solidarity and brotherhood among the society and promote mutual and cooperative community concepts. Moreover, Takaful is based on cooperation that can bring society together, inject harmony in the atmosphere, and consider society’s needs for the long-term success and sustainability of the insurance operators. Consequently, foul play and unethical practices can be minimized to some extent. Regarding surplus distribution, the surplus is profit in insurance, and the insurance operators take it without sharing it with the policyholders. However, in Takaful, the excess is shared among the participants, so it is an excellent and unique practice. Takaful contribution is structured to allocate some donation amount to the risksharing fund from which the claims are paid. This fund is based on the concept of risk-sharing among the participants under Takaful operators’ supervision to help the participants’ financial needs according to the terms and conditions of the Takaful contract. It is a feature that can only be found in Takaful because, in conventional insurance, the policyholders pay the premium. Consequently, it will be revenue for the operators, and when there is any claim, it is recognized as an expense for the operators. Thus, in the later practice, there is no concept of risk-sharing. Takaful is not a religious product, but rather, it is a commercial product. It is suitable for anyone, regardless of religion. Its importance and significance role in the finance industry is tremendous. It can be remarked that Takaful has a more value-added substance than insurance. It is the ultimate solution for anyone seeking financial protection for their potential misfortune. The distinctive features of Takaful make it appealing even to non-Muslims. Takaful operations have not yet started functioning in India. This book focuses on insurance operators because studies are already concentrated on insurance policyholders’ knowledge, awareness, feasibility, and acceptability of India’s takaful products. Whereas no one emphasis the point of insurance operators. Thus, this book tries to fill this lacuna. The author realizes that if he concentrates on policyholders, it may be the repetition; he accepts to overlook the policyholders’ observation. Insurance companies are significant respondents since the research seeks to scrutinize

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the viability of Takaful, and they are the potential suppliers of Takaful products. For instance, Islamic banking products and Takaful products are allowed by Islamic windows during the early development stage in Malaysia’s case. Also, Indian insurance operators say that most educated Indians demand Takaful because of its ethical nature. Insurance operators know about the public perception of adopting Takaful in India and the level of awareness and acceptability of Takaful. Thus, it can be believed that insurance operators are energetic than policyholders. Therefore, this research focuses on the empirical aspect by examining insurance operators’ perception of Takaful’s viability in India. Three crucial facts make this research valuable. The first issue is the limited engagement of life insurance by Muslims in India. For instance, an agent of Life Insurance Corp. of India (LIC) who operates in central Mumbai highlights that 90% of his clients are Muslims, but at least 30% avoid life insurance. Besides, the steady decrease in life insurance penetration rate from 2010 until 2019 is further evidence for the lesser demand for life insurance policy (IRDAI Annual Report, 2010–2019). The second issue is related to insurance practices in India. In 1956, the entire insurance industry was nationalized due to some insurance operators’ unethical practices against insurance consumers’ interests (IRDA Annual Report, 2000–01). Later, the insurance companies were privatized. Even now, the insurance companies’ unethical practices still exist, according to IRDAI Report (2010–2015). The third issue is the Takaful industry’s rapid growth in Muslim countries and non-Muslim countries. According to Salman et al. (2017), India has immense potential for Takaful based on the size of its Muslim population and the growth of its economy. However, it is surprising that Takaful has yet to be permitted in India since it has been allowed to offer even in non-majority Muslim countries, for instance, Singapore, Thailand, and Sri Lanka. The government should consider and encourage Takaful within India given the success of its investment in Takaful in Saudi Arabia in the form of the Saudi Indian Company for Cooperative Insurance (SICCI), owned by the Indian public company the LIC.

1.2 Appraisal of Indian Insurance Market The primary purpose of insurance is to provide coverage for the policyholders in misfortune (Htay & Salman, 2014). This noble objective of insurance is much appreciated since it reduces the policyholders’ financial burden according to the insurance contract’s terms and conditions. Insurance has developed as a procedure for protecting the interest of people from financial loss. It can be used as a risk management tool to expose our daily life activities and business activities. Moreover, it contributes to the community’s general economic growth to mobilize funds in the economy. Insurance can provide complete financial protection against loss for specific incidents. For instance, in life insurance, the beneficiaries can claim the insured’s death,

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or the insured can claim if the term is expired. Insurance arrangement, the beneficiaries are not left with the financial burden, but they are paid for the claims. Life insurance motivates savings and encourages the habit of well-planned and wellorganized savings along with the premiums. The insured has a responsibility to pay the premium punctually, and he cannot be withdrawn simply before the expiry of the term. Insurance operators give an individual complete shelter against unusual losses caused by any of the threats. At the country level, life insurance encourages the nation’s economic growth. Insurance offers massive support and protection against loss of goods and property, and it manufactures more capital for more wealth to expand its economic development. It gathers the money from the insured and uses the capital for the nation’s progress. Therefore, insurance encounters all the essential needs and demands for the economic growth of the country. In general insurance like fire insurance, financial support is provided against loss or damage from fire, destruction, etc. Insurance delivers calmness, discards panic, stress, worry, anger, and relieves an individual’s mind concerning future events. It promises to repay the losses from various risks to reduce the financial burden of the insured. Insurance also provides financial security for the people who buy insurance against their loans. If the insured dies, the policy can be used to pay back the outstanding loan balance from the insurance claim, and there will be no financial burden left on the beneficiaries. Insurance assists employers reduce their financial burden. Employers can buy insurance to claim damages incurred due to the accidents of employees in the workplace. Insurance takes care of the employees’ safety and welfare by transferring their burden to the insurance operators. Moreover, group insurance can have a variety of products such as sickness benefits and pensions. It is an uncomplicated and easy procedure for employers to manage their financial risk and support society’s welfare by having group insurance. Also, the other essential elements of insurance are encouraging foreign trade by providing financial security against trade threats, resolving the foul of unemployment, creating employment opportunities in the country, eliminating the loss on damage, destruction, or disappearance of the property or goods, and providing tax advantages for life insurance premium payments. When the Indian historical development of insurance is reviewed, India’s insurance is far from a recent phenomenon. Instead, the birth of insurance in India started in 1818 when Oriental Life Insurance was founded. Only five years later, in 1823, another insurance company called the Bombay Assurance Company was established, followed six years later by the Madras Equitable Life Insurance Society. Bombay Mutual, Oriental, and Empire of India are three more Bombay-based insurance companies founded following the British Insurance Act of 1870, 1871, 1874, and 1879. All the local insurance companies had to face many hurdles to flourish because of intense competition from foreign companies such as Liverpool and London Globe Insurance, Royal Assurance, and Albert Life Assurance (Insurance Regulatory and Development Authority, 2012- 13). With the implementation of the Indian Life Insurance Companies Act in 1912, operating life insurance companies came under the direct control of the Indian government. In 1928, the Indian Insurance Companies Act was introduced for both life and general insurance companies.

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India’s government has undertaken good initiatives by proposing a committee in 1993 to look into the insurance market issues and offer recommendations for reforming the insurance industry. This committee is known as the Malhotra Committee. Based on the Malhotra Committee Report’s guidance, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body regulating and developing the insurance industry. IRDA became a statutory body in April 2000. One of the primary purposes of IRDA is to promote competition to enhance customer satisfaction through increased consumer choice and lower premiums while ensuring the financial security of the insurance market (Sinha, 2007; Sharma, 2010; Insurance Regulatory and Development Authority, 2012–13, Salman et al., 2016). IRDA opened the market in August 2000, intending to invite privately-owned companies into the fold. Foreign companies were permitted ownership of up to 49%. At the end of March 2019, 70 insurers are operating in India; of which 24 are life insurers, 27 are general insurers, 7 are standalone health insurers, and 12 are reinsurers, including foreign reinsurers branches and Lloyd’s India. Of the 70 insurers presently in operation, eight are in the public sector, and the remaining sixty-two are in the private sector. Two specialized insurers, namely ECGC and AIC, one life insurer, namely LIC of India (LIC), four in general insurance, and one in reinsurance, namely GIC Re., are in the public sector. Twenty-three life insurers, 21 general insurers, seven standalone health insurers, and 11 reinsurers, including foreign reinsurers’ branches and Lloyd’s India, are private (IRDAI, Annual Report, 2018–2019). According to the Annual Report of Insurance Regulatory and Development Authority India, 2017–18, on the global scale, in 2017, life insurance took up 54 0.32 percent of the total premium industry. In contrast, India’s life insurance takes up an even more significant percentage of the unlimited premium at 74.73 percent. (The Annual Report of Insurance Regulatory and Development Authority India, 2017–18). Globally, India’s share in the global insurance market was 2.0 percent during 2017. However, during 2017, the total insurance premium in India increased by 10.1 percent (inflation-adjusted). In contrast, global total insurance premium increased by 1.5 percent (inflationadjusted), placing India in 10th place in international life insurance markets. As for the general insurance business, the Indian non-life insurance sector witnessed a growth of 16.7 percent (inflation-adjusted) during 2017. During the same period, the increase in the global non-life premium was 2.8 percent. However, Indian non-life insurance premiums in global non-life insurance premiums were at 1.11 percent, and India ranked 15th in global non-life insurance markets. Based on the Annual Report of Insurance Regulatory and Development Authority India, 2018–19, the life insurance sector’s insurance density had gone up from USD 9.1 in 2001 to reach a peak of USD 55.7 in 2010. Since then, it has exhibited a declining trend up to the year 2013. During the years 2017 and 18, the life insurance density level was USD 55.00 (USD 46.50 in 2016) (Fig. 1.2). The life insurance penetration had gone up from 2.15 percent in 2001 to 4.60 percent in 2009. Since then, it has exhibited a declining trend up to the year 2014. A slight increase in 2015,

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reaching 2.72 percent, remained the same in 2016 and increased to 2.76 in 2017 and a bit declined in 2018 (2.74) (Fig. 1.1). It can be seen in Fig. 1.3, the country’s penetration of the non-life insurance sector rose from 0.56 in 2001 to 0.97 in 2018 (0.93 in 2017). Its density had gone up from USD 2.4 in 2001 to USD 19.0 in 2018 (18 in 2017) ((IRDAI, 2018–2019) (Fig. 1.4). Based on these statistics, the insurance market in India can be regarded as successful. Precaution becomes a must due to the complicated business activities of today’s lifestyle.

Fig. 1.1 Life insurance penetration

Fig. 1.2 Life insurance density

1.3 Research Objectives

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Fig. 1.3 Non-life insurance penetration

Fig. 1.4 Non-life insurance density

1.3 Research Objectives Although India has a high potential growth for Takaful, to the extent of the researcher’s knowledge, no survey has yet been conducted that examines the perception and acceptability of insurance operators to introduce Takaful in India. Therefore, the objectives of this research are as follows: 1. 2. 3.

To examine the knowledge of insurance operators on Takaful and insurance. To identify the determinants that cause the introduction of Takaful. To examine the perceptions of insurance operators towards the strengths, weaknesses, opportunities, and threats of Takaful in India

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To examine insurance operators’ perceptions on how to overcome weaknesses and threats to introduce Takaful in India.

1.4 Motivation and Significance of the Study Four motivating factors encouraged undertaking this research. The first factor is related to the population in India. The third-highest Muslim population belongs to India2 (Htay & Salman, 2013). If there is no Takaful in India, Muslims are helpless except to participate in insurance, i.e., prohibited in Islam. Besides being the thirdlargest Muslim population globally, India is the second-highest populous country after China, with 136. 64 billion people.3 The second motive is related to the involvement of items in conventional insurance prohibited by India’s principal religions and the ethical nature of Takaful. The majority of Indians belong to five main religions, i.e., Hinduism, Islam, Christianity, Buddhism, and Sikhism. When conventional insurance is examined from the abovestated faiths, it is found that insurance’s current practice involves prohibited elements such as interest, uncertainty, and gambling. On the other hand, since it is believed that Takaful is based on Shari’ah, it can be termed as ethical insurance. Literature has provided sufficient evidence that moral and social justice is desirable in all religions. With this in mind, the researcher hopes that Indians will respond positively to Takaful as an alternative to conventional insurance. The third factor arises from the economic growth of India. Prior researchers such as Carter and Diacon (1992), Enz (2000), Zheng et al. (2008), Sastry (2011), and Sinha et al. (2012) examined the nature of the inter-relationship between insurance penetration and the per capita GDP. These studies revealed that a positive relationship exists between insurance penetration and per capita GDP. It means that insurance penetration usually increases with the increase in the per capita GDP. India’s GDP per capita has been rising steadily since 2011 till 2015 with INR 72,394 (2011–2012), INR 80,879 (2012–2013), INR 90,688 (2013–2014), and INR 98,983 (2014–2015).4 The fourth factor is the unique nature of Takaful, i.e., participants may share the surplus (profit) with the Takaful operators. It is a unique feature and a great benefit that Takaful can offer compared to conventional insurance. In the latter case, the profit will belong to the insurance companies only and is not shared with the policyholders. Thus, the researcher is interested in examining insurance operators acceptability if they know this profit-sharing benefit. It is expected that the findings of this research will be of great significance to Indian regulators,5 insurance operators, investors, and insurance policyholders. In the case 2

http://www.mapsofworld.com/world-top-ten/world-top-ten-countries-with-largest-muslim populations map.html. 3 http://www.indiaonlinepages.com/population/india-current-population.html 4 http://statisticstimes.com/economy/gdp-capita-of-india.php 5 According to Saleh (2010), the State Bank of India and Life Insurance Company are planning to offer Shari’ah-compliant products and its related market survey is in progress.

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of regulators, the findings will provide the necessary inputs to decide whether Takaful will be permitted in India and develop future rules and regulations. The results of this research will provide opportunities for insurance operators and investors for future market expansion and investment. The study will be an eye-opener for the Muslim insurance policyholders to rethink that choosing Takaful will be to their advantage, minus the worries of dealing with conventional insurance’s unethical elements. And for the non-Muslim investors will rationalize whether Takaful offers similar or better coverage and benefits compared to traditional insurance operators.

1.5 Structure of the Book This book is organized into seven chapters. The first chapter has introduced this research. It provides information on the study’s background, objectives, motivation, and significance. Chapter 2 Risk, Risk Management and Insurance: Conventional and Islamic Dimensions elaborates on the conventional and Islamic dimensions of risk, risk management, and traditional insurance. The purpose of this chapter is to highlight what risks people get exposed to in personal and business aspects of their lives, how it has been managed by engaging with insurance or Takaful, and why insurance or Takaful is necessary for daily lives. It also provides the definitions and classification of risk. It further elaborates on recognizing risk and its management from the conventional and Islamic points of view. The Islamic dimension on insurance emphasizes prohibited elements in insurance’s traditional practice by referring to the Quran and Hadith. Chapter 3, Takaful: Concept, Principles, Types, and Models, aims to show that Takaful can be an alternative to conventional insurance. The overview of Takaful, such as its concept, definition, Shari’ah framework, its differences from traditional insurance, the development of Takaful, Takaful models, and their comparison are discussed in detail. Chapter 4 Takaful in Non-Muslim Countries: A way Forward This chapter identifies the regulatory and legal requirements for establishing Takaful in nonMuslim countries, with Europe and Australia as the case studies. As for Europe, this chapter explores the establishment and growth of Islamic finance, particularly Takaful, in the United Kingdom and Luxembourg. Then it looks at the possible implementation of Takaful in the existing legal and regulatory framework of Australia. In addition to these three countries, Takaful in Singapore, Sri Lanka, and Thailand are studied. Chapter 5, Research Methodology, presents the theoretical framework and research methodology. New product adoption theory and new product diffusion theory are explained. Under the research methodology section, the data and research method used in this research, sample, sampling method, data collection method, questionnaire, and interview technique are presented. Also, the statistical approach that was used is shown.

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Chapter 6 Findings from Interviews with Insurance Operators discussed the interview results of the insurance operators. The purpose of this section is to know the potential practical issues that might be faced by the operators who offer Takaful in India. Eight strengths show the strength of the current insurance operators to provide Takaful in India. The interviewees highlighted four weaknesses, and they identify five main categories of opportunities to introduce Takaful in India. Finally, there are five significant threats for Takaful to be offered in India. Also, the research suggests how to overcome weaknesses and threats that Takaful operations may have to face. The last seven-chapter concludes the book.

References Billah, M. M. (2002). Takaful (Islamic insurance) premium: A suggested regulatory framework. International Journal of Islamic Financial Services, 3(1). Billah, M. M. (2007). Applied Takaful and Modern Insurance: Law and Practice. Petaling Jaya. Diacon, S. R. & Carter, R.L. (1992). Success in Insurance 3rd Edition. (Success Study books) Paperback—John Murrary, Eston Road. Enz, R. (2000). The S-curve relation between per-capita income and insurance penetration. Geneva Papers on Risk and Insurance, 25(3), 396–406. Faruk, O., & Rahaman, A. (2015). Measuring efficiency of conventional life insurance companies in Bangladesh and takaful life insurance companies in Malaysia: A non-parametric approach. Management Studies and Economic Systems, 2(2), 129–144. Htay, N., Nu, S., & Salman, S. A. (2014). Introducing takaful in India: An exploratory study on acceptability, possibility and takaful model. Asian Social Science, 10(1), 117. Htay, S. N. N., & Salman, S. A. (2013). Viability of Islamic insurance (Takaful) in India: SWOT analysis approach. Review of European Studies, 5(4), 145. Htay, S. N. N., & Salman, S. A. (2015). Future outlook of takaful (Islamic Insurance) in Canada. Banking and Finance Law Review, 30(3), 541. Htay, S. N. N., Salman, S. A., & Meera, A. K. M. (2013). Let’s move to" universal corporate governance theory". Journal of Internet Banking and Commerce, 18(2), 1. IRDA, (2000–01). Annual Report Retrieved January 9th, 2014, from http://www.irda.gov.in/ADM INCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1. IRDA, (2010–2019). Annual Report. Retrieved January 9th, 2014, from https://www.irdai.gov.in/ ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1 Maysami, R. C., & Williams, J. J. (2006). Evidence on the relationship between Takaful insurance and fundamental perception of Islamic principles. Applied Financial Economics Letters, 2(4), 229–232. Najmul, H. (2013). Interest: A Bane for the Society. Retrieved January 15th, 2015, from http:// www.indianmba.Com/Faculty_Column/FC987/fc987.ht. Salman, S. A., & Htay, S. N. N. (2014). Insurance in the light of religious teaching and ethics: A case study of India. Middle-East Journal of Scientific Research, 19(2), 299. Salman, S. A., Rashid, H. M. A., & Hassan, R. (2017). Awareness and knowledge of insurance and takaful In India a survey on Indian insurance policy holders. Man in India, 97(11), 127–140. Salman, S. A., Rashid, H. M. A., & Htay, S. N. N. (2016). The progressive development of india’s insurance industry from ancient to present times. Human Resource Management Research, 6(4), 91–98. Sastry, D. V. S. (2011). Life insurance penetration in India. Journal of Social and Economic Policy, 8(2), 207–215. Sharma, D. (2010). Banking and Insurance. Rajat publications.

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Sinha, R. K., Nizamuddin, M. M, & Alam, I. (2012). An investigation of insurance penetration and density of India by geography. 16th Annual Conference of Asia Pacific Risk and Insurance Association (APRIA), July 2012. Sinha, T. (2007). An analysis of the evolution of insurance in India. In Handbook of International Insurance (pp. 641–678). Springer. Usmani, M.J. (2007). Takaful paper presented at Securities and Exchange Commission of Pakistan. Takaful conference in Karachi. Zheng, W., Liu, Y., & Deng, Y. (2008). New Paradigm for International Insurance Comparison: With an Application to Comparison of Seven Insurance Markets. The Geneva Association/IIs Research Awards Partnership.

Chapter 2

Risk, Risk Management and Insurance: Conventional and Islamic Dimensions

Risk is one of the determinants that can make our lives succeed or fail. Risk has been playing a significant role in our daily life. This chapter discusses the origin of risk in the sources of Shari’ah and its historical development in Islam by referring to the practices of Prophets. Furthermore, the current method of engaging with insurance involves the prohibited elements. These elements can bring unfairness and injustice towards the involved parties in particular and society at large.

2.1 Introduction The previous chapter introduced this research by highlighting the study’s background, problem statement, research objectives, motivation, and significance. This chapter is discussed in several sections to explain risk, risk management, and insurance from the conventional and Islamic dimensions. The second section provides the definitions and classification of risk. The third section highlights the risk according to the Islamic dimension. Section fourth presents risk management from an Islamic size. Section fifth discusses insurance from an Islamic extent, and the last section concludes the chapter.

2.2 Definition and Classification of Risk Risk accompanies every stage of human development. Risk emerges with the birth of a human being. Once we come out from the mother’s womb, we are exposed to the sophisticated environment unfamiliar to newborns. Due to the environment’s exposure, the baby can be exposed to risk whether the baby is healthy or not, and the baby can be breastfeeding by the mother or not. From the stage of a newly born baby until he dies, the risk becomes part of your everyday life. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_2

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Since risk is part and parcel of our daily lives, many prior researchers define risk in many different ways. For instance, the risk is the probability of a negative outcome and adverse impacts due to the desirable outcome deviation (Campbell, 2005; Graham & Weiner, 1995; Lowrance, 1976; Vaughan, 1997). Some define risk as the undesirable outcome of uncertainty (Rosa, 2003; Hillson & Webster, 2007; Renn, 2005, 2008). Risk can be divided into pure risks and speculative risks (Diacon & Carter, 1992; Kassar, 2008). Pure risk refers to a condition when there is no prospect of gain if a chance becomes a reality or not. Speculative risk refers to a position where there is a possibility of either profit or loss, such as gambling or a business undertaking (Crockford, 1987). According to Salman (2015), risk can be defined as a positive or negative event whose probability of occurrence may be due to external or internal susceptibility. That should be minimized by preventive action. Risk can be classified into two types, i.e., speculative risk (similar to gambling and two possible outcomes: gain or loss) and pure risk, resulting in loss or no loss (Diacon & Carter, 1992; Kassar, 2008).

2.3 Risk in Islam According to Alhabshi et al. (2012), the origin of the word “risk” comes from the Arabic word “risq1 ” or the Latin word “risqum.2 “ In the case of usage, the term “risq” has been used starting from the 12th century to represent the chance of a particular outcome, but it does entail a positive or negative result. “Risqum” is usually used to describe the negative work, but sometimes, it is used for the positive effect. Since the eighteenth century, these words have been known as “risk” in standard English and are widely used today. Risk is an essential source for the existence of Takaful, and hence, it is necessary to examine risk in Islam. In Islam, it is believed that eternal life will be in the Hereafter, and this world is a temporary abode. In this world, we will be tested by Allah (SWT), and hence, sometimes, we will face some difficulties. The Qur’¯an and Sunnah say: We will surely test you through some fear, hunger, and loss of money, lives, and crops. Give good news to the steadfast. (Surah Al-Baqarah, 155).

Abu Huraira reported: The Messenger of Allah said: Allah, the Exalted, says: “I have no reward except Jannah for a believing slave of Mine who shows patience and anticipates My reward when I take away his favorite one from the inhabitants of the world.“ (Sahih Bukh¯ari). 1

The Arabic word “risq” means “anything that has been endowed to humans (by Allah) and from which they attain goodness” and has connotations of a fortuitous and favorable outcome (Alhabshi et al, 2012). 2 The Latin word "risqum" means "the challenge that a barrier reef presents to a sailor and has connotations of an equally fortuitous but unfavorable event" (Alhabshi et al, 2012).

2.3 Risk in Islam

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Based on the above-stated authorities, it can be deduced that whether we can be successful or not depends on our performance in this world. The main concern is we need to follow Shari’ah in all aspects of our lives, including business activities. The earned profit will be legitimate only if achieved by putting iwad in three forms: risk, effort, and liability. Hence, it is accepted that risk is an everyday phenomenon in our daily activities.

2.3.1 Islamic Dimension of Risk Management As earlier discussed, the risk is accepted as part and parcel of our daily lives, and Islamic history shows how risk was managed during the Prophets. Risk management is essential from the Islamic perspective to better social well-being (Abdullah, 2012). The following sources of Shari’ah evidence it: O, Yusuf! O man of truth! Give us interpretation regarding seven fat cows eaten by seven lean ones and seven green ears and the other seven dry; perchance, I may return to the people, perchance they learn He said. ‘You will do cultivation for seven straight years, then what you reap, leave it in its ear, but a little which you may eat. Then after it, there shall come seven hard years that shall eat up what you had stored up for them before, but a little which you may save. Then after that, there shall come a year wherein people will have rain and in which they will press juice (Surah Yusuf, 46–49).

The Prophet Yusuf interpreted the King’s dream that the soil will be fertile for seven years with plenty of water. During a fruitful seven-year period, Egypt’s people should work hard for more plantations and harvest. However, Prophet Yusuf suggests not to over-harvest that will end up with waste and harvest to fulfill their need and save the crop used during the lean years, after seven fruitful years. These verses show the importance of planning to manage undesirable risks to avoid possible hardship in the future. O my sons, enter not all by one gate: enter ye by different gates. Not that I can profit you aught against God (with my advice): None can command except God: On Him do I put my trust: and let all that trust put their trust on Him (Surah Yusuf, 67).

In the above Surah, Prophet Yaqub suggested that his sons not enter the same gate during Egypt’s journey to mitigate the risk. Prophet Yaqub a.s. (Jacob), The father of Prophet Yusuf advised his children that when they enter the City of Egypt, they need to be careful and take precautions from danger by using different gates. He has suggested it because Egypt is a big city where many unknown threats might harm his children. If all of his children enter the same entrance and undesirable things happen, all of them will be in trouble. However, they can avoid the potential danger they might face if they enter through the same entrance. This precautionary instruction is a risk management strategy, and after that, He asked his children to put their faith in Allah. This verse focuses on the significance of risk management strategy to minimize the potential undesirable risks while putting their trust in Allah that He will protect us from danger.

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The following Quranic verses show that we are supposed to better our lives, and then we should seek Allah’s (SWT) help and guidance. Verily never will God change people’s condition until they change themselves (with their souls) (Surah Ar-Ra’d, 11).

But on Allah put your trust if ye have faith. (Surah Al Ma’ida, 23). Apart from the Quranic verses, the following h.adith show risk management practices during the Prophet’s time (SAW). When the Holy Prophet (SAW) asked a Bedouin Arab, who entered the mosque with his camel left outside untied, if his camel would run astray, he said, “Inshaallah.“ The Prophet (SAW) then said: “Tie your camel first, then, say Inshaallah.“ (Sahih al Bukhari narrated by Anas bin Malik).

The above Hadith is evidence that the Prophet (SAW) wants us to put our effort into minimizing the negative consequences and then pray to Allah (SWT) to help us. Moreover, the Prophet’s (SAW) history journey to Madinah provides us additional instructions on managing risk. The Prophet (SAW) reduced the danger of getting murdered by asking Ali to sleep in his bed throughout the night of migration. It was reported that as the night advanced, the Quraysh posted assassins around the Prophet’s house. Thus, they kept vigil all night long, waiting to kill him the moment he left his house early in the morning, peeping now and then through a hole in the door to make sure that he was still lying in his bed. From this, it can be surmised that risk management has been encouraged based on the sources of Shari’ah to protect ourselves.

2.4 Dimension of Insurance Insurance is defined as “a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder” (International Financial Reporting Standard for insurance contracts, 2009). According to American Risk and Insurance Association (1965), it is also defined as “the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary on their occurrence, or to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.“ The standard-setting body and association give the definitions. Some of the researchers define insurance as follows: A way to provide security and compensation to what is valuable in the event of its loss, damage, or destruction based on the principle of risk-taking and speculation (Usmani, 2007). A contract of insurance in the widest sense of the term may be defined as a contract whereby one person called the insurer undertakes in return for the agreed consideration called the premium, to pay to the other person called the assured, a sum of money or its equivalent on the happening of a specified event (Ivamy, 1970).

2.4 Dimension of Insurance

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An agreement by one person, having agreed with another on the price of risk, takes upon himself that others misfortune (Van Niekerk, 1998). A device for reducing risk by combining many exposure units to make their losses collectively predictable. The predictable loss is then shared by or distributed proportionately among all units in the combination (Mehr, 1986). Based on the definitions stated above, insurance is bought by the people who want to transfer their risks to the insurance companies by exchanging the premium and the possible claims in the future. In the researcher’s opinion, insurance can be defined as “an agreement between policyholder and insurance company that provides a predetermined compensation for a specified loss in return for the payment of a premium. The former will pay the premium, and the latter will take responsibility and pay the compensation”. It is a valuable risk management mechanism since it can provide financial assistance when the insurance policyholders’ misfortune, depending on the insurance policy’s terms and conditions. Since the concept of insurance is excellent, Islam recognizes and acknowledges the importance of its role. However, insurance practice involves interest, uncertainty, and gambling, which are prohibited in Islam. The following subsections discuss conventional insurance prohibition due to prohibited elements’ involvement by referring to the Qur’¯an, Sunnah, and Fatawa.

2.4.1 Prohibited Elements of Conventional Insurance in the Sources of Shari’ah 2.4.1.1

Prohibition of Riba (Interest)

The notion of Riba dates back roughly 4000–3000 yrs. BC. Riba is criticized not only in Islam but also in other religions like Judaism and Christianity (Daud, n.d.). It is mentioned repeatedly in the Holy Qur’¯an that Riba is prohibited. According to El-Gamal (2000), Riba means ‘’unearned” capital or wealth ‘’illogical increase” or ‘’an unfair” or ‘’unequal exchange” between two parties. Engku and Scott (2008) defined it as excess, augmentation expansion, or growth. In the Shari’ah, Riba stands for any surplus or excess amount or an addition to the principal. Therefore, it differs from the principle of tawhid (monotheism) and Islamic brotherhood and the Islamic notion of wealth circulation (Choudhury & Rahman, 1986).

2.4.1.2

Prohibition of Riba (Interest) in the Qur’an and Hadith

Interest has been prohibited clearly in the Qur’¯an. Thus, Muslims have no option except to avoid it. Unfortunately, conventional insurance involves an interest in its

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business activities. The following Quranic verses provide evidence of prohibition of interest: O those who believe fear Allah and give up what remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your principal. Neither you wrong nor be wronged. And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you if you know. And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged. (Surah Al-Baqarah, 278–281).

2.4.1.3

Prohibition of Riba (Interest) in Hadith

The following Hadith provide evidence of the prohibition of interest: Jabir b. Abdullah _reports that “the Prophet _ cursed the receiver of interest and the payer thereof, the one who records it and the two witnesses thereof. He said: They are all alike [in guilt].“ (Sahih Muslim, Tirmidhi & Ahmad).

2.4.1.4

The Reasoning for the Prohibition of Riba (Interest)

In the researcher’s opinion, the reasons for the prohibition of interest in the Qur’¯an and h.adith are: first, interest will make the rich richer, and then the wealth will be circulating among the rich only. It will increase the gap between the poor and the rich and create hatred and envy towards the rich (Razi, 2008). Secondly, the interest practice does not have the value-added to the production and creates a burden on the borrower (Daud, n.d.). In Islam, debt is the main thing that we should avoid since the Prophet (SAW) refuses to pray Janazah for those in debt (Sahih Al-Bukhari). Thirdly, the interest practice will spoil the profit and loss sharing motive for the equitable distribution of wealth. It is not fair in any situation. For instance, when the borrower’s business is at a loss, he still needs to pay interest. In a situation whereby the borrower’s business is booming, he will give the predetermined interest rate, and he will not share his profit with the lender. In this case, it is not fair for the lender (Kasim et al., 2015). Fourthly, it has been evidenced that all the involved parties in the Riba transaction will be punished in the Hereafter, and Allah (SWT) declared war against them (Al Baqarah, 279). Fifth, the Prophet (SAW) condemns the practice of interest. All the involved parties, such as a receiver, payer, witnesses, and the recorder of the interest-based transaction, will be punished (Sahih Muslim, Tirmidhi & Ahmad). Therefore, it can be summed that from the Islamic perspective, the involvement with Riba is a severe offense, and it must be avoided.

2.4 Dimension of Insurance

2.4.1.5

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Prohibition of Gharar (Uncertainty)

Gharar is defined or described in many ways. According to Khorshid (2004), Gharar is uncertain about affecting a contract’s occurrence or the obligation under the agreement, on the contrary. Ayub (2007) stated that Gharar means a hazard, chance, stake, or risk. According to Frenz and Soualhi (2010) and Htay et al. (2012), Gharar can insecurely be translated as uncertainty, but the description varies by madhab (school of thoughts). The general meaning of Gharar includes “that those consequences are hidden,” “that whose nature and consequences are hidden,” “that which admits two possibilities, with the less desirable one being more likely,” or that whose consequences are unknown.“ “Economically, it can be compared to asymmetric information.“ Technically, it means uncertainty or ignorance of one or both parties in a contract over the substance or attributes of the subject of the sale, or doubt over the existence of the object of sale at the time the contract is enforced (Zuriah & Hendon, 2009). Gharar Fahish (major or excessive) and Gharar Yasir (minor or slight) has two main uncertainty categories. Gharar Fahish is not tolerated, and its involvement will increase the chances of the contract being void. And Gharar Yasir is accepted, and it will not result in an invalid agreement. Examples of Gharar Fahish are the sale of fish in the sea, birds’ deals in the air, and unborn animals. Another example is the commercial transaction selling an object that does not have an owner since it was stolen. In this situation, it is uncertain whether the seller can deliver the item, i.e., the subject matter, according to the contractual terms and conditions. The subject matter is not under the seller’s control during the contract, and it results in Gharar Fahish, and the entire agreement is void. Similarly, when the size, quantity, price, and delivery time are not sure of the contract, the contract will be void. It is because these uncertainties will create a problem in the future and conflicts between the contracting parties. Gharar Fahish can incur when there is a conditional sale. For example, when it rains tomorrow, I will sell you the umbrella. In this situation, the condition of rain is not necessarily put in the sale contract. It is uncertain whether it will rain or not. In the case of Gharar Yasir, it will not result in the contract being void. For instance, charging the same amount of the hotel service fee to the customers, although the services required to provide the customers might vary. (Al-Nawawi, 1992; Ibn Qayyim, 1993). There are some exceptions to it. The involvement of Gharar is permissible for the unilateral or charitable contract and bay’ al-Salam (Forward sale) Istisna’ (Manufacturing sale) for the sake of the public interest.

2.4.1.6

Prohibition of Gharar (Uncertainty) in the Qur’¯an and Hadith

O you who believe! Intoxicants (all kinds of alcoholic drinks), and gambling, and Al-Ansab, and Al-Azlam (arrows for seeking luck or decision) are an abomination of Shaitan’s (Satan) handiwork. So, avoid (strictly all) that (abomination) so that you

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may be successful. Shaitan (Satan) wants only to excite enmity and hatred between you with intoxicants (alcoholic drinks) and gambling and hinder you from the remembrance of Allah and As-Salat (the prayer). So, will you not then abstain? (Surah AlAl-Ma’idah, 90–91).

2.4.1.7

Prohibition of Gharar (Uncertainty) in the Hadith

The Holy Prophet (SAW) had prohibited transaction with Gharar (uncertainty). Abu Huraira (Allah be pleased with him) reported that “Allah’s Messenger (may peace be upon him) forbade a transaction determined by throwing stones and the type which involves some uncertainty (Sahih Muslim).

2.4.1.8

The Reasoning for the Prohibition of Gharar (Uncertainty)

In the researcher’s opinion, the reasons for the prohibition of uncertainty in the Quran and Hadith are: first, contrary to risk. Uncertainty is not inherent in any business activities (Zarqa, 1994 and Nordin et al., 2014). Uncertainty is created by one party to get an advantage over the other party. Hence, it will cause unfairness in business dealing (Azhari, 1990). Secondly, the consequence of uncertainty will be the dispute between the contracting parties, and it will harm the harmony among the ummah (Nordin et al., 2014). It will prevent realizing the Maqasid al-Shari’ah. Thirdly, since uncertainty is prohibited from the Islamic perspective, anyone involved in this practice will not have the blessing from Allah (SWT). Finally, they will get the punishment in the Hereafter. In sum, Islam as a comprehensive religion provides guidance on all aspects of our lives, including business activities. Once uncertainty is prohibited in the Quran and Hadith, we must avoid uncertainty because it is compulsory for us to abide by Islamic teachings.

2.4.1.9

Prohibition of Maysir (Gambling)

When an entrance element of Gharar (uncertainty) is present in a contract, then the existence of Maysir (gambling or speculation) is natural; therefore, gambling is prohibited. It is against the fundamental principle of justice, equality, and morality, which are mandatory priorities within Islam (Muhaimin, 2005). Gambling, gaming, or waging can be suitably defined or explained in one term, namely Maysir. Maysir refers to a situation where a person gets involved, or unnecessary risk is taken by him when entering into a transaction where the chance of gain is less or fear of loss is more (Zuriah & Redzuan, 2009).

2.4 Dimension of Insurance

2.4.1.10

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Prohibition of Maysir (Gambling) in the Quran

They ask you (Prophet) about intoxicants and gambling: say, “There is great sin in both, and some benefit for people: the sin is greater than the benefit.“ They ask you what they should give: say, “Give what you can spare.“ (Surah al- Baqarah, 219).

2.4.1.11

Prohibition of Maysir (Gambling) in the Hadith

The Noble Prophet said: “Whosoever says to his companion: ‘Come let us play a game of chance,’ should give charity (as atonement).“ (Sahih Bukhaari and Sahih Muslim).

2.4.1.12

The Reasoning for the Prohibition of Maysir (Gambling)

In the researcher’s opinion, the prohibition of gambling in the Quran and Hadith is: first, gambling is a social tragedy. It is repeatedly seen that the Quran and Sunnah strictly prohibit this unhelpful evil because it destroys many families. Secondly, gambling can lead to evil deeds like alcohol, telling lies, insatiability, grudge, retaliation, and assassination. Thirdly, it can cause syndromes, disagreements, and neglect in family lives.

2.4.1.13

Prohibited Elements in Conventional Insurance

Conventional insurance is based purely on the element of Riba, whether it is life or general insurance. The insurance company’s main objective is to generate interest income by investing its funds in traditional investment instruments. The policyholders have to pay surcharges if they fail to pay their premium on time. Moreover, when a life insurance policy reaches its maturity/death claim, the amount payable under such an approach is much more than the amount received by way of premium. Both in general and life insurance, the insurance funds are invested in instruments that are interest-based (Qaiser, 2014). Conventional insurance is based on uncertainty; whether it is life or general insurance, the policyholders pay the premium with the expectation that they will be able to claim in the case of misfortune and future loss. In this situation, it is not clear what the policyholders are paying. The prospective loss is uncertain, and hence, there exists uncertainty of the substance for which the policyholders are spending their money (El- Gamal, 2000). Insurance involves gambling because it is a game of gain or loss. If the policyholders make the claims, it will be a loss for the insurance companies. If there is no claim, the insurance companies profit, and the policyholders will get nothing and lose their premium. Also, Actuaries use the statistical method to estimate the probability of gain for the insurance companies, and then the underwriting process and

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compensation are determined. Hence, it is trying to ensure that insurance companies are in the upper hand to benefit more from the game. When the insurance operator receives the premium, it will be invested in incomegenerating activities such as short-term deposits or companies buying the shares. The investment revenue must not be generated from prohibited actions such as investing in the interest-bearing loan or liquor business. Conventional insurance operators are not currently restricted on where they can invest. They can invest anywhere regardless of Shari’ah compliance. To sum up, insurance practice involves interest, uncertainty, gambling, and involvement in prohibited elements. Thus, Shari’ah scholars unanimously agreed on the prohibition of insurance.

2.4.1.14

Prohibition of Conventional Insurance in Fatawa

Muslim scholars prohibit conventional insurance. It is evidenced in the First International Conference on Islamic Economics (Makkah) 1976, Resolution of the Fiqh Academy of OIC 1985, Resolution 12/11 of Al Barakah Group Symposium, Resolution 42 of Al-Rajhi Bank-Saudi Arabia, Resolution of National Fatwa Committee of Malaysia 1972, Resolution of Dewan Syariah Nasional Indonesia 2001 and Resolution of Fiqh Council of Muslim World League 1978. From the various fatawa and research from scholars on the subject, the alternative form of ‘insurance,’ which is permissible under Shari’ah, should be based on the contract of donation (uqud tabarruat). Instead of the conventional commercial agreement of exchange (uqud muawadhah), the latter contains significant Riba elements, Maysir and Gharar, invalidating the traditional insurance contract.

2.5 Conclusion This chapter has explained the recognition of risk and risk management from both conventional and Islamic perspectives. The reasons for the prohibition of traditional insurance from the Islamic perspective are the involvement of interest, gambling, and uncertainty in the products they offer. The ban’s main reason is these prohibited elements can cause social and economic injustice to the ummah. The next chapter discusses Takaful, an alternative to traditional insurance-based on Islam’s teachings.

References Abdullah, S. (2012). Risk management via takaful from a perspective of maqasid of shariah. Procedia-Social and Behavioural Sciences, 65, 535–541.

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Alhabshi, S. O., Sharif, K., Razak, H. A., & EzamshahIsmail. . (2012). Takaful Realities and Challenges. Pearson Sdn Bhd. Al-Nawaw¯ı, A. S. (1992). Raudah al-talibin. D¯ar al-Kutub al-‘Ilmiyah. Ayub, M. (2007). Understanding Islamic Finance. Wiley. Azhari, S. A. (1990). Jawahir al-iklil sharh mukhtasar li khalil ibn ishaq. Maktabah al-Thaqafah. Bulletin of the commission on insurance terminology of the American Risk and Insurance Association, (1965). Campbell, S. (2005). Determining overall risk. Journal. of Risk Research, 8, 569–581. Choudhury, M. A., & Azizur Rahman, A. N. M. (1986). Macroeconomic relations in the Islamic economic order. International Journal of Social Economics, 13(6), 60–78. Crockford, N. (1987). The Administration of Insurance. ICSA Publishing Limited. Daud, M. B. (n.d.) Riba and Islamic Banking and Finance. Diacon, S. R. & Carter, R. L. (1992). Success in Insurance 3rd Edition. (Success Study books) Paperback El- Gamal, M. (2000). A Basic Guide to Contemporary Islamic Banking and Finance. Islamic society of North America. Engku, R., & Hassan, S. (2008). Essential Guide to Takaful (Islamic insurance). CERT publications. Frenz, T., & Soualhi, Y. (2010). Takaful and Retakaful: Principles and Practices. Munich Re Retakaful. Graham, J. D., & Weiner, J. B. (1995). Risk Versus Risk: Tradeoffs. Harvard University Press. Hillson, D., & Murray-Webster, R. (2007). Understanding and managing risk attitude. Gower Publishing, Ltd.. Htay, S. N. N., Arif, M., Soualhi, Y., Zaharin, H. R., & Shaugee, I. (2012). Accounting, Auditing and Governance for Takaful Operations. John Wiley & Sons. Ibn Qayyim, J. (1993). I‘lam al-muwaqi‘in ‘an rabb al-‘alamin. D¯ar al-Kutub al-‘ Ilmiyyah. IFRS 4 Insurance Contracts. (2009). Retrieved on 7th April, from https://www.ifrs.org/issued standards/list-of-standards/ifrs-4-insurancecontracts/#:~:text=An%20insurance%20contract% 20is%20a,event)%20adversely%20affects%0the%20policyholder. Ivamy, E. R. (1970). General Principles of Insurance Law (2nd ed.). Butterworths. Kasim, N., Htay, S. N. N., & Salman, S. A. (2015). Risk-sharing and shared prosperity through takaful. Middle East Journal of Scientific Research, 23(11), 27132721. Kassar, K. (2008). what’s Takaful A guide to Islamic Insurance. Bisc Group, Beruit. Khorshid, A. (2004). Islamic Insurance a modern approach to Islamic Banking. Routledge. Lowrance, W. (1976). Of Acceptable Risk—Science and the Determination of Safety. William Kaufmann Inc. Mehr, R. I. (1986). Insurance principles and practice. Fundamentals of Insurance. Muhaimin, I. (2005). General Takaful Practice Technical Approach to Eliminate Gharar Maisir and Riba. GEMA. Nordin, N., Aziz, S. A., Ahmad, A. A., & Daud, N. (2014). Contracting with Gharar (Uncertainty) in forward contract: What does Islam says? Asian SocialScience, 10(15), 37. Qaiser. R. (2014) Islamic Insurance. Retrieved January 20, 2012. http://www.Niapune.com/Res earch/TAKAFUL%20INSURANCE.pdf. Razi, M. (2008). Riba in Islam Fiqh of Contemporary Issues. http://www.Kantakji.com/media/ 3241/ribain-islam-v0-4.pdf. Renn, O. (2005). Risk governance: Towards an integrative approach. White Paper No. 1, written by Ortwin Renn with an Annex by Peter Graham (International Risk Governance Council). Renn, O. (2008). Risk Governance. Earthscan. Rosa, E. A. (2003). The Logical Structure of the Social Amplification of Risk Framework (SARF); Metatheoretical Foundations and Policy Implications, in: N. Pidgeon; R.E. Kasperson, & P. Slovic (eds.), The Social Amplification of Risk (Cambridge University Press), pp. 47–79. Salman, S. A. (2015). Insurance as the backbone of risk Management. International Business Management, 9(1), 54–59.

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Usmani, M. J. (2007). Takaful Paper Presented at Securities and Exchange Commission of Pakistan. Takaful conference in Karachi. Van Niekerk, J. P. (1998). The Development of the Principles of Insurance Law in the Netherlands from 1500 to 1800 (Vol. 1). Uitgeverij Verloren. Vaughan, E. J. (1997). Risk Management. Wiley. Zarq¯a’, M. A. (1994). Nizam al-ta’min: haqiqatuuh, wa al-ra’yu al-syar’i fihi. Mu’assasah alRisalah. Zuriah, A. R., & Hendon, R. (2009). Takaful 21st Century Insurance Innovation. Mc Graw Hill.

Chapter 3

Takaful: Concept, Principles, Types, and Models

Takaful is social and ethical insurance based on the principle of Ta awun (cooperation) and Tabarru, where the risk is shared collectively by members of a policy. The concept of Takaful is providing financial assistance to the participants based on mutual aid, brotherhood, and solidarity if the participants face misfortune. Takaful is an alternative to conventional insurance, and its primary objective is to protect the participants based on ethical and moral foundations. The idea and practice of Takaful are not new, as it was practiced during the time of the Prophet Muhammad (PBUH) by its adoption of the concept of Aqilah. Due to the complex nature of business activities and evolving human needs, Takaful is now fully commercialized and essential to the financial markets. This chapter’s discussion focuses on the historical development of Takaful, its available products, and Models and comparison of Takaful models. The practice of insurance was officially prohibited in 1972. Since then, Takaful has been introduced as Shari’ah compliant insurance product.

3.1 Introduction The previous chapter discussed insurance and conventional insurance evolution in light of religious teaching and ethical values within the Indian context. This chapter discusses Takaful, an alternative to traditional insurance since it is based on Islam’s teachings. This chapter is organized into six sections. Section Two presents an overview of Takaful. Section Three elaborates on the development of Takaful. Section Four focuses on the main types of Takaful products. Section Five discusses Takaful models, concluded by Section Six.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_3

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3.2 Overview of Takaful This section presents an overview of Takaful that includes the concept and definitions of Takaful, its governing rules in the Quran and Sunnah, and its historical development. Also, the main differences between insurance and Takaful and the main types of Takaful are discussed.

3.2.1 Concept of Takaful The original concept of Takaful can be traced back to the time of the Prophet (SAW). In those days, it was practiced as “Aqilah,” which is the payment to the victim’s heir by the kin of the murderer. Aqilah was widely practiced among the Arab tribes and the Prophet and His Companions (Salman & Htay, 2014; Arifin et al., 2013; Salman et al., 2018; Alhabshi et al., 2012; Archer, Karim, & Nienhaus, 2011; Jaffer et al., 2010; Othman & Abdul Hamid, 2009; Salman, 2014).

3.2.2 Definitions of Takaful “Takaful” is an Arabic term that means joint guarantee among the participants, and it is derived from the Arabic word “Kafalah,” which is taking care of one another (Alnemer, 2013; Kassar, 2008; Yazid et al., 2012). Kafalah also means a guarantee, warrant, or the act of securing one’s needs (Alnemer, 2013). Takaful is based on the principle of Ta awun (cooperation) and Tabarru, where the risk is shared collectively by members of a policy (Billah, 2002; Maysami & Williams, 2006; Usmani, 2007; Saaty, 2008; Kassar, 2008; Noor, 2009; Zuriah & Hendon, 2009; Fadzli et al., 2011; Alhabshi et al., 2012; Yazid et al., 2012; Arifin et al., 2013; Noordin, 2013; Faruk & Rahaman, 2015; Salman et al., 2019; Hassan et al., 2018;). In the contemporary world, Takaful has been defined in various ways, and some of them are as follows: “Takaful” means an arrangement based on mutual assistance under which Takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to the Takaful participants or their beneficiaries on the occurrence of pre-agreed events; (Islamic Financial Service Act, 2013). Islamic Insurance is an agreement of some persons facing certain types of risk to remedy the losses raised from those risks by paying subscriptions based on a donation commitment. This amount will be established as an insurance fund that will have its juristic personal. With separate financial liability, the compensation will be done for the losses that affect any subscriber due to insured risks that took place with this fund. It will be done according to bylaws and documents. This fund will be managed by a committee selected among the document holders or a stock company with certain

3.2 Overview of Takaful

29

charges to manage insurance-related works and the fund’s investment. (Accounting, Auditing, and Governance Standards for Islamic Financial Institutions, 2014). “Takaful is the Islamic counterpart of conventional insurance and exists in both Family (or “Life”) and General forms. Takaful is derived from an Arabic word that means a joint guarantee. A group of participants agrees to support one another jointly for the losses arising from specified risks. In a Takaful arrangement, the participants contribute a sum of money as a Tabarru’s commitment into a common fund used mutually to assist the members against a specific type of loss or damage. The underwriting in Takaful is thus undertaken on a mutual basis, similar in some respects to conventional mutual insurance. A typical Takaful undertaking consists of a two-tier structure that is a hybrid of a joint and a commercial form of company— which is the Takaful operator (TO)—although in principle it could be a pure mutual structure”. (Islamic Financial Services Board, 2009). In the author’s opinion, Takaful is social and ethical insurance based on the principle of Ta awun (cooperation) and Tabarru, where the risk is shared collectively by members of a policy. The concept of Takaful is providing financial assistance to the participants based on mutual aid, brotherhood, and solidarity if the participants face misfortune. Takaful is an alternative to conventional insurance, and its primary objective is to protect the participants based on ethical and moral foundations.

3.2.3 Shari’ah Framework of Takaful Shari’ah framework of Takaful is discussed by referring to the Quran, Hadith, and Shari’ah scholars’ views.

3.2.3.1

Takaful in the qur’an

The word “Takaful” is not mentioned in the Quran. However, its notion, idea, and concept, such as cooperation and assistance (Yusuf & Babalola, 2015; Januar, 2013) and helping the needy, are encouraged in the Quran, Hadith, and legal maxim. The fundamentals of Takaful are built on verses of the Quran and Prophet Muhammad’s sayings (PBUH). The following verses and sayings confirm the need for Takaful and its legitimacy: Help ye one another in righteousness and piety but help ye not one another in sin and rancor (Surah Al-Maidah, 2). Allah intends every facility for you; he does not want to put to difficulties (Surah Al-Baqarah, 185).

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3 Takaful: Concept, Principles, Types, and Models

3.2.3.2

Takaful in Hadith

When the historical development of Takaful is examined, the Prophet (SAW) approved the practice of Aqilah, as evidenced by the following ways: Once two women from the tribe of Huzail clashed when one of them hit the other with a stone, which killed her and the fetus in the victim’s womb. The heirs of the victim brought an action to the Holy Prophet’s court (s.a.w), who verdict that the infanticide’s compensation is freeing of a male or female slave. In contrast, the compensation for killing the woman is blood money (diyat), paid by the ‘Aqilah’ (the paternal relatives) of the accused. (Sahih Al-Bukhari).

It was reported from the Prophet as thus: ‘Allah will always help His servant for as long as he helps others.‘ (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud). Also, the first Islamic constitution prepared by the Prophet in 622 AC includes the concept of social insurance, which is founded on Aqilah, as seen in the following (Ab Ghani & Lambak, 2015; Billah, 2003): The immigrants among ‘Quraish’ shall be responsible for their word and pay their blood money in mutual collaboration.1 The immigrants among the Quraish shall be responsible for releasing the prisoners by way of paying their ransom. The mutual collaboration among the believers will be by the principles of goodness and justice.2 The society shall establish a joint venture with a mutual understanding towards providing necessary aid and help for the needy, ill, and low.3 Ibn Omr, May Allah (SWT) be pleased with them, reported: “The Holy Prophet Muhammad (p.b.u.h) said: A Muslim is the brother of another Muslim, he does not oppress him nor does he hand him over to his enemy. Whoever fulfills the needs of his brother, Allah (SWT), will satisfy his needs. Whoever brings a Muslim out of a difficulty, Allah (SWT) will get him out of one of the challenges of the Day of Resurrection; and whoever screens a Muslim, Allah (SWT), will screen him on the Day of Resurrection. Sa’d Bin Abi Waqqas, may Allah (SWT) be pleased with him, reported: “The Holy Prophet Muhammad (p.b.u.h) said: To leave your heirs rich better than to leave them destitute, begging from people. Abu Musa, May Allah (SWT) be pleased with him, reported: “The Holy Prophet Muhammad (p.b.u.h) said: A believer to another believer is like a wall of bricks supporting each other.

1

Article 3 of the constitution of Madina. It deals with the payment of blood money relying, on the doctrine of Aqilah; See Hamidullah, op.cit., at Arts. 4-12a, at 42ff. 2 See Hamidullah, The First Written Constitution in the World, op.cit. Art 3, p.55. 3 Articles 4-20a of the Constitution of Madinah. Islam da DevletButcesi, pp 382–83 as cited by Vardit, op.cit., at f.n. 84, p.28.

3.2 Overview of Takaful

31

To sum up, from the above verses of the Prophet’s Quran and sayings, it can be concluded that mutual help, helping the poor, and caring for others are encouraged in Islam. Takaful is based on mutual assistance, cooperation, brotherhood, and solidarity. So, it can be said that Takaful is in line with Shari’ah, i.e., Quran and Hadith.

3.2.4 Takaful: Shari’ah Scholar Point of View Mulhim and Sabbagh (n.d.) make an issue of the Shari’ah-compliant nature of cooperative insurance. Some scholars have permitted and legitimized it, but others have prohibited it. The supporters of mutual insurance justify why they believe that it is Shari’ah compliant. Islamic Jurisprudence Council held in Mecca Mukarramah on 10 Shaban 1398 AH supported this view. Mulhim and Sabbagh (n.d.) further mention that cooperative insurance is free from uncertainty (Hussein Hamed). It is based on cooperation (by referring to Mustafa Al-Zarqa), the principle of cooperation (by referring to Ahmed Sa’id Sharafeddin), cooperation, and donation (by referring to Mohamed Shawqi Al-Fanajri). Mulhim and Sabbagh (n.d.) further mention that a small group of Shari’ah scholars does not support that cooperative insurance is Shari’ah compliant by stating that it involves the interest practice based on Nasi’a (on credit) and Fadil (surplus). Nasi’a is incurred due to the time difference of the payment for premium and receiving claims. Fadil is incurred because the participants usually contribute a lesser amount than the claims received. It still has the nature of gambling because the contribution payment is based on the contingency, i.e., the participants are uncertain whether the accidents will occur or not. If there is no accident, he will lose his contribution, and if there is an accident, he will gain since the claimable amount is more than the donation. Mulhim and Sabbagh (n.d.) provide their view, and they believe that cooperative insurance is Shari’ah compliant. Some Shari’ah scholars believe that cooperative insurance is Shari’ah compliant because it is based on the contracts of donations (Wihba Al Zuhaili & Al-Saddik Mohammad Al-Amin Al-Dareer). And cooperation for good and righteous deeds (Wihba Al Zuhaili, Mohammed Abu Zahra, Sa’id Sharaf Eddin & Mohammad Shawki Al-Fanjari). Abdallah Naseh Alwan adds that for the cooperative insurance to be Shari’ah compliant, the contribution should be based on donation; investment should be made in the Shari’ah-compliant way, and claims should be paid out of the group’s money. According to Hassan (2011) and Billah (2007), they categorize Shari’ah scholars’ opinions into three groups. The first group mentions that insurance practice is lawful as long as it is free from the method of interest. The scholars who support this view are Shaikh Mohammad Abduh, the Hanafi lawyer Shaikh ibn Abidin, Mohammad Taqi Usmani, Shaikh Mahmud Ahmad, Mustafa Ahmad Zarqa, Sayed Mohammad Sadeeq Al Ruhani, Ibrahim Tahawi, Ahmad Taha Al Sanusi, Yusuf Musa, Mohammad Al

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3 Takaful: Concept, Principles, Types, and Models

Bahi, Ali Al Khafif, Zafar Shahidi, Mohammad Nejatullah Siddiqi, Mohammad Muslehuddin, MA Mannan, Ali Jamaluddin Awas, and Ayatullah Khomeini. The second group accepts general insurance and its practices. Still, it rejects life insurance because the latter involves gambling and uncertainty against mirath (Inheritance) and wasiyah (A Will). This view is accepted by the Muslim League Conference held in Cairo in 1965 and in the seminar held in Morocco on May 6, 1972. The Shari’ah scholars who take this view are Abdur Rahman Isa, Ahmad Ibrahim, Mohd Musa, Mufti Mohammad Bakheet, Mohammad Abu Zahra, and Shaikh Al Azhar Shaikh Jad Al Haq Ali Jad Al Haq. The third group rejects any insurance practice because it involves interest, gambling, and uncertainty. This view is supported by Mustafa Zaid, Abdullah Al Qalqeeli, and Jalal Mustafa Al Sayyad.

3.2.5 Fundamental Differences Between Takaful and Insurance Table 3.1 highlights the fundamental difference between Takaful and insurance (Fisher & Taylor, 2000; Salman et al., 2017; Billah, 2003; Frenz & Soualhi, 2010; Farooq et al., 2010; Khan et al., 2011; Ezamshah, 2011; Naseer & Jamil, 2011; Matsawali et al., 2012; Yousuf, 2012; Coolen-Maturi, 2013; Salman & Hassan, 2020; Salman, 2014). The above comparison is made from 18 aspects, namely, place and time, concept, principle, contractual relationship, motive, payment, profit from the investment, surplus from participant risk funds, sources of the ruling, standard-setting bodies, choice of investment, risk, Shari’ah-compliant, religious and ethical aspect, motivation, receivable upon maturity, receivable upon surrender and the payment for agency commission.

3.3 Development of Takaful The practice of Aqilah was continued by the companions of the Prophet (SAW). For instance, Sayyedana’ Umar (Rz) commanded a Diwan of Mujahidin to provide mutual help among themselves if anyone commits murder (Billah, 2003, 2007). The concept of Takaful originated from the idea of Aqilah, and it has been practiced since the Prophet’s (SAW) time until now (Matsawali et al., 2012). Thus, the following paragraphs will discuss its practices by splitting into different centuries. During the 14th to seventeenth centuries, insurance practices focused on marine trade. During the nineteenth century, a Hanafi lawyer Ibn Abidin (1784 –1836), became the primeval Islamic philosopher to develop the importance, general notion, or idea and legal basis of an insurance agreement (Klingmuller, 1969). He is the first person who discussed the legal basis of insurance and starting from that time.

3.3 Development of Takaful

33

Table 3.1 Fundamental differences between takaful and insurance No

Description

Takaful

1

Place and time

Ancient arab tribal customs The traditions of Babylon before 570 AC 4000–3000 BC

Insurance

2

Concept

Based on Aqilah

3

Principle

Aqilah was practiced based The Contract of Bottomry on cooperation among the was founded on interest tribes

4

Contractual relationship

• Shari’ah-compliant Takaful models • Unilateral contract

• Interest-based contract • Bilateral contract

5

Motive

Mutual help and Tabarru

Profit based

6

Payment

Contribution belongs to the Premium belongs to the participants and Takaful insurance companies operators depending on the Takaful model adopted

7

Profit from investment

It can be shared between participants and Takaful operators according to the Takaful model adopted

It belongs to the insurance operator only

8

Surplus from participant risk fund

It can be shared depending on the Takaful models adopted

It belongs to the insurance company

9

Sources of ruling

Qur’¯an sunnah fiqh

Purely based on human-made laws such as Acts, Statutes, and Case laws

10

Standard-setting bodies

AAOIFI IFSB local standard-setting bodies

Local standard-setting bodies

11

Choice of investment

Shari’ah-compliant investment

No restriction

12

Risk

Risk sharing

Risk transfer

13

Shari’ah-compliant

It is in line with Shari’ah

It is not in line with Shari’ah since it involves prohibited elements such as interest, uncertainty, and gambling

14

The religious and ethical aspect

Acceptable under any religion

Prohibited under the religious and ethical teaching

15

Motivation

Both material and spiritual motivation

Only material motivation

Based on the Contract of Bottomry

(continued)

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3 Takaful: Concept, Principles, Types, and Models

Table 3.1 (continued) No

Description

Takaful

Insurance

16

Receivable upon maturity

Participant’s portion from the investment account and profit (if any) and the maturity value of the participant’s risk fund

The whole amount agreed in the policy, interest, dividend, and bonus

17

Receivable upon surrender

Participant’s portion from the investment account and profit (if any) and the surrender value of the participant’s risk fund

The whole amount agreed to the policy and interest, dividend, and bonus (if any)

18

Agency commission

Depending on the Takaful model adopted

Paid from the premium

Insurance practices are based on traditional institutions, not based on customary practice. Also, Islamic jurists started issuing the fat¯awa on the illegitimate nature of conventional insurance and introduced Takaful as an alternative to insurance in the twentieth century (Alhabshi et al., 2012; Billah, 2003; Ezamshah, 2011; Htay & Salman, 2013; Kassar, 2008). Such institutions include (Fisher & Taylor, 2000): • • • •

Higher Council of Saudi Arabia in 1397 AH (1976) Fiqh Council of Muslim World League in 1398 AH (1977) Fiqh Council of the Organisation of the Islamic Conference in 1405 AH (1984) Grand Council of Islamic Scholars in Mecca, Majma AL-Fiqh in 1985.

EY Global Takaful Insights (2013) provides the critical milestones in the Takaful industry’s current development worldwide. In 2002, Lebanon (in the MENA region) entered the Takaful market by establishing Al Aman Takaful. In Asia, the Islamic Financial Services Board (IFSB) was established. In 2003, Pakistan (in the Asian region) established Pak Kuwait Takaful Limited, the first Takaful Company. In the case of regulatory development, in 2005, Saudi Arabia enacted the Saudi Arabia Monetary Authority (SAMA) regulations for cooperative insurance supervision. Bahrain enacted Bahrain Monetary Authority Rules, which includes rules related to Takaful. Besides, the Securities and Exchange Commission Pakistan (SECP) issued Takaful rules in Pakistan. In Europe, the significant milestones started in 2006. Hannover Re from Germany and Swiss Re from Switzerland entered the Retakaful industry. In 2007, Munich Re from Germany joined the Retakaful industry. In 2008, the Salaam insurance company was established in Britain. In 2009, IFSB issued governance guidelines for Takaful, i.e., IFSB-8 and Shari’ah governance principles, i.e., IFSB-10. In 2010, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) issued the AAOIFI Islamic insurance standard no. 26, and IFSB-11 gave Takaful operators solvency. In 2011, Kenya entered the Takaful market with Takaful Insurance Africa, and Saudi Arabia directed all the operators to use the cooperative insurance model. In 2012, Islamic Finance Amendment Rules 2012 allowed the operation of Takaful by conventional firms.

3.3 Development of Takaful

35

Similarly, Pakistan allowed a Takaful window, while Malaysia launched its Takaful operating framework. In 2013, Cobalt from Britain launched the platform for writing significant commercial risks (Shari’ah compliant) in the London market. Dubai tried to become the capital of the global Islamic economy. Indonesia proposed a new Act to phase out Takaful windows and the Islamic Financial Services Act (IFSA) requiring the separation of family and general Takaful into separate entities. EY Global Takaful Insights (2013) further highlights Takaful operators’ numbers in key Takaful market centers. According to this report, the total number of Takaful operators in the key market is 174, comprising of 34 in Saudi Arabia, 11 in Malaysia, 43 in GCC countries (excluding Saudi Arabia), 29 in ASEAN (excluding Malaysia), 12 in South Asia, 36 in Africa and 9 in the Levant. Family and medical Takaful are the primary business lines in the markets. For instance, 80% in South Asia, 50% in ASEAN, and 47% in MENA belong to the family and medical Takaful. According to the global Takaful insurance market: Charting the road to mass markets by Deloitte (2014), the GCC countries contribute more than 62% of the gross Takaful contribution globally, and it is expected to grow significantly and reach USD20 billion in the contribution by 2017 (Salman et al., 2015).

3.4 Main Types of Takaful There are two main categories of Takaful products, i.e., general Takaful and family Takaful (Kwon, 2007; Redzuan et al., 2009; Alhabshi & Razak, 2011; Onagun & Ismail, 2011; Htay & Zaharain, 2011; Htay & Salman, 2013). The following two subsections discuss these products.

3.4.1 General Takaful According to IFSB, general Takaful is defined as “schemes which are contracts of joint guarantee on a short-term basis (normally one year), providing mutual compensation in the event of a specified type of loss.“ The schemes are designed to meet the needs to protect individuals and corporate bodies from material loss or damage resulting from a catastrophe or disaster inflicted upon real estate, assets, or participants’ belongings. The Takaful contribution is pooled into the participant risk fund under the principle of Tabarru to match the risk elements of the business inherent in its underwriting activities”. According to Fadzli et al. (2011), the participants can engage with Takaful for the assets recognized as valuable items according to the Shari’ah. For instance, a factory producing alcohol is not allowed to apply for general Takaful. Also, the potential loss incurred must be an accident and unintentional. It is seen in Surah-Baqarah, 195.

36

3 Takaful: Concept, Principles, Types, and Models And spend of your substance in the cause of Allah and make not your own hands contribute to (your) destruction; but do good, for Allah love those who do good.

The main types of general Takaful products are motor vehicle Takaful,4 fire Takaful,5 marine Takaful6 , and engineering Takaful.7 Takaful for motor vehicles, motorcycles, and commercial vehicles are under motor vehicle Takaful. The fire Takaful case covers Takaful for standard fire, house owner or householder, and home package. Marine cargo and marine hull or machinery are the sub-products of marine Takaful, and machinery breakdown and construction risk are under engineering Takaful (Ezamshah, 2011; Fadzli et al., 2011).

3.4.2 Family Takaful Family Takaful provides protection and long-term saving and investment opportunities. Having family Takaful products will release the family’s financial burden in times of misfortune, and return will be accumulated from the Takaful operators’ investment account.8 There are two main types of family Takaful products: individual family Takaful products and group family Takaful products. Individual family products comprise protection products, investment products, retirement products, and medical products. Family Takaful aims to protect by offering financial help for the participant’s beneficiaries when they die or become permanently disabled. This product also tries to release the participant’s financial burden if he suffers a critical illness, temporary (totally or partially) disability. In the case of family Takaful investment products or investment-linked family Takaful products, it provides investment opportunities in addition to the protection given to the participants. Retirement family Takaful products offer financial assistance to the participant when he retires from work. This product’s benefit is that the participant can get adequate financial support after retirement and cover old age’s medical expenses. Medical family Takaful products cover hospitalization and surgery (Ezamshah, 2011; Fadzli et al., 2011). 4

“It covers against the loss or damage to vehicle due to accidental fire, theft or accident and or third party bodily injury or death, third party property or loss” (www.insuranceinfo.com.my/_sys tem/media//motortakaful.pdf downloaded on 21st February 2014). 5 “It provides comprehensive protection for both residential and commercial properties (including the structure) against several perils" (http://www.takaful-ikhlas.com.my/generaltakaful/fire.asp downloaded on 21st February 2014). 6 It protects the participants from any financial loss due to perils insured against (http://www.rit ajins.com/custompages.aspx?pid=26 downloaded on 21st February 2014). 7 It covers damage related to the construction such as construction plant and equipment and machinery and also it’s surrounding (http://www.watania.ae/en/products/general-takaful/engine ering.Aspx downloaded on 21st February 2014). 8 http://www.insuranceinfo.com.my/choose_your_takaful/protect_your_family/family_takaful. php?intPrefLangID=1&

3.4 Main Types of Takaful

37

The employers usually subscribe to group family Takaful for the benefit of employees and their family members. Like the individual family Takaful products, it provides financial assistance to the participants to cover hospitalization, surgery, and regular medical expenses. The coverage amount depends on the employer or employees (Fadzli et al., 2011).

3.5 Takaful Models Discussions on Takaful models are presented in two subsections, i.e., general Takaful and family Takaful models. These models are prepared based on (Salman, 2014; Frenz & Soualhi, 2010; Htay et al., 2013; Engku & Scott, 2008; Alhabshi et al., 2012; Dawood Family Takaful, 2015; Fadzli et al., 2011; Islamic Financial system: principles and operations, 2012).

3.5.1 General Takaful Models Four types of general Takaful models are explained, and these models are the pure wakalah (agency) model, pure mudarabah model, hybrid wakalah-mudarabah model, and wakalah waqf model.

3.5.1.1

Pure Wakalah (Agency) Model

In this model, the general Takaful contribution is split into two: general Takaful fund and Wakalah fee. Some portion of the general Takaful fund is allocated for investment. Takaful operators can get the Wakalah fee as their income. The profit generated from investment accounts is distributed back to the general Takaful fund. Claims, Retakaful contribution, and reserve are paid out of the general Takaful fund. Any surplus from the general Takaful fund will be distributed to the participants. If there is any deficit in the general Takaful fund, Takaful operators are required to provide the interest-free loan to the general Takaful fund. (Refer Fig. 3.1).

3.5.1.2

Pure Mudarabah Model

In this model, the general Takaful contribution is kept under the general Takaful fund. Some portion of the general Takaful fund is allocated for investment. Some of the profit generated from the investment account is given to the Takaful operators, and the balance is assigned to the general Takaful fund. Claims, Retakaful contribution, and reserve are paid out of the general Takaful fund. Any surplus from the general Takaful fund will be distributed to the participants. If there is any deficit in the general

38

3 Takaful: Concept, Principles, Types, and Models

Fig. 3.1 Pure wakalah (Agency) model

Takaful fund, Takaful operators are required to provide the interest-free loan to the general Takaful fund. (Refer Fig. 3.2).

3.5.1.3

Hybrid Wakalah-Mudarabah Model

In this model, the general Takaful contribution is split into two: general Takaful fund and Wakalah fee. Some portion of the general Takaful fund is allocated for investment. Takaful operators can get the Wakalah fee as their income. They can also get the investment profit share and performance fee if there is any surplus from the general Takaful fund. The profit generated from the investment account is allocated back to the general Takaful fund after sharing some Takaful operators’ investment profit. Claims, Retakaful contributions, and reserves are paid out of the general Takaful fund. After spending the Takaful operators’ performance fee, any surplus from the general Takaful fund will be distributed to the participants. If there is any deficit in the general Takaful fund, Takaful operators are required to provide the interest-free loan to the general Takaful fund. (Refer to Fig. 3.3).

3.5.1.4

Wakalah Waqf Model

In this model, Takaful operators make the waqf fund on behalf of shareholders. It will then be parked together with some portion of the general Takaful contribution after

3.5 Takaful Models

39

Fig. 3.2 Pure mudarabah model

paying the wakalah fee. The General Takaful fund is the combination of the Waqf fund and a part of the general Takaful contribution. A portion of the General Takaful fund is allocated for investment. The savings after giving the Takaful operators’ share will be assigned back to the general Takaful fund. Any surplus from the general Takaful fund will be distributed to the participants. If there is any deficit in the general Takaful fund, Takaful operators are required to provide the interest-free loan to the general Takaful fund. (Refer to Fig. 3.4).

3.5.2 Comparison of General Takaful Models Table 3.2 is compared four general Takaful models in terms of contribution, payment for claims, Retakaful reserve, investment profit, surplus, and Qard. When TOs receive the donation, it has been split into general Takaful fund and wakalah fee under all the Takaful models (i.e., pure wakalah model, hybrid wakalah), mudarabah model, and wakalah waqf model) except for the mudarabah model. All the payments for claims, Retakaful contribution, and reserve are from GTF. The investment profit is shared between TOs and GTF under the hybrid wakalah-mudarabah model and wakalah waqf model. Under the pure wakalah (agency) model, the investment profit

40

3 Takaful: Concept, Principles, Types, and Models

Fig. 3.3 Hybrid wakalah-mudarabah model

is allocated back to GTF, and under the mudarabah model, the investment profit will be shared between the participants and TOs. In the case of a surplus, the participants can get the surplus under all models, but under the hybrid Wakalah-Mudarabah Model, TOs can get a performance fee if there is any surplus. If there is any deficit in GTF, TOs are required to provide the Qard.

3.5.3 Family Takaful Models Seven types of family Takaful models are discussed. They are the cooperative (Taa’wuni) model, pure wakalah (agency) model, modified wakalah/wakalah with incentive compensation, a pure mudarabah model, and a modified mudarabah, hybrid wakalah-mudarabah model, and waqf model.

3.5 Takaful Models

41

Fig. 3.4 Wakalah waqf model

3.5.3.1

Cooperative (Taa’wuni) Model

In this model, when the participants contribute, it will be allocated to the participant’s particular account (PSA) and participant account (PA). The claims, Retakaful contribution, and operating expenses will be paid from PSA, and reserves will be kept. Moreover, the management expenses will be paid to the Takaful operators from PSA. Some portions of PSA and PA will be invested to generate income. PA’s investment profit will be given to the participants, and PSA’s investment profit will be channeled back with PSA. Any surplus in PSA will be given to the participants. Upon maturity or surrender, the participants will receive their respective amounts from PA and PSA share (if any). It is demonstrated in Fig. 3.5.

3.5.3.2

Pure Wakalah (Agency) Model

In this model, the relationship between Takaful operators (TOs) and participants is the principal-agent relationship. TOs act as an agent on behalf of participants to make the investment and manage the funds. Usually, the Wakalah fee covers commission fees, operating expenses, and investment management. In this situation, the participants’ contributions will be split into the Wakalah fee, PSA, and P.A. TOs do not share the investment profit and PSA surplus.

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3 Takaful: Concept, Principles, Types, and Models

Table 3.2 Comparison among general takaful models Contribution No

Takaful model

1

Pure wakalah (Agency) model

2

Mudarabah model

3

Hybrid wakalah-mudarabah model

4

Wakalah waqf model

Wakalah fee (WF) √

General takaful fund (GTF) √ √

√

√

√

√

Claims, retakaful contribution, and reserve 1

Pure wakalah (Agency) model

2

Mudarabah model

3

Hybrid wakalah-mudarabah Model

4

Wakalah waqf model

GTF √ √ √

√

Investment profit 1

Pure wakalah (Agency) model

2

Mudarabah model

3

Hybrid wakalah-mudarabah model

4

Wakalah waqf model

GTF √

TOs

Share √

Share

√

-

Share

Share

Surplus 1

Pure wakalah (Agency) model

2

Mudarabah model

3

Hybrid wakalah-mudarabah model

4

Wakalah waqf model

Participants √

TOs -

√ √

√

Performance fee

-

Qard 1

Pure wakalah (Agency) model

Yes √ (continued)

3.5 Takaful Models

43

Table 3.2 (continued) Contribution No

Takaful model

2

Mudarabah model

3

Hybrid wakalah-mudarabah model

4

Wakalah waqf model

Wakalah fee (WF) √

General takaful fund (GTF)

√

√

Fig. 3.5 Cooperative (Taa’wuni) model

Moreover, the claims, Retakaful contribution, operating expenses will be paid, and reserves will be kept from PSA. The PSA’s investment profit will be channeled to PSA, and PA’s investment profit will be distributed to the participants. Upon maturity or surrender, the participant will be receiving his respective amount from PA and their share from PSA (if any). Surplus from PSA will be channeled to the participants. However, in the case of a deficit, the qard loan (interest-free loan) will be given out from the TO, and it should be paid back to the TO (Engku & Scott, 2008; Frenz & Soualhi, 2010; Htay et al., 2012). It is demonstrated in Fig. 3.6.

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3 Takaful: Concept, Principles, Types, and Models

Fig. 3.6 Pure wakalah (agency) model

3.5.3.3

Modified Wakalah Model (Wakalah with Incentive Compensation)

In this model, the relationship between TOs and participants is the principal-agent relationship. The TOs are allowed to share the surplus and investment profit from PSA and PA with the participants. The purpose of this model is to give incentives to TOs for their efficient management. Like the wakalah model, the wakalah fee covers commission fees, operating expenses, and investment management. The contribution received from the participants will be split into the Wakalah fee, PSA, and PA Claims, Retakaful Contribution is paid out of PSA, and reserve will be kept out of PSA. Upon maturity and surrender, the participant will be receiving his respective amount from PA and PSA (if any). In the case of a deficit in PSA, the qard loan (interest-free loan) will be given out from the TOs, and it should be paid back to the TOs (Frenz & Soualhi, 2010; Htay et al., 2012). It is demonstrated in Fig. 3.7.

3.5.3.4

Pure Mudarabah (Investment Profit-Sharing) Model

In this model, the contractual relationship between the participants and TOs is based on the concept of profit-sharing. Participants are the capital providers, while TOs provide the services by managing the participants’ funds. The income of the TOs is solely based on the share of the investment profit from PSA, and PA Claims, Retakaful Contribution, will be paid out of PSA. Also, the reserve will be kept out of PSA. Upon maturity or surrender, the participant will be receiving his respective

3.5 Takaful Models

45

Fig. 3.7 Modified wakalah model

amount from PA and PSA (if any). The surplus will only be distributed back to the participants. However, in the case of a deficit, the qard loan (interest-free loan) will be given out from the TOs, and it should be paid back to the TOs (Engku & Scott, 2008; Frenz & Soualhi, 2010; Htay et al., 2012). It is demonstrated in Fig. 3.8.

3.5.3.5

Modified Mudarabah Model

In this model, TOs can share the investment profit from PSA and PA and the PSA surplus. The contribution received from the participants will be split into PSA and PA Claims, the Retakaful contribution will be paid out of PSA, and the reserve will be kept out of PSA. Upon maturity or surrender, the participant will be receiving his respective amount from PA and PSA (if any). In the case of a deficit, the qard loan (interest-free loan) will be given out from the SF, and it should be paid back to the SF. It is demonstrated in Fig. 3.9.

3.5.3.6

Hybrid Wakalah-Mudarabah Model

This model combines the principles of Wakalah and Mudarabah. In this model, TOs can get the Wakalah fee, share the investment profit from PSA and PA, and also, TOs are entitled to receive a performance fee if there is any surplus. The contribution received from the participants will be split into the Wakalah fee, PSA, and PA Claims,

46

3 Takaful: Concept, Principles, Types, and Models

Fig. 3.8 Pure mudarabah model

and Retakful contributions will be paid out of PSA, and reserves will be kept out of PSA. Upon maturity, the participant will be receiving his respective amount from PA and their share from PSA (if any). In the case of deficit, the qard loan (interest-free loan) will be given out from the TOs, and it should be paid back to the TOs (Frenz & Soualhi, 2010; Htay et al., 2012; Engku & Scott, 2008; Alhabshi et al., 2012; Dawood Family Takaful, 2015; Fadzli et al., 2011; Islamic Financial system: principles and operations, 2012). It is demonstrated in Fig. 3.10.

3.5.3.7

Waqf Model

In this model, TOs (i.e., the shareholders) need to put up money in the PSA as waqf. Participants’ contributions will be split into the Wakalah fee, PSA, and P.A. TOs are allowed to earn the Wakalah fee, the PSA’s investment fee, and the PA’s investment profit share. Claims, Retakaful contributions, will be paid out of PSA, and reserve will be kept out of PSA. Upon maturity or surrender, the participants will get their respective amounts from PA and their PSA share (if any). Surplus from PSA will be channeled back to participants. In the case of deficit, the qard loan (interest-free loan) will be given out from the TOs, and it should be paid back to the TOs (Dawood Family Takaful, 2015; Engku & Scott, 2008; Fadzli et al., 2011; Frenz & Soualhi, 2010; Htay et al., 2012). It is demonstrated in Fig. 3.11.

3.5 Takaful Models

47

Fig. 3.9 Modified Mudarabah model

After explaining the models with the Figures, the following section performs a comparison of the models.

3.5.4 Comparison of Family Takaful Models This section makes a comparison among seven Takaful models in terms of the participant contribution, payment for claims, Retakaful contribution, and reserves, surplus from particular participant account (PSA), profit from the participant account (PA), surrender, maturity, and Qard (Refer to Table 3.3).

48

Fig. 3.10 Hybrid wakalah-mudarabah model

Fig. 3.11 Waqf model

3 Takaful: Concept, Principles, Types, and Models

3.5 Takaful Models

49

Table 3.3 Comparison among family takaful models Participant contribution No

Takaful model

1

Cooperative (Taa’wuni) Model

2

Pure Wakalah (agency) Model

3

Modified Wakalah Model

4

Pure Mudarabah Model

5

Modified Mudarabah Model – √ Hybrid Wakalah-Mudarabah Model √ Waqf Model

6 7

Wakalah fee Participant (WF.) special account (PSA) √ –

Participant account (PA) √

√

√

√

√

√

√

√

√

√

√

√

√

√

√

PSA √

PA

–

Claims, Retakaful contribution, and reserves No

Takaful model

WF

1

Cooperative (Taa’wuni) model

–

2

Pure Wakalah (agency) model

–

3

ModifiedWakalah model

–

4

Pure Mudarabah Model

–

5

Modified Mudarabah Model –

6

Hybrid Wakalah Mudarabah model

–

7

Waqf model

–

No

Takaful model

Participants

1

Cooperative (Taa’wuni) model

2

Pure Wakalah (agency) model

3

Modified Wakalah model

4

Pure Mudarabah Model

5

Modified Mudarabah model

6

Hybrid Wakalah-Mudarabah model

7

Waqf model

√ √ √ √ √ √

– – – – – – –

Surplus from PSA √ √ √ √ √ √ √

Takaful operator – – Shared – Shared Performance fee – (continued)

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3 Takaful: Concept, Principles, Types, and Models

Table 3.3 (continued) Participant contribution No

Takaful model

Wakalah fee Participant (WF.) special account (PSA)

No

Takaful model

Participants

1

Cooperative (Taa’wuni) model

2

Pure Wakalah (agency) model

3

Modified Wakalah model

4

Pure Mudarabah model

5

Modified Mudarabah model

6

Hybrid Wakalah-Mudarabah model

7

Waqf Model

Profit from PA √ √ √ √ √ √ √

Takaful operator – Shared Shared Shared Shared Shared

Surrender or maturity No

Takaful model

1

Cooperative (Taa’wuni) model

2

Pure Wakalah (agency) model

3

Modified Wakalah model

4

Pure Mudarabah Model

5

Modified Mudarabah model

6

Hybrid Wakalah-Mudarabah model

7

Waqf model

PSA √

PA √

√

√

√

√

√

√

√

√

√

√

√

√

Yes √

No

Qard No

Takaful model

1

Cooperative (Taa’wuni) model

2

Pure Wakalah (agency) model

3

Modified Wakalah model

4

Pure Mudarabah Model

5

Modified Mudarabah model

6

Hybrid Wakalah-Mudarabah Model

7

Waqf model

√ √ √ √ √ √

– – – – – – –

Participant account (PA)

3.5 Takaful Models

51

When the TOs receive the participants’ contribution, the contribution amount will be split into the wakalah fee (WF.), PSA, and PA. for the pure wakalah model, modified wakalah hybrid wakalah-mudarabah model, and waqf model. The cooperative model, pure mudarabah model, and modified mudarabah model, PSA, and PA will be allocated. Regarding the payment for claims, Retakaful contribution, and allocation for reserves, it will be given out of PSA under all Takaful models. In the case of a surplus, it is shared between the participants and TOs in the modified wakalah model and modified mudarabah model. For the hybrid wakalah-mudarabah model, TOs can get the performance fee if there is any surplus. However, for the rest of the models (cooperative model, pure wakalah model, pure mudarabah model, and waqf model), TOs do not share the surplus. Concerning profit from PA, all the Takaful models except the cooperative and pure wakalah models, TOs, share the profit. In the case of surrender, participants receive the accumulated amount from PA (i.e., allocated an amount initially from contribution and profit (if any) and surrender value (if any) from PSA. Similarly, upon maturity, participants receive the accumulated amount from PA (i.e., initially allocated an amount from contribution and profit (if any) and maturity value (if any) from PSA. In every Takaful model, TOs must provide the qard if necessary.

3.6 Conclusion This chapter gave an overview of Takaful that includes the concept and definitions of Takaful. Its governing rules in the Quran, Sunnah, legal maxim and views from the Shari’ah scholars, and its historical development include issuing the fatawa on the illegitimate nature of conventional insurance and introducing Takaful as an alternative to insurance in the twentieth century. Also, the main differences between insurance and Takaful. The main types of Takaful, Family Takaful, and General Takaful and their respective models are explained. The comparison among the models is described.

References Ab Ghani, H., & Lambak, S. (2015). Does Darura Concept Still A Dispensation to Takaful Operators in Malaysia. In International Conference on Empowering Islamic Civilization in the 21st century. 6th–7th June. Accounting and Auditing Organization for Islamic Financial Institutions. (2014).Accounting, Auditing and Governance Standards for Islamic FinancialInstitutions. Manama, Bahrain. Alhabshi, S. O., & Razak, S. H. (2011). Takaful insurance: concept, history anddevelopment challenges. The Foundations of Islamic Banking: Theory, Practice and Education, 184. Alhabshi, S. O., Sharif, K., Razak, H. A., & EzamshahIsmail. (2012). Takaful Realities and Challenges. Pearson Sdn Bhd.

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AlNemer, H. A. (2013). Poverty in Saudi Arabia, The Way to Reduce: An Empirical Study on Takaful Participants. 5th Islamic Economic System Conference. Archer, S., Karim, R. A. A., & Nienhaus, V. (Eds.). (2011). Takaful Islamic Insurance: Concepts and Regulatory Issues (Vol. 764). John Wiley & Sons. Arifin, J., Shukri Yazid, A., & Sulong, Z. (2013). A Conceptual Model of Literature Review for Family Takaful (Islamic Life Insurance) Demand in Malaysia. International Business Research, 6(3), 210–216. Billah, M. M. (2003). Islamic and Modern Insurance principles and practices. Ilmiah Publishers. Billah, M. M. (2007). Applied Takaful and Modern insurance. Malaysia: sweet and Maxwell Asia. Billah, M. M. (2002). Takaful (Islamic Insurance) premium: A suggested regulatory framework. Journal of Islamic Banking and Finance, 19(3), 52–64. Coolen-Maturi, T. (2013). Islamic insurance (Takaful): demand and supply in the UK, International Journal of Islamic and Middle Eastern Finance and Management, 6(2), 87–104. Dawood Family Takaful. (2015). http://www.Dawoodtakaful.com/WakalaWaqfModel.aspx. Engku, R., & Scott, H. (2008). Essential guide to Takaful (Islamic insurance). CERT publications. Ernst and Young. (2013). World Takaful Report. Ezamshah, I. (2011). Basic Takaful broking handbook. IBFIM. Fadzli, Y., Zamri, W. W. I., & Khudus, A. M. N. A. (2011). Fundamentals of Takaful. IBFIM. Farooq, S. U., Chaudhry, T. S., Alam, F. E., & Ahmad, G. (2010). An analytical study of the potential of Takaful companies. European Journal of Economics, Finance and Administrative Sciences, 20, 54–75. Faruk, O., & Rahaman, A. (2015). Measuring Efficiency of Conventional Life Insurance Companies in Bangladesh and Takaful Life Insurance Companies in Malaysia: A Non Parametric Approach. Management Studies and Economic Systems, 2(2), 129–144. Fisher, O., & Taylor, D. Y. (2000). Prospects for Evolution of Takaful in the 21st century. In Proceedings of the Fifth Harvard University Forum on IslamicFinance: Islamic Finance: Dynamics and Development Cambridge, Massachusetts. Centre for Middle Eastern Studies, Harvard University (pp. 237254). Frenz, T., & Soualhi, Y. (2010). Takaful and Retakaful: Principles and Practices. Munich Re Retakaful. Hassan, R. (2011). Islamic Banking and Takaful. Pearson Custom Publishing. Hassan, R., Salman, S. A., Kassim, S., & Majdi, H. (2018). Awareness and Knowledge of Takaful in Malaysia: A Survey of Malaysian Consumers. International Journal of Business and Social Science, 9(11), 45–53. Htay, S. N. N., & Salman, S. A. (2013). Viability of Islamic Insurance (Takaful) in India: SWOT Analysis Approach. Review of European Studies, 5(4), 145. Htay, S. N. N., & Zaharin, H. R. (2012). Critical analysis on the choice of Takaful (Islamic Insurance) operating models in Malaysia. World Journal of Social Sciences, 2(2), 112–127. Htay, S. N. N., Arif, M., Soualhi, Y., Zaharin, H. R., & Shaugee, I. (2012). Accounting, Auditing and Governance for Takaful Operations. John Wiley & Sons. Islamic Financial Services Act (2013). http://www.bnm.Gov.my/documents/act/en_ifsa.pdf. Islamic financial services board standard on solvency requirements for takaful (Islamic insurance) undertakings. (2010). Retrieved January 21st, 2012, fom http://www.ifsb.org/standard/ifsb11% 20%20standard%20on%20solvency%20requirements%20for%20takaful%2%28islamic%20i nsurance%29%20undertakings.pdf. Islamic Financial System Principles and Operations. (2012). Published by International Shari’ah Research Academy for Islamic Finance (ISRA). Jaffer, S., Ismail, F., Noor, J., Unwin, L., & Ajayi, D. (2010). Takaful (Islamic Insurance): Concept, Challenges, And Opportunities. Milliman research report.Retrieved May 30, 2012, from http:// publications.milliman.Com/research/liferr/pdfs/takafulIslamicinsurance-concept.pdf. Januar EKO, P. R. A. S. E. T. I. O. (2013). Takaful: Opportunities and Challenges in Indonesia. In Prosiding Conference International and Call Paper: Transformation Malaysia Indonesia Relation Toward Asean Community (pp. 113–123). Fakultas Ekonomi UPN” Veteran” Yogyakarta.

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Kassar, Khlid. (2008). what’s Takaful A guide to Islamic Insurance. Lebanon: Bisc Group, Beruit. Khan, M. M., Alam, H. M., Ahmad, N., Iqbal, M. S., & Ali, S. (2011). Comparative analysis of Islamic and prevailing insurance practices. International Journal of Business and Social Science, 2(10). Klingmuller, E. (1969). The concept and development of insurance in Islamic countries. Islamic Culture, 43, 27–37. Kwon, W. J. (2007). Islamic Principle and Takaful Insurance: Re-evaluation. Journal of Insurance Regulation, 26(1), 53. Matsawali, M. S., Abdullah, M. F., Yeo, C. P., Abidin, S. Y., Zaini, M. M., Ali, H. M. & Yaacob, H. (2012). A study on Takaful and conventional insurance preferences: The case of Brunei. International Journal of Business and Social Science, 3(22). Maysami, R. C., & Williams, J. J. (2006). Evidence on the relationship between Takaful insurance and fundamental perception of Islamic principles. Applied Financial Economics Letters, 2(4), 229–232. Mulhim, Ahmed Salem & Sabbagh Ahmed. (n.d.). The Islamic InsuranceTheory and Practice. Retrieved on July 18 2015, from http://www.albaraka.com/media/pdf/ResearchStudies/Book-Isl amic-Insurance.pdf. Yassin, N., & Ramly, J. (2011). Takaful: A study Guide. IBFIM. Noor, A. M. (2009). A Shari’ah Compliance Review On Investment Linked Takaful In Malaysia. Islamic Economic Studies, 17(1), 1–20. Nordin, N., Aziz, S. A., Ahmad, A. A., & Daud, N. (2014). Contracting with Gharar (Uncertainty) in Forward Contract: What Does Islam Says? Asian SocialScience, 10(15), 37. Onagun, A. I., & Ismail, A. (2011). Solvency of Takaful Fund: A Case of Subordinated Qard. In 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding. Conference Master Resources. Othman, M. S., & Abdul Hamid, M. (2009). A study on the level of knowledge and understanding among Muslims towards the concepts, arabic and shariah terms in Islamic insurance (Takaful). European Journal of social sciences,10(3), 468 478. Redzuan, H., Rahman, Z. A., & Aidid, S. S. (2009). Economic determinants of family takaful consumption: Evidence from Malaysia. International Review of Business Research Papers, 5(5), 193–211. Saaty, A. S. (2008). Takaful–an Islamic way of insurance-developments, growth, challenges and issues. Retrieved on April 5 2021, from https://www.kau.edu.sa/Show_Res.aspx?Site_ID=000 7001&Lng=EN&RN=31263 Salman, S. A. (2014). Contemporary issues in Takaful (Islamic insurance). Asian Social Science, 10(22), 210. Salman, S. A. (2014). Critical review on the prevailing Takaful models. International Journal of Applied Business and Economic Research, 12(4), 1079–1088. Salman, S. A., & Hassan, R. (2020). Motivating factors for consumers to participate in Takaful: a survey by Indian insurance policyholders. Journal of Islamic Accounting and Business Research. Salman, S. A., & Htay, S. N. N. (2014). Potential push-pull factors to introduce Takaful (Islamic insurance) as a new product in India: Preliminary overview. Research Journal of Applied Sciences, Engineering and Technology, 8(20), 2121–2125. Salman, S. A., Hassan, R., & Tahniyath, M. (2019). Takaful an Innovation to Contemporary Insurance. International Journal of Research in Social Sciences, 9(8), 434–442. Salman, S. A., Rashid, H. M. A., & Hassan, R. (2017). Awareness and Knowledge of Insurance and Takaful In India A survey on Indian Insurance Policy Holders. Man in India, 97(11), 127–140. Salman, S. A., Rashid, H. M. A., & Htay, S. N. N. (2015). Takaful (Islamic insurance): When we started and where We are now. International Journal of Economics, Finance and Management Sciences, 3(5/2), 7–15. Salman, S. A., Rashid, H. M. A., & Htay, S. N. N. (2018). The impact of internal forces on acceptance of Takaful by insurance policyholders in India. Journal of Islamic Accounting and Business Research.

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Usmani, MJ (2007). Takaful paper presented at Securities and Exchange Commission of Pakistan. Takaful conference in Karachi. Yazid, A. S., Arifin, J., Hussin, M. R., Daud, W., & Norhayate, W. (2012). Determinants of Family Takaful (Islamic Life Insurance) Demand: AConceptual Framework for a Malaysian Study. International Journal of Business & Management, 7(6), 115–127. Yusuf & Babalola. (2015). Takaful in Nigeria: Penetration Challenges and WayForward. Journal of Islamic Economics, Banking and Finance, 11(2), 133–148. Yusuf, T. O. (2012). Prospects of Takaful’s (Islamic Insurance) Contributions to the Nigerian Economy. Journal of Finance and Investment Analysis, 1(3), 223–224. Zuriah, A. R., & Hendon, R. (2009). Takaful 21st century Insurance Innovation. Mc Graw Hill.

Chapter 4

Takaful in Non-Muslim Countries: A Way Forward

Despite the strong growth momentum for the Takaful industry, attempts to introduce non-Muslim countries have coincided with inadequate success. Takaful remains focused in key markets such as Malaysia, Indonesia; Saudi Arabia; the UAE; Bahrain, and other Muslim countries. However, there are limitations in finding the cause of the Takaful operator’s failure to sustain in some non-Muslim countries due to a lack of good sources to make a trustworthy analysis. This chapter attempts to identify possible ways of developing Takaful to assist Muslims and non-Muslim countries’ existing legal framework of non-Muslim countries. This chapter also identifies the regulatory and legal requirements for establishing Takaful in non-Muslim countries, with Europe and Australia as the case studies. As for Europe, this chapter explores the establishment and growth of Islamic finance, particularly Takaful, in the United Kingdom and Luxembourg. Then it looks at the possible implementation of Takaful in the existing legal and regulatory framework of Australia. In addition to these three countries, Takaful in Singapore, Sri Lanka, and Thailand are studied.

4.1 Takaful in Europe According to Jaffer (2010), there are three main reasons why Europe has the right environment for Takaful operation. First, Europe has broad market experience in the insurance industry and financial industry as a whole. Europe has a mature industry with the right skills and experience - essential to develop marketing and selling strategy, which helps promote Takaful products. Besides market experience, the financial sector in Europe is strongly regulated hence place the region as one of the most advanced and reputable hubs for the financial industry worldwide. The statutory body regulating the financial sector in a country plays a vital role in allowing and supporting the development of Takaful– enable firms to be recognized by the rating agencies, also to operate with a fair, transparent marketplace for businesses, investors, i.e., stakeholders as a whole. Finally, Halim (2012) says that a single © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_4

55

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4 Takaful in Non-Muslim Countries: A Way Forward

passport system, commonly known as "passporting," allows Takaful company to operate in all European countries. It can significantly aid the growth and distribution of Takaful across the region.

4.1.1 United Kingdom The United Kingdom (UK) is widely known as the leading Western center for Islamic finance. The potential of Islamic finance in the UK has been identified by The Bank of England in 2000. Since then, the Financial Services Authority (FSA) and the Government’s Treasury have supported the development of Islamic finance in the UK over the past decades (Treasury, 2008). On March 11, 2013, the Government launched the UK’s first Islamic Finance Task Force with three key objectives (Treasury, 2013): 1. 2. 3.

To act as UK Ministerial Champions for the World Islamic Economic Forum in London from October 29 until 31, 2013. To engage with the United Kingdom Islamic Finance Secretariat (UKIFS) and others to promote and raise the industry’s international profile. To use Islamic finance to facilitate inward investment and strengthen the UK economy, including Government’s ongoing support for Sovereign Wealth Funds looking to invest in UK infrastructure.

These tasks force further prove that the UK government always and continuously supports the Islamic finance industry. The UK has a uniform regulatory body that applies across the financial sector, both conventional and Islamic, i.e., Shari’ah compliant. The Financial Services Authority (FSA), established in 1997, is the single financial regulator in the UK. It combined eleven different regulators into a single body under the 2000 Financial Services and Markets Act (Treasury, 2008). Financial Services Act 2012, which is expected to commence on April 1, 2013, comes with a new approach to financial regulation - to strengthen the financial regulatory structure in the UK whereby the responsibility for financial stability between the Treasury, the Bank of England, and the Financial Services Authority (FSA) are reformed. From a regulatory perspective, the same authorization criteria apply to both conventional and Islamic financial institutions. Like the Takaful industry, just like Islamic banks licensed as banks, Takaful operators are empowered as insurance companies. In other words, there is no specific regulatory regime for Takaful operators, as can be found in The Development of Islamic finance in the UK: The Government’s perspective (2008),1 which states that: "The UK Authorities’ support for Islamic finance is characterized by an approach of equal treatment for conventional and Islamic finance. Therefore, the Government’s financial stability objectives apply equally to all conventional and Islamic financial institutions."

According to Ainley et al. (2007), Shari’ah scholars’ role in the Islamic financial institutions or firms operating Islamic window. FSA concerns about the influential 1

Treasury, Paragraph 1.14, 12.

4.1 Takaful in Europe

57

role that Shari’ah Supervisory Board plays in each authorized firm. Whether the Shari’ah scholars have an executive position or are simply advisory of the firm, this classification has raised some issues discussed in this chapter. In the UK, Principle Insurance Holdings Limited, previously known as British Islamic Insurance Holdings (BIIH), was the first independent Shari’ah compliant insurance provider authorized by the FSA in April 2008 to operate Islamic insurance Takaful business under Islamic rules. Initially, the company, launched in July 2008, was given the authority to conduct general insurance with motor and property markets as its primary business. However, in October 2009, Dunkley (2009) mentioned that the Takaful business under the Salaam Halal Insurance brand has stopped accepting new business because it fails to raise enough capital to continue the business. In other words, the rights issued did not produce sufficient funds to cover the policyholders’ claims. The company aimed to raise 80 million euros but managed to raise 60 million euros, a 20 million shortage following the effects of the global economic downturn (Dunkley, 2009). Later in April 2010, Principle Insurance Holdings sold its subsidiaries, Principle Insurance Company and Principle Marketing Services, to one of its most significant stakeholders, Al-Salam Group Holding Company- a Kuwait-based member company Al-Madina Group undisclosed amount (Dunkley, 2009).

4.1.2 The Authorization Process in the UK The FSA continues to facilitate innovation in the country’s financial industry. As highlighted earlier, the FSA approach is a level playing field in authorizing conventional and Islamic firms’ applications. Treasury (2008) laid down that regardless of the country of origin, the sectors they wish to specialize in, their religious principles, all financial institutions authorized by the FSA and operating in the UK, or seeking to do so, are subject to the same standards. According to FSA Handbook, the summary of the five conditions for firms seeking authorization from the FSA are as follows (Ainley et al., 2007): 1.

2. 3. 4.

The firm must have the proper legal status for the activities it wishes to undertake. It recognizes, for example, that European activities place certain limits on the standard form that a firm accepting deposits or affecting and carrying out contracts of insurance may take. For a firm incorporated in the UK, its head office and ‘mind and management must also be in the UK. The ‘close links with another person or firm are not likely to prevent the person or firm from seeking authorization, the firm’s adequate supervision. The firm has adequate resources, both financial and non-financial, including capital requirements and sound systems and controls to manage the activities it seeks to carry on.

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4 Takaful in Non-Muslim Countries: A Way Forward

5.

The firm is ‘fit and proper’ – considering its connection with other persons, including employees and shareholders, the nature of the activities it wishes to undertake, and the need to conduct its affairs in a sound and prudent manner.

4.1.2.1

Takaful

The FSA has been regulating and administering the contracts of insurance in the UK since January 2005. Effective on April 1, 2013, the Prudential Regulation Authority (PRA), created by the Financial Services Act 2012, is responsible for the prudential regulation and supervision of insurance companies and other sectors. Ainley et al. (2007) elaborate that Takaful operations in the UK are mutual and similar to conventional mutual insurers with three distinctive features from a regulatory perspective. Greater transparency in providing a clear distinction between the Takaful fund consists of contributions from the policyholders akin to premiums. The Takaful operator manages the fund, profit sharing between policyholders Takaful operators, and limitations on suitable investments. By definition, Takaful, according to FSA, is defined as a form of Islamic insurance based on the concept of collective risk pooling. To get authorization, the insurance or Takaful operators need to apply to the FSA for permission under Part IV of the Financial Services Markets Act 2000. Other than pure reinsurance, insurance or Takaful companies cannot carry on any commercial business other than insurance or Takaful business and activities directly arising from that business, as for intermediaries selling or arranging or advising contract of insurance or Takaful, i.e., activities connected with a contract of insurance or Takaful such as Shari’ah compliant broker. GNL Insurance was launched in London in July 2011. They must be authorized by FSA or by the appointed representatives or professional firms, as well, under Sect. 19 of the Financial Services Markets Act 2000 (Treasury, 2008). GNL Insurance, however, has ceased its trading in 2012 (Bernstein, 2012). Therefore, a breach of Sect. 19 may be a criminal offense. Activities conducted in a regulated manner including, an entity that undertakes the regulated activities of accepting deposits, effecting or carrying out contracts of insurance, and advising on investments, are subject to regulation specified in the Financial Services and Market Acts (Regulated Activities) Order 2001 (RAO).

4.1.3 Legal Issues and Challenges Facing Takaful Industry in the UK Looking positively at Islamic finance in the UK and other countries, Islamic firms face some potential difficulty in their application to be authorized. More clarification is needed by the authority in ensuring continuous development, prudent and wise of Islamic finance in the country. Effective collaboration between the FSA and the applicants is encouraged to develop realistic and practical solutions. The three main areas of difficulty identified by FSA are matters relating to the regulatory definition

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of products, Shari’ah scholars, and financial promotions (Treasury, 2008). Because of the underlying structure of Islamic products, which is based on sets of contracts in line with Shari’ah that differs from the conventional equivalent, the definition of Islamic products under the Regulated Activities Order may not be the same. Two implications arrive from this to be noted by the applicants. Firms need to be sure that they are applying for the proper scope of permission for the regulated activities they wish to undertake, requiring an assessment of whether the structure of Islamic products can be accommodated within the Regulated Activities Order. In addition to this, the framework in which the products can be sold relies on the regulatory definition. Therefore, if the product falls outside the FSA’s regulatory framework, there may be restrictions on which parties the products can be sold. For these reasons, new applicants must engage with the FSA and legal advisors about the products’ regulatory definition for the start-up business. The lack of Shari’ah scholars with relevant skills remains one of the main issues in establishing firms providing Islamic products. The role of Shari’ah scholars is one of the issues concerning the regulation of Islamic finance and services. Looking at the UK market’s future, experts identify several challenges facing Takaful companies in this country. Mahesh Mistry, associate Director for analytics at AM Best, said that, for start-up operations, the companies would need to generate sufficient business volumes to achieve economies of scale and lower the expenses to an adequate level (Bernstein, 2012). Mahesh further suggests that the company will need to target a specific market segment, competing with prominent players, be aggressive on price, and operate on thinner margins. In response to this prerequisite, Richard Bishop, an independent consultant on Takaful insurance, has positively argued that the UK’s target market is not sufficiently large to make the provision of Takaful products economically viable due to lack of demand. Halim (2012) advises that relying upon an aggressive pricing strategy to compete against the established, experienced conventional players that young Takaful operators have adopted may not be a good strategy. Such pricing is not sustainable and causing significant pressure on the Takaful industry’s profitability. Richard further identified lack of awareness of Takaful as an alternative to conventional insurance adds to the shrink of the sector in this country. He is of view that to reach a broader market. The Shari’ahcompliant element is not necessarily the only element differentiating Takaful and conventional insurance, limiting its potential to non-Muslim customers. Instead, it should be promoted as a ‘green’ product where the investments from the contributions or premiums are invested in ethical and socially responsible instruments. This idea is supported by Mohammad Khan, the head of Islamic finance at Price Water Cooper House, PWC, a marketplace for an ethical insurance product that is also Shari’ah compliant. He believes that by this kind of marketing, the target audience is less restricted.

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4.1.4 Luxembourg Another leading Islamic finance center in Europe is Luxembourg. In 1978, Luxembourg hosted the first-ever Islamic financial institution – Islamic bank in the Western world (Jaffer, 2010). According to Luxembourg for Finance, Luxembourg is the second largest investment fund center globally after the United States, the premier captive reinsurance market in the European Union, and the premier private banking center in the Eurozone. With the experience in the authorization and supervision of Islamic finance that Luxembourg’s financial sector supervisory authority - the Commission de Surveillance du Secteur financier (CSSF) has, Luxembourg has gained an outstanding reputation in the area of Islamic finance after the successful issuance of Sukuk by Luxembourg stock exchange in 2002. Since then, issuers from Malaysia, Pakistan, Saudi Arabia, the UAE, and Europe have listed Sukuk in Luxembourg, making it the leading non-Muslim home for Shari’ah-compliant investment funds top European centers for Islamic finance. In 2010, the Luxembourg Central Bank became the first European central bank to be a member of the Islamic Financial Services Board (IFSB). As described, same as the UK, Luxembourg has a supportive regulatory environment. The insurance industry supervisory authority regulates the insurance industry in Luxembourg. The Commissariat aux Assurances (CAA), a public body under ministerial control whereby all legal entities or natural persons wishing to operate in this sector must be approved by the competent minister, with the objectives to ensure the financial solidity of insurance companies. As for reinsurance, CAA has issued Laws and Regulations of December 5, 2007, on reinsurance companies’ supervision. Two legal texts regulate Luxembourg insurance companies – the law of December 6, 1991, in the Insurance Industry and The Grand-Ducal Regulation of December 14, 1994.

4.1.4.1

Takaful

Takaful in Luxembourg, in 1983, Takaful was launched to establish Takaful SA (The World Takaful Report, 2012). According to Luxembourg for Finance, at present, no Takaful products are offered in Luxembourg. However, many Luxembourg insurance companies offer Takaful in Malaysia and the Gulf Cooperation Council (GCC) countries. Luxembourg-based has successfully operated Takaful in the international market via the bancatakaful channel. For example, FWU Group was awarded in 2007 and 2008 for Best Takaful Operator; and Best Bancatakaful in 2009 for its International Family Takaful Business. There is a high potential for the Takaful industry to be developed because a wide range of Shari’ah-compliant products is already offered in Luxembourg, such as Islamic wealth management, structured finance, and specialized investment fund (The World Takaful Report, 2012). The Price Water Coopers House has also regarded Luxembourg as one of the most prominent investment management centers worldwide. It is a perfect place to meet the Middle East

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region’s demand as Luxembourg has a wide range of Shari’ah-compliant products, a regulator with an incredible reputation worldwide; flexible and proactive policymakers; and experience global distribution. All and all, Luxembourg is positive to develop Takaful products in the country shortly.

4.2 Takaful in Australia According to the Australian Bureau of Statistics (2011), in its 2011 Census report, Muslims in Australia constitute 2.2 percent of the country’s population in 2011. The report says that this country’s Muslim population has increased from 0.340 million in 2006 to 0.476 million in 2011, the second-fastest growth after Hinduism. Research done by the US-based Pew Forum on Religion and Public Life has projected the Muslim population in Australia to reach 0.714 million in 2030, at 2.8% growth from 2010 with the estimated Muslim population of 0.399 million. As the country’s Muslim population grows, there is an increasing demand for Shari’ah-compliant financial products, such as Islamic insurance, by Takaful. Given the growth of conventional insurance in the financial industry, the Takaful market can develop since people are concerned about the economic loss caused by unfortunate events in the future. In this case, the Muslim population and non-Muslim can be the market targets for Takaful in this country. The Australian Government has introduced the 2010 Review of The Transaction Taxation Treatment of Islamic Finance responsible for ensuring that Islamic finance products have parity with conventional products about their economic substance. With this effort, there is a significant potential for further innovation and competition in Islamic finance. Dr. Mohd Daud Bakar has said Australia has a competitive and innovative financial services industry, and the Middle East enjoys its strong business relationships (Jamaldeen, 2010). According to Reid (2008), the first entrant should expect the authorization process to be more challenging than for a conventional insurance start-up. Also, the application of tax and other legal requirements might be different from the conventional ones. Finally, the investigations of these issues may add to the usual cost of authorizing a new business.

4.2.1 Potential for Establishing Takaful A leading law firm in the Asian region King and Wood Mallesons has listed out which Australian regulations may apply to Takaful. First, suppose Takaful is a facility that a person or persons manage financial risk. In that case, the Takaful product is most likely to be a financial product to which the Australian financial services regime would apply. Second, Chapter 5C of the Corporations Act 2001 requires companies who provide a managed investment scheme to comply with its provisions. Third,

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if the sale can be categorized as the business of undertaking liability by way of insurance, then the Takaful operator can get authorization under the Insurance Act 1973; Life Insurance Act 1995 for life insurance; and the Insurance Contracts Act 1984, assuming local law is governed by the governing law of the policy. As for general insurance, the authorization required under the said act depends on whether the Takaful product constitutes insurance. Yes, the answer is yes, if we look at the nature and objectives of the Takaful product. Besides, the services provide to clients by Takaful and insurance are similar; that is, the people can benefit from the Takaful arrangement just like in the insurance arrangement. The guidelines on the authorization of general insurers in Australia are under the Australian Prudential Regulation Authority (APRA). As any other insurance regulator, APRA will give applicants the capacity, capability, and commitment to conduct insurance business continuingly, with integrity, prudence, and professional skill. According to Ann Newbrun, Sarah Awad (2009) from King & Wood Mallesons, although exist some issues facing the operator or companies to start up the Takaful business, the fact that the financial industry regulator, for instance, the Financial Services Authority (FSA) of the UK who treats Takaful as insurance assuming there is enough similarity in its function and form makes it possible for Takaful provider to obtain APRA authorization for Takaful to be written in Australia. Even though the hurdles to set up a viable Takaful operator in countries like Australia, the existence and market acceptance of the well-known insurer and reinsurer that are already established in Muslim countries makes it worth exploring the potential of Takaful and re-takaful in non-Muslim countries.

4.3 Takaful in Sri Lanka There are 21 registered insurance companies practicing insurance operations in the country, including a fully-fledged Takaful company, namely Amana Takaful PLC, and a Takaful window, namely HNB Assurance Takaful under the HNB Assurance PLC, an established conventional insurance company. A Takaful company, namely Ceylinco Takaful Ltd., is prohibited from engaging in Takaful operations by IBSL, the regulatory body for insurance in Sri Lanka (Athukorala & Jayasuriya, 1994; Seyed Mohamed, 2016).

4.3.1 Amana Takaful PLC Amana Takaful PLC is the only full-fledged Takaful company in Sri Lanka that provides Takaful services to Muslims and non-Muslims. As the pioneer Takaful operator, it commenced its operations in 1999. It is a public quoted company with limited liability incorporated in Lanka on December 7, 1998, and registered (PQ 23) under the Companies Act, No. 07 of 2007 on June 27, 2007. MNRB Retakaful, GIC

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Retakaful, Labuan Reinsurance (L) Ltd, Trust International Bahrain, Catlin Labuan Ltd. (Lloyds Syndicate), and Hannover Re are the retakaful panel which provides retakaful services to Amana Takaful PLC. Amana Takaful has affiliations with several firms and companies such as Amana Global Limited, Amana Takaful Maldives, Amana Asset Management Limited, Amana Securities Limited, Lanka Commodity Brokers Limited, IGL Lanka Limited, and Amana Capital.

4.3.2 Ceylinco Takaful Ltd Ceylinco Takaful Ltd. (CTIL), a subsidiary company of Ceylinco Groups, started its operations in 2006. CTIL was a new entrant to the Takaful business in Sri Lanka. Takaful emerged from the necessity to have an insurance system acceptable to Muslims, which complies with Shari’ah. However, the conventional insurance system is more favorable to insurance companies than to the policyholders. The Ceylinco Group wanted to start a Takaful company to choose between traditional insurance and Takaful insurance. They already had an established conventional insurance company called Ceylinco Insurance PLC registered under the regulations of IBSL. Ceylinco Takaful established provincial branches in Akurana, Matale, Bandarawela, Gampola, Kurunegala, Puttalam, Chilaw. Colombo dealt with Takafulbased insurance business in Fire, Consequential Loss, Motor, Marine, Liability, Workmen Compensation, Engineering, General Accident, and Miscellaneous. In a first-of-its-kind action, the IBSL temporarily suspended Ceylinco Takaful Ltd’s registration for failing to submit audited accounts on time. By law, all insurance firms are required to submit the annual audited statements promptly. Ceylinco Takaful was required to submit the 2006 accounts by June 30, 2007. A further extension was provided, but since the company had failed to meet the extended deadline, the IBSL has temporarily suspended its registration. The initial suspension was for two weeks, during which period the company could submit the audited accounts or explain why the rest should be lifted.

4.3.3 HNB Assurance Takaful HNB Assurance Takaful launched its operations on July 6, 2013, as a window operation under the HNB Assurance PLC, a leading conventional insurer in Sri Lanka. The parent company operates in two units, i.e., General and life. Accordingly, they opened non-life Takaful and life Takaful under HNB Assurance as separate units. HNB launched the ‘Al Najah’ Islamic banking window around the same time because it needs an Islamic insurance arm and vice versa. Based on that need, both initiatives were started.

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They cater to their client’s life and non-life Takaful needs; every single Takaful product maintains full compliance with Shari’ah. It is launched only with the approval of the Shari’ah supervisory board. A separate manager heads their Takaful window, and he ensures that all related processes, including underwriting, servicing, fund management, and accounting, are carried out in compliance with Shari’ah principles. The takaful industry in Sri Lanka is related to Amana Takaful PLC because it is the only full-fledged Takaful company that continues its operation. Ceylinco Takaful Ltd. no longer exists, and HNB Assurance Takaful is initially offering Takaful services.

4.3.4 Takaful Standards In terms of standards followed by the Takaful companies in Sri Lanka, they unanimously agreed to follow AAOIFI standards due to AAOFI’s world-class reputation among the operators and intellectuals. Notably, the Takaful industry got technical assistance and guidance from Malaysian experts and operators. But they did not utilize standards and Shari’ah guidelines issued by BNM, even though jurisprudential practices according to Shafi’¯ı school law are in a way in both countries. Besides, the Shari’ah Supervisory Council of Amana Takaful PLC has prepared regulations for their jurisprudential necessities. They got unique solutions for the problems which AAOIFI standards did not address. For instance, AAOIFI does not mention the Waqf model. When they started implementing the Waqf model in the Maldives, they secure legal opinions from leading Muslim scholars, including Moulana Taqi Usmani and Pakistan’s Waqf-based standards. Sometimes, the Shari’ah Supervisory Council takes decisions that are a hybrid of Shari’ah rules and the land law. For instance, in the family Takaful, the property’s delivery procedure is a mixture of Shari’ah and the land’s common law in the event of death. The Takaful company, at the time of application, requests participants to indicate his/her Wasi. He/she can appoint a nominee like his wife/husband, son, daughter, or another person. The Wasi should distribute the (the person who passed away) property according to the Islamic inheritance law, or the court will interfere and make arrangements to do so. It is for Muslims. For non-Muslims, it is done according to the common law. In situations such as this, the Shari’ah Supervisory Council of Amana Takaful PLC has compiled Fatwas to solve practical problems.

4.4 Takaful in Singapore Takaful in Singapore is being regulated by the Monetary Authority of Singapore (MAS) as the same framework as conventional insurance since prudential concerns and supervisory oversight are mainly familiar to both (Lian, 2008). In ensuring a level playing field between Takaful and conventional counterparts, MAS works closely with industry players to ensure that Shari’ah-compliant products are being treated

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similarly to traditional in terms of regulatory and tax incentives. Takaful products were first offered in Singapore in 1995. HSBC Insurance (Singapore) was one of the insurance companies operating with Islamic window offering Takaful. However, HSBC Insurance (Singapore) has discontinued its Takaful business. Established in September 2004, Tokio Marine Re-Takaful by Tokio Marine Asia was given the first license to operate a re-Takaful business. The company specializes in Family re-takaful business, providing risk coverage similar to life reinsurance on an Islamic basis.

4.5 Takaful in Thailand Currently, Islamic finance continues a unique region in the general financial industry in Thailand. Nevertheless, there have been numerous advancements in financial goods in current years, among Thailand’s Islamic customs. The critical turning time of Islamic finance in Thailand was when the Islamic Bank of Thailand Act B.E.2545 (2002) was established, followed by discovering the Islamic Bank of Thailand. Subsequently, several organizations have taken part in building financial products which are suited for Muslim investors. As it was first introduced in 2011, Muang Thai Life Insurance has consistently enlarged its Takaful products. The corporation offers general life Takaful, personal accident Takaful, and newly cooperated with the Islamic Bank of Thailand to begin savings Takaful, which provides long-term savings and life planning, like regular savings insurance but without risk breaching any Shariah laws. These products adhere to the principle of no uncertainty. A Shariah advisory board supervises no gambling (Maisir) under Shariah laws and the products to ensure full compliance with Islamic law. Smaller players in the insurance business are likewise catching interest in Takaful, such as the South East Group, which offers Takaful and Philip Life Assurance which also partnered with the Islamic Bank of Thailand to offer different Takaful products, such as Takaful for Hajj, Takaful for family and Takaful for education.

4.6 Globalization of Takaful In recent years, the Takaful market has been flourished by significant insurance and reinsurance companies operating Takaful business mainly in countries with several Muslim populations, including Malaysia and the Middle East. Among them is Allianz Takaful which began its operation in the GCC in 2009; Swiss Re Re-takaful, a branch of Swiss Re Zurich which began offering Re-Takaful solutions for the Family (Life) Re-Takaful business in the Middle East in 2006; Munich Re Re-Takaful which opened its operation in Kuala Lumpur, Malaysia in December 2007 offering Family and General Re-takaful solutions to Takaful operators worldwide and in June 2010,

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Munich Re Underwriting Agents, part of Munich Re of Malta and a reinsurance subsidiary of Munich Re has received authorization and license from the Dubai Financial Services Authority (DFSA) to operate in the Dubai International Finance Centre (DIFC) Jaffer (2010). These foreign full-fledged Islamic finance operators have received various awards for their outstanding performance in Muslim countries. Munich Re-takaful has received Asia’s Best Re-Takaful Company at the 6th International Takaful Awards 2012 held on July 11, 2012, in London. It is proven that the presence of these insurance companies providing Takaful in Muslim countries indicates the great potential of Takaful in the global financial industry. With their expertise and experience, they could explore the Takaful and re-takaful markets in non-Muslim countries. Indeed, these foreign full-fledged Takaful and re-takaful cannot succeed without being encouraged by a country’s regulator. Hence, the entry of more international insurers into the market needs to be enabled and facilitate in the existing legal and regulatory framework of non-Muslim countries. On the other hand, Jaffer (2010) explains that Islamic windows enable the conventional insurer to offer Takaful products to their clients without the need for the subsidiary to go fully Islamic. In Pakistan, the Securities and Exchange Commission Pakistan (SECP) issued 2012 draft Takaful Rules proposing significant changes in its current regulatory framework – to allow the conventional insurer to open Takaful windows (The World Takaful Report, 2012). Other countries which will enable Takaful windows in its regulatory framework are Indonesia and Kenya, which countries like Saudi Arabia, Malaysia, Bahrain, and UAE do not allow. Compared to setting up a new company or a branch that requires a significant capital investment, a Takaful window is more cost-effective and less capital-incentive. Another significant contributor to the Takaful industry is bancassurance. Bancassurance has been an excellent channel for distributing Takaful products domestically and internationally by branded partners, i.e., banks. For example, in Malaysia, a Takaful joint venture between CIMB and Aviva, Hong Leong Bank with Tokio Marine, Bank Simpanan Nasional with Prudential has been successful. Other than bancatakaful as the most preferred mode for most Takaful operators, different distribution channels include retail and corporate agencies, corporate direct channels, brokers, and treasury business channels. Agency distribution, for example, allows Takaful operators to reach customers at a lower management expense than bancatakaful. While bancatatakaful has an advantage of economies of scale, the agency effectively distributes Family and General Takaful products and facilitates a more comprehensive customer, including non-Muslim demographic (Halim, 2012).

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4.7 Challenges in Establishing Takaful and Re-Takaful in Non-Muslim Countries and Solutions: What Needs to Be Done and Ways Forward Despite the strong growth momentum for the Takaful industry, Takaful attempts in non-Muslim countries have met limited success (Staib, 2011). Nowadays, Takaful is highly concentrated in key markets such as Malaysia, Indonesia; Saudi Arabia; the UAE; Bahrain, and other Muslim countries. From this research study, the major challenge in establishing Takaful in non-Muslim countries is the market acceptance of Takaful itself. According to Staib (2011), even in Muslim countries, conventional insurance is still predominant. Economic Research and Consulting of Swiss Reinsurance Company Ltd reported that as a share of total contributions and premiums written in Muslim countries of USD73 billion in 2010, 83% or USD60.6 billion was generated by conventional insurance. Islamic insurance model shared 17%, including 4.4% from Takaful, 7.0% from the Iranian model, and 5.4% from the Saudi Cooperative model (Staib, 2011). Looking ahead to the Takaful market, by 2015, Staib (2011) estimated that Takaful’s contribution could surpass USD7 billion. Whether in Muslim or non-Muslim countries, the following issues may arise when they want to get authorization to open Takaful or even while operating the Takaful business. Firstly, with regards to governance. In Australia’s case, Ann Newburn and Sarah Awad said that the Takaful provider in obtaining the authorization might face a conflict of interest between the Shari’ah Supervisory Board and the Board of Directors of the Takaful operator. For conventional firms operating Islamic windows, it is accepted worldwide that the Board of Directors has the ultimate responsibility for the sound and prudent management of the companies’ operation (Ainley et al., 2007). On the other hand, Shari’ah Supervisory Board’s role is to ensure the products are Shari’ah Compliant. The Takaful fund is protected from activities that are not in line with the rules of Shari’ah. In the UK, FSA has remarked Shari’ah scholars’ role as one of the risks and challenges in Islamic finance, i.e., whether they play an executive position or simply advisory. The FSA’s Fit and Proper Test for Approved Person requires a person acting as a Director of an authorized firm to have competency and capability; therefore, relevant experience is expected to become a certified firm’s Director. Looking into the matter, since Shari’ah Supervisory Board has necessary ‘says’ in Shari’ah issues, their role is more likely to resemble of an Executive Director as it might involve active participation in the firm’s business. From the FSA perspective, Shari’ah Supervisory Board should not hold the role of the executive. Its role should focus on advising, advising, approving, monitoring, and reviewing transactions and operations to ensure business and financial dealings comply with Shari’ah. Shari’ah Supervisory Board can play a more executive role, especially in product development and Shari’ah Audit or Review (Ainley et al., 2007). Further constraint the industry - the issue concerning qualified individual Shari’ah scholars to hold positions on the Shari’ah Supervisory Board in a few Islamic institutions or companies due to lack of Shari’ah experts with the industrial package have raised the

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concern over the ability of Shari’ah Supervisory Board to provide enough rigorous challenge and oversight of firms’ products and services. The Shari’ah governance of any regulatory framework adopted by countries worldwide has directly or indirectly stated that the responsibility played by Shari’ah Supervisory Board is a continuous process – ensuring their firm’s products and services are adequately monitored Ainley et al. (2007) added that failure to do so might adversely affect a firm’s solvency by converting an asset onto a liability on the balance sheet. As reminded by James Smith, executive director of financial services at Ernst & Young, “Companies would need to ensure their investment strategies and products are Shari’ah compliant and meet the supervisory board’s approval” (Bernstein, 2012). Therefore, adequate knowledge, integrity, and professionalism are qualities that Shari’ah experts and Shari’ah Supervisory Board need to have. Their role in the company’s organizational framework should be acknowledged and respected. Their opinions and judgments on matters within their expertise should be prevalent over the others, even if it would affect the company’s profits and interests. The involvement of Shari’ah experts in structuring Takaful products is vital to ensure the products are Shari’ah compliant. Also, for robust Shari’ah governance, an internal Shari’ah audit must be established to monitor and review product structuring, operation, and business management; and propose rectification whenever necessary. With the industry players’ ongoing incentives with the support from academicians, Shari’ah experts, and Government, the Takaful industry can be competitive enough to sustain itself in the financial sector. Although the country has a mature insurance market, a continuous search for human capital development is needed. More talents need to be invited regardless of their working background. The employees who have experience in insurance can be guided by giving them adequate education and training on the Takaful concept, conducts, products and implementation. One of the main regulatory challenges for Takaful that has been discussed in recent years is the lack of common standards and practices among Takaful operators. According to Papp (2010), different Takaful operating models and methods are adopted, putting a barrier for reasonable regulations to all market players. Moreover, some practices or product approval may depend on the jurisdiction they are to offer (Ainley et al., 2007). Some products and services may be acceptable in one country and prohibited in another, i.e., Shari’ah scholars vary in opinions and interpretations. Some examples of this case apply bay’ ‘inah in Islamic finance instrument accepted in Malaysia but not in the Middle East; and sharing of underwriting surplus between the Takaful operator and participants allowed in Malaysia Indonesia but not in the Middle East. However, global standardization is difficult to realize in terms of practical difficulties and ground realities. Few efforts have been made by several international setting bodies such as Islamic Fiqh Academy of the Organization (OIC); Accounting and Auditing for Islamic Financial Institution (AAOIFI); Global Takaful Group (GTG); Islamic Financial Services Board (IFSB); and Malaysian Takaful Association (MTA), to standardize the operation of Takaful, and the Islamic financial industry as a whole to develop standards and guidelines for Islamic financial institutions and regulators. Financial Services Authority of the United Kingdom

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suggests that greater standardization could reduce the potential for Shari’ah arbitrage and make it easier for market players to understand the market (Ainley et al., 2007). Ann Newbrun and Sarah Awad (2009) pointed out another issue is the capital adequacy requirement that the Takaful provider needs to comply with. It requires a Takaful operator to maintain sufficient capital to meet the minimum capital adequacy requirement set out in the prudential standards. The Takaful provider needs to ensure that its assets are adequate to cover the expected claims and other liabilities. To do so, they also need to write a large pool of clients and sound underwriting – a premium or contribution that can cover current and future claims and expenses. In Australia’s case, the country’s Islamic financial services are still in their infant stage and immature. Therefore, there are not many Shari’ah compliant investment products and facilities for the Takaful provider to source their capital. The lack of re-takaful providers remains the main obstacle to the growth of the Takaful industry. In Australia, the reinsurance arrangements with non-APRA authorized reinsurers involve additional capital charges at various levels for capital adequacy requirements (Ann Newbrun and Sarah Awad, 2009).

4.8 What Needs to Be Done by the Start-Up Takaful or Re-Takaful Operator For start-up Takaful or re-Takaful operators, Ann Newbrun and Sarah Awad (2009) have identified several guidelines for what to be done by the newcomers - first, there is a need to ensure readiness for effective implementation of the domestic regulatory framework and international best practices. Second, robust risk management framework – that the Takaful operator’s risks are being prudently and soundly managed considering the size, business mix, investment, reserves and capital requirement, and the complexity of its operation (Ann Newbrun and Sarah Awad, 2009). Identify, monitor and mitigate the risks are some of the risk management frameworks that need to be carefully evaluated and provide the necessary solution. Third, sound corporate governance and appropriate systems and controls are vital to any corporation. Fourth, the type of business is an important consideration when studying how Takaful can succeed despite its challenges. For example, according to Richard Bishop, an independent consultant on Takaful insurance, Takaful has enormous potential in London’s metropolitan city. The UK provides its services to large corporates and specialty risks, rather than on personal lines or Small Medium Enterprise (SME) commercial business because it has the capacity and expertise. Fifth, educate Muslim and nonMuslim customers on Takaful products’ ethicality (Bernstein, 2012). Briault (2007), in his speech at Financial Services Authority Forum in London, has clearly remarked that the basis on which an Islamic firm claims to be Shari’ah compliant, including a clear explanation of products and the associated risk, is communicated clearly to

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customers. Takaful players are encouraged to focus on customer research – understand and facilitate their needs and expectations. Halim (2012) suggests, more tailormade products should be developed, such as ladies’ plans and affluent plans with individualized protection that shall include critical illness cover, travel care, personal accident, and child protection. Finally, encourage innovation and expand distribution channels by facilitating more international insurers’ entry into the market.

4.9 Conclusion Both Islamic and conventional insurers can be ethical and socially responsible, for example, mutual insurance; cooperative insurance; micro-insurance, or microTakaful. About micro-Takaful, recent studies indicate that there is a demand for such Takaful among the rural or low-income population in countries like India and some parts of Latin America - to protect their business, for instance, in the agricultural sector and their everyday life as well, from risks exposure that they cannot afford to handle if it occurs in the future. Acknowledging the emergence of such a new customer demographic, they shall be tackled by addressing their specific needs and preferences and giving suitable Takaful solutions through practical communication tools, such as customer profiling, continuous updates, and timely reporting. Therefore, regardless of whether it is for-profit or not-for-profit, Islamic insurance should be easily accessed and facilitate the people’s needs. According to most Shari’ah scholars, due to a limited number of players and capacity available, it is acceptable to get protection from conventional insurance and reinsurance based on the principle of darurah or necessity, provided there is no practicable Shari’ah-compliant alternative. According to Staib (2011), the consistent use of re-takaful as an alternative to conventional insurance is one way to uphold Takaful industry integrity. Takaful and re-takaful operators strictly observe shari’ah principles, or otherwise, consumers might perceive Takaful offers not much different from conventional insurance. There is a vast potential for Takaful in non-Muslim countries with a sizeable Muslim population and a fast-growing economy such as Australia, India; China; Russia; and some European countries, especially in countries where Islamic finance is recognized. A matured insurance industry and the presence of mutual insurers in Europe; and Asian countries like Australia and India indicate the joyous prospect of Takaful in these regions on the basis that mutual insurance and Shari’ah compliant insurance have very much in common (Staib, 2011). The Takaful and re-takaful players need to be done, of course, harnessing its skills and expertise and gaining international recognition. Other than the distribution channel, enhancing cross-border distribution of Takaful products and improving operating efficiencies is also essential. For example, FWU Group, a Luxembourgbased company, has innovated an online administration system and web-based point of sale to facilitate the sales process through bancatakaful with proprietary software that can simplify online customer application issuance, policy administration,

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and management information reporting. The Central Bank of Malaysia’s assistant governor encourages advancements in systems and technology because of a more advanced back-end system and up-to-date structured information retention and data mining system for more comprehensive market analysis (Staib, 2011). The industry’s main challenges include standardization of the Takaful framework; conflict of interest between Shari’ah Supervisory Body and the Board of Directors; lack of qualified Shari’ah scholars in the financial industry; enhancing distribution channels; building customer awareness about the existence and benefits of Takaful products; etc. In the UK and Luxembourg, despite the challenges of setting up Takaful companies and competing with the conventional at a competitive price, the country has a significant advantage – a supportive regulatory environment. A lesson is learned from the failure of the Takaful operator in the UK - for Takaful to sustain itself in the market, competing with conventional insurance and other financial markets, there should be many policies being written to support the business. In Australia, by looking at the Muslim population’s growth in Australia, Takaful has a bright future. Looking ahead, since the number of Muslim people in Australia may not support the demand for Takaful if the market is targeted to the Muslim population only, non-Muslims need to be invited as well. Non-Muslims can be attracted to Takaful because of the combination of Takaful’s mutuality and ethical investment (Ann Newbrun and Sarah Awad, 2009). ‘In reality, in whatever sector, including insurance or Takaful; and financial industry as a whole, people, look for the low price given the various options to reach their financial management objectives. Therefore, products need to be designed at a price lower or about the same as comparable conventional products because customers nowadays are highly-priced sensitive, especially in today’s economic condition.

References Ainley, M., Mashayekhi, A., Hicks, R., Rahman, A., & Ravalia, A. (2007). Islamic finance in the UK: Regulation and challenges. The Financial Services Authority (FSA), London. Newbrun, A. & Awad, S. (2009). Takaful: Can it be done in Australia?. King & Wood Mallesons. Retrieved on March 19 2013, from http://www.mallesons.com/publications/marketAlerts/2009/ InsuranceaneReinsuranceUpdate/Pages/Takaful-can-it-be-done-in-Australia.aspx. Athukorala, P., & Jayasuriya, S. (1994). Macroeconomic policies, crises, and growth in Sri Lanka, 1969–90. The World Bank. Australian Bureau of Statistics. (2011). Religious Affiliations. Australian Bureau of Statistics, Retrieved June 21, 2012, from http://www.abs.gov.au/websitedbs/censushome.nsf/home/CO-61. Bernstein, J. (2012). Opening the takaful market. Retrieved on March 28 2013, from http://222.pos tonline.co.uk/post/feature/2179084/takaful-market. Briault, C. (2007). Speech at Financial Services Authority (FSA) Forum, London. Retrieved on March 24 2013, from http://www.fsa.gov.uk/library/communation/speches/2007/1018_cb.shtml

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Dunkley, J. (2009). Islamic Insurance Company Salaam Halal Closes to New Business. The Telegraph. Retrieved on March 4 2013, from http://www.telegraph.co.uk/finance/newsbysector/ban ksandfinance/6600525/Islamic-insurance-company-Salaam-Halal-closes-to-new-business.html. Halim, N. (2012). The Takaful & re-Takaful industry: An overview. Islamic Financial News, May. http://www.globalislamic financemagazine.com/?com=sponsor_articles_list&aid=797 http://www.swissre.com/search/?searchterm=islamic+insurance+revisited. Jaffer, S. (2010). Europe opens up to Takaful. The European Financial Review, 2–5. Jamaldeen, F. (2010). Dubai’s Islamic financial services firms to support the development of Islamic finance in Australia. Islamic Finance Expert. Retrieved on March 24 2013, from http://ifinanceexpert.wordpress.com/2010/03/01/dubai%E2%80%99s-islamic-financ ial-services-firms-to-support-the-development-of-islamic-finance-in-australia/. Lian, T. S. (2008). 4th IFSB Seminar on The Regulation of Takaful, Singapore, Monetary Authority of Singapore. http://www.Mas.gov.sg/news-and–publications/monetarypolicy statements-and–speeches/2008/opening-address-by-teo-swee-lian-dmd-mas-at the-4thifsbseminar-on-the-regulation-of-takaful.aspx. Papp, M. O. (2010). Solvency and capital requirements in Islamic insurance. Global Islamic Finance Magazine. Retrieved on March 24 2013, from Reid, J. (2008). Takaful insurance an introduction. Journal-Australian and New Zealand Institute of Insurance and Finance, 31(5), 36. Seyed Mohamed, M. M. (2016). Operation of Islamic insurance in Sri Lanka: Developments and challenges/Seyed Mohamed Mohamed Mazahir (Doctoral dissertation, University of Malaya). Staib, D. (2011). Islamic Insurance Revisited. Swiss Re. Retrieved on March 24 2013, from The World Takaful Report (2012). Industry Growth and Preparing for Regulatory Change. Ernst and Young. 5th ed. Retrieved on 24 March 2013, from http://www.ey.com/Publication/vwLUAs sets/The_World_Takaful_Report_2012/$FILE/Ernst%20&%20Young’s%20The%20World% 20Takaful%20Report%202012.pdf Treasury, H. M. (2013). Government launches first Islamic Finance Task Force. HM Treasury, United Kingdom, Retrieved on March 11 2013, from http://www.hm-treasury.gov.uk/press_20_ 13.htm Treasury, H. M. S. (2008). The development of Islamic finance in the UK: The Government’s perspective. Bank of England.

Chapter 5

Research Methodology

Nowadays, most developed and non-developed countries care and pay attention to the explores because it plays a significant role in developing, improving, and solving problems. It is clear that billions of dollars are spent on the investigates to get relevant results or findings. In any research, it can be found some pillars that guide the researcher to get his/her objectives. This chapter is explained in several sections. Section two focuses on two theories: new product adoption theory and new product diffusion theory, whereas the following section describes the research methodology in detail in this chapter. Qualitative research is applied by interviewing insurance operators, and it is appropriate for the exploratory study, and it is discussed in section five, and the last section concludes the chapter.

5.1 Introduction This chapter is explained in five sections. The second section discusses the theoretical framework. The third section presents the research methodology. The fourth section discusses the interview technique, and the last section concludes this chapter.

5.2 Theoretical Framework This study uses two theories: new product adoption theory and new product diffusion theory, to develop the hypotheses.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_5

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5.2.1 New Product Adoption Theory The source of new product adoption theory and diffusion theory is innovation.1 New product adoption2 theory highlights the factors influencing the customers whether to accept or reject the latest products. It refers to the customers’ internal forces such as psychological influence, socio-cultural influences, and customers’ preference criteria in selecting the products. Thus, in the adoption process, the product’s awareness is the first stage, followed by the customers’ interest, evaluation of the product, and trial. This theory’s logic is that if the customers know this product, they might be interested in learning more about the products and evaluating them by comparing the cost and benefit. Later, the customers buy the products or services, and if they satisfy or meet their expectations, they will adopt the products or services. If the customers are not aware of the products or services, they should be informed of the features of the products or services and the advantages or disadvantages. It will attract customer interest (Antil, 1988; Roger, 1962, 1976, 2003; Sahin, 2006). According to Roger (1962, 1983) and Lowrey (1991), this theory points out the factors influencing the customers internally to adopt the new products or services. These factors are a relative advantage (i.e., the customers should be able to see the better advantages or benefits of adopting the new products or services.), compatibility (i.e., if the customers are using the existing products or services and new products or services are introduced to them, they will make a comparison of the new ones with the existing ones.), complexity (i.e., if the functions and the features of products or services are easy to understand, they have less complexity and easy to understand by the customers.), divisibility (i.e., referring to whether the customers buy a small portion and try to check whether it meets their expected performance) and communicability or observability (i.e., how easy it is to demonstrate or describe the products or services to the customers and visible to the customers). In Takaful, the agents’ role is vital since most Takaful products are marketed through direct selling. They should be persuasive enough to explain until the customers are convinced (Langley et al., 2012).

5.2.2 New Product Diffusion Theory While the new product development theory explains the customers’ internal forces that make them adopt new products, the new product diffusion theory focuses on the customers’ external forces that cause them to adopt the latest products. Some external forces are changes in agents, information channels, types of information available, and the surrounding community. Roger (2003) states that diffusion is the process of communicating the new product innovation through the communicating 1

Innovation means the creation of better products or services which are already available in the market. 2 Adoption can be defined as the early utilization of new products.

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channels3 to the community. According to him, the diffusion process involves four main elements: innovation, social system, the communication channel, and time. This theory highlights that the news or ideas of the new products or services will be spread among the people, and in the early stage, a few people will initiate buying the latest products, and later it will spread to others. In other words, this theory emphasizes the vital role of communication and advertising new products or services (Roger, 2003). The early adopters of new products or services have a venturous and innovative mind, and they are more educated, willing to take more risks, and positively communicated in society. The customers’ demographic background and personal characteristics are the main factors determining whether they are early adopters or not. The adapters can be categorized into five main groups based on their innovativeness (Roger, 1962, 2003). The earliest customers (2.5%) will be the innovators who are venturesome, younger, well educated, financially viable and risk-takers. Early adopters are local opinion leaders interested in reading news and have influential power among their communities (13.5%). The early majority are more deliberate and cautious middle-class customers (34%). The late majority are skeptical (34%), the laggards are traditional, conservative, and old (16%). The timing of the adoption depends on the customers’ innovativeness (Wright & Charlett, 1995). It can be concluded that having a sound functional, innovative system, i.e., good networking to introduce new products or services, will lead to the early adoption of new products or services (Barczak et al., 1992).

5.3 Research Methodology The research methodology discusses sample, sampling method, and data collection method. Also, the statistical method used is presented.

5.3.1 Samples, Sampling Method, and Data Collection Method In this study, the sample is insurance companies.4 Insurance companies are also essential respondents since the research seeks to examine the viability of Takaful, and 3

There are many ways of communication and among them are promoting among the customers (worth of mouth), telemarking, advertising through broachers, agents, television channels, radios, opinion leaders, etc. 4 Insurance company is “a company that offers insurance policies to the public, either by selling directly to an individual or through another source such as an employee’s benefit plan. An insurance company is usually comprised of multiple insurance agents. An insurance company can specialize in one type of insurance such as life insurance, health insurance, or auto insurance or offer multiple types of insurance” (downloaded on 27th May 2014, http://www.investorwords.com/6843/insura nce_company.html).

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they are the potential suppliers of Takaful products. For instance, Islamic banking products and Takaful products are allowed by Islamic windows during the early development stage in Malaysia’s case. Hence, it is believed that their opinions are vital for this research. There are two types of samples, namely, probability (random) sample and nonprobability. A probability sample is for the data for which the population is known. The selection is randomly selected from the known people, and all the items in the people have an equal chance to be chosen. In this research, the population is unknown, and hence, a non-probability sample is used. There are three main types of non-probability samples: convenience sample, purposive sample, and quota sample. Non-probability samples can be used for qualitative or exploratory research,5 and hence the researcher believes that non-probability samples are the most suitable for this research. Moreover, convenient sampling and purposive or judgemental sampling are used to select insurance companies. According to Tongo (2007), the purposive sampling technique effectively studies a specific cultural domain with experts. It is a nonrandom technique that does not require the underlying theories or a set number of informants. It allows the experts to discuss in depth during the interviews and select the respondents who fit the specific purpose or expertise in the research area.

5.3.2 Questionnaire Development There will be one set of survey questionnaires for insurance operators. In developing the survey questionnaire and interview questions for insurance companies, the researcher refers to two theories: new product adoption and new product diffusion theory based on prior literature and SWOT analysis. SWOT technique is used to know the strengths, weaknesses, opportunities, and threats of offering Takaful. This technique is widely used in business research. Strengths and weaknesses focus on the internal factors, and options and threats focus on the current circumstances’ external factors to offer the new products or services (FME Team, 2013; Dyson, 2004; Piercy & Giles, 1989). It is used to examine the gaps and matches between competencies and resources and the business environment in which the products or services will be introduced. It is a valuable technique for strategic planning (Helms & Nixon, 2010). The studies which the researcher refers to preparing the questionnaire are Rogers (1976), Berkowitz (1986), Cooper and Kleinschmidt (1987), Norton and Bass (1987), Chan (1991), Antil (1988), Barczak et al. (1992), Majumdar (1993), Montoya-Weiss and Calantone (1994), Wright and Charlett (1995), Nijssen and Frambach (2000), Wren et al. (2000), Im et al. (2007), Sethi et al. (2008), Eng and Quaia (2009), Redzuan et al. (2009), Croasmun and Ostrom (2011), Akhter and Hussain (2012), Ayinde and Echchabi (2012), Gustina and Abdullah (2012), Langley et al. (2012), Matsawali et al. (2012), Yazid et al (2012), Arifin et al. (2013), Fu and Elliott (2013), 5

http://www.people-press.org/methodology/sampling/why-probability-sampling/.

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Coolen-Maturi (2013), Murray (2013), Salleh et al. (2013a; b) and Sherif and Shaairi (2013). The interview questionnaire will be created to know their opinions towards introducing Takaful in India.

5.4 Interview Technique Qualitative research is applied by interviewing insurance operators. Interviewing can be defined as a tool to gather information related to a particular study or phenomenon (Denzin, 1978; Spradely, 1979; Frankfort-Nachmias & Nachmias, 2007; Leedy & Ormrod, 2004; Bogdan & Knopp Biklen, 2002). According to Sekeran and Bougie (2010) and Mathers et al. (2002), there are different interviews, such as face-to-face interviews, emails, and telephone interviews. This study will utilize in-person interviews (face-to-face interviews) to gather the information needed for this research. Fink (2003) stated that the in-person interview provides valid, accurate, and precise data. Furthermore, the face-to-face interview technique allows the researcher to interact and clarify any issues with interviewees. Doyle (2004) states that data quality collected from the face-to-face interview is good. According to Opdenakker (2006) and Sekeran and Bougie (2010), the interview is a helpful data compilation technique, specifically during the exploratory periods. The interviewing tools used in this research are face-to-face interviews, telephone interviews, and emails. In the case of emails, when the interviewees’ answers need clarification, the researcher communicates with a telephone to have a clearer picture of the interviewees’ opinions. Regarding insurance companies, there are 24 life insurance companies and 28 general insurance companies. It is planned to communicate with all the insurance companies, and depending on their acceptance, interviews will be conducted.

5.4.1 Statistical Method Descriptive statistics are used to describe the profile of the insurance operators. It is the standard method of describing respondents’ profiles and their other characteristics (Redzuan et al., 2009). There are 52 insurance companies, including 24 life insurance and 28 general insurance, concerning interviews with insurance operators. All the operators are called to get their consent for interviews. Fifteen life insurance and 14 general insurance operators accept to be interviewed. Thus, it represents 56% of the total insurance operators. Interview results are collected via face-to-face interviews, phone, or emails. Out of 29 interviewees, 22 interviews are conducted through a face-to-face interview. Nine of them permitted recording the interview, while the remainder did not. Also, 7 of the interviews are done through phone calls.

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Moreover, interviews are prepared manually because all the interviews are not recorded. In analyzing the interview results, a thematic approach is used. The coding is used to simplify in presenting the interview results. For example, each Insurance operator is assigned an “IO,” and thus, “IO 1” refers to insurance operator number 1, “IO 2” refers to the insurance operator number 2, etc. After analyzing the interviews, the results were shown to experts for their comments and suggestions. Regarding the interview content, thematic analysis is used. According to Alhojailan (2012) and Attride-Stirling (2001), it allows the researcher to understand the issues more widely and deeply. It is an appropriate qualitative analysis method (Fereday & Muir-Cochrane, 2006). It is suitable to explore the theme’s thoughts, experiences, and opinions from more than one participant for each issue. Hasan (2014) and Kasim et al. (2015) used the thematic approach in their research. The total time for each interview is in the range of 50 min to 2 h. A semistructured interview is conducted. The interviewees are encouraged to express their views without restrictions on the questions relating to their opinions, knowledge, and practices. Notes are taken throughout the interviews, and the researcher listened to the recorded interview data three times. The pre-scheduled personal interviews were conducted at the offices of interviewees or preferred locations. Some of the interviews were conducted at hotels or restaurants. The data is revised and transcribed in a written form. The information is prearranged by questions to look at all candidates and their answers to classify similarities and differences.

5.5 Conclusion This chapter has explained the theoretical framework. This framework includes the discussion of new product adoption theory and new product diffusion theory. Research methodology, including data and research method, sample, sampling method, and data collection method, are presented. In developing the survey questionnaire and interview questions for insurance companies, the researcher refers to two theories: new product adoption and new product diffusion theory based on previous literature and SWOT analysis. Finally, the discussion and explanation of the interview and statistical methods are discussed.

References Akhter, W., & Hussain, T. (2012). Takaful standards and customer perceptions affectingtakaful practices in Pakistan: A survey. International Journal of Islamic and Middle Eastern Finance and Management, 5(3), 229–240. Alhojailan, M. I. (2012). Thematic analysis: A critical review of its process and evaluation. West East Journal of Social Sciences, 1(1), 39–47. Antil, J. H. (1988). New product or service adoption: When does it happen? Journal of Consumer Marketing, 5(2), 5–16.

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Arifin, J., Shukri Yazid, A., & Sulong, Z. (2013). A conceptual model of literature review for family Takaful (Islamic Life Insurance) demand in Malaysia. International Business Research, 6(3), 210–216. Attride-Stirling, J. (2001). Thematic networks: An analytic tool for qualitative research. Qualitative Research, 1(3), 385–405. Ayinde, L. O., & Echchabi, A. (2012). Perception and adoption of Islamic insurance in Malaysia: An empirical study. World Applied Sciences Journal, 20(3), 407–415. Barczak, G. J., Bello, D. C., & Wallace, E. S. (1992). The role of consumer shows in new product adoption. Journal of Consumer Marketing, 9(2), 55–64. Berkowitz, M. (1986). New product adoption by the buying organization: Who are the real influencers? Industrial Marketing Management, 15(1), 33–43. Bogdan, R., & Knopp Biklen, S. (2002). Qualitative research for education (4th ed.). Allyn and Bacon. Chan, C. J. (1991). Response-order effects in likert-type scales. Educational and Psychological Measurement. Coolen-Maturi, T. (2013). Islamic insurance (Takaful): Demand and supply in the UK. International Journal of Islamic and Middle Eastern Finance andManagement, 6(2), 87–104. Cooper, R. G., & Kleinschmidt, E. J. (1987). New products: What separates winners from losers? Journal of Product Innovation Management, 4(3), 169–184. Croasmun, J. T., & Ostrom, L. (2011). Using Likert-type scales in the social sciences. Journal of Adult Education, 40(1), 19. Denzin, N. K. (1978). The research act (5th ed.). McGraw-Hill. Doyle, J. K. (2004). Introduction to interviewing techniques. Handbook for IQP advisors and students. Dyson, R. G. (2004). Strategic development and SWOT analysis at the University of Warwick. European Journal of Operational Research, 152(3), 631–640. Eng, T. Y., & Quaia, G. (2009). Strategies for improving new product adoption inuncertain environments: A selective review of the literature. Industrial Marketing Management, 38(3), 275–282. Fereday, J., & Muir-Cochrane, E. (2006). Demonstrating rigor using thematic analysis: A hybrid approach of inductive and deductive coding and theme development. International Journal of Qualitative Methods, 5(1), 80–92. Fink, A. (2003). How to conduct in-person interviews for surveys (Vol. 5). S. M. Oishi (Ed.). Sage. Fm, E. T. (2013). SWOT analysis: strategy skill. Franfort-Nachmias, C., & Nachmias, D. (2007). Research methods in the social sciences (7th ed.). Worth Publishing. Fu, F. Q., & Elliott, M. T. (2013). The moderating effect of perceived product innovativeness and product knowledge on new product adoption: An integrated model. The Journal of Marketing Theory and Practice, 21(3), 257–272. Gustina, & Abdullah, N. I. (2012). Analysis of demand for family Takaful and life insurance: A comparative study in Malaysia. Journal of Islamic Economics, Banking and Finance, 68(8), 4. Hasan, Z. (2014). In search of the perceptions of the Shari’ah scholars on Shari’ah governance system. International Journal of Islamic and Middle Eastern Finance and Management, 7(1), 22–36. Helms, M. M., & Nixon, J. (2010). Exploring SWOT analysis-where are we now? A review of academic research from the last decade. Journal of strategy and management, 3(3), 215–251. Im, S., Mason, C. H., & Houston, M. B. (2007). Does innate consumer innovativeness relate to new product/service adoption behavior? The intervening role of social learning via vicarious innovativeness. Journal of the Academy of Marketing Science, 35(1), 63–75. Kasim, N., Nu Htay, S. N., & Salman, S. A. (2015). Risk-sharing and shared prosperity through Takaful. Middle East Journal of Scientific Research, 23(11), 27132721. Langley, D. J., Bijmolt, T. H., Ortt, J. R., & Pals, N. (2012). Determinants of social contagion during new product adoption. Journal of Product Innovation Management, 29(4), 623–638.

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Leedy, P., & Ormrod, J. E. (2004). Practical research: Planning and design (8th ed.). Prentice Hall. Lowrey, T. M. (1991). The use of diffusion theory in marketing: A qualitative approach to innovative consumer behavior. Advances in consumer research, 18(1). Majumdar, A. S. M. E. (1993). Microscale heat conduction in dielectric thin films. Journal of Heat Transfer, 115(1), 7–16. Mathers, N. J., Fox, N. J., & Hunn, A. (2002). Using interviews in a research project. NHS Executive, Trent. Matsawali, M. S., Abdullah, M. F., Yeo, C. P., Abidin, S. Y., Zaini, M. M., Ali, H. M. & Yaacob, H. (2012). A study on Takaful and conventional insurance preferences: The case of Brunei. International Journal of Business and Social Science, 3(22). Montoya-Weiss, M. M., & Calantone, R. (1994). Determinants of new productperformance: A review and meta-analysis. Journal of Product Innovation Management, 11(5), 397–417. Murray, J. (2013). Likert data: What to use, parametric or non parametric? International Journal of Business and Social Science, 4(11). Nijssen, E. J., & Frambach, R. T. (2000). Determinants of the adoption of new product development tools by industrial firms. Industrial Marketing Management, 29(2), 121–131. Norton, J. A., & Bass, F. M. (1987). A diffusion theory model of adoption andsubstitution for successive generations of high-technology products. Management Science, 33(9), 1069–1086. Opdenakker, R. (2006). Advantages and disadvantages of four interview techniques in qualitative research. Retrieved. March 20th, 2013. http://www.qualitativeresearch.net/index.php/fqs/article/ view/175/391 Piercy, N., & Giles, W. (1989). Making SWOT analysis work. Marketing Intelligence & Planning, 7(5/6), 5–7. Redzuan, H., Rahman, Z. A., & Aidid, S. S. (2009). Economic determinants of family takaful consumption: Evidence from Malaysia. International Review of Business Research Papers, 5(5), 193–211. Rogers, E. M. (1962). Diffusion of innovations (1st ed.). The Free Press. Rogers, E. M. (1976). New product adoption and diffusion. Journal of consumer Research, 290–301. Rogers, E. M. (1983). Diffusion of innovations (3rd ed.). The Free Press. Rogers, E. M. (2003). Diffusion of innovations (5th ed.). Free Press. Rogers, E. M. (1995). The diffusion of innovations (4th ed.). NewYork. Sahin, I. (2006). Detailed review of Rogers’ diffusion of innovations theory and educational technology-related studies based on Rogers’ theory. TOJET: The Turkish Online Journal of Educational Technology, 5(2). Salleh, M. C. M., Abdullah, N. I., & Razali, S. S. (2013). Customer perception towards relationship marketing practices in takaful industry. In: 4th International conference on business and economic research proceeding. www.internationalconference.com.my Salleh, M. C. M., Abdullah, N. I., Razali, S. S., & Wok, S. (2013). The relationship of Takaful agents’ Islamic ethical behaviour towards customers’ satisfaction, trust and commitment: A preliminary analysis. Journal of Islamic Financeand Business Research, 2(1), 77–88. Sekeran, U., & Bougie, R. (2010). Research method for business: Skin building approach (5th ed.). Wiley. Sethi, G., Sung, B., & Aggarwal, B. B. (2008). Nuclear factor-{kappa}B activation: From bench to bedside. Experimental Biology and Medicine, 233, 21–31. Sherif, M., & Shaairi, N. A. (2013). Determinants of demand on family Takaful in Malaysia. Journal of Islamic Accounting and Business Research, 4(1), 26–50. Spradely, J. P. (1979). The ethnographic interview. Holt, Rinehart and Winston. Tongco, M. D. C. (2007). Purposive sampling as a tool for informant selection. Wren, B. M., Souder, W. E., & Berkowitz, D. (2000). Market orientation and new product development in global industrial firms. Industrial Marketing Management, 29(6), 601–611.

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Chapter 6

Findings from Interviews with Insurance Operators

This chapter aims to explore the perception of insurance operators towards the viability of Takaful in India. Due to the non-existence of takaful companies in India, insurance companies are essential respondents since they are the Takaful products’ potential suppliers. A convenient sampling and purposive sampling method are used for selecting the insurance companies as the respondents. The interview technique is the sole method used to collect the findings for this research. Twenty-nine interviews have been conducted, of which 15 respondents are from life insurance operators and 14 from general insurance operators. The interview results have highlighted eight strengths, four weaknesses, five opportunities, and five threats if Takaful is offered in India. Also, the insurance operators have discussed how to overcome weaknesses and threats. In summary, it can be concluded that Takaful is viable to be offered in India. This research seeks the perception of insurance operators on the viability of Takaful in India. Thus, the findings will interest the industrial players, Shari’ah advisors, and Indian regulatory bodies, among others.

6.1 Introduction This research aims to explore insurance operators’ perceptions towards the viability of introducing Takaful in India. There are 52 insurance companies, including 24 life insurance and 28 general insurance. All the operators are called to get their consent for interviews. Fifteen life insurance and 14 general insurance operators accept to be interviewed. The total number of accepted insurance operators is 29. Thus, it represents 56% of the full insurance operators. Interview results are collected by face-to-face interviews, phone, or emails. In analyzing the interview results, a thematic approach is used. The coding is used to simplify in presenting the interview results (Hasan, 2014). For example, each Insurance operator is assigned as “IO,” and thus, “IO 1” refers to insurance © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_6

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operator number 1, “IO 2” refers to the insurance operator number 2, etc. This study applies the thematic approach to analyzing the contents of the interview data. The main research question is “What is insurance operators’ perception towards the viability of Takaful in India”?

6.2 Profile of Interviewees There are 29 interviewees, and most are male, i.e., 26, and the rest are female. In terms of age, most of them (12) is between 31 and 35 years, followed by five interviewees (51–60 years), four interviewees (26–30 years), three interviewees (36–40 years), three interviewees (46–50 years) and two interviewees (41–45 years). Almost all the interviewees (24) are Hindu, and the rest (five interviewees) are Muslims. All the interviewees hold the insurance companies’ positions at the minimum level of assistant manager/officer. There are four branch managers, one head of branch manager, one assistant administrative officer, one executive officer, three development officers, one associate officer of the customer, one deputy manager of underwriting, one deputy manager, two managers, one regional manager, one associate circle head, two deputy underwriting, two senior sales executive, two assistant managers, one district manager, one head for Andhra and Telangana, one senior branch manager, one senior manager, one administrative officer, and one area sales manager. Among the interviewees, five are from government-owned insurance companies, and the rest (24) are from privately owned insurance companies. Fifteen interviewees are from life insurance companies, and 14 interviewees are from general insurance companies. In terms of working experience, the majority (11 interviewees) have experience of working 6–10 years, and it is followed by eight interviewees (more than 20 years), five interviewees (11–15 years), four interviewees (less than five years) and one interviewee (16–20 years) (Refer to Table 6.1).

6.3 Awareness and Knowledge of Conventional Insurance Table 6.2 discusses awareness and knowledge of conventional insurance. All the interviewees except one (IO 13) think that all people should have insurance regardless of their economic status. When the interviewees are asked why they need insurance, they can give more than one reason for that question. Having insurance will help them to reduce the financial burden of policyholders (28 interviewees), to be less worried about kids’ education fees (20 interviewees), and get sufficient financial support after retirement (19 interviewees). Insurance expenses are tax-deductible expenses and so the policyholder can take advantage of them (15 interviewees). It can also be a risk-mitigating tool since it can provide financial coverage according to the policy documents’ terms and contract (17 interviewees). All the 20 interviewees think that insurance has the prohibited elements such as interest, gambling, and uncertainty but

6.3 Awareness and Knowledge of Conventional Insurance

85

Table 6.1 Interviewees profile of insurance operators No.

Age

Religion

Position

Insurance company

Working in life/general

Experience (years)

1

Male

Muslim

Assistant Administrative Officer

Government

Life

24

2

Male

Hindu

Executive Officer

Private

Life

Four

3

Male

Hindu

Development Officer

Private

Life

Four

4

Male

Hindu

Branch Manager Private

Life

Ten

5

Male

Hindu

Branch Manager Private

Life

Three

6

Female

Muslim

Deputy manager Private underwriting

Life

Seven

7

Male

Hindu

Branch Manager Private Head

Life

Ten

8

Male

Muslim

Deputy Manager Private

Life

16

9

Male

Hindu

Manager

Private

Life

30

10

Male

Hindu

Regional Manager

Private

Life

31

11

Male

Hindu

Associate circle head

Private

Life

Ten

12

Male

Hindu

Underwriter (Deputy)

Private

Life

15

13

Female

Hindu

Senior sale executive

Private

Life

Six

14

Male

Hindu

Assistant Manager

Private

Life

12

15

Male

Hindu

District Manager Private

Life

Eight

16

Male

Hindu

Head for Andhra Private and Telangana

General

11

17

Male

Hindu

Development Officer

Government

General

31

18

Male

Hindu

Senior branch manager

Government

General

31

19

Male

Hindu

Branch manager

Private

General

Seven

20

Female

Hindu

Deputy Manager Private underwriter

General

Seven

21

Male

Hindu

Unit sale manager

Private

General

Four

22

Male

Muslim

Development Officer

Government

General

28

23

Male

Hindu

Senior Manager

Private

General

12 (continued)

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6 Findings from Interviews with Insurance Operators

Table 6.1 (continued) No.

Age

Religion

Position

Insurance company

Working in life/general

Experience (years)

24

Male

Hindu

Administrative Officer

Government

General

26

25

Male

Hindu

Assistant Manager

Private

General

12

26

Male

Muslim

Area sale manager

Private

General

Nine

27

Male

Hindu

Branch Manager Private

General

Eight

28

Male

Hindu

Manager

Private

General

Ten

29

Male

Hindu

Branch Manager Private

General

28

Table 6.2 Awareness and knowledge of conventional insurance 1. Which class of people should have insurance? All classes

28

Only for poor class

1

2. What are the advantages of having the insurance products? (You may tick more than one) Reduce the financial burden

28

Less worried about kids’ education fee

20

Get sufficient financial support after retirement

19

Tax-deductible expenses

15

Risk management tool

17

3. Do you know conventional insurance practice involves elements such as interest, uncertainty, and gambling? Interest

29

Uncertainty

29

Gambling

20

4. Do you agree that the practice of insurance should consider ethical values? Yes

29

nine interviewees 2, 7, 11, 12, 16, 18, 20, 24, and 29 interviewees think that there is no gambling in insurance. They have said that insurance is free from gambling, and insurance companies have already written terms and conditions clearly in the policy documents. Also, the fact that ethical value should be considered in insurance operators’ current practice is supported by all the interviewees. Ethical behavior is one of the main elements of any sector, especially the business and finance sector. Moral values are the core values for any human being, regardless of religion. Hence, insurance companies always consider the ethical code of conduct.

6.3 Awareness and Knowledge of Conventional Insurance

87

Based on the interviewees’ answers, it can be assumed that insurance is a valuable tool since it can bring financial benefit to the policyholders. However, it involves the prohibited elements from the Islamic perspective, and the current insurance operators should observe ethical business practices.

6.4 Knowledge of Takaful Table 6.3 discusses awareness of Takaful. Most of the interviewees (27) have heard about Takaful. They are further asked how they know about Takaful, and they are allowed to give more than one way to tell about Takaful. Most of them know about Takaful through the internet (17 interviewees), and it is followed by relatives, friends or neighbors (7 interviewees), magazine (3 interviewees), market or local people (3 interviewees), agents (3 interviewees), corporate publicity (1 interviewee). The interviewees are asked whether they know the differences between insurance and Takaful. For example, in terms of contract sales of exchange vs. mutual contribution), payment (premium belongs to insurance companies vs. contribution belongs to the participants and Takaful operators depending on the Takaful model adopted), risk (risk transfer vs. risk-sharing), and religious and ethical aspect (Prohibited under the spiritual and moral teaching vs. Acceptable under any religion). Twenty-seven interviewees know the difference between them in terms of religious and ethical aspects. Twenty-five of them see the variance in terms of risk. Twenty-five of them distinguish their difference from the payment aspect. Twenty-four of them know that in terms of the contractual relationship between the insurance companies and the insured. Also, 25 interviewees know that Takaful is ethical insurance. Twenty-seven interviewees see that it is suitable for anyone regardless of religion. Twenty-seven interviewees believe that Takaful is free from interest, uncertainty, gambling, and investing in prohibited business activities. Twenty-two thinks that Takaful can provide coverage and benefit similar to the conventional insurance, and 23 interviewees know that Takaful has been offered in many countries, including non-Muslim countries, worldwide. In sum, the internet is the most efficient way to make interviewees aware of Takaful products. The majority of the interviewees know the differences between Takaful and insurance regarding the contract, payment, risk, and religious and ethical aspects. Most of them accept Takaful as honest insurance free from interest, gambling, uncertainty, and non-halal investment because the popular Takaful model is based on profit and loss sharing. Most of them think that Takaful is suitable for anyone regardless of religion, and it can provide similar benefits and coverage as conventional insurance in India.

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6 Findings from Interviews with Insurance Operators

Table 6.3 Knowledge of Takaful 1. Have you heard about Takaful (Islamic Insurance)? Yes

27

No

2

2. How did you hear Takaful? (You may tick more than one) Internet

17

Magazine

3

Market or local people

3

Relatives, friends, or neighbors

7

Agents

3

Corporate publicity

1

3. Do you know the following differences between conventional and Islamic insurance? Contract

24

Payment

25

Risk

25

The religious and ethical aspect

27

4. Do you know that Takaful is ethical insurance? Yes

25

No

4

5. Do you know that Takaful is suitable for anyone regardless of religion? Yes

27

No

2

6. Do you know that Takaful is free from interest, uncertainty, gambling, and investing in prohibited business activities? Yes

27

No

2

7. Do you know that Takaful can provide coverage and benefit similar to conventional insurance? Yes

22

No

7

8. Do you know that Takaful has been offered in many countries all over the world? Yes

23

No

6

6.5 Interviewee’s Opinion on Determinants to Offer Takaful This section tries to determine the insurance companies’ criteria before offering any new products (Table 6.4). Nine determinants are selected based on the related theory and literature. It seems that all the determinants are essential and are considered to

6.5 Interviewee’s Opinion on Determinants to Offer Takaful

89

Table 6.4 Determinants to offer Takaful No. Description

Mean

1

Prefer to offer the products which will maximize the profit of the company

3.50

2

Offering socially responsible products is given priority

3.89

3

Your company follows the market demand in offering new products

4.01

4

A new product that is encouraged by the government is given priority in the offering 3.71

5

Your company follows its competitors in offering new insurance products

3.89

6

Your company should offer new insurance products which are acceptable in all religions

4.10

7

If your company offers Takaful products, it will bring more profit to the company

3.57

8

If your company offers Takaful products, it will provide more options for the existing products

4.00

9

If your company offers Takaful products, the market will broaden because Muslims 3.86 might refuse to buy life insurance products

offer new products. The most crucial factor is the acceptability of the products by all religions (mean = 4.10). Market demand follows it (mean = 4.01), variety of choices to the customers (mean = 4.00), socially accepted products (mean = 3.89), the trend of the competitors (mean = 3.89), to get more participation from customers who refuse to buy (mean = 3.89), support of government (mean = 3.71). Also, the interviewees think that if Takaful is offered in their companies, it will bring more profit to the companies, and it is supported by the mean value of 3.57. Finally, profit is still an essential criterion for deciding which product to offer with a mean value of 3.50.

6.6 Interviewee’s Opinion on Future Takaful When interviewees are asked about the possibility of introducing Takaful in the future, more than half of the interviewees (16 interviewees) think that their companies will offer it if the government allows them to offer Takaful. However, 12 interviewees are not sure because the top management will decide it. One interviewee does not provide his opinion on it. Interviewees are further asked if their companies choose to offer Takaful products, which products, i.e., general or family or both, should be provided first. Fourteen interviewees think that both general and family Takaful products should be introduced at the same time. However, one interviewee thinks that family Takaful products should be offered first, and three interviewees think that general Takaful products should be offered first. The remaining interviewees are silent on this matter. If the general Takaful products are planned to offer in their companies, which products are essential to delivering first is further asked. General Takaful such as health, vehicle insurance, third-party liability, fire, marine, property insurance, and

90

6 Findings from Interviews with Insurance Operators

personal accidents are highly demanded, and they should be given priority. More general Takaful products such as private care policies, comprehensive plans, and worker policy should be offered to expand the products. However, 13 interviewees think that they cannot decide because the higher authority determines it. Regarding family Takaful products, term policy, life policy, hospitalization insurance, family insurance, and child education investment plans should be offered in India. Also, it is encouraged to provide other family Takaful products such as Endowment Plans, Children Plans, Money Back Plans, Unit Linked Plans, Terms Plans, Wealth Plans, Protection Plans, Health plans, Saving with protection, wealth protection plans, basic insurance plans, Hajj/Umrah Life Takaful, MicroTakaful, Medical Takaful, Child Takaful, and Joint Life Takaful/Marriage Endowment Takaful. However, 18 interviewees cannot answer this because top management will decide which products to be offered. Based on the theories, seven factors are extracted to determine which factors are the most influential or persuasive factors in offering the new products (Refer to Table 6.5). The highest factor is cost versus benefit (4.79), it is followed by accessibility, availability, and service quality (4.75), Product features (4.6), the reputation of the company (4.35), Marketing and promotion (3.8), Attributes of the agents (3.57) and Social and religious factors (2.43). The interviewees’ opinions are asked regarding their experience if they offer new products to Muslims, and they are allowed to choose more than one factor. The most critical factors for Muslims in deciding to buy the product are accessibility, availability, service quality (19 interviewees), and social and religious aspects (19 interviewees). They have said that Muslims are very serious and prefer religious-based products. Whether they have insurance or Takaful, cash outflow will be assumed as an expense from a Muslim perspective. Thus, they like Table 6.5 Influencing factors to make the the decision to supply or demand the products No.

Factors

Level of importance (Mean)

Frequency of essential factors for Muslims

Frequency of crucial factors for non-Muslims

1

Cost versus benefit

4.79

18

24

2

Accessibility, availability, and service quality

4.75

19

20

3

Product features

4.6

17

19

4

The reputation of 4.35 the company

16

20

5

Attributes of the agents

3.57

15

12

6

Marketing and promotion

3.8

16

15

7

Social and religious factors

2.43

19

10

6.6 Interviewee’s Opinion on Future Takaful

91

to spend their money so that it is not against religious teaching, and consequently, they prefer Takaful over conventional insurance. Many Muslims question the service quality of the product and the insurance company. Takaful or insurance is a service industry, and hence, quality is the main significant factor for the customers in deciding whether they should participate in Takaful. However, the social and religious aspect is one of the vital factors to attract Muslim customers. The lowest contributing factor is an attribute of agents (15 interviewees). In non-Muslims, the most crucial factor is cost versus benefit (24 interviewees), and the lowest influential factor is the social and religious factor (10 interviewees).

6.7 Interviewees’ Opinions on the Level of Difficulty to Promote Takaful in India When the respondents are asked their opinions on difficulty (i.e., easy, moderate, and challenging) to promote Takaful in India, any difference between Muslims and non-Muslims is further requested. Their responses are as follows. In approaching the potential Muslim participants, the majority (13 interviewees) think that it will be moderate, and it is followed by easy (eight interviewees) and complex (six interviewees) levels (Refer to Fig. 6.1). In non-Muslim participants, most interviewees (11 interviewees) think that they might find it a moderate level to approach them. It is followed by difficulty (nine interviewees) and easy (seven interviewees) levels (Refer to Fig. 6.2). According to Salman et al. (2017), Takaful is social and ethical insurance based on the principle of Taa¯ wun (cooperation) and Tabarru, where the risk is shared collectively by members of a policy. The concept of Takaful is providing financial assistance to the participants based on mutual aid, brotherhood, and solidarity if

Fig. 6.1 Opinions on the level of difficulty and simplicity to promote Takaful in India for Muslims

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6 Findings from Interviews with Insurance Operators

Fig. 6.2 Opinions on the level of difficulty and simplicity to promote Takaful in India for nonMuslims

the participants face misfortune. Takaful is an alternative to conventional insurance, and its primary objective is to protect the participants based on ethical and moral foundations. As we know, Takaful is based on ethical principles, so introducing Takaful in any non-Muslim country is not difficult because of its nature and practice. Ali (2006) mentioned that Takaful could be introduced if the Muslim population is 10–15% of the total population in the non-Muslim countries, and then it can attract non-Muslims later. For instance, in Singapore, 22% of the Takaful participants are non-Muslims. He further states that Takaful products are ethical, and hence, they can be accepted regardless of religion. Also, Alamasi (2010) said that in the Muslim countries and Western countries, the rise of new educated, mindful people is creating awareness for Takaful. He further states that Takaful’s acceptance by non-Muslims in Malaysia is also a motivating factor and a good sign that Takaful can expand to non-Muslim countries. The Muslim population in Europe is around 15 million, and thus, they are a potential market for Takaful. Fortunately, Indian has the third-highest Muslim population in the world1 (Htay & Salman, 2013). If there is no Takaful in India, Muslims are helpless except to participate in insurance prohibited in Islam. Surprisingly, conventional insurance is not permitted by the main religions in India. The majority of Indians belong to five main religions, i.e., Hinduism, Islam, Christianity, Buddhism, and Sikhism. When conventional insurance is examined from the above-stated faiths, it is found that insurance’s current practice involves prohibited elements such as interest, uncertainty, and gambling. Also, since it is believed that Takaful is based on Shari’ah, it can be termed as ethical insurance. Literature has provided sufficient evidence that moral and social justice is desirable in all religions. With this in mind, the researcher hopes that 1

http://www.mapsofworld.com/world-top-ten/world-top-ten-countries-with-largest-muslimpop ulationsmap.html.

6.7 Interviewees’ Opinions on the Level of Difficulty …

93

Indians will respond positively to Takaful as an alternative to conventional insurance. Not only does India house the third-largest Muslim population in the world, but it is the second-highest populous country in the world after China.2 The respondents are asked about difficulty and simplicity (i.e., easy, moderate, and challenging) to promote Takaful in India. Specifically, whether there is any difference between Muslims and non-Muslims is further asked. In approaching the potential Muslim participants, the majority (13 interviewees) think that it will be moderate, and it is followed by easy (eight interviewees) and complex (six interviewees) levels. One of the interviewees expressly said: Takaful is booming all over the world, and it is providing products similar to insurance products. It should not be any issue or problem to start introducing Takaful in India. (IO 27)

Takaful has been offered widely all over the world, including both Muslim and non-Muslim countries. Currently, there are more than 174 Takaful operators in the world (Salman, 2014). However, it is surprising that Takaful (Islamic insurance) has not been offered in India. According to IO 27, if Takaful is introduced in India, it should not be a problem. Particularly the Muslim community, they are not having insurance coverage because of its practice. The Muslim community is aware of its prohibition from the Islamic perspective. Establishing Takaful in India will not be an issue and problem. According to Ernst and Young (2012), India has immense potential for Takaful based on the size of its Muslim population and the growth of its economy. However, it is surprising that Takaful has yet to be permitted in India since it has been allowed to offer even in non-majority Muslim countries, for instance, Singapore, Thailand, and Sri Lanka. The government should consider and encourage Takaful within India, given its investment in Saudi Arabia in the form of the Saudi Indian Company for Cooperative Insurance (SICCI), owned by the Indian public company, the LIC.3 According to IO 9, establishing Takaful is not tricky, and near-future regulators will permit it. He says: Indian government allows and permits for Shari’ah approved companies, and hopefully they will allow Islamic insurance shortly. (IO 9)

One of them mentions that: A Division Bench of the Kerala High Court on 04.02.2011 reserved its verdict on the writ petitions challenging a government order according to sanction for registration of an Islamic finance service company by the Kerala State Industrial Development Corporation (KSIDC). The Kerala High Court Thursday gave the green signal to Al Barakah, a company registered under the tenets of Shariah, to operate a financial institution based on the principles of Islamic banking. In this scenario, Takaful can also establish soon. (IO 26)

2 3

http://www.indiaonlinepages.com/population/india-current-population.html. http://www.sicci-ksa.com/Aboutus.html.

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6 Findings from Interviews with Insurance Operators

In terms of awareness and knowledge, Indian companies are already experienced. They know the benefits of Islamic finance and Shari’ah-approved companies; hence many companies want Shari’ah certified. Moreover, India already has financial institutions that provide Shari’ah mutual funds. These interests are a positive sign for Takaful. Another one said: Every company has its reputation and brand name. People already have confidence in the company, and it is well known for the good quality and services due to the well-experienced people. Takaful is new for the company since it needs modification to be Shari’ah compliant. (IO 26)

However, the insurance industry has its history dated back to 1818 to establish an Oriental insurance company. There will be stiff competition for Takaful companies since Takaful does not have that long history and insurance coverage. People already have enough confidence in the insurance companies, and they are aware of pricing, premium, and the atmosphere. Therefore, introducing Takaful in a country like India is not easy. According to IO 19, understanding the Takaful product and its mechanisms is difficult even for insurance operators. To some extent, introducing Takaful will incur additional training for their agents and operational team. He mentions that, The practice of Takaful is not easy; it will take time to understand the whole procedure since the concept of insurance is straightforward for the policyholders. Takaful operators have two separate accounts in Islamic insurance, i.e., the Participants Fund or policyholders fund, and the other one is known as the Shareholders Fund. It is different from conventional insurance since it has only one account, and there is no separation between the insurance operator account and participant fund account. (IO 19) Since Takaful offers similar coverage as insurance, its contribution should be the same or lower than the premium charged by the current insurance products that have the same coverage. Otherwise, potential customers will not choose Takaful products. (IO 3)

The Takaful operators should observe new conventional insurance products to offer similar Takaful products at affordable prices and meet the current market’s needs. The benefits and coverage needed by the potential and existing policyholders will vary over time due to different exposures such as business, working environment, and health trends. Changes that come with exposure can make the existing products unsuitable for them. In non-Muslim participants, most interviewees (11 interviewees) think that they might find it a moderate level to approach them. It is followed by difficulty (nine interviewees) and easy (seven interviewees) levels. One interviewee (IO 1) mentions: In his opinion, the promotion of Takaful to non-Muslims is not as difficult because the Takaful is ethical and can be easily accepted. As for Muslim customers, it is effortless to promote as it is Shari’ah-based. Mosque marketing is one of the effective promotional channels. (IO 1)

6.7 Interviewees’ Opinions on the Level of Difficulty …

95

Interviewee (IO 9) said that: It is very easy for non-Muslims. There is no difference between these two groups. Takaful should be promoted as ethical insurance. Once it is promoted as an ethical product, then it has many opportunities. (IO 9)

For insurance to be a perfect tool, it should be transformed into Takaful. Takaful has been introduced as an alternative to conventional insurance. Takaful is an insurance product free from prohibited elements such as interest, uncertainty, gambling, and non-Shari’ah compliant investment. It is because Takaful as an ethical product can attract anyone regardless of religion. Moreover, Takaful is based on cooperation that can bring society together, inject a harmonized atmosphere, and consider society’s needs for the long-term success and sustainability of the insurance operators. Consequently, unfairness and unethical practices can be minimized to some extent. Takaful is not a religious product but a commercial product. It is suitable for anyone, regardless of religion. Its essential and significant role in the finance industry is tremendous. It can be remarked that Takaful has a more value-added substance than insurance, and it is the ultimate solution for anyone who is seeking financial protection for their potential misfortune. Although Takaful is a social and ethical product, it does not mean that insurance companies can easily offer it. There are a lot of additional costs, such as hiring Shari’ah advisors and marketing Takaful products. One of the interviewees believed that: Takaful companies can offer the products after getting approval from the Shari’ah Supervisory Board and respective governing bodies. In the case of conventional insurance products, they can offer the products without requiring permission from the Shari’ah committee. (IO 14)

According to him, getting approval from Shari’ah scholars is not easy, even in India. We do not have Islamic finance experts, and it will affect the whole system. On the other hand, insurance companies do not need permission from the Shari’ah advisory board. In Takaful, different Takaful operators should take approval from Shari’ah advisors and should follow the Shari’ah governance framework strictly. India is a unique country, and it has many experienced people who are experts not only in the conventional aspect but also in the Islamic element of Takaful. Many people are providing Shari’ah advisory services to the Islamic financial industries outside India. Hence, it should not be a severe issue. One of the interviewees mentions that, Promoting Takaful products all over India is difficult due to a lack of awareness and education.

Since the insurance market has been well established for a few decades, Takaful operators should be creative and innovative with their products and operators’ operational aspects. The insurance operators’ techniques and methods should be observed to ensure that Takaful operators can offer better or comparable products with an affordable contribution. Insurance agents and staff are well versed in insurance products and know about the need of the market. These experiences are crucial for them

96

6 Findings from Interviews with Insurance Operators

to start offering new products. For instance, which product should be created first depends on the knowledge of market demand and needs. However, in some states, people do not even have insurance awareness, and thus they cannot almost know about Takaful. Moreover, in India, there are a variety of tribes that live there. Different tribes have different perceptions. Therefore, some states will easily promote Takaful; some states will be moderate, and the rest will be difficult. Apart from insurance awareness, the education level can significantly influence the potential participants’ decisions. Suppose the insurance operators plan to offer the Takaful products. In that case, they should focus on the ethicality of the products and look at the potential participants’ educational backgrounds. Thus, in general, it can be summarised that the level of effort that they need to put to promote Takaful to both potential Muslims and non-Muslims is moderate based on the majority. Takaful should be promoted as an ethical product rather than a religious product. Indians will get attracted to the qualitative characteristics of Takaful.

6.8 Strengths of Introducing Takaful in India Eight strengths can be beneficial when offering Takaful in India (Refer to Fig. 6.3). The first strength is that since customers are already familiar with the insurance products and Takaful has similar insurance. Takaful will not be alien to Indians (15 interviewees). Since the insurance policyholders know why they need to buy insurance, it is believed that they are aware of the benefits covered by the insurance and see whether it is worth paying the premium in exchange for the protection that they get in the future. It is opined that a few terminologies are required to explain, for instance, life insurance products that are similar to family Takaful products. However, the same languages are used in both insurance and Takaful for general and health-related products.

Fig. 6.3 Strength to introduce Takaful in India

6.8 Strengths of Introducing Takaful in India

97

One of the interviewees said that, There is no difference between Takaful and insurance. Both are risk managing tools. The only difference is Takaful is free from prohibited elements from the Islamic perspective, i.e., interest, uncertainty, gambling, and involvement in non-Shari’ah compliant investments. (IO 25)

The second strength is due to the unique nature of Takaful (16 interviewees). Some of them provide specific reasons why it is beneficial to use Takaful. They are surplus distribution (IO 8), providing interest-free loans (IO 13), Shari’ah compliance (IO 14), risk-sharing (IO 26), ethicality, and free from uncertainty, gambling, interest, and involvement in non-Shari’ah compliant investments (IO 27). Regarding surplus distribution, some countries like Malaysian practice. Insurance operators take surplus profit in insurance without sharing it with the policyholders. However, in Takaful, the surplus is shared among the participants, so it is an excellent and unique practice. Takaful contribution is structured, so donations are allocated to the risk-sharing fund from which the claims are paid. This fund is based on the concept of risksharing among the participants under Takaful operators’ supervision to address the participants’ financial needs according to the terms and conditions of the Takaful contract. This unique and special feature of Takaful cannot be found in conventional insurance, whereby the policyholders pay the premium, which will be revenue for the operators. When there is any claim, it is recognized as an expense for the operators. Thus, in the later practice, there is no concept of risk-sharing. Besides this, Takaful is a Shari’ah compliant product that makes it free from elements prohibited in Shari’ah, such as interest, uncertainty, and investment in non-halal business activities. The third strength is Takaful being a new product (9 interviewees), which will attract customers. One of them (IO 7) states that: Indians are innovative, and they tend for new ventures. If the new product is launched, it will get the attention of the market. However, Takaful operators’ responsibility is to maintain a good reputation and provide quality service. (IO 7)

His opinion reflects the current market situation because nowadays, the trend in India is that Indians want to try new products that are ethical and financially attractive. When the Takaful product is observed, it has many positive features, especially moral characteristics, which will be very persuasive for Indians. Moreover, when the innovative nature of the insurance policyholders is examined, the results reveal that Indians are creative. Based on this theory, it has been concluded that the more imaginative the people, the higher the potential they would like to try a new product. The fourth strength is insurance companies’ ability to hire agents, and thus, the process will be quicker if they need new agents (6 interviewees). IO 24 mentions: Insurance Regulatory Development Authority of India permits insurance operators to hire agents at the company level so that it is free for the operators to recruit anyone they prefer. This feature makes Takaful operators easy to recruit agents and to promote Takaful insurance all over India. (IO 24)

When Takaful is offered, more agents will be required, and if the current policy applies to Takaful, it facilitates the operators in recruitment. Since authority is given

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to Takaful operators to choose qualified agents and staff, expedite and enhance the process. The fifth strength is related to cost-effectiveness and efficiency (17 interviewees). One interviewee (IO 4) explains this issue as follows: There should not be much additional cost to insurance operators since the existing facilities and staff will be able to handle the starting stage of offering Takaful products by extending the product line. (IO 4)

Another interviewee (IO 8) adds that: For marketing, the existing agents can be trained to promote Takaful products, and thus it should not be an added burden for insurance operators. Only the additional cost will be training the agents to understand the new products. (IO 8)

They have pointed out that if Takaful is offered, the existing fixed cost, such as building depreciation, can be shared between Takaful and insurance. It will fully utilize the existing facility, resulting in a more cost-efficient way of doing business. Furthermore, by providing additional training related to Takaful to existing agents, the operators do not need to recruit many fresh agents to promote Takaful products. Thus, Takaful should be introduced with a cost-effective and efficient approach. Also, some of the existing staff are Muslim, whose educational background is Shari’ah. Hence, it will reduce the operators’ burden in finding Shari’ah advisers for pre-approval of Takaful products. The sixth strength is related to offering more products if Takaful is provided (17 interviewees). IO 29 states that: Agents prefer to offer a variety of products so that potential customers can choose the product that best suits them. (IO 29)

Since India is a multicultural and multi-religious country, people’s needs are varied. If someone is avoiding insurance due to his religious prohibition, the agents can always suggest having an alternative insurance product, i.e., Takaful. Moreover, Takaful’s ethicality can be accepted by anyone regardless of religion. It can be another way for the agents to promote the products to match the products with the people’s different demands looking for ethical products. The seventh strength of Takaful can arise if the existing insurance operators are willing to offer Takaful products because they have a long time experience in the current Indian insurance market and Takaful is just a new business venture for them (18 interviewees). One interviewee (IO 3) said that: The insurance industry has existed for a long time, and most of the companies are wellexperienced and well-established. The staff is qualified enough to handle the new products, and thus, there should not be a big deal for the existing operators to introduce Takaful products in India. (IO 3)

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Another one (IO 5) said that: Takaful is not a new and strange terminology for insurance employees. The staff is aware that the difference is only Shari’ah compliance. Since the operators have experts, it is not difficult for the operators to introduce Takaful products. Also, it is believed that the staff will pick up quickly how to market the products and conduct an underwriting process to determine Takaful contribution. (IO 5)

In the opinion of the researchers, the insurance industry in India dates back to 1818, and most of the companies are experienced and well-established. Every company has its reputation and brand name. Consequently, insurance agents and staff have long experience dealing with insurance products and know about the market’s needs. These experiences are crucial to the new products offered. For instance, good knowledge of market demand and needs enable them to decide which product is suitable to be provided first; to what market segment should the products be promoted; the most helpful promotion strategies, and many others. Moreover, currently, many insurance companies are already offering unit-linked products and are very experienced in them. Takaful is similar, and so the experience is pushing the operators to provide Takaful products. The eighth strength is related to having well-qualified Indian Shari’ah advisers (13 interviewees). According to IO 10, Many Indians are Shari’ah advisors overseas, and some are in fiqh academies. (IO 10)

Another one (IO 17) said that: India has so many Islamic universities and organizations. In terms of seeking their assistance with offering Takaful in the Indian market is not a challenge or difficult job. (IO 17)

India is a prosperous country in terms of Shari’ah and Shari’ah Scholars from early history. India produces many famous and popular scholars in the field of Quran, Hadith, and Islamic jurisprudence. Furthermore, there are many well-known Jamia’s in India, such as Darul-Uloom Nadwatul Ulama, Jamia Nizamia, DarulUloom Deoband, Al Mahd Ul Aali al Islami, Mazahir Ululoom, and many more. Many Indians are advising Islamic banks, Takaful companies, and Islamic capital markets. Thus, it can be another strength for the current industry to offer Takaful products. After discussing the strength of offering Takaful, the following subsection will highlight the possible weaknesses.

6.9 Weaknesses of Introducing Takaful in India The interviewees highlight four weaknesses, which can be seen in Fig. 6.4. The first one is related to terminology (22 interviewees). Some of them mention: If the term ‘Takaful’ is used, some of the non-Muslims might think that this product is only for Muslims. (IO 3)

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Fig. 6.4 Weaknesses to offer Takaful in India

Moreover, IO 21 adds that: For the marketing purpose, the term ‘Takaful’ is the first barrier for the agents to explain. It is not user-friendly. (IO 21)

The terminology “Takaful” is not easily understood compared to the word “insurance.” To cater to all the potential customers, it is not accessible if this terminology is retained. Also, it will be difficult for agents to explain to the policyholders. Operators should think of a name or terminology that will attract customers as far as it is Shari’ah compliant. Another interviewee (IO 10) expresses his concern due to a small number of the Muslim population, and it is as follows: Although India has the third-highest Muslim population globally, only 15% of the Indian population are Muslims. To gain support from other religions, if the term Takaful is used, it might not be easily accepted by other religions. (IO 10)

The interviewees’ concern seems to be correct based on the current situation because when the word “Takaful” is used, it tends to portray that it is an Islamic product. The worst case is that it is not easy to pronounce and understand the Shariah Contracts commonly used in Takaful as mudarabah and wakalah is another challenge for potential customers. In the beginning, the targeted customers can be Muslims. However, for survival and success in the long term, the industry needs to get support from non-Muslims, and hence, choosing the acceptable terminology is a must. Some interviewees suggest finding an alternative term and overcoming the terminology issue, and their answers are provided below. One interviewee said: Takaful has a good reputation, and its business is going well all over the world with a bright prospect. India is a multicultural country, and the majority of the population is not Muslim.

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It is not advisable to use the name “Takaful,” and the operators should think of a better term to offer in India. (IO 9)

Another interviewee specifically assumed that: Many countries offer Islamic finance products, but they are not using the word ‘Islamic.’ For instance, Turkey uses the term ‘participative banking’ instead of ‘Islamic banking’ although it is a Muslim-dominated country. So, if India uses other terminologies rather than ‘Takaful’ or ‘Islamic insurance,’ it might be a better marketing strategy in India. (IO 19)

Terminology should not be a barrier to introducing Takaful, and it is not necessary to use the term ‘Takaful’ to offer an Islamic product. The choice of words does not make the industry Shari’ah compliant. Only the practice of the industry will make itself Shari’ah-compliant. Thus, as long as the way is Shari’ah respectful, it does not matter which term is used. Operators should find the terminology which is acceptable by anyone and which is not based on religion. Suppose the terminologies such as ‘Takaful,’ ‘Islamic insurance,’ and ‘Shari’ah based insurance’ are used. In that case, it is easy to promote to Muslims, and at the same time, the operators need to support all other religions. To maintain the public’s reputation and confidence, the operators should develop easily acceptable terms by all. The second weakness is the switching cost. The cost needs to be borne by the insurance policyholders to switch from insurance products to Takaful. It is a disadvantage for them in terms of price (15 interviewees). One of them (IO 10) states that: Once an existing conventional insurance plan is terminated early, the policyholders will lose some portion of the money, for instance, charges for early termination. It will be severe in a life insurance policy, compared to general insurance. (IO 10)

It can be explained in two scenarios. In the first case, the same operator is offering both insurance and Takaful products. If the operator can allow the insurance policyholder to switch to Takaful products without any additional cost or loss, it will be suitable for the insurance policyholders. However, in the second case, there are two different operators involved. Hence, it is nearly impossible for the insurance policyholders without incurring any cost or loss to drop the existing insurance policy for the sake of participating in Takaful with another operator. The situation can worsen if the policyholders cannot get the same benefit coverage offered by the insurance products. Since Islam prohibits insurance, they might not mind bearing the additional cost or getting lesser coverage when switching from insurance to Takaful. However, nobody can guarantee that Muslim insurance policyholders are willing to pay the price of disadvantage for the sake of religion. In non-Muslim policyholders, they will not switch if they know that they enjoy a financial burden. All these unfavorable possibilities should be considered, and necessary precautions and steps should be taken to introduce Takaful. The third weakness is related to insurance operators. If existing policyholders drop the existing conventional insurance products and participate in Takaful, companies have no added value (15 interviewees). One of the interviewee’s mentions:

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Switching from conventional insurance to Takaful from the same company is not worth it for the operators. The operators are not getting new participants rather than the existing policyholders switching from one service to another. There can be no additional income for the operators if they cannot attract new participants. (IO 3)

Another one mentions: Takaful is free from prohibited items and based on solidarity and brotherhood. The concept of Takaful is unique and attractive. However, if participants are not taking any new Takaful policy by switching from conventional insurance to Takaful, it is not value-added to the insurance company. (IO 9)

It may not benefit the operators in the short term because they are not getting new participants if the existing customers switch from insurance to Takaful. However, it might be helpful in the long-term to both participants and operators since they are based on the concept of solidarity and brotherhood, at least from the aspect of corporate social responsibility. The operators should get new participants to expand the market. The fourth weakness is related to the costly process for the operators (12 interviewees). One of them (IO 3) mentioned that: Information technology (IT) system needs to be upgraded because the Takaful contribution’s fund flow is different from the insurance premium. (IO 3)

Although the operators can use the existing infrastructure, the operators cannot avoid the cost. Since Takaful is based on mutual contribution, the operator’s fund needs to be channeled into a few accounts, such as participant accounts, participant risk fund accounts, and agent fees, depending on the operator’s Takaful models. It is not the case in insurance because once the premium is received, it belongs only to the operator, and it is recognized as revenue for the operator. In the case of claims, it is paid out of the participants’ risk fund in Takaful, but it is recognized as an expense in insurance. If the funds’ flow is not in line with the Shari’ah-compliant contracts in Takaful, the whole process of Takaful practice will be in vain. So, the operator needs to offer both Takaful and insurance an adequate IT system to ensure that Shari’ah’s requirements are met. The operators are accountable and meet the participants’ expectations. IO 4 states that: Although the existing staff can be used to market or take charge of operating Takaful products, training will be required, and it will incur substantial amounts of cost. The operators also need the Shari’ah board members to approve the products and monitor Shari’ah compliance. It will be another additional cost for the operators. (IO 4)

Ongoing costs related to marketing, training, remuneration for the Shari’ah advisers need to be considered. Moreover, innovation and research are essential to ensure that Takaful products are comparable with the insurance products and develop new Takaful products that can provide more coverage with minimum contribution and are suitable to the current market needs. More cost might be involved in family Takaful because to underwrite a family Takaful policy, both front and back-office

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support are required. Moreover, it needs vital help from the staff involved in administration, claim management, and underwriting. Maintaining and attracting qualified staff that understands Takaful can be another issue for the operators. After explaining the possible weaknesses in introducing Takaful, the following subsection will elaborate on India’s potential opportunities.

6.10 Opportunities to Introduce Takaful in India The interviewees point out five main categories of opportunities to introduce Takaful in India: population, economic development, international experience, education, and the existence of Shari’ah-approved companies (Refer to Fig. 6.5). The first opportunity is related to the Indian population, and 26 interviewees collectively agree on this fact. The interviewees mention that the population is one of the possibilities. Interviewer 4 mentions: 15% of the total population belongs to Muslims, and India is the highest Muslim populated country among the world’s non-Islamic countries. Also, India is the second-highest populated country. The Indian population is above one billion, and thus, India has a large market for Takaful. (IO 4)

India has a population of 1.29 billion, and it is the second-highest populated country after China. Also, there are around 180 million Muslims in India, and it is the third-largest Muslim-populated country in the world after Indonesia nad Pakistan. Since Takaful is a Shari’ah compliant product, it is ethical, and hence it can appeal

Fig. 6.5 Opportunities to introduce Takaful in India

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to the entire Indian population. It is expected that the higher the people, the greater the demand. Furthermore, one interviewee (IO 29) says: The Muslim population in India is the largest Muslim population in a non-Muslim country. This huge Muslim population creates a demand for Takaful products and services. Takaful products are yet available in India, although these communities regarding Shari’ah-compliant products express the interest. (IO 29)

One of the interviewees declares that: In my company, only 3% to 4% Muslims are my clients. Most of the Muslims are not buying insurance because of non-Shari’ah compliance. If Takaful is offered, more Muslims will participate in it. (IO 14)

Since the Muslim population is enormous, India should take this as an opportunity to start offering Takaful. Muslims currently subscribe to insurance because no other alternative is available. For general insurance, Muslims buy it because of government regulation since having insurance is one requirement to renew the vehicle owners’ road tax. However, many Muslims refuse to have life insurance due to the non-Shari’ah-compliant nature of insurance. The untapped market in India and the operators should not miss this opportunity. Once it is offered, Muslims will participate in it. However, Takaful operators should be innovative enough to develop Takaful products that provide similar coverage with a minimum contribution. The second opportunity is related to India’s economic development, and 23 interviewees point to this opportunity. The economic development of India creates the opportunity for Takaful to be offered (23 interviewees). One interviewee (IO 1) says: Indian economy is growing, and this is a good sign for insurance companies. Takaful is an alternative to insurance, which will share the same opportunities as insurance. Also, as Takaful is an ethical product, it will be more favorable in the market. (IO 1)

According to IO 17, Once the country’s economy is developing, the living standard and the people’s purchasing power will be uplifted. This means that there will be more people who can afford to participate in Takaful. (IO 17)

Since the economy is booming, individuals and businesses will demand insurance products. Individuals need it personally, and companies need insurance to protect themselves from various types of perils. With the rapid growth of the Indian economy, there is an increase in the people’s income level, and it is expected that there will be more demand because of the higher income level. Recent government regulations can support the boom of Takaful. One interviewee (IO 4) states that: Foreign insurance companies can invest up to 49% in the Indian market. Whereas, previously it was only 26%. Suppose the regulators allow the investors to start Takaful. In that case, it will be beneficial for the Muslims and non-Muslims because it is an ethical product free from interest, gambling, and uncertainty. (IO 4)

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Thus, it is a perfect opportunity for foreign companies to invest in the Indian market since foreign direct investment has increased by 49%. It is an excellent opportunity for investors looking for Shari’ah-compliant investment. It is a perfect sign for insurance companies to expand their businesses and attract more foreign investors, such as Gulf Cooperation Council countries. Islamic insurance is operating in many countries, and it is booming; hence, India should be prosperous if it introduces Takaful. Due to the crisis, all the investors, including Muslims and non-Muslim, are looking for a better investment choice based on ethicality and transparency in a conducive business environment. Thus, as a rapidly economically developing country, India should take advantage of offering ethical products like Takaful while India is increasing more foreign direct investment in the insurance market. The third opportunity is related to the foreign and government body’s international experience in offering Takaful, and 25 interviewees support this opportunity. In India, there are a few foreign insurance companies with expertise offering Takaful products outside India. It is an excellent opportunity for India since it has experienced suppliers of Takaful products. IO 25 states that one of India’s prominent insurance companies, i.e., Alliance insurance company has Islamic products outside India. It is expected that Takaful can be offered soon since the Indian government owns Retakaful businesses in Saudi Arabia, Malaysia, and other countries. General Insurance Corporation (GIC), the country’s only reinsurer, has launched Retakaful companies in several countries. GIC is the sole reinsurance company in India, and the Indian government wholly owns it. Indian insurance companies do not have any problem establishing Takaful if it is allowed by the regulatory body. If IRDAI is willing to approve offering Takaful, IRDAI should not have severe difficulty because it has Retakaful businesses in other countries outside India. Also, future Takaful companies will not find it challenging to find Retakaful companies to protect them. Takaful has more possibilities and potentials because of GIC’s experience. The fourth opportunity is related to education, and 22 interviewees support it. The new generation is educated and is aware of Takaful. One interviewee (IO 19) says: Nowadays, Indians are more educated and getting more exposure from overseas and the internet. They become more creative and innovative types of people. The young Muslim generation is more aware of Takaful, and the demand for it has started. So, Takaful should be introduced soon. (IO 19)

One interviewee (IO 9) also mentions: Education is essential for every human being. Compared to previous days, Muslims are educated, and they are focusing on different fields of study. The demand from the young Muslim generation is that they want Takaful because of ethicalness and justice. Moreover, Takaful is a Shari’ah compliant product. (IO 9)

Education makes people reason and decide logically. If two products are compared, they will go for the ethical products, provided that all the benefits and costs are similar. Education changes the mindset of people. Education will encourage people to think outside the box. Most of the educated demand Takaful because of its ethical nature. Based on the current trend, Indians are studying overseas. They are learning the importance of corporate social responsibility, and ethicality, and justice.

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It indicates that the demand for Takaful will be high, at least on the foundation of ethics. Moreover, the young Muslim generation in India is active in society and mixes with the local community. Takaful is based on risk-sharing and caring about humanity. It is a product based on corporate social responsibility, and hence more educated people will understand the goodness of ethical insurance, i.e., Takaful. If Takaful is offered in India, it will be the first group of participants and promote its products. The fifth opportunity is related to Shari’ah-approved companies in India, and 15 interviewees agree with it. One interviewee mentions: The Bombay Stock Exchange, in collaboration with the Taqwaa Advisory and Shariah Investment Solutions Tasis has launched an Islamic index which calls for many investors from India and overseas. The new index BSE Tasis Shariah 50 was formed using the guidelines of the Islamic investment code and upon the advice of a Shariah advisory board. The index allows investors to trade in the stock markets without violating the Islamic code on investment and finance. Thus, these preceding situations show that Takaful is possible to introduce shortly. (IO 1)

Another interviewee (IO 19) believes that the existing Shari’ah-compliant index is a good sign for the future Takaful. According to him: The National Stock Exchange of India already has an Islamic index that is linked to Standard and Poor’s Shariah-compliant index. Hence, Takaful is not the first Islamic finance product in India. There should not be an obstacle for introducing it. (IO 19)

In terms of awareness and knowledge, India already has Shari’ah-approved companies. The Indian government allows and permits Shari’ah-approved companies, and hopefully, they will enable Islamic insurance soon. Since Shari’ah-approved companies are available, there is no need for concern regarding where to look for Shari’ah-compliant investment.

6.11 Threats to Introduce Takaful in India There are five significant threats for Takaful if it is offered in India (Refer to Fig. 6.6). The first is related to the regulatory and legal framework (25 interviewees). According to IO 10, It is difficult to get approval from IRDAI to introduce Takaful products. Current regulation is too rigid to allow for Shari’ah-compliant insurance product. (IO 10)

Another interviewee (IO 24) supports his arguments and says: The idea was first mooted by Raghuram Rajan in 2008 when he was Chief Economic Advisor to the Ministry of Finance. But the Rajan report did not get approval from D Subbarao (the RBI Governor at that time). Subbarao conveyed to the government that Islamic Banking was not legally feasible in the current statutory and regulatory framework. It might be the same result if Takaful is introduced in the existing legal framework. The strong support from the IRDAI is essential to establish Islamic insurance in India. (IO 24)

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Fig. 6.6 Threats to offer Takaful in India

One of the interviewees says: Indian insurance laws do not explicitly prohibit Takaful, but there are provisions that make Islamic insurance impossible to be introduced. (IO 16)

This threat might be due to the existing legal framework, which is not flexible to start Takaful. A lot of amendments need to be carried out to introduce Takaful. For instance, it is necessary to have Shari’ah corporate governance with transparent accounting standards to offer Islamic insurance. It can be done once regulators amend the laws. Thus, establishing Takaful will incur unique issues like Shari’ah and legal issues and the insurance industry’s problems. A sound regulatory and supervisory system must maintain efficient, safe, fair, and stable insurance markets, promote growth and competition in the sector, and protect policyholders. Considerable effort will need to be taken by the government, regulators, Shari’ah scholars, and others to raise Takaful awareness to support the Takaful industry to live up to its potential. The second threat is related to political interest (7 interviewees). Regulation changes depend on the political party, and one of the current threats to Takaful seems not to favor politicians (7 interviewees). IO 1 mentions: Although the current government is not opposing Islamic finance, it is not encouraging as well. The government should know that Islamic finance can be successful, but there is no green light or initial step from it.

One of the interviewees says: Although Takaful is an ethical product, many people think it is a religious product. This wrong perception will hinder political support. (IO 17) Certain political parties might not favor the use of the word “Islamic” and could be assumed that it is anti-Indian. They might also argue that it is to go against the secular fabric of India. (IO 5)

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The success of any industry depends on governing rules and regulations. Countries like Malaysia and many Middle East countries have support from the government, so the industry’s success is way ahead. Politicians or political parties are critical and essential to amend the existing laws. Since the term “Takaful” or “Islamic insurance” can mislead the politicians’ understanding, people might think that Islamic insurance is one way to separate Indian economic activities into Shari’ah-compliant non-Shari’ah compliant activities. It will create an unhealthy economic atmosphere, and because of that reason, some politicians might not want to encourage introducing Takaful. This threat needs to be handled with care. The support from politicians is essential to ensure that the existing regulatory framework can be modified to suit the needs of Takaful. The third threat is because of the potential competition from the existing insurance industry (24 interviewees). One of them (IO 1) mentions: Takaful is similar to insurance, and if it is offered, it will be at the infant stage. It is not that easy for Takaful to compete with the well-known insurance products which have been in existence for a few decades. (IO 1)

In India, the insurance sector is run by giant industrial players who already offer various insurance products. The Life Insurance Corporation has existed for a long time in India, and it is a public company dominating the market. Other insurance companies face stiff competition with the LIC. Also, many insurance companies have excellent marketing strategies, innovative products, qualified staff, and agents. Insurance has been operating for more than 3000 years. However, Takaful and Islamic insurance have been running since the 1970s. It will be difficult for Takaful operators to penetrate the market due to the competition from the insurance industry. Takaful operators should be well-prepared to ensure that they can offer better benefits coverage with minimum cost. The fourth threat is related to having many Muslim groups that listen to their religious leaders. Most of them are aware that insurance is prohibited in Islam. In Takaful, few leaders still think that Takaful is not Shari’ah-compliant because it is similar to insurance. The misunderstanding by some Indian Muslims is that Islamic insurance is also prohibited. It will take time to eliminate such misconceptions. Some Indian Muslims believe that Islam does not allow insurance, and hence Takaful as a similar product to insurance should be avoided (3 interviewees). Also, some Muslims believe that insurance, especially life insurance is not Shari’ahcompliant. They think that Takaful will be the same, i.e., still non-Shari’ah compliant. This belief is not easy to change quickly unless their religious leaders convince them. The fifth threat is due to the limited support from other Islamic financial markets. Takaful has minimal support because Islamic banks and Islamic capital markets are not available in India. Islamic financial institutions are necessary to accommodate Takaful. The success of Takaful depends on the support of Islamic financial institutions. Moreover, to operate Takaful smoothly, it is required to have other Shari’ahcompliant investments available. Otherwise, it is difficult for the Takaful industry to perform successfully (11 interviewees).

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After explaining the operators’ threats, the following sub-section suggests how to overcome weaknesses and threats.

6.12 Overcoming Weaknesses to Offer Takaful in India Since several interviewees have raised issues related to weaknesses of offering Takaful (Refer to Fig. 6.7), the interviewees are further asked how to overcome these issues, and the interview results are summarised in the following paragraphs. When it comes to terminology, it is better to use the term familiar to everyone, such as ethical insurance or CSR insurance, etc. (IO 15, 16, 25). Indians may not accept the current terminology because it reflects a religion. Most of the interviewees suggest that ethical insurance is the suitable terminology for Takaful. One of them (IO 25) believes that mutual insurance or social insurance is the best term to represent Takaful in India. However, the word can be changed into any possible or attractive name without any difficulty. The second weakness is switching costs for potential participants if the policyholders switch from insurance to Takaful because they may lose some portion of their accumulated premium and pay for an early termination fee. Suppose the insurance companies offer Takaful. In that case, they should make the policy so that the policyholders do not experience negative financial impacts for switching from insurance to Takaful (IO 10, 17, 18, 19, and 20).

Fig. 6.7 Overcoming weakness to offer Takaful in India

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The third weakness is similar to the second issue but from the perspective of the insurance company. In this situation, there is no added value for the insurance companies which offer Takaful products under the Takaful window if the existing policyholders switch from the insurance to participate in Takaful provided by the same insurance operators. It is because Takaful windows are not getting new participants. However, it will still be beneficial for both operators and participants in the long run since they can share the profit and surplus, depending on the Takaful model adopted. The situation becomes worse if existing policyholders terminate their policy and go to another Takaful operator. In this case, insurance operators lose their business. Companies should try to find why they want to remove their policies by providing them with other possible benefits, qualified services, and proposing various products suitable for policyholders’ needs (IO 3, 9, 14, 15, and 19). The fourth weakness is the initial stage’s cost; as usual, completion is unavoidable in any business. Takaful should be started with windows at the beginning stage to cut down some of the fixed costs by sharing the infrastructure and management personnel to minimize cost (IO 3, 22, 23). The operators should get new customers and try to meet the needs of the untapped market.

6.13 Overcoming Threats Related to Offering Takaful in India Figure 6.8 discusses how to overcome threats related to offering Takaful in India. The most critical threat to offering Takaful is getting regulatory and political support.

Fig. 6.8 Overcoming threats related to offering Takaful in India

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It can be done by convincing the respective authority by explaining that Takaful is ethical and suitable for anyone regardless of religion. It will help and support the existing insurance industry and the national economy. Many countries are amending their existing country laws to cater to Takaful companies to avoid being left behind. Based on the current market situation, insurance penetration is low, and general insurance is not working well, especially in the public sector. Thus, it is the right time for IRDAI to think seriously about introducing Takaful. IRDAI plays a significant role in permitting to offer Takaful products, and there is a possibility of getting its approval if the insurance operators collectively request or apply for it. About the regulatory framework, the existing one should be amended or modified. It will not be a complicated process since the Insurance Act was amended frequently. There were amendments in 1999, 2014, and 2015 (IO 1, 10, 15, 16, 20, and 24). Politicians also play an essential role in introducing Takaful. The main factor is that we should create awareness among politicians and reveal the importance of Takaful and everyone’s benefits. The crucial features of Takaful are its suitability for all religions, higher penetration rate, foreign investment attraction, creation of harmony and solidarity in the social and ethical business practices. If these reasons are explained and understood by the politicians, the interviewees strongly believe that Takaful will receive the support it deserves (IO 1, 5, 6, 17, and 25). The third threat is competition from insurance companies or insurance products. It can be overcome by many strategies, for instance, offering attractive schemes like the possibility of getting a higher return from risk-sharing practiced by the Takaful operators compared to the risk transfer mechanism in insurance (IO 1, 4, 13, 15). The fourth threat for Takaful is various opinions on Takaful from Muslim groups. Indian Muslims rely on the views and suggestions of their trusted Islamic group leaders. Some Muslim group leaders think that since insurance is prohibited in Islam, Takaful should be banned. Their negative opinions are not healthy for Takaful operators. However, this threat of misunderstanding can be minimized by creating awareness and educating people. Nowadays, Indians are educated, and they are very keen on Takaful or ethical-based insurance. Indians, especially, Muslims are asking for Takaful and ethical insurance. People who are not aware of it can be educated slowly that Takaful is honest insurance and it is not against Shari’ah, and it is free from prohibited items. (IO 3, 21, and 27). The last threat for Takaful is limited support from other Islamic financial markets. Since Retakaful and Islamic banks are not currently available in India, Takaful operators should engage with the conventional ones and do the Shari’ah screening and necessary steps to purify it (IO 1, 2, 22, 28). Moreover, India has a lot of Shari’ahapproved companies where Takaful can invest. Kerala already has an investment bank: a Shari’ah-approved bank, and nearly many banks are trying to open an investment bank (IO 1).

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6.14 Conclusion This chapter examines insurance operators’ perception of the viability of Takaful if it is offered in India. The interview results from the insurance operators highlight eight strengths if Takaful is being provided in India. They are (a) familiar with the insurance products which are similar to Takaful, (b) unique nature of the Takaful products, (c) new product, (d) authority of insurance companies to issue the license for agents, (e) cost-effective, (f) variety of products, (g) experience of insurance operators and (h) availability of Shari’ah experts. Four weaknesses highlighted by them are (a) terminology “Takaful,” (b) switching cost for potential participants, (c) no added value if the existing policyholders switch to participate in Takaful, and (d) costly process. They point out five main categories of opportunities to introduce Takaful in India, and they are related to (a) population, (b) economic development, (c) international experience, (d) education, and (e) existence of Shari’ah approved companies in India. Finally, they mention five significant threats, and they are (a) regulatory and legal framework, (b) political interest, (c) competition, (d) various opinions on Takaful from Muslim groups, and (e) limited support from other Islamic financial markets. Also, the research suggests how to overcome weaknesses and threats that the Takaful operators might face. There are four insurance operators’ suggestions to overcome weaknesses: modification of terminology, ethical insurance, CSR insurance, mutual or social insurance, minimize switching cost for potential participants and maintain the existing customers to start with Takaful windows. Further, they were asked how to overcome threats. The most critical threat to offering Takaful is to get regulatory and political support. It can be done by convincing the respective authority by explaining that Takaful is ethical and suitable for anyone regardless of religion. It will help to boom the existing insurance industry at a faster rate. Finally, it will help the country’s economy. Another threat is competition from insurance companies or insurance products. It can be overcome by many strategies, for instance, offering attractive schemes and benefits, etc. The last threat for Takaful is various opinions on Takaful from Muslim groups. This threat of misunderstanding can be minimized by creating awareness and educating people. In summary, it can be concluded that Takaful is viable to be offered in India, provided that it gets support from the politicians and regulators. Since no research examines insurance operators’ opinions related to Takaful in India, this research’s findings significantly contribute to the existing literature and academicians. Moreover, the industrial players, including insurance operators and Shari’ah advisors and consumers, will be interested in this research’s findings. From the government’s point of view, this study’s findings can be used as a foundation to explore the opening up of Takaful in India.

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References Alamasi, A. (2010). Surveying developments in takaful industry: Prospects and challenges. International Association for Islamic Economics Review of Islamic Economics, 13(2), 195–210. Ali, K. M. M. (2006). Present scenario and future potentials of Takaful. Islamic Economics, Banking and Finance, 2(2), 1–14. Ernst and Young. (2012). World Takaful Report. Hasan, Z. (2014). In search of the perceptions of the Shari’ah scholars on Shari’ah governance system. International Journal of Islamic and Middle Eastern Finance and Management, 7(1), 22–36. Htay, S. N. N., & Salman, S. A. (2013). Viability of Islamic insurance (Takaful) in India: SWOT analysis approach. Review of European Studies, 5(4), 145. Salman, S. A., Ab Rashid, H. M., & Htay, S. N. N. (2017). Viability of Introducing Takaful (Islamic insurance) in India: Views of politicians. Banking & Finance Law Review, 32(2), 389.

Chapter 7

Conclusion, Suggestions, and Recommendations

7.1 Introduction The previous chapter discusses the results of interviews with insurance operators. This book examines insurance operators’ views on the practicalities of Takaful if it is offered in India. It looks at the pictures of insurance operators on the practical capabilities of Takaful. The second section provides a glance at the book. The third section discusses the contribution to the literature review, and the following section explains the future research. The last section provides essential recommendations.

7.2 Summary of the Book Four significant weaknesses highlighted by interviewees are (a) terminology “Takaful,” (b) switching cost for potential participants, (c) no added value if the existing policyholders switch to participate in Takaful, and (d) costly process. They point out five significant categories of opportunities to introduce Takaful in India. Also, the research suggests how to overcome weaknesses and threats that the Takaful operators might face. There are four suggestions from insurance operators to overcome weaknesses. They are modifying terminology, ethical insurance, CSR insurance, mutual or social insurance, minimizing switching costs for potential participants, and maintaining the existing customers to start with Takaful windows. Moreover, they were asked how to overcome threats. The most critical threat to offering Takaful is to get regulatory and political support. It can be done by convincing the respective authority by explaining that Takaful is ethical and suitable for anyone regardless of religion. It will help boost the existing insurance industry faster and finally allow the country’s economy. Another threat is competition from insurance companies or insurance products. It can be overcome by many strategies, for instance, offering attractive schemes and benefits, etc. The last threat for Takaful is various

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. A. Salman, Implementing Takaful in India, https://doi.org/10.1007/978-981-16-6281-2_7

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opinions on Takaful from Muslim groups. This threat of misunderstanding can be minimized by creating awareness and educating people. It can be concluded that Takaful can be offered in India, provided it has politicians’ and regulators’ support. As no research examines insurance operators’ opinions on Takaful in India, this study’s results have contributed significantly to the current literature and academics. Besides, industrial players, insurance operators, law consultants, and consumers will be interested in this research result. From the government’s point of view, this study’s findings can be used as a basis for the opening of Takaful in India.

7.3 Contribution of the Research This research focuses on the viability of introducing Takaful in India. This research’s findings significantly contribute to the existing literature, industrial players, investors, regulators, current and potential insurance policyholders. The research studies the viability of Takaful from the various methods by conducting a survey questionnaire and in-depth interviews with insurance operators. Currently, there is a minimal study related to Takaful in India. Since this study is comprehensive research in Takaful in India, the findings will be valuable to the current literature. The findings also provide possible strengths, weaknesses, opportunities, and threats if Takaful is introduced in India. Thus, it serves as a beacon to the industrial players and investors to expand their business and investment opportunities. Based on this study’s findings, it can be predicted that there are more favorable situations to introduce Takaful compared to the possible barriers. Thus, the regulators can plan for the future development of rules and regulations regarding Takaful to ensure that the existing regulatory framework can provide a conducive business environment for Takaful. Currently, there is no Takaful in India, and due to the government rules and regulations, Muslims have to buy general insurance, especially for the renewal of motor vehicles. For the existing and potential non-Muslim policyholders, the possibility of introducing Takaful is of great interest to them because it is an ethical and socially responsible product. In the general public’s case, they can hope to participate in Takaful as ethical insurance suitable for everyone in India. Also, insurance is not acceptable in all religions such as Hinduism, Islam, Christianity, Buddhism, and Sikhism because of interest, uncertainty, and gambling.

7.4 Suggestions for Future Research This research examines the viability of Takaful in India. This study does not cover the possibility of micro-Takaful in India. Micro-Takaful is also essential in India’s context

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because Takaful typically targets middle and high-class people. Once Takaful is stabilized in India, the operators should go further into the niche area of micro-Takaful. It focuses on the poor people who cannot afford to pay a significant contribution, and they can afford around 100 to 500Rs per month. They need micro-Takaful financial assistance since they cannot pay the medical expenses and invest in harvesting if their fields are flooded. Since India is an agricultural country, micro-Takaful is essential to help the poor people, at least based on corporate social responsibility. This research’s findings can be used as a steppingstone to examine the viability of micro-Takaful in India.

7.5 Recommendations Education is one of the ways to uplift society and disseminate the knowledge to decide what is right or wrong and what is suitable or not. If the public is lacking education, it is not ideal for the country. So, to make people understand insurance or Takaful, education should be the first step. Thus, the government must seriously consider the teaching of the young generation. The second essential step is lobbying the regulatory body because it might be because the Insurance Regulatory and Development Authority (IRDAI) is a supervisory body for insurance in India. Without the support and approval from this regulatory body, Takaful cannot be offered in India. Takaful has additional restrictions, such as the product’s approval from the Shari’ah board and investment choice. It has unique nature since the contracts in insurance and Takaful are not the same. The third essential step is related to Shari’ah governance. Seven interviewees believe good Shari’ah governance will be necessary since it can mold the operators to operate in line with Shari’ah. Shari’ah governance should be established in Takaful, and it should be the foremost step. The ultimate aim of having Takaful is to eliminate Shari’ah noncompliant practices and to minimize the unethical issues as much as possible. Once the procedure is in line with Shari’ah, automatically evil problems will not exist anymore. The role of Shari’ah governance in Takaful is essential because it is responsible for product approval and ensuring the whole process of Takaful practices is in line with Shari’ah. They can monitor the endorsement of advertisements’ contents in the pamphlet to ensure that the potential policyholders are not misled, and there is no misunderstanding towards the Takaful operators. It can mold the operators rather than a facilitator to the industry. They should be independent of the management, and if possible, they should be centralized at the government level and the Shari’ah boards at the operator level. Transparency of the information is essential, especially regarding how Takaful operators have complied with the Shari’ah requirements. There should be reports from the Shari’ah board regarding Shari’ah compliance. Also, Shari’ah board members need to ensure the information disclosed is transparent enough to

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ensure that uncertainty regarding the inflow and outflow of the Takaful funds does not exist and minimize possible unethical problems. The fourth essential point is that the operators need to prepare themselves before offering Takaful products. Their suggested area is related to marketing, infrastructure, and innovation. Marketing is essential to portray the product in the eyes of the public. Agents and front-office employees are the prominent people dealing with the customers directly. They should be well trained on how to market the products and ethically convince potential policyholders. Every single word coming from the front office people reflects on the image of the companies. Hence, it is the most important initiative that the Takaful operators should take. Strategies used in marketing the Takaful products are stressing the products that suit their needs, free from unjust and unfair activities, observing ethical code of conduct and reliable and transparent products. By doing that, the public will have confidence and trust in the operators. Thus, the top management should think carefully in choosing the strategy which comprises the elements mentioned above. In addition to marketing, there is a need to have adequate infrastructure, mostly when Takaful products are offered through Islamic windows. There should be a separate system to handle insurance and Takaful and also in the investment. Separating the management will be a preference not to mix up these two different types of products. Innovation plays a significant role in the operators’ success because Takaful offers similar prices and benefits coverage like insurance. Hence, it is tough to penetrate the market unless the operators emphasize research and innovation to attract attractive products. The fifth essential support is from other Islamic financial institutions. Takaful needs help from other Islamic financial institutions such as Islamic banking, the Islamic capital market, and the Islamic money market. Takaful needs Islamic banks to deposit the money and make business transactions with other parties like issuing a cheque. At the same time, it needs to have an avenue to invest in Islamic markets. Finally, India needs to learn experience from other countries that offered Takaful products. According to one of the experts, non-Muslim countries like Thailand do not have a centralized Shari’ah board. Hence, the individual operators need to take the initiative to have their own Shari’ah committee members to get the products’ approval and ensure that the operating activities are in line with Shari’ah. Takaful operators should take advantage of the high Muslim population as a first step to enter the market. Moreover, the Indian economic section is booming and enhance. It is the right time for the Takaful operators to introduce it since the better financial situation positively impacts the insurance sector. Amending the existing law is essential to start the operating activities for Takaful. It should be promoted as a suitable product, rather than Takaful as a religious product to persuade the participation from the nonMuslims faster. Since India has plenty of Waqf assets, it should be fully utilized for the beneficiaries, and in this sense, the Waqf model can be used. In this regard, Islamic Institutes and Islamic schools/Madrasas should include extensive finance and Islamic finance education in their syllabus. Imams of the masjid should impart knowledge and importance of Islamic finance through their sermons and initiate courses for

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the men and the women of society. Universities and colleges should include Islamic Finance into their curriculum, which will cater to the increase in Takaful human capital in India and enable the graduate to avail stable jobs in India and across the globe.