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Takaful presentation by muhammad ashfaq


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Takaful presentation by muhammad ashfaq

  1. 1. Presentation Topic: Introduction to Takaful Insurance – the Islamic Way Presenation By: Mehar Muhammad Ashfaq Date: June 2 , 2010 Room 5-5 University of Applied Sciences Coburg-Germany Introduction to Takaful 1
  2. 2. My Introduction  MBA Financial Management- Germany  Ds- Concept Factoring GmbH- Germany  MBA Banking & Finance Position Holder-Pakistan  Lecturer Punjab Group of Colleges- Pakistan  Research Analyst Pakistan & Gulf Economist. Introduction to Takaful 2
  3. 3. Outline of Presentation Part No 1 • Concept of Risk • Introduction to Takaful • Takaful Insurance Potential • Islamic Finance and Takaful in Germany • Basic Elements of Takaful • Takaful Worldwide Part No 2 • Objections to Conventional Insurance • Difference b/w Conventional Insurance & Takaful • Misconceptions about Takaful • Takaful Products Part No 3 • Takaful Models • Takaful Accounting • ReTakaful • Uses of Takaful • Takaful Challenges • Growth and Future Outlook Conclusion Introduction to Takaful 3
  4. 4. Part No 1 " Good Character is the Best Insurance..." Introduction to Takaful 4
  5. 5. What Do You Perceive From Picture Introduction to Takaful 5
  6. 6. Risk and Insurance  Risk and uncertainty are fundamental facts of life.  All human activities are subject to risk, which may lead to financial or physical losses to him. “Insurance is a contract or an act of assuring by which persons or precious items, articles or valuable properties are guaranteed against a possible loss or damage by a contingent event in routine life. " Introduction to Takaful 6
  7. 7. Classification of Insurance Business By Type of Products i) Life insurance ii) General insurance iii) Liability insurance Introduction to Takaful 7
  8. 8. Methods of Handling the Risk Insurance Perspective 1. Risk Transfer 2. Risk Sharing Introduction to Takaful 8
  9. 9. Meaning of Takaful • Takaful comes from the Arabic root-word…. ‘kafala’ Guarantee • So it means mutual protection and joint guarantee. Introduction to Takaful 9
  10. 10. Takaful Insurance Mission “To create solidarity, peace of mind and security by sharing risks for mutual protection of assets and property against damage or loss within the framework of Shariah” Introduction to Takaful 10
  11. 11. Origins of Takaful Prophet Muhammad (PBUH) 14 centuries ago practiced successful schemes of co-operative risk sharing. Modern Takaful: 1. Sudan: 1970s Emergence of Takaful as Waqala Model. First Ever Takaful Companies: The Islamic Insurance Co. of Sudan The Islamic Arab Insurance Co. (IAIC) in the UAE 2. Malaysia: 1980s Emergence of Takaful as Mudarabah Model. Introduction to Takaful 11
  12. 12. How Islamic Principles Works ISLAM AQIDAH SHARIAH AKHLAQ Faith & Belief Practices & Activities Moralities & Ethics IBADAH MUAMALAT Man-to-God Worship Man-to-Man Activities Political Economic Social Activities Activities Activities Risk Management Takaful Introduction to Takaful 12
  13. 13. Sources of Islamic Law Primary Source Secondary Source • Quran : the very word of God reveled to the • Ijtihad : Independent Prophet Muhammad judgment by: (P.B.U.H.) through the – Ijma : juristic angel Gabriel. consensus opinion; • Sunnah: the sayings – Qiyas : reasoning by deeds and approval of analogy; the Prophet Muhammad (P.B.U.H.) Introduction to Takaful 13
  14. 14. Growth Potential in EU % of GDP Total Muslim Origins of Total Population Population Muslims Insurance Potential UK 58.8 m 1.6 m Somalia 16.5 % 2.8% Pakistan Bangledesh France 62.3 m 5m Algeria 11% 8% Maraco Tunisia Germany 82.5 m 3-4m Turkey 6.7% 3.6 % Bosnia Kosvo Source: PriceWaterHauseCoopers Introduction to Takaful 14
  15. 15. Takaful Opportunities in Non-Muslim Countries with significant Muslim Minorities Source: PriceWaterHauseCoopers Introduction to Takaful 15
  16. 16. Potential Takaful Distribution ion Malaysi 15% a Pakista Singapor 14% n e Indonesi Thailand a 1% Sri Lanka 34% 0% Bahrain 1% Jorda n Kuwait 3% Oma n Qata r Saudi Arabia Bangladesh United 17% 6% Yemen Syria Arab 3% 0% Source: Google Emirate Introduction to Takaful 16
  17. 17. Low Takaful / Insurance Penetration in Muslim Countries Source: PriceWaterHauseCoopers Introduction to Takaful 17
  18. 18. Islamic Finance Enters in Germany First Islamic Finance Conference by Bafin in Frankfurt 2009 Issance of License by Bafin Opening of Kuveyt Turk Participation Bank in Germany in 2011 Source: Islamic Finance Expert Introduction to Takaful 18
  19. 19. What German Companies Doing Largest insurer in Europe and the second largest in the world. Allianz Takaful (Bahrain) subsidiary of Allianz Group Business of Allianz Takaful: Family takaful with a focus on life insurance and investment- linked insurance as well as health and medical insurance. Introduction to Takaful 19
  20. 20. What German Companies Doing Establishment of Hannover Retakaful Company in Bahrain. "The entry of a major reinsurance player, such as Hannover Re, into the retakaful arena points to the tremendous growth potential of the takaful and retakaful industry.“ (Ahmed Al Bassam, Director, Licensing & Policy, Central Bank Bahrain) Views of Mahomed Akoob, CEO, Hannover Re Takaful, Bahrain Gulf Business Report Introduction to Takaful 20
  21. 21. Takaful – Regulatory Framework • Takaful Act – 1984 of Malaysia. • Saudi Arabian Monetary Agency (SAMA) Regulations of Saudi Arabia - 2004 . • Bahrain Monetary Authority (BMA) Rules – 2005. • Takaful Rules – 2005 of Pakistan. Introduction to Takaful 21
  22. 22. Basic Elements of Takaful • Risk Sharing: Risk is shared between participants and not bought or sold between them and the Operator • Nature of Contract: 3 party contract involving Takaful Operator, Company, and the Participant No direct relationship of Participant with Takaful Operator. • Investment Management: All investments are done based on Shari’ah guidelines • Shari’ah Compliant: Takaful is accepted by Shari’ah Scholars as a Halal risk mitigation tool • Constitution of separate “Participants’ Takaful Fund”. • Constitution of “Shariah Advisory Board.” Introduction to Takaful 22
  23. 23. Main drivers of Takaful • Individual purification • Mutual assistance • Contribution • Mutual Guarantee • Community well-being as opposed to profit maximization. Introduction to Takaful 23
  24. 24. Muslim World Introduction to Takaful 24
  25. 25. Takaful Worldwide • The first ever Takaful company was established in 1979 - the Islamic Insurance Company of Sudan. • 124 Takaful Companies in over 23 countries. • Global Market Size • – 2004: US$ 1.4 billion • – 2010: US$ 8.9 billion • Average growth rate (30 % for 2010 ) higher than conventional insurance companies. • Non – Muslims increasingly opting for Takaful products for commercial benefits. Source: (Ernst &Young 2010, P. Ahmed) Introduction to Takaful 25
  26. 26. Part No 2 " Insurance is like marriage. You pay, pay, pay, and you never get anything back….. " Introduction to Takaful 26
  27. 27. Objections to Conventional Insurance Introduction to Takaful 27
  28. 28. Declaration by Shariah scholars rendering conventional insurance un-Islamic • Fatwa (Unanimous Decision) issued in Judicial Conference held in Makkah in Shaban 1398 AH. • Verdict of Supreme Court of Egypt on Dec. 27, 1926. • Unanimous resolutions and fatwa by Ulama in the Muslim League Conference in Cairo in 1965. • Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972. Introduction to Takaful 28
  29. 29. Objections to Conventional Insurance Because of following Elements of: • Uncertainty – Gharar • Gambling – Maisir • Interest – Riba • Risk Transfer Mechanism Introduction to Takaful 29
  30. 30. Uncertainty – Gharar • Conventional insurance contract is basically a contract of exchange i.e. buying and selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration. • The consideration must be certain for an exchange contract. • The timing and amount of loss to be paid is not Certain. • Thus, it involves an element of uncertainty in the subject matter of the insurance sales contract, which renders its void under the Islamic law. Introduction to Takaful 30
  31. 31. Gambling – Maisir • The insured loses the money paid for the premium when the insured event does not occur. My Example……… Techniker Krankkenkasse • The company will be in deficit if claims are higher than premium. Introduction to Takaful 31
  32. 32. Interest – Riba • “ …. Allah has permitted trading and forbidden riba (Interest) ” (Al Baqarah 2 : 275) • Insurance funds invested in financial instruments which contain element of Interest like securities etc. Introduction to Takaful 32
  33. 33. How is Takaful Insurance Different ? • Certain aspects of normal insurance conflict with Shariah principles Maysir - insurers make bets on the loss occurrence (Gambling) and this is deemed to be gambling Gharar timing and amount of the loss are (Risk & Uncertainty) - uncertain Riba investments in interest bearing securities (Interest) - and possible interest on loans Haram investments in commodities or involvement (Forbidden / Unlawful) - in activities that are forbidden (alcohol, pork etc). Introduction to Takaful 33
  34. 34. Takaful and Conventional Insurance Issue Conventional Insurance Takaful Organization Principle Profit for shareholders Mutual for participants Basis Risk Transfer Co-operative risk sharing Value Proposition Profits maximization welfare and spiritual satisfaction Laws Secular Regulations Shariah regulations Ownership Shareholders Participants Management status Company Management Operator Form of Contract Contract of Sale Cooperative, Islamic contracts of Wakala or Mudarbah Investments Interest based Shariah compliant, Interest-free Surplus Shareholders’ account Participants’ account Introduction to Takaful 34
  35. 35. Mitigating Misconceptions about Takaful Misconception The Truth is… Products only Covers Larger Investor Base relevant to Muslims Both Muslims and Non-Muslims Products are too Only difference is the Islamic complicated screening process 2,545 stocks, USD 9.3 trillion market cap- Restricted Dow Jones Islamic Market World Index* Universe 50% of SP500 is Shariah (by mkt cap)** Performance Drag Not Inferior to Conventional Performance: Return, Volatility, Risk-Return Profile Source: *Dow Jones,30/01/09, **Standard & Poors 17/2/09 Introduction to Takaful 35
  36. 36. Takaful Products • General Takaful offers all kinds of non-life risk coverages products like motor takaful, marine takaful, fire takaful, home takaful, shop takaful, etc. • Family Takaful offers life coverage and it has significant success in SE Asia. Malaysia 73% net contributions and cut throat competition among market players in SE Asia. • Banca-Takaful offers tailored coverage for banks. Source: (Ernst &Young 2010) Introduction to Takaful 36
  37. 37. Part No 3 " The chief beneficiary of life insurance policies for young, single people is the life insurance agent…. " Introduction to Takaful 37
  38. 38. Takaful Models Introduction to Takaful 38
  39. 39. 1. Mudaraba Model  It is an equity Partnership .  The Profit Sharing Model.  The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as mutually agreed between the contracting parties.  This is commonly used in Malaysia. Introduction to Takaful 39
  40. 40. Profits attributable Mudaraba Model to Shareholders Company’s Company Admin. & Allianz Mangt. Takaful Expenses Investment Profit By From Company Investments Company’s Share from Surplus Takaful General Operational Participant Contribution General Surplus Takaful Cost of paid by Takaful (Profit) Peter Fund Takaful Participant Fund Participant’s Share from Surplus Introduction to Takaful 40
  41. 41. 2. Wakala Model  It is an agency Model.  Cooperative risk sharing occurs among participants where a takaful operator earns a fee for services (as a Wakeel or Agent) and does not participate or a share in any underwriting (Profit) results as these belong to participants as surplus or deficit.  Under the Wakala model the operator may also charge a fund management fee and performance incentive fee.  This model is used in Middle East region. Introduction to Takaful 41
  42. 42. Wakala Model Mudarib's’ Wakala Profit Share Management Profit/Loss Company From of PTF’s Fee Expense attributable to Investments Investment (Capital) (30% to 35%) of the Company Shareholders Income Takaful Contribution Investment by Investment Income Sharing paid the Company on Mudaraba Basis by Participant General Operational Surplus Participants’ Investment Cost of Surplus Distribution Takaful Income Takaful/ Reserves (Profit) to Takaful Fund Fund ReTakaful Participants Introduction to Takaful 42
  43. 43. Takaful Accounting  Two separate accounts are created: 1. Participants’ Takaful Fund. 2. Shareholders’ Fund.  Separate Accounts are created for: 1. Operational activities. 2. Investment activities.  Dual audit of all transactions: 1. Financial Auditors. 2. Shariah Auditors. (criteria: Accounting & Auditing Organization of Islamic Financial Institutions, AAOIFI). Introduction to Takaful 43
  44. 44. ReTakaful (Reinsurance) • Currently few ReTakaful companies worldwide offering a relatively small capacity: – Sudan (1979) National Reinsurance. – Sudan (1983) Sheikhan Takaful Company. – Bahamas (1983) Saudi Islamic Takaful and ReTakaful Company. – Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance Company. – Tunisia (1985) B.E.S.T. Re – Malaysia (1997) ASEAN ReTakaful International. More than – Dubai (2005) TakafulRe by ARIG. 18 – Lloyds of London to form a ReTakaful Syndicate. Retakafuls – SwissRe to form a separate ReTakaful Pool Worldwide – MunichRe to form a separate ReTakaful Pool Source: (Ernst &Young 2010, P. Ahmed) Introduction to Takaful 44
  45. 45. Introduction to Takaful 45
  46. 46. Foundations of Takaful in Pakistan • 1949 - Declaration made in the Objectives Resolution adopted by the Constituent Assembly of Pakistan “Sovereign state of Pakistan is established to enable Muslims individually and collectively to order their lives in accordance with the injunctions of the Holy Qur’an and Sunnah”. • 1973 - The Constitution of Pakistan declares Pakistan as “Islamic Republic of Pakistan and Islam as the official religion of the state”. • 1985 - Objectives Resolution was made ‘substantive’ part of the constitution. • 1983 to 1989 - The Council of Islamic Ideology held its sessions in order to survey the Islamic Insurance System. • 1992 - The Council of Islamic Ideology submitted its report on Islamic Insurance System. • 2000 - The Insurance Ordinance defines the term “Takaful” in Section 2 and provides for establishment of Takaful companies in the country. • Sept., 2005 - Takaful Rules notified . Introduction to Takaful 46
  47. 47. Uses of Takaful Takaful can be used to cover: • Property like house, factory, mosque, offices • Vehicles (car, motorcycle etc..) • Goods ( like during import or export ) • Valuables • Health, accidents and Life etc Introduction to Takaful 47
  48. 48. Not Developed as Conventional Insurance Shortage of Global Takaful Skilled Awareness Challenges Resources Lack of Harmonised Regulations Introduction to Takaful 48
  49. 49. Future Outlook Despite the remarkable growth rate recorded by the Takaful industry, penetration is still far below the enormous market potential offered by the Muslim community worldwide (25% of the total world population). Introduction to Takaful 49
  50. 50. Growth Outlook • World Muslim population is estimated at 1.5 billions, of which around 97% are based in Asia and Africa. • A two-digit growth in the range of 20% to 30% can be reasonably sustained for at least the next 10 years in the existing markets (Far and Middle East). Introduction to Takaful 50
  51. 51. New Takaful Frontiers • Markets like Europe, North and Latin America, Central Asia, Australia where large Muslim communities live are huge untapped reservoirs; • The recent opening towards “Islamic windows” in the banking sector in Europe is likely to be followed by “Takaful windows” initiatives. Introduction to Takaful 51
  52. 52. Takaful Products to Non-Muslims • Takaful Products are not exclusive to Muslims. • Competitively pricing and sale through the right channel it could attract any consumer irrespective of their origin or faith. Introduction to Takaful 52
  53. 53. Conclusion • The success of Takaful largely depends on that of Islamic Financial institutions on a global basis. • Takaful defined. • Difference with conventional insurance. • Takaful Models • Takaful Worldwide • Prospects and Outlook. Introduction to Takaful 53
  54. 54. In short “Takaful is a viable Shariah compliant alternative to Conventional insurance”! Introduction to Takaful 54
  55. 55. Questions ? Introduction to Takaful 55
  56. 56. Next Presentation Introduction to Islamic Finance Date: June 8, 2010 Introduction to Takaful 56
  57. 57. Thanks a lot Mehar Muhammad Ashfaq MBA Financial Management Univerisity of Applied Sciences Coburg - Germany Introduction to Takaful 57