Takaful Islamic Insurance (Full)

Islamic insurance (Takaful):  demand and supply in the UK This paper aims to examine empirically whether there is a real demand for takaful products among Muslims in the UK, and to assess the awareness about takaful insurance and its main principles among UK Muslim communities

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1. Introduction 
Takaful is the Shariah compliant alternative to conventional insurance (Al-Qaradaghi, 2011). While there is a rapid growth in the takaful industry worldwide, it is in its early stages in the UK. In the UK there are only two takaful providers, one of which is struggling to raise capital and remain in business. Despite the fact that there are about 1.6 million Muslims in the UK, which constitutes 2.8 per cent of the whole population (ONS, 2010), there is only a small demand for Islamic insurance ( takaful ). In this paper, the main objective is to examine empirically whether there is a real demand for takaful products among Muslims in the UK. Other relevant aspects and questions that are considered in this paper are stated below.

Q1. Is there a real demand for takaful in the UK market?

• Are people willing to switch from their current insurance providers to takaful providers if they will get the same service (cover) at competitive prices?
• Are there different levels of demand for takaful products in different cities in the UK?
• Is there a market among overseas Muslim students for takaful products? If so which products?

The latter point is interesting to look at since there is a significant increase in the number of overseas students in the UK. According to UKCISA (2010), India, Malaysia and Pakistan are among the top ten countries that send students to the UK. In 2007/2008, the numbers of students from these countries was 25,905, 11,730 and 9,305, respectively, hence in total 46,940 students. There is also a substantial number of Muslims from other Arabic and Islamic countries who study in the UK. Therefore, it may be interesting to investigate if there is special demand for insurance products in this segment of the Muslim population, such as student insurance, car insurance, home contents insurance or mobile phone insurance.

Q2. Is there awareness among Muslims in the UK about the Islamic insurance ( takaful )?
This includes whether they are aware of the main concept of takaful and its important principles, and whether they consider takaful to be Shariah compliant. There are two takaful providers in the UK, to what extent UK Muslims are aware of their existence is of interest.

Q3. Do UK Muslims agree with the use of Arabic terms for the Islamic insurance ( takaful )?
Using Arabic terms for the Islamic insurance takaful may help to distinguish takaful products from the corresponding conventional insurance products. Furthermore, this may help to emphasize that these products are Shariah compliant. However, avoiding Arabic and Islamic terms may help to attract non-Muslim customers and thus increase the takaful share in the market.

This paper aims to answer these questions using empirical data collected via an online questionnaire. Some secondary data may be used for discussion and comparisons. This paper is organized as follows: Section 2 introduces takaful insurance and provides an overview of previous research on this topic. The demand for Islamic financial services and the status of takaful industry in the UK are highlighted. It also looks at some vital aspects of retailing takaful products such as promoting and increasing customers’ awareness. Finally, some opportunities and challenges for takaful industry are discussed. Section 3 explains the methodology that has been used in this paper. The analysis and the findings of the main questions of this paper are presented in Section 4. Section 5 summarizes the results of this paper with some recommendations.

2. Takaful 
2.1 Introduction and overview 
Takaful is derived from the Arabic word “Kafala” which means “guaranteeing each other” or “joint guarantee”. It is not a new concept; it has been practiced in various forms for over 1,400 years, back to the practice of “Aqilah” by ancient Arabs in which there was a mutual agreement among the tribes that, if anyone is killed unintentionally by a person of a different tribe, the killer’s relatives take the responsibility to make a mutual contribution towards paying the blood money to the victim’s relatives. This was later extended to cover many other situations, for example in sea trade to cover anyone in the group who had an accident during sea voyages (Khorshid, 2004; Sadiq, 2006).

There are several indications from theQur’anand theSunnahthat encourage and support the concept of takaful . For example, in the Qur’an(Surah al-Maidah): “Help ye one another in righteousness and piety, but help ye not one another in sin and rancour” (Qur’an, 5:2).

Takaful Islamic Insurance

And in theTraditions of the Prophet(the Sunnah), people are encouraged to help each other particularly in hard times:

The believers, in their affection, mercy and sympathy to each other, are like the body; if one of its organs suffers and complains, the entire body responds with insomnia and fever (Muslim). All these evidences support the importance of mutually guaranteeing of each other and therefore support the main principle of insurance in Islam or takaful . The AAOIFI’s accounting, auditing and governance standards for Islamic financial institutions provide:

Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions (Rabiah Adawiah Engku Ali and Odierno, 2008).

How does takaful work. Essentially, in takaful insurance, participants agree to guarantee each other by making a contribution (as a donation) to a mutual fund or pool. This pool creates the takaful fund. The amount of contribution depends on the type of cover, nature of the risk and the period of the cover. The takaful fund is managed on behalf of the participants by a takaful operator who charges an agreed fee which could be a fixed fee or a percentage of the profit or even both. The takaful fund is used to pay any claims by participants and any surplus, after reducing any expenditure and reserves, belongs to the participants and may be distributed among participants in the form of cash dividends or discounts towards future contributions (IIBI, 2010; Rabiah Adawiah Engku Ali and Odierno, 2008).

Takaful compared to conventional insurance. There are several differences between takaful and conventional insurance. The main difference is that in takaful , the participants make a donation to the takaful fund to provide protection for each other against risks, whereas in conventional insurance the premium is paid to the insurance company which bears all of the risk.

Takaful Islamic Insurance

In addition, any surplus in the takaful fund is distributed among participants and shareholders on the basis of Mudaraba, WakalaorWaqfmodels (Khorshid, 2004; Rabiah Adawiah Engku Ali and Odierno, 2008; Sadiq, 2006), whereas all profits in conventional insurance belong to the shareholders of the insurance company only. As such, takaful is based on mutual cooperation whereas conventional insurance is based more on profits and commercial aspects. The third major difference is that takaful companies adopt Shariah principles in all aspects of their operations, avoiding prohibited concepts, such asriba[1] (interest), maysir[2] (gambling) and gharar[3] (uncertainty). takaful companies are subject to the governing laws as well as to the Shariah Supervisory Board. On the other hand, conventional insurance companies are only subject to the governing laws.

If there is any shortfall in the takaful fund, this would be covered by an interest-free loan (Qard Hasan) by the participants, whereas in conventional insurance the company covers the risks. With regard to the investment, the takaful fund should invest in investment channels that are Shariah compliant (Kassim, 2007; Haron and Taylor, 2009).


2.2 UK Demand for Islamic Financial Services
Following the closure of the Al-Baraka bank in the early 1990s and the failure of the Halal Mutual Investment Company in the mid-1990s to attract sufficient customers, it has been doubted whether there is a real demand for Islamic financial services among Muslims in the UK. Dar (2005) based a study on 503 Muslims living in ten cities in the UK that have large Muslim communities. He found that two thirds of the UK Muslims were indifferent to Islamic financial services (e.g. mortgages, current and savings accounts).

Furthermore, only 5 per cent of UK Muslims were seriously interested in Islamic finance services, while 23 per cent claimed they would be interested in Islamic mortgages if they were comparable in price with conventional mortgages. According to the survey, the typical consumer of Islamic finance services is likely to be a highly educated person with a high income and a higher professional job living in the North or Central England. Despite London being considered the international finance centre, the study showed that a Londoner who is highly educated, who works in a highly professional job and earns a high income is likely to be, at best, indifferent to Islamic finance services. On the other hand, a person living in Manchester with similar credentials is three times more likely to use Islamic finance services than being indifferent to them.

In addition, the study showed that the majority of Muslims in the survey (about 83 per cent) did not believe that these Islamic services and mortgages are really Islamic (Halal). This reveals the lack of awareness of Islamic finance among Muslims which naturally has a significant impact on the demand for Islamic finance services. Therefore, according to Dar (2005), there is no significant demand for Islamic finance services in the UK despite Muslims showing great interest for such services. As a result, Islamic financial providers need to create a demand for their products and services because it may not already exist.

2.3 UK takaful industry (demand and supply)
The takaful industry has a rapid growth rate worldwide. In July 2006, in the Middle Eastern region, there were 23 functional takaful companies and 18 companies in their formation process. In the Asia Pacific region there were 34 takaful companies; 23 of them in Indonesia alone. In Africa 12 out of 17 takaful companies were located in Sudan (Bhatty, 2007b).

A study by Abdul Rahman (2009) shows that there is a potential demand for and growth of takaful worldwide. She also considers in particular the main factors that affect the future potential growth of the takaful market in the USA. She highlighted that affluent communities, high education, positive population growth rate and social structure all play a role in this potential growth.

Despite there being many Islamic insurance providers across the world, there are only two takaful insurance providers in the UK; Muslim Insurance Services (MIS, 2010) and Salaam Halal Insurance (SHI, 2010). MIS provides several Islamic insurance products ranging from personal insurance products to commercial insurance products. As personal products they provide home insurance and travel insurance with different options to suit Muslim needs, e.g. single trip insurance, annual multi trip insurance, family travel insurance, pre-existing medical insurance, business travel insurance and Hajj/Umrah travel insurance. In addition, they also provide a package of products for commercial needs, such as business insurance, professional indemnity insurance, landlord insurance, mosque insurance and charity insurance. The last two are very unique which aim to insure and protect the religious and charity buildings in the UK, including asset and liability cover. All of these are Shariah compliant.

Principle Insurance Holdings Limited (PIH, 2010) was the first independent takaful insurance provider in the UK. They had been providing car insurance trading as “Salaam Halal” since July 2008 aimed at the 1.6 million Muslims living in the UK. However, their business failed to raise capital to continue as they stated on their web site: “We are sorry, Salaam Halal insurance is not accepting any new requests for insurance quotations or issuing new contracts.” (SHI, 2010).

There are several studies, for example, those carried out by Abdul Hamid and Othman (2009) (introduced below) and Dar (2005). Some of these considered questions which are of great interest to the topic of this paper; these are re-examined in Section 4, based on Muslims in the UK.

2.4 Retailing takaful products
This subsection considers different factors which may have an important impact on retailing takaful products.

Bancassurance and banca takaful .
Islamic bancassurance, known as Banca takaful , means promotion, marketing and distribution of takaful products through Islamic banking channels. This is particularly important in order to attract Muslim and non-Muslim customers.

There are several advantages and disadvantages of banca takaful for both banks and takaful operators. For example,banca takaful will help the banks to increase their range of products and thus increase their earning. It also helps them to establish a strong relationship with customers and better understanding of their needs. It also enables banks to combine and improve the products and consequently attract more customers. However, some drawbacks may occur due to the lack of a bank’s expertise in insurance and sometimes its complicated nature. Additionally, the relationship with customers may suffer due to negative claiming experiences. For the takaful operators, on the other hand,banca takaful widens the distribution of their products and consequently may lead to reduced costs and increases the competition with other providers. However, by shifting to bank distribution channels, the takaful operator may face the fact of the possibility of damaging the relationship with the traditional distribution channels which need to be considered carefully by the takaful manager (Rabiah Adawiah Engku Ali and Odierno, 2008).

Promoting takaful and customer awareness. Promoting takaful products includes branding, marketing and advertising. Since insurance was an untouched topic for many years, many Muslims believe that insurance isHaram(prohibited). Therefore, strategies are needed to educate customers about the main principles of takaful , and create demand for such products (Bhatty, 2007a; Abdi, 2007).

Abdul Hamid and Othman (2009) studied the level of knowledge and awareness among Muslims towards takaful insurance and its terms and concepts in Malaysia. Based on 232 Muslim banking customers in Kuala Lumpur, they showed that there is a lack of awareness among Muslims about the main principles and elements of takaful , such as tabarru, ghararandmaysir. They also showed that about 75 per cent of respondents agreed with the use of Arabic terms in takaful in order to differentiate takaful products from conventional insurance. Conversely, Al Rasheedi (Anon, 2005) emphasised the importance of promoting a takaful concept worldwide without it being linked to religious beliefs, as he said:

We take into account the vital role and responsibility undertaken to promote the takaful concept throughout the world, especially in the developed world, to give a model example of Islamic economy and to introduce a new insurance branch based upon fairness, equality and cooperation. It is a concept that meets the community’s requirements without being linked to religious belief. It is indeed a civilized behaviour that is both commendable and worthy of gaining more ground to underline our Islamic identity (Anon, 2005).


2.5 Takaful Opportunities and Challenges 
There are several challenges facing takaful insurance, for example, one of the biggest obstacles for takaful providers is the limited amount of Shariah compliant reinsurance capacity. In this case takaful providers have to deal with conventional reinsurance companies untilre takaful [4] companies become available. takaful insurers need also to improve and develop their technical skills to meet an increasing demand for more complex insurance products (e.g. catastrophic risks) and investment portfolios. They also need to enhance their quality of coverage with reasonable prices to be able to compete with other conventional insurance companies (Kwon, 2007). On the other hand, there are still many opportunities for developing takaful products, increasing its covering not only among Muslims but among non-Muslims as well, to create potential demand for its products and to highlight its important principles.

The main unique selling point of takaful is its Shariah compliment mutuality. takaful operators need to enhance this unique selling point; otherwise they will start losing their Muslim customers. takaful operators also need to seek support from Islamic banks and other Islamic finance institutions for funding in the case of deficits in the claims rather than looking for funding via Qard Hasanloans (Asaria, 2009).

In addition to the general and family insurance products that takaful can offer as alternatives to conventional insurance, takaful can offer more to the society as well. For example, T’azur, a takaful firm in Bahrain, has launched what it claims to be the world’s first Shariah compliant charitable insurance product, called the “Sadaqah” plan (T’azur, 2010). This plan suggests that the participants donate regular contributions which will be invested by the takaful operator over a number of years in Shariah compliant investments, and then later this sum will be passed on to a charity that has been chosen by the participant. If at any time the participant is unable to make this payment due to illness or other unforeseen events, the takaful provider will continue to make the payment on behalf of the participant. This type of plan is synchronized with the main aim of takaful , namely mutual help for the common good. Its benefit beyond the individual participant is benefit to the community as a whole (Anon, 2009).

Despite the fact that recently a lot of research has been done on takaful insurance, see for example Abdul Rahim (2009, 2010), more research is needed to develop this important area of Islamic finance. For example, a recent study by Kaderet al.(2010) won a top prize in 2009 from the Geneva Association and the International Insurance Society, Inc. This study examines the cost efficiency of (non-life) takaful insurance firms operating in ten Islamic countries. They examined whether the cost efficiency of takaful insurance companies will be positively affected by three main factors; the proportion of non-executive directors on the board, a separation of the CEO and Chairman positions and the size of the board of directors. They found that neither non-executive directors nor the separation of the CEO and Chairman positions positively affect the cost efficiency, however, the board size and firm size have been found to have positive effects on the cost efficiency of takaful insurers. Finally, the study showed that there is no statistical evidence that regulatory environment has effect on cost efficiency




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To cite this document:
Tahani Coolen-Maturi, (2013) "Islamic insurance (takaful): demand and supply in the UK", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 6 Issue: 2, pp.87-104, doi: 10.1108/17538391311329806.