PETALING JAYA: Takaful has been gaining traction lately in the Middle East, Africa, Europe and in parts of Asia, largely because of its strong value system.
One of the main reasons for its rising popularity is the principle behind the concept of takaful, irrespective of faith or belief.
Takaful is shariah-compliant and is based on the principles of cooperation, responsibility, protection and mutual help. The term is derived from the Arabic word ‘kafala’, which means guarantee.
It is widely known as a protection plan where monetary contributions are channelled into a pool called the risk fund used as donations (tabarru), to help participants faced with a misfortune. Because takaful contributions are considered a form of unilateral donation, it tolerates the element of uncertainty (gharar), such as unpredictable incidents and misfortunes. As an extension, it eliminates gambling (maisir), as a contributor would not expect returns.
In contrast, conventional insurance treats this as a form of sale and purchase agreement. Under takaful, such a transaction must have the element of certainty of value exchange, something which insurance doesn’t guarantee.
In the context of how the funds are invested, takaful puts its money in shariah-compliant investment schemes, companies and financial instruments, determined by the Securities Commission Malaysia (SC) or shariah-compliant foreign indices for local and international markets.
Prominent insurance and takaful provider Etiqa said its takaful business generates income through ‘wakalah’, which is a form of contract that allows for a fee to be paid by contributors for services rendered.
The operators also earn income through ‘ju’alah’, a form of a promised reward when a result is achieved, where the surplus is shared and distributed between the operator and the participants.
Etiqa says that while both takaful and insurance have their own benefits, the former is driven by a set of principles and values that have appealed to like-minded people all over the world.
Credit rating agency Fitch Ratings says the takaful market in Malaysia was led by family takaful, increasing 46.7% in the first half of 2021 compared to 7.08% for the same period in 2020.
“The sharp growth in contributions was propelled by a boost in public awareness of takaful products, supportive government initiatives, easing of Covid-19 movement restrictions and a recovering economy,” Fitch said.
“Fitch expects the takaful sector to continue its sound growth in 2022 on improved penetration rates, business models and technology capabilities amid higher takaful awareness, digitalisation innovation and government initiatives.
“Malaysia is the third-largest takaful market globally, according to the Islamic Financial Services Board, with a vibrant Islamic finance ecosystem that includes Islamic banks, shariah-compliant corporates, Islamic fund managers, and halal industries that seek takaful products,” it added.
According to Deloitte Touche Tohmatsu Limited, the global takaful market reached a value of RM115.7 billion (US$27.6 billion) in 2021, and is expected to reach RM208.7 billion (US$49.8 billion) by 2027.
“Catalysed by factors such as an ethical investment policy, strong growth prospects and price competitiveness, takaful represents a strong business proposition and has a significant share of non-Muslim customers as well,” it said.