Malaysia’s takaful industry is still an infant compared to its conventional counterpart. The country, however, has the most developed takaful infrastructure in the world. A pertinent question remains – how conscious and receptive are Malaysian Muslims towards takaful products?

Explaining Islamic Insurance or Takaful

Insurance, as a concept does not contradict the Shari’ah or Islamic law, in facr, pooling resources to help the unfortunate is a social good, which is encouraged in Islam. Takaful is an Arabic word, which means “guaranteeing each other” or joint guarantee and is in line with the principles of compensation and shared responsibilities among the community. In theory, the purpose of this system is not profits but to uphold the principle of “bear ye one another’s burden.”

In fact, the idea is not new, but may be traced to the practices of the Muhajirun of Mecca over 1,400 years ago. In essence, many Muslim jurists do not reject the concept of takaful. However, the modus operandi of takaful must be Shari’ah-compliant; in takaful business, the basic elements of a contract, as well as the insurance principles (utmost good faith, proximate cause, indemnity and insurable interest) also apply.

In a nutshell, an insurance contract can be shariah-compliant if certain changes are made, for example, a fundamental issue is the premium. In takaful, the premium must be paid on the basis of “donation with condition of compensation” or tabarru’. What this means generally is that: participants agree that their premium be used to assist others according to the terms of the takaful contract. With the intention of tabarru’ (the correct niat) the insurance transaction becomes valid and permissible in the eyes of Islamic law.

Different Models of Takaful Companies

“Although theoretically, the scholars suggest cooperative insurance (a non-profit model) can be the basis of Islamic insurance, not all companies follow the recommendation. Companies in Sudan for example, follow the cooperative insurance model. However, companies in ASEAN region are primarily commercial in nature… where profit-making is one of the objectives,” writes takaful expert Azman Ismail. Models adopted by these companies are all Shari’ah-compliant and in Malaysia we can find the following models:

Al-Mudharabah Model (The Pioneer Model in Malaysia)

This describes a cooperative risk sharing model where operators and participants share in the distribution profit and surplus. No agency or service fee is deducted from the takaful fund. In this model, “the sales staff are remunerated from the shareholders fund,” says Dato’ Mohd Fadzli Yusof, chief executive officer and director, Syarikat Takaful Malaysia Berhad (STMB), the first operator in the industry and the only one adopting this model.

Al-Wakala Model

Here, while the cooperative risk sharing takes place between the 2 parties, a sum is deducted upfront for the services rendered (for the wakil or agent)and this is the main difference. Operators also do not partake in the underwriting results. Examples of this model are Mayban Takaful Berhad (MTB) and Takaful Ikhlas Malaysia.

One should not be overly concerned with the merits and de-merits of the different shariah-compliant models. In the words of Dr Mas’um Billah, an Islamic finance expert, “modelling will create a vision in the Islamic Ummah and commercially hamper the takaful industry in the world.”

Takaful Industry in Malaysia – A snapshot

The Takaful industry in Malaysia is only about 20 years old or so, hence it is still in its infant stage compared to its conventional counterpart, which began in the mid 1900s. however, globally the country has the most developed takaful infrastructure with four existing operators in place: Syarikat Takaful Malaysia Sdn Bhd, Takaful Nasional Sdn Bhd, Mayban Takaful Sdn Bhd and Takaful Ikhlas Sdn Bhd.

To succeed takaful is facing an uphill struggle. The market share percentage of takaful assets in the insurance sector at the end of 2003 was a mere 5.6 per cent. The takaful industry had penetrated only 4.5 per cent of the market in 2003 compared to the 36.7 per cent of the conventional sector. This means that 58.8 per cent of the Malaysian market effectively has no insurance of any kind. The figures for other Islamic Development Bank member countries are even lower. In contrast, Islamic banking assets are 9.7 per cent of the total assets in the banking sector; and Islamic banking deposits are 10.4 per cent of the market share of deposits in the banking sector.

However, Dr Mas’um is optimistic. He argues that given its short history, Islamic insurance as we know it today has done remarkably well and its potential to grow further cannot be denied. If 58.8 per cent of the market in uninsured, this figure alone should make takaful and insurance companies sit up.

Reason for the slow growth of takaful in Malaysia

Why are 60 per cent of the Muslims in this country not using takaful? Should not they be drawn to takaful on the basis of their faith, some have asked? If that is idealistic, how about the commercial returns, the sharing of the surplus, or the transparent nature of the products? Perhaps  those are not understood.

Conversations with industry leaders and practitioners reveal different reasons for the slow growth of takaful in this country.

Life assurance – A mindset predicament among Muslims

The under-development of family takaful, has contributed to the slow penetration of takaful products. Yes, in 1972 the National Fatwa Committee of the Malaysian Islamic Affairs Council declared that the conventional life insurance business contravenes shariah principles, but 12 years later, that changed. The Islamic alternative presented itself, but unfortunately, the Muslim community has not warmed up to it completely. Perhaps to many the word “insurance” still drown frowns, because it sounds like something forbidden, while others who simply know little of it, choose to keep away. Whatever the reason, the stigma of insurance lingers. Family takaful has still not been fully embraced by the Muslim community.

Could the lack of marketing be a major factor for its lack of growth?

Maybank Takaful’s managing director and CEO Tuan Haji Mohd Tarmidzi Ahmad Nordin does not think so. He blames the attitude of Malay Muslims generally towards life insurance, saying that they fail to appreciate the concept. He says the “level of awareness is still quite low” and “it is not within the Malay culture.” In fact, according to him, “less than 10 per cent of Malays are insured.” Others industry players agree with that figure.

Understandably so, it is much easier introducing takaful to customers, who are familiar with insurance as a financial tool, due to perhaps a prior experience or exposure. Whereas, presenting takaful to someone who has not the slightest notion of what insurance is, or worse still, built-in aversions to it, can be an uphill battle.

Is changing the mindset taking longer than expected?

Tarmidzi suggests that the way to go is to “make [the community] aware of the problem first, so that they can appreciate the solution.” By “problem” he means the uncertainty of the future and the need to make preparations for what may come – such as tertiary education for the children, and financial soundness in the event of calamity or misfortune. If they understand the need to prepare for the future, only then can takaful be appreciated as the possible “solution”.

One practitioner, blatantly admits that selling takaful products to non-Muslims is more straightforward. He attributes the current attitude of Malays, to what he describes as , the “subsidy mentality”. The non-Muslims on the other hand, he comments, have not been “spoonfed and did not get things easily over the years”, medical and educational expense had to be borne by themselves. Good habits such as planning for the future and preparing for rainy days and old age come to them naturally, he reiterates. Such is the profile of a typical insurance policy holder.

Lop-sided emphasis by religious educators.

While the ibadat aspect of Islam is very important, there may have been an overemphasis, some say. Islam being a way of life calls its followers to abide by Quranic laws in all aspects of everyday life and this includes conducting business transactions that are Shari’ah compliant, and the importance of financial planning in Islam, takaful and wasiah or will-writing. Religious authorities and teachers should educate the community on these aspects as well, so as to do justice to the holistic nature of Islam.

The element of time

Put simply, conventional insurance, has been around for ages. Some of the companies are giants, who have stood the test of time. It is understandable if consumers feel more secure leaving their money with the Prudentials of the world, as opposed to its younger competitors.

Generally speaking, takaful operators are new and do not have a long story, with the exception of Mayban Takaful Berhad, which has the backing and support of the Maybank Group, Malaysia’s largest banking group with an existence of  over 35 years.

Lack of product innovation

“Most takaful companies in Malaysia have hitherto positioned their products as direct substitutes of conventional products with shariah compliance being the basic difference. Product development initiatives appear to be confined mainly to coming up with takaful versions of the conventional insurance products. I have hardly seen products that are distinctly takaful,” says Mayban Takaful’s Tarmidzi.

Ineffective Marketing Strategy

One takaful agent readily agrees that this is indeed, the case. He laments that agents did not receive enough training and were not well equipped with financial planning knowledge, compared to their conventional counterparts. “Our competitors have good support,[but] we have to equip ourselves with financial planning knowledge on our own, and based on our own initiative,” he complains.

According to another source, aggressive marketing is not the solution, because it will not be received well. In fact, it may be perceived as “pushy” and going against the grains of the Malay culture, where subtleness may work better. Marketing efforts must complement the different profile of Malay Muslims. What may appeal to the Muslims in the Malaysian northern states, may not appeal to others elsewhere, he adds.

The presence of takaful companies in Malaysia offers us a viable, attractive and shariah-compliant alternative to conventional insurance. However, more must be done by these companies to increase and create awareness amongst the general population.

**This article was first published in The Halal Journal May/Jun 2005 edition, and was written by Zarina Nalla.