An Analysis of the Business Challenges Posed Exclusively to Takaful Operators

Abstract

Since the operational models of conventional insurance are composed of some non-shariah compliant elements, viz. are riba, (interest) maysir (gambling) and gharar (excessive uncertainty) Muslims are prohibited to subscribe its schemes. But bearing the fact in mind that, mere prohibition does not serve the purpose and is unlikely to satisfy the practical need of the ummah, scholars successfully brought the shariah compliant alternative of the same, namely takaful. Takaful, means "guaranteeing each other", is the same as insurance. It represents the concept of insurance based on mutual co-operation and solidarity of people by participating in a takaful scheme.

A takaful operator is considered as a custodian of participants’ fund and 'thus, has a fiduciary duty to ensure that funds under its management are invested in a prudent and sound manner to avoid undue risk or loss. As far as investment options, for Takaful companies, are concerned, they are generally left with more cash due to unavailability of enough shariah compliant asset classes ‘in terms of number, to invest in. They lack access to adequate long-term Islamic debt instruments, and are, therefore, at a loss when it comes to matching maturities of assets and liabilities. Hence, practically, shariah compliant funds are likely to generate lower returns with exposure to higher risk than their non-shariah compliant counterparts. In fact, the task of earning a steady required rate of return for a takaful company is something that demands for availability of good number of Islamic securities and evolution of better secondary market of the same.