Abstract
Takaful, an alternative to conventional insurance, is based on Shari'ah principles. It is founded on the concept of ta'āwun, which means “mutual assistance”. The practice of Takaful is to provide participants financial security based on mutual responsibility and assistance. The primary objective of Takaful is not to maximize profits as in conventional insurance but rather to help participants—in a spirit of solidarity—to face well-defined risks. Despite its steady growth, the Takaful industry faces many challenges. The core issue remains, the structure and application of the Takaful business model. This chapter critically analyzes the main business models and proposes a Takaful business model that matches the expectations of both the shareholders and the participants in line with Shari'ah rules and principles. The model is structured on Musharakah principles at both the shareholder and participant levels and has been termed “The Musharakataan Business Model.”
TopIntroduction
Takaful or Islamic insurance is an integral part of the Islamic financial system and is spreading out in many parts of the world, though at a small pace. The Takaful industry is quite in its early stage of development, and in 2017 contributed to USD $26.1 billion worldwide (IFSB, 2018) and is expected to exceed USD $40 billion by 2023 (Imarcgroup, 2019).
Despite its steady growth, the Takaful industry today faces many challenges. The core issue remains the optimal structure of the Takaful model. Takaful operators had to meet the continuous pressures coming from both the supply and demand sides while meeting the expectations of the shareholders and participants. On the one hand, shareholders are expecting more profitability similar or better than conventional insurers; and on the other hand, participants are looking for more application of mutual insurances that clearly underline the true spirit of Takaful.
The aim of this chapter is to propose a Takaful business model that matches the expectations of both the shareholders and the participants in line with Shari’ah rules and principles. The model totally disregards the use of a Takaful Operator (TO) and applies the concept of Musharakah and Musharakah Ta’awuniyyah at the shareholder and participant levels, respectively. Thus, it has been termed “The Musharakataan Business Model.”
TopBackground
Takaful in Arabic means to guarantee (Abdullah, 2012). The premise of the Takaful model is based on the concept of ta’āwun, which means mutual assistance. The practice of Takaful is to provide participants financial security based on mutual responsibility and assistance. The primary objective of Takaful is not to maximize profits as in conventional insurance but rather to help participants—in a spirit of solidarity—to face well-defined risks. In today’s social and economic environment, Takaful is a necessity since it conforms to the higher objectives of the Shari’ah in terms of the protection of life and wealth. It can be regarded as a risk management technique—one founded on the spirit of cooperation—that is in conformity with the Shari’ah. It is an alternative to conventional insurance, and it eliminates the elements of Riba (interest), Maisir (gambling), and Gharar (excessive ambiguity).
Key Terms in this Chapter
Musharakataan: Two partnerships.
Shari’ah: The corpus of the Islamic law that governs not only religious rituals but all aspects of day-to-day life in Islam.
ReTakaful: Islamic Reinsurance.
Musharakah: A commercial/commutative partnership to undertake any joint business to earn a profit. Alternatively, it is a non-commutative partnership to help and support each other in a group.
Tabarru: It is a gift or donation or charitable contribution.
Wakalah: Agency.
Musharakah Ta’awuniyyah: A partnership based on mutual help and cooperation between people who mutually agrees to indemnify each other in order to safeguard the properties of all.
Mudarabah: A kind of partnership where one partner provides the capital, called the rabb-ul-maal , and the other partner, called the Mudarib , provides the expertise and management.
Takaful: Islamic Insurance or Shari’ah -compliant insurance.
Qard: Interest-free loan.