Seizing the opportunities and meeting future challenges

Islamic insurance, commonly known as Takaful, is a key sector that impacts the lives of people, their security, stability, and their plans for retirement. Therefore, developing and investing in Islamic insurance will enable Takaful to increase productivity and better meet the needs of the public in securing their goals for a stable financial future.

While on the subject of enhancing productivity, we must understand that the basic goal of any economic activity is to achieve social and economic stability for the community, and reduce stress points and sustained anxiety about the future. Today, the Takaful sector is still at a nascent stage — particularly in comparison to conventional insurance sectors. Despite the myriad challenges that abound with any emerging sector, the opportunities Takaful offers are immense and attractive. Takaful is intrinsically based on concepts of shared contributions and cooperation that ensure no one member can make profits at the expense of another. Besides, emerging sectors have the capability to evolve and develop faster than sectors that have long existed and therefore carry the burden of legacy challenges.

Strong sense of mistrust

Let’s examine the growing opportunities within Islamic insurance or Takaful. It is one of the sectors that not only meets the needs of Muslims but also caters to a large cross-section of non-Muslim clients looking for ethical and humane entities to safeguard their rights in the event of an emergency.

In the prevailing economic climate as I see it, there is a strong sense of mistrust between the public and insurance providers. You merely have to speak to any individual to confirm his or her lack of trust with the insurance provider. We are not here to blame anyone for the absence of trust — however, we must find a way to restore the credibility of the sector and strengthen the relationship to ensure it is built on a foundation of transparency and clarity.

With the exception of countries in the GCC region, specifically the UAE and Saudi Arabia, the Islamic insurance sector remains conspicuously absent in the wider Arab and Islamic world. This absence is either caused by the growth of conventional insurance companies or due to traditional frameworks and systems that do not recognise the legitimacy of Islamic insurance (Takaful).

Globally, until the end of 2016, the Islamic insurance sector was valued at around $33 billion (Dh121.21 billion). In the GCC region, the Takaful industry is estimated to be worth nearly $9 billion.

This validates the fact that a majority of Muslims — numbering 1.6 billion people, in fact — do not enjoy the services and facilities that Islamic insurance (Takaful) offers. The opportunities that exist in this sector are abundantly clear. It is now the responsibility of the pioneers of Islamic economy to take the initiative forward and maximise the potential of this sector.

The key challenges that dominate the Islamic insurance sector:

* Cooperation between relevant parties in the Takaful sector is vital if we are to reformulate the laws of transparency and pragmatism within the sector itself. It is equally important to keep the public informed about these laws and their rights. Insurance companies are the focus of several gatherings I have attended, and most of the discussions revolve around the lack of knowledge about the insurance companies’ laws or dissatisfaction about what clients know. Islamic insurance companies are founded on the capital of their client, which makes the client the core of the company’s focus and central to its regulations. Islamic insurance companies should aim to stand by their clients when their assets are adversely affected and not surprise them with something they are unaware of.

* There is an urgent need to establish a unified global reference for all Islamic insurance companies or to design a framework for Takaful companies that will help unify Takaful laws under one umbrella. Furthermore, a unified global reference will boost the establishment of new Islamic insurance companies in countries that currently do not deliver Takaful services and enhance the foray and penetration of the sector into uncharted regions.

* Takaful companies must agree to spend part of their profits in raising awareness on the concept of Takaful, its legitimacy and its importance to the public — focusing on the role of Takaful in achieving social stability and enhancing the sense of security. These awareness campaigns should include activities that encourage the use of corporate laws to ensure transparency between the clients and Takaful companies.

* It is important to introduce innovative Takaful products that allow different social groups across income levels to benefit. Today, it is necessary to work on the basis that every individual is a stakeholder. Equally importantly, as stakeholders we need to work on developing guidelines for the investments of Islamic Takaful companies that will ultimately protect their financial solvency, reduce the risk of liquidity and manage their need for capital.

* Takaful companies must focus on making investments in real economy sectors and provide their clients with a percentage of the dividends from these investments — offering them much-needed confidence, winning their loyalty and making them stakeholders in the nation’s progress.

* Collaborations between small Takaful companies can enhance their competitiveness and financial viability against the conventional insurance companies. Such alliances will lead to the emergence of global Takaful entities that drive the development of the industry as a whole.

* Guiding existing Takaful entities to work in developing their respective countries and conceptualising products that are aligned to the needs of the market within these countries is also crucial. Furthermore, we need to focus on reducing the hesitation with regard to investing in these countries. There is abundant scope for lucrative investments in potential markets that are capable of development, especially if companies can adapt their laws and services to suit the requirements of specific countries.

* Last, but certainly not the least, is the weakness of the re-takaful sector that is forcing Islamic Takaful entities to fall back on the same models followed by their conventional counterparts to make up for the shortcomings within their own industry. In the process, they further augment the ambiguity surrounding their offering, while jeopardising their independence and the relationship of trust between themselves and their clients.

The Takaful market is a reflection of the principles and ethics of the Islamic economy sector at large. The significant global interest in developing this sector is an indicator of the positive shift in international economic policies.

At DIEDC, we are committed to making the public aware of this transformation. We also seek to enlighten the global community on how the Takaful industry is all about achieving security, prosperity, and stability. The discouraging experience of the public with conventional insurance companies only motivates us to intensify our efforts in building the Islamic insurance sector, and gain the awareness and support of the Muslim and non-Muslim communities.

Abdulla Mohammad Al Awar is CEO of the Dubai Islamic Economy Development Centre.