1. 12 - 13 November, 2015 ALMATY- KAZAKHSTAN Dr. Osman Babiker Takaful – SHARI’AH ASPECTS

2. Main Topics Shari’ah Aspects of Insurance Islamic Alternative: Takaful Models Takaful Industry-Hurdles - – Focus Areas Islamic Micro Takaful Sector - Exposition

3.  Risk and uncertainty are fundamental facts of life. All human activities are subject to risk, which may lead to financial or physical losses to him.  Every individual try to protect himself against future potential losses.  Insurance is a modern time method to cover the losses arise due to occurrence of some undesired event. Risk and Insurance

4. Insurance is an economic method whereby the individual/entity substitutes a small certain cost (premium) for a large uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance. Definition of Insurance

5.  Risk Coverage  Habit of Prudence/carefulness  Safe and Profitable Investment  Secure working environment for businesses  Planning for life stage needs  Capital formation in the Economy Socio-Economic Benefits of Insurance

6. Opinion of Shariah scholars is divided on insurance. Mainly classified into three major opinions:  Those who consider both the concept and practice of commercial insurance un-Islamic.  Those who are in agreement with the present insurance and find nothing wrong in it.  Those who accept the concept of insurance, but find prohibited elements in its present practice. Shariah Position of Insurance

7. According to Shariah scholars and Fiqhi Academies conventional Insurance is unlawful because of involvement of prohibited elements like,  Riba (Interest)  Qimar (Gambling)  Gharar (Uncertainty, Doubt, Risk)  Unlawful appropriation of others’ property  Violation of law of inheritance in case of life insurance. Opinions Rejecting Insurance

8.  The proponents of insurance tried to establish analogy between insurance and many institutions, considered permissible in Islam like;  Mudarabah, A’qila, Aqd-e-Muwalat, al-Wa’ad al-Mulzim, Services of security guard, Pension scheme etc. Opinions in favor of Insurance

9. Islamic insurance started some 30 years ago in Sudan and Middle East in 1979 with the establishment of:  The Islamic Arab Insurance Co. (IAIC) in the UAE and  The Islamic Insurance Co. of Sudan  It took some time to take shape and mature. Takaful in Practice

10. This emerging experience is driven by  A strong demand from a public who would not insure otherwise (because of religious beliefs); and  The successful development of Islamic banking institutions providing capital and Islamic financial instruments for asset management and investment. Takaful Prime Movers

11.  Policyholders cooperate among themselves for their common good  Every policyholder pays his subscription to help those who need assistance  Losses are divided and liabilities spread according to the community pooling system  Uncertainty is eliminated concerning subscription and compensation  It does not derive advantage at the cost of others Takaful PRINCIPLES

12.  Takaful is perceived as cooperative or mutual insurance: members contribute a certain sum of money to a common pool.  The purpose is not profits, but to uphold the principle of "bear ye one another's burden".  Commercial insurance is strictly disallowed for as agreed upon by most contemporary scholars because it contains the following elements: Al-Gharar (uncertainty) Al-Maisir (gambling) Riba (usury) Takaful PURPOSE

13.  Mudaraba Model: is essentially a basis for sharing profit and loss between Takaful operator and policyholders. Takaful operator manages the operation in return for share of the surplus on underwriting and share of profit from investment. The model commonly used in SEA, especially Malaysia.  Wakala Model: is a contract of agency: replaces surplus sharing with a performance fee. Takaful operator here acts as an agent (Wakeel) for participants and manages the Takaful fund in return for a defined fee. (widely used in the Middle East) Takaful BUSINESS MODELS: two basic models

14. Under Mudharabah model:  Profit (returns on investment plus underwriting surplus) is then shared according to a mutually agreed ratio between participants and operators.  Management expenses of the operator including agency remuneration, if any, shall be borne by the shareholders' fund and not from the Takaful funds. Hence, there is a distinct separation between Takaful funds and shareholders' fund. PROFIT UNDER MUDARABAH

15. Under Wakalah Model,  The surplus of policyholders' funds investments (net of the management fee or expenses) goes to the policyholders.  The shareholders charge Wakalah fee from contributions that covers most of the expenses of business.  Fee rate is fixed annually in advance in consultation with Shari'ah board. To give incentive for good governance, management fee is linked to the level of performance SURPLUS UNDER WAKALAH

16. Insurance Takaful Contract Utilized Exchange ContractDonation Contract Ownership of Premium Insurance CompanyParticipant or Waqf Company Responsibility Pay Claims fromPay Claims with underwriting fundsunderwriting fund and Qarz- and Shareholders Equity e-Hasan in case of Shortfall Participants responsibility Pay PremiumPay Contribution Capital Utilized Share CapitalParticipants’ Funds Investment Considerations No restrictions except Shariah Compliant prudential Business Concerns Can provide insurance Can provide Takaful cover cover to any business to only Permissible Business Differences between Takaful & Insurance

17.  As an industry, Takaful witnesses rapid development that benefited from the ongoing economic development in its core regions.  Having grown from a niche product servicing limited demand, the Takaful industry has reached a critical mass in the last decade and is now firmly established within the global risk management markets.  The potential for sustained growth in this market is significant, held up by the still low insurance penetration and growing recognition and acceptance of the concept of insurance and its benefits. Takaful INDUSTRY: SOME CHALLENGES

18.  Takaful sector is likely to continue growing in the next years. The long- term viability of Takaful industry remains supported by high expected levels of growth and an increase in profitability, particularly in the GCC region and Malaysia. Nonetheless, some challenges face this growing industry:  SUSTAINABILITY: while these positive factors should support growth of the sector, the high competitive and, in some cases, developing, nature of the local market-place, as well as the impact of global investment markets on returns, continue to place an ongoing strain on sustainable development. SOME CHALLENGES

19.  Severe competition: Also, competitive pressures from within the sector, and from conventional insurers, means that success in this market requires careful map-reading.  High cost: Takaful operations tend to have a still-developing business model and high start-up costs. Thus, in contrast to window operations of conventional insurers, the window operations benefit from the ability to leverage existing infrastructure and costs. CHALLENGES

20.  Efficiency and Customer Excellence: Takaful operators still have to improve operational efficiency, Shari’ah compliance and thus acceptance by targeted customers and competitiveness through potential increased capacity operators can offer.  Limited Capital Adequacy: Capital management remains an issue for Takaful operators. Especially, lack of consistent and risk-based regulatory supervision of Takaful sector, means Takaful and conventional insurance sectors lack the growing sophistication of risk management and capital demand found in developed economies. This lack will put pressure for control of risks. CHALLENGES

21.  Limited Shari’ah-compatible Investment Opportunities: Halal investments remain an issue of focus for Takaful operators, partly because they are more limited in terms of assets that they are able to invest in. As a result, Takaful companies have a bias for equity investments.  Limited Professional Expertise: Although unlikely to have an impact in the immediate future, the limited supply of appropriate, qualified and experienced staff could constrain the long-term development of Takaful industry. This is particularly crucial given expectations that demand for staff will remain high due to growth prospects of Takaful industry. CHALLENGES

22.  Takaful Product Development and the Right Offerings: Growth in current and new lines of business creates necessity for product development. Product development together with benefits of economies of scale and greater stability will enable Takaful operators generate more surpluses for policy-holders.  Distribution Channel and Pricing Management: It's evident that product development is a key growth driver for Takaful, but even with the best products around, it's crucial to have effective and efficient distribution channels that will ensure that these products reach the right customers. CHALLENGES

23.  Sharii’ah Compliance: To address business and investment constraint, Takaful operators need to grasp a more sizeable share of Shari’ah compliant investible universe. Streamlining and harmonization of Shari’ah fatawa (religious rulings) and enforcement is also an issue that Takaful sector has to resolve.  Benchmarking Takaful Businesses: To benchmark with peer conventional competitors, Takaful operators must adopt and intensify development of international best practices. Applying established best practices would prop up comparability of Takaful as Shari’ah compliant mainstream protection product that co-exists alongside conventional insurance. CHALLENGES

24.  Low Return on Takaful equity: The Takaful challenge remains the maintenance of profitable growth in the severe economic conditions and to some extent, the sector has been successful and Takaful companies continue growing though they still struggle to generate shareholders’ return.  Awareness Issues: There continues to be some confusion and lack of knowledge about the Takaful operating models and product features as well as the differentiation between Takaful and conventional insurance. The lack of awareness in certain markets is adversely affecting the growth of Takaful, family Takaful in particular, as many Muslims remain hesitant about the concept of life protection. CHALLENGES

25.  Product development: to have attractive portfolio of product and services that meet current market standards and is highly diversified. This implies having Takaful value-added products/services.  Branding and marketing: Takaful operators should have acquired strong reputation and create goodwill and trust of customers. This is certainly an outcome of better-quality services and competencies that grasp customer loyalty KEY FOCUS AREAS

26.  Powerful underwriting capabilities: Takaful operators have to get hold of strong underwriting capacities and skills in asset allocation. Technical ability is necessary to underwrite all types of businesses (mega projects/micro projects, etc.). Here Takaful industry needs comprehensive and yet efficient data base and analytical techniques.  Wider outreaching: as legitimate operators, Takaful companies should follow efficient networking channels adapted to customers’ preferences. Key elements in this regard are operational merit, cost- effectiveness and multi channeling and partnership KEY FOCUS AREAS

27.  Insurance for low-income populations, or micro insurance, is now firmly accepted as an integral tool for poverty alleviation and building resilience in communities against natural and manmade disasters.  With the support of national governments, donors and insurers, micro insurance has grow rapidly from covering 78 million risks in 2007 to an estimated 500 million risks in 2012. Micro-insurance: Global Outlook:

28.  Micro insurance is now widely practiced in the form of mutual insurance which is substantially Takaful insurance.  The Takaful insurance model has for centuries demonstrated the success of a client-centered approach to serve the underserved populations in both established and emerging markets.  Mutual and cooperative insurers uniquely have the ability to align the incentives of insurer and insured, as clients simultaneously are the owners of their insurance activity as well as the policyholders. Mutual Insurance: client-centered approach:

29. Needs-centered approach to risk Enhancement Profit-centered approach to risk Enhancement Insured person as a member of a group undertakingInsured person as a consumer Relationship between insurer and members based on engagement and participation Relationship with insurer based on customer service interaction Mutual insurance solutions primarily developed from within communities/societies Micro insurance increasingly delivered by external players Mutual insurance is part of a wider process of empowerment and education Micro insurance is part of the development of an effective market Economy Key features of mutual insurance in comparison to commercial insurance

30.  The majority of mutual insurers have been hindered in achieving their potential scale compared to their commercial counterparts. This is partly due to:  a focus on a commercial led approach by the donor and micro-insurance community;  a changing regulatory environment which does not take into consideration the mutual model;  limited capacity and will to support the long-term development of grassroots organizations and,  a lack of awareness of what actually works for poor people. Mutual Insurance: Critical Challenges:

31.  Inclusive mutual insurance, which is essentially Takaful practice, is broader and includes all types of marginalized groups which may not fall under the conventional micro-insurance definition.  In Islamic Finance, we can develop and adopt the concept of Inclusive Mutual Insurance (Micro-Takaful) which is defined as pro- active efforts at providing insurance services to low income or marginalized groups in a manner where they participate in the design, development, management and governance of such product, services or institutions. The Way Forward for Mutual Insurance: Developing Inclusive Mutual Insurance:

32.  In Islamic finance, strategy toward mutual insurance (Takaful), could be in the form of:  providing technical assistance to mutual insurers in some emerging economies.  Setting up new mutual insurers  supporting the growth of existing mutual insurers through capital and resource provisions.  Strengthening of cooperation among larger mutual insurers and encourage support mutual insurers operating in difficult Markets.  help the established mutual insurers to take a more proactive role in developing inclusive mutual insurance. New Strategy-Micro-Takaful

33.  Must be impact-based: focusing on mutual/Takaful insurance in countries there are large numbers of underserved populations and high incidence of poverty;  Give special attention to existing mutual insurers who have a strong on-the-ground presence and are leading in providing inclusive mutual insurance.  Build the capacity of mutual insurers to be able and willing to contribute in developing and carrying out micro-Takaful program in countries where they operate. Features of the New Micro-Takaful Strategy:

34.  The Strategy should certainly be preceded by studies to: A.assess mutual insurance markets, B.and develop accordingly work plan then C.lay out the relevant intervention plan to develop the Takaful markets in different economies.  However, this prerequisite for the Strategy needs a strong local research capacity and institutions for collaboration on assessing the Micro-Takaful markets. Pre-requisites for the New Micro-Takaful Strategy:

35.  The pre-Strategy Study shall be spotlighting (i) the mutual insurance landscape and, (ii) the case studies.  The landscape will aim to provide a comprehensive picture of mutual insurance in emerging markets by analyzing the demand for and supply of inclusive mutual insurance as well as the impact of regulation on the sector.  The case studies will feature prominent mutual micro-insurers in the targeted countries and highlight their products, business model, impact on risk management and their key concerns. Theme of the Pre-Strategy Study:

36.  A set of common parameters will be developed to 1.select these case studies across countries in order to 2.make them comparable.  Based on these analyses, the country diagnostic will 1)identify the challenges faced by the mutual insurance sector in that particular market and 2)make recommendations for future development of the inclusive mutual insurance sector. Common Parameters

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