Takaful is an insurance contract that is compliant with Shariah, the body of Islamic law. The name derives from the Arabic verb “kafalah” that means mutual guarantee. Islamic insurance is based on the principle of mutuality where policyholders own the company and share in its profits. There are three main types of takaful: mudharaba, wakala and a hybrid of the two.
Islamic law forbids “riba,” a concept that means interest, usury and the exploitation of the poor. It also prohibits “gharar,” meaning risk, uncertainty, hazard and deceit. “Maysir,” which is the acquisition of wealth by chance, or gambling, is also proscribed. Conventional insurance works on the concept of risk transfer where an insurance company accepts a risk from a policyholder in exchange for a premium. The company invests the premiums on capital markets to make further profits. In Islamic jurisprudence, this is viewed as gambling on uncertainty and in the process, exploiting a policyholder by making money from money.
In an arrangement that bears some similarity to mutual, or cooperative, insurance, takaful policyholders pay premiums into a policyholders' fund. Administrative expenses and reinsurance are paid from this fund. Any surplus at the end of the financial years is the underwriting profit. This may be allocated in part to a policyholders' reserve fund, and in part distributed among policyholders as a dividend. Underwriting losses in the policyholders’ fund are covered by an interest-free loan from a shareholders’ fund.
The shareholders’ fund consists of paid-up shareholders’ capital and reserves together with investment income. All investments must be Shariah-compliant, meaning that these should be on a profit-and-loss sharing basis rather than speculative investment in capital markets. The shareholders are liable for the losses of the policyholders' fund, but this liability is limited to the amount of equity they hold in the company.
Mudharaba is one of the oldest concepts in Islamic finance and is based on profit-sharing. This type of takaful is practiced widely in the Asia-Pacific region. The company’s management is paid from the profits the company makes and shares in the surplus and losses. The ratio of profit-sharing is pre-agreed on the basis of the company’s performance.
The wakala version of takaful is an arrangement where an agent manages the company and receives a fee for his services. The fee is pre-agreed at the beginning of a financial year and may be a fixed amount or an agreed share of investment profits or shareholder or policyholders' funds. The agent does not share in any of the company’s liabilities. This type of takaful was developed in Sudan.
The mudharaba and wakala models can be combined to produce a hybrid type of takaful. The managing agent of the company receives a fixed fee from policyholders’ funds as in the wakala model and also a share of the profits on the basis of the mudharaba model, but from the company’s investments only. The policyholders have a right to share in both the underwriting profits and in investment profits.
One of the thorny perennial issues that governments and societies all over the world deal with is taxes. A key problem in developing countries is the fact that the tax revenue in size and base is small to a point of impeding a balanced and sustainable economic development. The availability of a tax system that is able to avail domestic financing is a key determinant for economic success and sustainability. Intellectually, it would be very difficult to advance the idea to tackle the issue seriously in Saudi Arabia given the level of the government’s financial status. The financial profile is dominated by distributional demands and total immersion in consumption at the expense of long-term economic and financial planning. Intuitively, everybody would be up in arms against it, yet it is of strategic dimension and is probably timely. For most, the talk of taxes is probably a non-starter and the reason is really two-fold. For one, the prevailing mindset is that a distributional nature where the sense of entitlement of the people is much stronger than the economic needs and imperatives to work, and the second is the tendency of governments to bank on the path of least resistance without due consideration to future planning. The economic system has become addicted to top down government expenditure system that distorts as much as it contributes to the building of the society. It fundamentally allows most people and many companies to skirt the productivity imperatives that are indispensable for real economic growth. Taxes will go a long way in reordering the economic system structure where taxes or the zakat system are part of tools to affect policy and management in the economic realm. In most developing countries, tax constitutes about 15-19 percent of GDP while in the advanced countries it is about 35 percent. I do not know the exact figures for the Kingdom but it is certainly less than 10 percent, according to initial data by Department of Zakat and Income. Hence, the road is long toward serious attempts to change the system conceptually and practically. The taxation does not mean the elimination of distribution or subsidies as these are practiced in all countries at different degrees. But it means change in the way we think about economic management. Taxes are proven instruments to calibrate, incentivize, accelerate, and decelerate certain behaviors. It plays a key role in bringing about a balance between investment and consumption, which is at the heart of economic management. Productivity will not be part of the Saudi system without taxation or Zakat. Unfortunately, for various reasons, Zakat has not been applied uniformly or consistently. Intrinsically, the choice between Zakat and taxes is not really that different. It is also conceivable that it can be better than taxes (since it is closer to a flat tax that has been popular recently around the world). In accounting terms, 2.5 percent Zakat on sales (assets) can work out to be around 20-30 percent of income approximating those of taxes. The details should be refined by the accounting definitions and rules. A key shortcoming has been the loose role of Zakat on real estate, particularly land and rent income, even salaries should be included at certain level. There is a need for universities, especially Um Al-Qura University in Makkah, Imam University in Riyadh and research institutions to undertake serious studies to modernize Aakat and understand it better in terms of policy. There is a need for conceptual framework with taxation or Aakat at the center of the “new” economic order to affect better economic management and transform productivity in the society at large. The key vexed issue of the national economic system is ability to upgrade productivity. Taxes or zakat will likely engender rationality when it comes to subsidies and consumption. I reckon that it would be very difficult to bring about meaningful improvement in productivity and real economic growth without tax or zakat system. It is time for the Shoura Council and others to break the mold by bringing tax or Zakat to the center of economic policy making to prepare the economy for a new dawn.
KUALA LUMPUR: The Securities Commission (SC) said Malaysian unit trust managers have nearly RM353.7 billion under their management as of Jan 31.
This amount represents a 24.86% in net asset value of the market capitalisation of Bursa Malaysia Bhd.
The amount under management by fund managers was RM53.5 billion and as at Jan 31, there were 40 approved fund managers.
The number of approved funds were 192, which included funds that were approved but not yet launched, with 142 of these funds conventional while the others were Islamic-based.
The amount managed by fund managers in December 2012 was RM52.5 billion and the latest figures released by the SC represents an increase of 1.9% on a monthly basis.
The total wholesale funds as at Jan 31 net asset value was 3.76% of the market capitalisation of Bursa Malaysia.
The 41 approved unit trust management companies (UTMC) managed a total of RM300.19 billion as at Jan 31, 2013. There were 607 approved funds where 433 were conventional and 174 were Islamic-based.
The amount managed by conventional unit trusts was RM265.42 billion while another RM34.77 billion was managed by Islamic unit trusts.
The total amount managed by UTMC represented 21.1% of the market capitalisation of Bursa Malaysia. The amount managed by UTMC in December 2012 was RM294.8 billion and the January 2013 figures show an increase of 2.04%.
“The wholesale funds and the amounts managed by UTMC especially the Islamic funds are relatively small and have further upside growth. The authorities should do more to educate the investors about these funds.
The high domestic savings rate of around 34% shows that the investing public may have been choosing alternative investments to invest their monies,” said a local fund manager.
KUALA LUMPUR, Malaysia — When Fabiola Nava Carrera told her friends that she was going to pursue a master of business administration degree in Islamic finance at a Malaysian university, they were taken aback.
“I was very interested in going there to see what was going on, because I knew nothing about Asian and Islamic culture,” said Ms. Carrera, a 27-year-old Mexican who had previously worked in international trade. “But my friends in Mexico couldn’t believe that I wanted to go to Malaysia, because they thought that it would be too dangerous or that the culture would be too different.”
Ms. Carrera went anyway. Last year, she was one of four students, three of whom were non-Muslim, who graduated from the inaugural class of the Universiti Tun Abdul Razak’s Global Islamic Finance M.B.A. program in Kuala Lumpur.
Islamic finance differs from conventional banking systems in that usury and speculation are prohibited. Transactions have to comply with Shariah, the legal code of Islam based on the Koran, and are based on principles of risk and profit sharing.
Islamic finance is booming. According to figures from Hong Leong Islamic Bank, a financial institution in Kuala Lumpur, Islamic finance activity has been growing 14 percent per year, with Islamic finance assets exceeding $1.1 trillion in cumulative value in 2011.
Such growth has pushed more educational institutions into creating degree programs in Islamic finance. In 2005, the International Islamic University Malaysia created an Islamic banking institute that offers students Master of Science and doctoral degrees in the subject. In recent years, at least half a dozen business schools in Britain, including the University of East London and Bangor University in Wales, have set up M.B.A. programs in Islamic finance.
Ms. Carrera’s alma mater, also known as Unirazak, is a rare business school located in an Islamic banking hub — according to the school, about a quarter of financial activity in Malaysia is compliant with Islamic law and customs — and yet foreigner-friendly.
“Malaysia is the third largest Islamic market after Saudi Arabia and Iran,” said Geoffrey Alan Williams, Unirazak’s deputy vice chancellor, whose jacket lapel sported a pin of the E.U. flag intertwined with the Malaysian flag. “So if you want to be in Islamic banking, you have to come here, unless you want to be in Tehran.”
Unirazak’s participation in the International Business School Alliance, a network of seven schools, also helps. The alliance, which Unirazak joined in 2011, allows students in member institutions to spend time in two schools and graduate with two M.B.A.’s. After one year in school, two thirds of which were spent in Bremen University of Applied Sciences in Germany and a third at Unirazak, Ms. Carrera graduated with an M.B.A. in logistics and supply chain management from the European school and an M.B.A. in Islamic finance from the Malaysian institution.
The other universities in the alliance are the University of Valencia in Spain, the University of Hertfordshire in Britain, Novancia Business School in Paris, the Institute of Business Studies in Moscow and the University of North Carolina Wilmington.
Each alliance member specializes in a particular area of finance and only students enrolled in their university’s specialty program can attend classes at sister schools. While Unirazak also offers more conventional M.B.A. programs, students there do not have access to I.B.S.A. resources.
“Our partners were initially quite skeptical because they thought” an Islamic finance program would be risky, said Barjoyai Bardai, the program’s director. “But global Islamic finance is trendy and will make an impact. A year on, I think we all feel we made the right choice.”
Unirazak has had to engage a wide range of faculty members to teach the course, with a specialized lecturer for each module. Apart from trained accountants like Dr. Barjoyai, the school has brought in a Shariah scholar from Egypt.
Most students, even practicing Muslims, are unfamiliar with the basic concepts of Islamic finance.
So classes are especially vigorous, since the school needs to impart very specialized knowledge in a limited time.
For a typical module in Islamic products and services, for example, students will have 14 four-hour lectures. The classes are aimed at both familiarizing them with the history of Islamic banking products, and encouraging them to think about developing more contemporary services. Apart from lectures, students are also expected to work on their own project papers.
“It would have been easier to get an M.B.A. in something else,” said Azrina Muhammad Aznan, a 28-year-old Malaysian enrolled in the program. “Other students have time to go to parties, but I have to sit down and do work.”
“If you are trained in Islamic banking, you should also be able to do conventional banking,” said Raja Teh Maimunah, the chief executive officer at Hong Leong Islamic Bank, who recently gave a talk to Islamic finance students at Unirazak.
The global Islamic finance master’s degree at Unirazak costs students more than 61,460 Malaysian ringgit, or nearly $20,000. At 29,020 ringgit, the master’s degree in leadership that Unirazak also offers costs less than half as much.
Dr. Williams, the university administrator, said the reason for the discrepancy was the standardization of prices for all programs under the I.B.S.A. aegis.
Because Islamic finance master’s degree programs were developed quite recently, it is difficult to assess how successful their graduates are.
“It must be relatively new, because I don’t see many of them,” said Ms. Maimunah, the banker. “I can see the benefits of regular conventional bankers going through certification programs that help them understand Islamic jurisprudence. I don’t know whether someone with an Islamic M.B.A. can give me something different.”
She cited programs like those offered by the International Center for Education in Islamic Finance, or Inceif, an organization established by the Malaysian central bank, as ones that were particularly valued in the industry.
Noting that Unirazak collaborates regularly with Inceif, Dr. Williams insisted that such programs were complementary with his school’s degrees.
“The whole industry is exploding in size, so we’re not fighting with other people,” he said, adding that Unirazak was preparing to roll out graduate degrees in Islamic branding and halal management in 2014. “There is so much demand, we just need to find out the right type of courses.
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