Takafuk (Islamic Insurance) in 2018
The global Takaful market reached US$ 19 Billion in 2017. The market is further projected to exceed US$ 40 Billion by 2023, at a CAGR of 13% during 2017-2023.
Takaful refers to a sharia-compliant insurance system through which members mutually contribute a sum of money, so as to support each other in case of a loss, damage or theft. The objective of Takaful is to cooperate, live harmoniously amongst the community and protect each other against uncertain mishaps. The policyholders of Takaful contribute regularly on monetary basis which are supervised and managed by a Takaful management firm. Nonetheless, the surplus amount invested is then employed for making investments which are helpful for earning a higher profit for the policyholders.
Takaful is rapidly gaining momentum, particularly in the Asia Pacific and the GCC region, owing to a large Muslim population. Muslims currently account for a fifth of the total global population and these levels are expected to further increase in the future.
Another major driver of the market is that, in contrast to Western countries, the majority of the world’s Muslim population is young with 60% of this entire population being less than 25 years of age. Catalyzed by rising levels of affluence, this large young Muslim population has the potential to represent a customer base for a fairly long duration if it is captured early.
The penetration of conventional insurance is relatively low in affluent Muslim regions like the GCC. As a result, Takaful is perceived as a key instrument to raise insurance awareness and has huge opportunities in these countries.
General Takaful provides protection to participants against losses arising from perils such as accident, fire, flood, liability and burglary. It makes about 83 percent of the global market share of Takaful, while family Takaful, which is designed to cover health and mortgage-related risks, occupies the remaining 17 percent
The existing portfolio of general and family Takaful needs to be extended towards investment-linked Takaful, retirement Takaful, travel Takaful, community Takaful, legal Takaful, products for certain client target groups such as high-net worth individuals and products for special risk groups, such as sports persons or heavy workers, as well as new variants for corporate insurances for executives, start-ups, entrepreneurs and small and medium enterprises.
Islamic Asset Management in global Markets
Bank deposits remain by far the largest source of Shariah-compliant assets, but other types of assets have become increasingly significant, particularly for the Islamic asset management industry.
Shariah-compliant equity funds were an early diversification from the original bank-based business. Takaful, an Islamic product akin to insurance, has been growing in significance, while financial professionals have been investigating ways to bring Waqf, or Islamic endowments (currently largely based on property) into the financial mainstream, either through Waqf-related bonds or equity-based investing. Perhaps the most dynamic area of development is in Sukuk, commonly referred to as Islamic bonds, an asset type that has been seeing rapid growth in the traditional Islamic finance markets and also new sovereign Sukuk from countries like the UK, Hong Kong, Luxembourg, Pakistan, Oman, Saudi Arabia and South Africa.
As we see it, the next step in the evolution of the Islamic finance industry is achieving critical size and global reach. At present, the origination and distribution of Shariah-compliant financial products is largely limited to a small pool of firms in the Middle East and Southeast Asia, such as Saudi Arabia and Malaysia. The most established players within the industry are “home-grown” local or, at best, regional, institutions.
The limitation of a local firm is that, while they may have a rich product offering focused on their region, they are often unable on the one hand, to offer their customers investment capabilities that extend beyond that region and, on the other hand, to offer their unique products to customers outside their region. Meanwhile, global players may have the necessary wide distribution network and capabilities to offer truly global financial products in more conventional asset classes across several countries and regions, but many cannot offer a wide range of products covering Islamic finance, nor a long track record in the space.
However, we are starting to see new markets outside of Muslim countries open the doors to Islamic finance and widen the distribution network for Shariah-compliant financial products. These include markets in London, Dublin, Hong Kong, Singapore and Luxembourg. The entrance of a few global players (such as Franklin Templeton) has also opened the doors for investors in Muslim countries to access products that are both more globally managed and globally accessible, to diversify their portfolio. While we see interest in Shariah-compliant products broadening out across the world as the instruments become more mainstream, the fact remains that Islamic financial institutions and wealthy Muslims are still the biggest investors. We believe much more needs to be done to grow and deepen the Islamic finance industry, not just by attracting more faith-based investors but also by appealing to and creating awareness among non-faith-based investors.
The principles of Shariah investing mean that these products lend themselves well to diversify any investor’s portfolio, regardless of faith. Not only are the returns attractive relative to traditional fixed income assets, volatility has historically been more subdued—something that could prove important in a rising interest-rate environment.
The limit on debt ownership due to Islamic principles also means that a Shariah-compliant equity portfolio may appear higher-quality than more conventional portfolios due to the screening out of highly leveraged companies, and the absence of sectors like alcohol, tobacco, gaming, etc. also makes them more ethical. Indeed, many attributes of a Shariah-compliant product may also appeal to those interested in ethical, environmental or socially responsible investing.
Islamic bonds or Sukuk provide exposure to some of the fast-growing and most financially sound economies in the Gulf Cooperation Council (GCC) and Southeast Asia, countries where credit ratings are relatively strong but that are often underrepresented in many traditional bond indices and funds. Due to their unique structure and market dynamics, Sukuk tend to be more insulated from market events and have lower correlations to other asset classes, including global bonds, global equity and commodities. We believe all of these factors could make Sukuk an appropriate complement to investors’ existing portfolios. Indeed, several so-called “conventional” investors around the world have been pouring funds into the asset class, attracted purely by valuations and fundamentals.
The inclusion of Sukuk to emerging-market indices will add to the pool of investors that are benchmark-sensitive in the emerging-market bond space, which is particularly important for the government and corporate Sukuk that meet these criteria. Even though some Sukuk issued out of the GCC may not meet the criteria for EM index inclusion (due to size, rating or per capita income), even partial inclusions bring light to the Sukuk regions that are still underrepresented in global fixed income allocations in spite of a compelling risk/reward investment rationale.
With expansion, the challenge for Islamic finance is to achieve a degree of uniformity in the treatment of assets, providing comfort to international investors, when the underlying principles governing such treatments necessarily have local roots. The Islamic banking system is itself seeing some interesting new developments that could extend the reach of more sophisticated Shariah-compliant products. Evolving banking solvency requirements are driving demand for subordinate, perpetual and lower-tier Sukuk as banks that previously held reserves largely in cash deposits at central banks look for more efficient balance sheet structures, which has the effect of widening investment choices for non-faith-based investors.
Islamic MICROFINANCE AND POVERTY ALLEVIATION
Poverty is the biggest moral challenge of this century. More than three billion human beings in this world live in abject poverty. Muslim societies fare far worse than the rest of the world in the matter of addressing the problem of poverty. The Islamic world is enormous with over 1.2 billion people, stretching from Senegal to the Philippines – comprising six regions: North Africa, Sub-Saharan Africa, the Middle East, Central Asia, South Asia, and Southeast Asia. Except for a handful of countries in Southeast Asia and the Middle East, there are high and rising poverty levels in both urban and rural parts of most Muslim countries. Poverty levels have also been associated with high inequality alongside low productivity. In Indonesia alone with world’s largest Muslim population, over half of the national population – about 129 million people is poor or vulnerable to poverty with incomes less than merely US$2 a day. Bangladesh and Pakistan account for 122 million each followed by India at approximately 100 million Muslims below poverty line. It is estimated that the ten Islamic countries at the bottom account for more than 600 million of the world’s poor.
A commonly held view among observers of poverty alleviation programs across the globe is that provision of “appropriate” microfinance products and services to the poor in a sustained manner helps bring down poverty levels. It is therefore, important to have a good understanding of what the poor need in terms of financial services.
The needs of the poor in Islamic countries are no different from the poor in other societies. They need financial services because they are often faced with events that call for spending more money than might be available with them. Experts generally point to three main categories of such events: lifecycle events, emergency needs, and investment opportunities. Life-cycle events include those once-in-a-lifetime occurrences (birth, marriage, death, home construction, old age) or recurrent incidents (education, festivals, and harvest times) that every household faces. Emergencies include personal crises like sickness or injury, the death of a bread-earning member or the loss of employment, and theft, as also natural calamities and disasters like earthquakes, floods and famines.
Opportunities to invest in businesses, land, or household assets also come up periodically. To come up with the financial outlays required by lifecycle events, emergencies, and opportunities, micro-credit is needed. Indeed the poor may need more than just credit. They need a range of services including credit, savings, money transfer facilities, and insurance in many forms.
Micro-credit as offered by conventional microfinance institutions (MFIs) in Muslim countries violates the fundamental prohibition of riba that the Islamic Shariah mandates.
While some poor Muslims, devoid of options and hard-pressed for cash may avail of interest-bearing credit, many prefer to stay away. As will be discussed in the following chapters, micro-credit may be offered using a variety of mechanisms that do not violate the Shariah. Islamic MFIs across the globe use a range of such Shariah-compliant mechanisms, such as, qard hasan, murabaha with bai-bithaman-ajil, ijara, bai-salam etc. All these modes create debt.
A micro-entrepreneur investing in a microenterprise may meet its financing requirements through debt or equity. Micro-equity provided to a first generation micro-entrepreneur is called micro venture-capital (VC). Micro VC providers are however, far smaller in number and outreach. In an Islamic economy, several partnership-based modes of equity financing exist, such as, trustee financing (mudaraba), joint venture (musharaka), share-cropping (mudara) and the like.
Poor people want to save. But they are constrained by the multiple demands on their low incomes and a lack of available deposit services that matches their needs and expectations. Poor people want secure, convenient deposit services that allow for small balances and transactions and offer easy access to their funds. Depositors – poor or rich – prefer high returns. They also want their deposits to score high on safety, security and liquidity. However, there is an additional dimension to the needs and expectations of Muslims in the matter of deposits. They want the returns to be permissible in Islam (halal) even while they may be using interest rates as a benchmark for comparison.
Money transfers encompass more than just remittances, which are defined as the portion of migrant-worker earnings sent to family members or other individuals in their place of origin. Remittances include both domestic and international transfers. Massive numbers of poor people have relatives living and earning a living in distant places. They need services relating to sending and receiving money.
Poor people, like other persons but probably more intensely, face a variety of risks and uncertainties, such as, death or sickness of the bread-earning member in the family, or loss of crops, livestock and housing due to natural calamities. These shocks are particularly damaging for poor households, because they are more vulnerable to begin with. Micro-insurance is the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved. As with all insurance, risk pooling allows many individuals or groups to share the costs of a risky event. To serve poor people well, micro insurance must be responsive to priority needs for risk protection, easy to understand, and affordable. Several different types of insurance might be relevant for poor and low-income clients. According to most Islamic scholars insurance in the Islamic framework is ideally not-for-profit and takes the form of mutual guarantee by members in a cooperative venture called takaful-tawuni.
To sum up, microfinance implies provision of financial services to poor and low-income people whose low economic standing excludes them from formal financial systems. Access to services such as, credit, venture capital, savings, insurance, remittance is provided on a micro-scale enabling participation of those with severely limited financial means. The provision of financial services to the poor helps to increase household income and economic security, build assets and reduce vulnerability.
A large number of studies on poverty indicate that exclusion of the poor from the financial system is a major factor contributing to their inability to participate in the development process. In a typical developing economy the formal financial system serves no more than twenty to thirty percent of the population. The vast majority of those who are excluded are poor. With no access to financial services, these households find it extremely difficult to take advantage of economic opportunities, build assets, finance their children’s education, and protect themselves against financial shocks. Financial exclusion, thus, binds them into a vicious circle of poverty. This needs and can be done through Islamic Microfinance mechanism.