Takaful is a key pillar of Islamic economy

In my inaugural speech at the World Takaful Conference held in Dubai last year, I focused on the best ways to create a stronger role for takaful in an integrated Islamic economy.

This year, the subject of my conversation at the 11th edition of the conference was: Strengthening Takaful as a Key Pillar of the Islamic Ecosystem. The topic inevitably leads us to question — and justifiably perhaps — whether anything of significance has been achieved since last year’s discussion that prompts us to move to a new level of thinking. Have we really created a definitive role for takaful in order to speak of strengthening it?

Looking at the growth statistics for the takaful industry, it is clear that this sector has witnessed a cycle of continuous growth. Interestingly, the growth rate of Sharia-compliant insurance is greater than that of conventional insurance.

We should take into consideration an important fact — despite the 1,000 year legacy of takaful as a social culture nurtured by Islam, the industry as a regulated and organised sector first saw light only four decades ago. Whereas conventional insurance was created more than 400 years ago.

Last year, on the sidelines of the Global Islamic Economy Summit, the Dubai Centre for Islamic Banking and Finance at Hamdan Bin Mohammad Smart University in collaboration with the Dubai Islamic Economy Development Centre launched a comprehensive report entitled: Takaful: Global Challenges to Growth, Performance and Governance.

The report noted that the annual contribution of takaful to the GDP registered significant growth from $750 million in the year 2000 to $2.5 billion in 2005, to $23.9 billion in 2012 — indicating an annual growth rate exceeding 20 per cent.

Experts forecast an increased contribution of global takaful to reach $52.5 billion in 2020.

But to maximise our benefits from these opportunities, we need to capitalise on the strengths of the takaful industry. Let us take a look at what these are:

• The rise of the Islamic economy ecosystem and the increase in global demand for Islamic finance and its instruments, as well as its culture that ensures sustainable market growth and stability.

• The rising costs of conventional insurance and the increased rigidity of its products. The difficulties in the compensation procedures can run-up to several years.

• The increasing awareness about the importance of takaful as a security blanket for individuals and the vital need for a change in the economic culture — from risk transfer to risk sharing.

• The concept of risk sharing is one of the key pillars of the future economy where financial institutions, products, laws and transactions are the outcome of a common social vision. The mission of the Islamic economy is to offer society an opportunity to select the best solution to fulfil its needs while also serving its best interests. This is the core mandate of takaful and the topic of our discussions today.

• The absence of conventional insurance in several markets due to the belief that it doesn’t provide a fast profit cycle. These markets exist mainly in emerging economies and poorer countries — countries that enjoy a strong social structure and a culture of cooperation and collaboration. In other words, countries that offer a rich social fabric to facilitate the penetration and success of takaful.

The global financial crisis of 2008 generated a new global reality marked by the lack of trust in financial institutions — especially insurance and reinsurance companies. The enormous losses experienced in the aftermath of the crisis can serve as a catalyst for the takaful sector — enabling it to take the lead in helping people achieve their aspirations.

It is crucial to agree on a harmonious approach on the steps needed to revitalise the industry and enable the public to benefit from takaful products.

My suggestions are:

• Harmonise Takaful Standards Accelerate the harmonisation of standard processes in the financial sector in line with the harmonisation of Islamic financial contracts and transactions.

• Clarify Ethical Nature of Takaful — We need to clarify the confusion by demonstrating the importance of takaful as a key pillar of Islamic societies.

• Establish Global Takaful Reference — Accelerate the establishment of a global and trusted reference body that can organise the industry and deal with emerging conflicts and disputes.

• Create Innovative Takaful Products — By creating need-based takaful products that cater to diverse income categories and social segments.

• Fill the Re-takaful gap- Eventually, this will impact the legitimacy and integration of the takaful industry as a whole.

• Ensure Collaboration — Takaful companies should cooperate with academic and training institutions to make sure the human capital needed to drive the sector is on par.

• Enhance Inclusiveness of Takaful Sector — Finally, by enhancing the inclusiveness of the Islamic economy sectors takaful and re-takaful companies can benefit from an enabling local and global environment that triggers growth. The conversation about takaful is a multifaceted and multidimensional one. It is a conversation on the economy of the future, a sustainable economy that is in harmony with human needs and the imperatives of social development.

-- Abdulla Mohammed Al Awar is CEO of Dubai Islamic Economy Development Centre.