Why takaful has not been successful

Humayun Dar

Insurance is considered prohibited in Islam and some of the objections to conventional insurance are:
(a) The contract of insurance does not pass the criteria of validity as any valid contract in Islamic law must specify unambiguously the consideration, the object of sale and its delivery time and place. In the case of insurance, while price (premium) and schedule of payments are known with certainty, it is not known when the object of sale will be paid if at all. This is considered as an example of contractual uncertainty or what is more commonly known as gharar in Islamic law.
(b) Some scholars oppose conventional insurance because of its similarity with gambling. One feature of gambling is the fact that the gamblers pool their money so that one benefits from this pool at the expense of others, contingent upon the outcome of a stochastic process. The only difference is that the stochastic process to draw the “lucky” person is not a game but an event (like theft or loss of life).
(c) Some other scholars deem insurance as something equivalent to riba or interest. The contract of insurance can be seen as payment of unequal quantities of money by the insurer and insured, which is precisely riba. A simple riba-based transaction would involve payment of X pounds by a party A to another party B who repays party A either less or more than X pounds, whether on spot or deferred. In case of insurance, the amount of premium is normally significantly less than the value of the item insured.
Given these perceived issues, one must have thought that takaful – an Islamic alternative to conventional insurance – would have become an automatic choice for the Muslims who are looking for modern shari’a. The question arises as to why it is taking so long for the takaful industry to take off; why aren’t there enough investment vehicles for takaful companies to invest in? This is no longer an embryonic industry, yet it hasn’t grown as quickly as the Islamic bond industry.
Following are possible explanations;
1. Takaful has not been able to attract an influential founder or champion as Islamic banking fortunately had. Starting right from the beginning, with Dr Ahmed El Naggar to Sheikh Saleh Kamel, Chairman of Dalla Al Baraka Group and the recipient of the first Royal Award in Islamic Finance, Islamic banking has received a lot of support from many influential figures in banking, academia and lately from governments as well.
2. Insurance is a relatively small sector whereas Islamic banking & finance has flourished. Insurance is considered as a “luxury” good and hence is considered for purchase only by those who are in the upper-income and wealth brackets. As such families are already better off economically, they prefer not to opt for insurance and rather prefer to invest in property and family business as a form of insurance and life cycle risk management.
3. This leads us to another related point – the effective market size. In the developing Muslim countries, only public sector employees are forced to save in the form of their pension and social security contributions. Public sector employment is only a fraction of the total employment in these countries, which rather restricts the market size for insurance and related products.
4. A right takaful model has yet to emerge. Mudaraba, wakala and hybrid models are not entirely convincing. The over-blown trumpet for mutuality in support of takaful has not lured any significant number of users for takaful products. This has also kept a number of conventional players out of the market because mutuality is facing a downfall. This demand-supply double edge drag has not been helpful for the growth of the takaful industry.
5. In absence of the right kind of assets for investment by takaful companies, takaful operators have found it difficult to generate impressive returns on their investment or endowment funds. This has obviously not been helpful for generating more demand for endowment policies by the Muslim masses.
The observed growth in takaful has not been as expected by many industry players. In countries such as the UK, where one Islamic insurance initiative has recently failed, immediate future of takaful business is rather bleak. However, there is significant potential in other countries including Pakistan. With the increase in availability of Islamic financial services, the demand for takaful profucts is bound to increase.
Awareness of takaful as a viable shari’a-compliant insurance solution is also on a rise, which should help future growth. The growth prospects are bright in the countries where Muslims live in great number and proportion. But it will take a few years for the industry to have the popularity enjoyed by Islamic banks.

The writer is a freelance journalist and economic researcher. He can be reached at [email protected]

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