Takaful

First, I would just like to say hello to everyone who has found this blog through that article in ABODE magazine. *waves*

Today I was at a roundtable discussion at the MultaQa insurance conference regarding takaful, or what many people might know as Islamic insurance.

Why Islamic insurance? It goes something like this: Islam has prohibitions about gambling, rooted in a concept that Muslims should avoid transactions that are maysir, an Arabic term where the only outcome in a transaction are that one party wins and the other loses -- there is no chance that both could win or both could lose. Gambling is definitely maysir. In fact I have noted before in my blog how raffles here never have a separate entry fee so that they would not be maysir (you didn't pay extra for the ticket so you didn't lose anything if you do not win). Grocery stores typically have promotions where for every 50 riyal worth of groceries you purchase you automatically get raffle ticket. Even if you don't win you still received 50 riyal worth of groceries for your 50 riyal so you haven't really lost, thus not maysir.

So, is conventional insurance maysir? It would be difficult to argue that it is not. When you buy an insurance policy you pay an amount of money to the insurance company for the policy. From this point there are pretty much only two outcomes: if you make a claim on the policy the insurance company has to pay so you "win" and the insurance company loses; if you do not make a claim then the insurance company keeps your money and you do not get anything in return. This creates an issue for devout Muslims who are reluctant to purchase conventional insurance because of its maysir nature.

To get around this prohibition on maysir some entrepreneurial people developed sharia compliant insurance, otherwise known as takaful. In a takaful when you purchase a policy your money is pooled with other policyholders in a policyholder fund. The shareholders of the company charges a policyholder fund a fee in exchange for managing the company. If at the end of the year there is a profit then some of the surplus will be given back to you, either by a direct refund or by a reduction in the amount you have to pay when you renew the policy. This avoids maysir because now it is possible for both the policyholder and the company to "win" by sharing any profits.

There are other requirements to being sharia compliant, the company can't invest in prohibited things like alcohol, investments that bear fixed interest etc. but it would take me forever to go into all the details. Takaful companies usually have a sharia board of Islamic scholars who review any investments and products to ensure that the company is being run according to sharia principles.

The roundtable discussion spent a lot of time on a key issue -- that there is no consistently accepted meaning of takaful across the Islamic world. Due to local beliefs and regulations an insurance company in Sudan, Saudi Arabia, Iran, or Malaysia might all consider themselves takaful but be very different when compared to one another. In Saudi Arabia they are known as "co-operatives", and others might call themselves Islamic companies but others might argue that they are not takaful for whatever reason. A universally accepted definition of takaful apparently does not exist. Some international bodies, such as the IFSB, are trying to standardize definitions, but perhaps it will take time before they are accepted across the entire Islamic world. I'm not sure how successful it will be, imagine in the West trying to get a diverse range of Christian groups, such as Catholics, Protestants, Orthodox, evangelical Pentecostals, Jehovah's Witnesses, Mennonites and Mormons, to come to an agreement on anything! I don't think we in the West would even bother trying.

One thing that there was no argument over, takaful insurance is gaining in popularity in the Middle East. Over the last eight years it has outpaced the growth in conventional insurance and some are hopeful that in time it will become larger than conventional insurance in Islamic countries. I think there is still a long way to go, while it is gaining ground in the Middle East in many countries such as Pakistan and Indonesia takaful has a very tiny market presence. I think Malaysia and Sudan have seen the biggest success. Time will tell if takaful becomes bigger than conventional insurance but the major market players are already paying attention. Well known insurance entities such as Chartis (i.e AIG) and Allianz have takaful operations and other conventional insurers in the region have either set up sharia compliant entities or are considering it. I believe there are also takaful companies now in Europe and the United States, drawing on a customer base from Islamic communities in those areas.

For the record, my insurance is still with a conventional insurer. Not because I have an issue with takaful, when I purchased my car it automatically came with one year's insurance from a conventional insurer, and I have simply renewed it with the same company.