In a world full of uncertainties, insurance products are no longer a matter of luxury. They have become essential for both private and corporate clients seeking to minimize and manage risks. But to many Muslims around the world, conventional insurance policies are considered haram, or forbidden. Most policies contradict with Islamic principles, as they contain elements of uncertainty, or gharar, gambling ( maisir ) and usury ( riba).
Meanwhile takaful, or Islam’s response to insurance, has grown steadily as a halal, or religiously permitted, alternative to traditional insurance policies.
“There is no problem with the concept of insurance itself; however the problem lies in the way it is practised,” said Abdel-Latif Sallam, managing director of Wethaq Egypt, a takaful insurance operator.
In essence, insurance is based on cooperation between people who are exposed to the same risk, a concept which complies with Islamic Sharia law. Originally, the term takaful stems from the Arabic word kafalah, which means mutual or joint guarantee.
As with traditional insurance policies, takaful works by collecting small premiums from a large number of people to create a mutual fund or pool, in order to pay for losses which might affect some of the pool members. The key difference between takaful and commercial insurance rests in how the pool is managed. Sallam explained that takaful operators put premiums in one fund, which is used to pay out any claims made by participants. Takaful funds are managed and administered on behalf of its participants by an operator, after charging administrative expenses.
In the takaful system policyholders, or participants, are joint investors with the insurance company, which in turn acts merely as a pool manager. Policyholders share in the investment pool’s profits as well as its losses. In case of surplus, the benefits are distributed between the shareholders and participants, with a certain percentage defined by the takaful company. “Each company is free to set the percentage,” Sallam told Al-Ahram Weekly. “However the general practice is 60 per cent for shareholders and 40 per cent for participants.” In case of deficit, an interest-free loan is taken from the company’s capital. It is repaid when surplus is achieved. Also, takaful operators need to maintain two funds: a participants’ or policyholders’ fund, and a shareholders’ fund.
Another difference between takaful and conventional insurance companies is that takaful companies work under the supervision of a Sharia board. This comprises Islamic scholars whose role is to judge whether the company’s business complies with Islamic Sharia. Sallam cited an example, whereby his company refused to cover a cigarettes factory because an Islamic fatwa, or decree, prohibits smoking. In investment, takafulcompanies are only allowed to work with companies that comply with Sharia law. Each takaful company elects its own Sharia board.
As corporate insurance providers, takaful operators work to insure companies against all kinds of risks.
Egypt’s first experience of takaful came in 2003, when the Saudi-Egyptian Insurance House, the first takafulcompany, started operating. It was later joined by seven other takaful companies, established in mid-2008.
” Takaful insurance amounts to five per cent of Egypt’s LE10 billion-worth insurance market,” Egyptian Insurance Federation Chairman Abdel-Raouf Kotb told the Weekly. Though this is a small percentage for now, Kotb expected growth for takaful insurance in the Egyptian market over the coming years. “Egyptians have a strong religious sentiment, which works in favour of a larger takaful market,” he said.
Sallam also believes in the potential of the Egyptian takaful insurance market. He said the surge witnessed by existing takaful companies helped spread the concept. Though the companies operating in Egypt were all quite new, they have enjoyed significant success. Sallam said that in the first five years, takaful premiums did not exceed LE100 million, while today’s premiums exceed LE600 million.
This potential for growth is apparent in international takaful operators’ confidence in the Egyptian market. Manfred Dirrheimer, chairman of FWU Group, a global provider of takaful products, expected Islamic insurance in Egypt to capture 30 to 40 per cent of the market within five years. “I am 100 per cent sure that the market is going to grow, and my company is looking very carefully at the Egyptian market right now,” Dirrheimer told the Weekly. “I would not be surprised if we decide to enter the Egyptian market this year.”
Dirrheimer added that Egypt has all the components to make takaful a success. It has both a sizeable market and the expertise, including that of University of Alexandria specialists, to make it fertile ground for this kind of policy.
But in order for the takaful market to expand in Egypt, Kotb recommends that legislation be passed in order to manage takaful insurance companies in the country. He said there are currently no laws to manage takafulin Egypt today. Rather, existing companies offering this type of insurance abide by regular insurance law. Kotb went on to say that the Egyptian Financial Supervisory Authority (EFSA) has set standards for takafulcompanies to comply with.
Sallam, on the other hand, believes there is no need for such legislation. Egypt, he said, is the only country in the region which has legislation that manages insurance companies’ operations. “We don’t need takafullegislation, because that might lead to discrimination,” he said.
To Sallam, key factors for the growth of the takaful market are stability and economic growth. He added that the insurance industry is currently vulnerable. “When there is a strong economic performance, you find a flourishing insurance industry, and vice versa,” said Sallam.
While takaful products have been primarily developed for the Muslim world, they have advantages that are just as appealing to non- Muslims. Dirrheimer believes takaful responds to “down-to-earth principles that are applicable on Muslims and non-Muslims.” He added that in Malaysia, more than 60 per cent of non-Muslims buy halal products.
Sallam agreed with Dirrheimer on that point. He added that takaful insurance has the capacity to attract non-Muslims. For one, his company has non-Muslim customers, producers and employees.
Not only is takaful expected to grow in the Egyptian market, but in the world at large. According to Ernst & Young, the global advisory services firm, the global takaful market could reach $25 billion at the end of 2015. The firm stated that the takaful industry is concentrated mainly in the Middle East and North Africa region and in Malaysia. “Saudi Arabia, Malaysia and the UAE are the top three takaful markets while Egypt, Sudan, Bangladesh and Pakistan are growing at a rapid pace,” according to the firm.
The world’s first takaful company was born in Sudan in 1979. It was followed by the United Arab Emirates in 1980 and Luxembourg in 1982. Afterwards, takaful companies started operating in Saudi Arabia, Malaysia, Bahrain, Indonesia, Qatar, Singapore, Jordan, Sri Lanka, Kuwait, Egypt and Britain.