Takaful In Australia....Why not???

A takaful market in Australia?

The Muslim population in Australia is growing and with that must come an increased demand for Shariah-compliant financial products, particularly as the comparatively larger younger groups within the Muslim population reach an age where they should start purchasing insurance. This view is confirmed by the recent announcement by a major Australian bank that it is intending to enter the Islamic finance market by offering Muslim friendly banking products and this suggests that there may also be a market in Australia for Shariah-compliant insurance - takaful. The 2006 Census reported that there were approximately 340,000 people (around 1.6% of the population) who identified Islam as their religion. The Australian Bureau of Statistics reports that since 1986, Australia has experienced remarkable growth with the number of Islam affiliates increasing 3 fold. In particular, the number of Islamic Australians in the 20-39 age group is approximately 123,800 as at 2006 (2.3% of that age group).

Takaful is not available in Australia. This lack of available Shariah-compliant insurance means that some Muslims may be uninsured because conventional insurance conflicts with core beliefs. Many Shariah scholars state that Muslims have a religious obligation to purchase takaful over conventional insurance.

Businesses could also benefit from the availability of takaful and, given Australia’s robust prudential and regulatory regimes, takaful sourced from Australia may be attractive to overseas companies. Furthermore, non-Muslims may also prefer takaful over conventional insurance due to the combination of mutuality and ethical investments.

In this article, we look at the characteristics of takaful and its difference from conventional insurance. We also consider the issues that may arise for a takaful provider seeking to obtain authorisation from APRA to offer takaful in Australia.

What is takaful?

Takaful is Islamic insurance which complies with Shariah law. Shariah law is Islam’s legal system based on scholarly interpretation of the Koran. Shariah law contains directions relating to fairness and overall prosperity in the community and prohibits certain activities including the payment or receipt of interest (known as riba) and investments relating to alcohol and gambling (haram). Contracts involving uncertainty (gharar), gambling or speculation (maisir) are forbidden under Shariah law.

Takaful means “guaranteeing each other” and is based on principles of mutual cooperation to provide protection from an unexpected future material risk and making a donation (tabaru’a) to enable this.

Structure of takaful

Takaful can be structured in several ways, the main structures are:

• Wakala model - this is the most common structure. A group of takaful participants (policyholders) agree between themselves to share the risk of a potential loss to any of them. They make donations to the takaful fund. The takaful fund compensates the participants for any loss suffered in accordance with the terms of the agreement. The fund is managed by an appointed agent who is paid a fee, wakala, for the services provided to the takaful fund and its participants.
• Mudarabah model - an operating company acts in partnership with the policyholders and receives a fixed percentage of the profits from investing the takaful funds.

Hybrid models also exist. Regardless of the structure, the common feature of takaful arrangements is that policyholders are entitled to a share of profits.

Difference between takaful and conventional insurance

Insurance involves a relationship of indemnity between the insurer and the insured, in particular, the insurer’s promise, usually but not necessarily in consideration of the payment of premium, to indemnify for the risk of financial loss suffered by the insured if a future fortuitous,iv adverse event eventuates.

Conventional insurance does not comply with the principles of Shariah law because it contains elements of uncertainty which are prohibited under Shariah law. Certain types of investments that may be made by conventional insurers are not permissible under Shariah law; for example, interest bearing instruments and investments linked to alcohol or gambling.

Takaful can overcome these issues by:

• providing a distinction between the takaful fund (made up of contributions from policyholders) and the takaful operator (management) or the agent (depending on the model used).
• the payment of a ‘donation’ rather than ‘premium’. Making a donation or gift into a takaful fund to help those who suffer loss is considered to be compliant with Shariah law, however paying a premium for the right to obtain future payments of claims resulting from unforeseen events is considered to be un-Islamic as the contract involves uncertainty.
• introducing an element of profit sharing (known as the principle of mudarabah, a financing technique, whereby both parties to the contract enjoy a share of profits). This can occur where the takaful fund becomes overfunded. This surplus can be distributed to eligible takaful participants by way of discount on the next year’s takaful donation.
• placing parameters around acceptable investments. That is, the takaful fund is invested strictly in Shariah-compliant (halal) activities including under non-interest bearing conditions to maximise the fund’s value.

All activities of the takaful provider are overseen by a Shariah Supervisory Committee - a group of recognised Shariah scholars who ensure products, investments and practices are consistent with Shariah law.

Takaful in the UK

In 2008, the Financial Services Authority (FSA) authorised the first independent Shariah compliant insurance provider, Principle Insurance Holdings Limited, the first to operate entirely under Islamic rules. The company is authorised to carry on general insurance and offers motor insurance and home insurance. HSBC also provides takaful home insurance to UK Muslims.

The FSA has publicly stated that from a regulatory perspective, it will treat a takaful provider as it would any other insurance provider, assuming there is enough similarity in function and form.

Takaful around the world

In recent years, major insurance companies have entered the takaful market, including AIG, Swiss Re, Hannover Re and Allianz. These companies mainly target Malaysia and the Middle East, however their presence in the takaful industry indicates the potential for Islamic insurance in other regions.