Takaful — How It All Started & Where It Is Now
From The Heart of Roslinah Daud
Takaful therefore, is a noble concept that brings forth mutual co-operation amongst individuals who get together with the intention to help one another in times of difficulties. “Help one another in righteousness and piety; but do not help one another in sin and transgression.”
WHEN I WAS ASKED TO PROVIDE SOME ARTICLES ON THE topic of takaful, I was a bit apprehensive as it is quite a daunting task for me, albeit being in the industry for the past 20 years; but yet, I feel there is a need to share and to enlighten on what takaful is all about. The concept of takaful is very close to my heart, having spent the whole of my career in this industry, from actuarial to operations to marketing of the products and services. Therefore, with much humbleness, here I am, sharing my views, thoughts and experience on the topic, which I hope will shed some light to those who seek to learn and to understand. In my series of articles, I will share the underlying concept of takaful from its theoretical aspects to its practical aspects and everything you need to know about takaful. So I hope. Despite being around for over a century, takaful is a term that is very much alien to many. Originating from pre-Islamic practices among the Arab tribes, takaful came from an Arabic word “Al-Kafala” which means “guaranteeing one another”. What had happened during those days were that the Arabs had this practice of collecting money amongst them to help fellow brothers who had killed another brother pay “blood money” to the family of the decease. This act was done to “save face” of the family of the person as well as the tribe he was in. It was also done to compensate the decease’s family for the loss of his family member. Takaful therefore, is a noble concept that brings forth mutual co-operation amongst individuals who get together with the intention to help one another in times of difficulties. This is very much encouraged in Islam, by virtue of the verse in the Quran, Take note of the word “help”. According to Oxford Dictionary, help is defined as making it easier or possible for (someone) to do something by offering them one’s services or resources. That is the true intention of takaful. Now, how can “help” be translated into its actual meaning in the practice of takaful? A takaful company is set upon the basis of ta’awun, an Arabic word which means helping one another. Similar to the practices of the Arab tribes, Takaful companies therefore help manage a pool of money contributed by participants. The money that is pooled is then used to help participants and their families in the event of any mishaps. The only difference between practices of the olden days and now is perhaps, there is no killing or blood money involved, but the underlying concept remains the same – to help those in need. The initial intention is indeed good, yes? But as of many things in these modern days, this noble intention of helping one another has translated into business ventures and with that comes the element of profit making - by both takaful operators and participants. Thus, in addition to helping participants manage their money, takaful operators need to generate more money out of the participants’ money to be able to fulfil the expectations of the participants of getting more out of their investment.
Of course, there is no such thing as free lunch. In order to manage the fund, takaful operators need to be paid too, as costs are incurred to employ staff, to build systems to manage the money and its investments and most importantly to the shareholders, it is a business venture which needs to generate profit and give returns for the money they have invested. Thus, the underlying concept of takaful has shifted from just helping one another in need, to profit-making. Don’t be mistaken, I have no objection regarding profit-making. In my opinion, profit-making is not wrong as long as the underlying intention and trust are fulfilled, the transactions are transparent to stakeholders and the management of the company and investments of the fund are done according to ways that do not contravene with the Shariah, i.e. the principles put forth to us by Allah through the Quran, and all supporting practices of the Rasulullah through its sunnah, i.e. his words and his deeds. However, let us take a look at the current practices in the industry. Because takaful has become business ventures that are deemed to be profitable, many takaful companies have emerged. With many players in the market, naturally competition will exist; as in order to prove its existence and to gain market share, takaful operators will tend to compete among each other. Hence, products are being designed creatively and when products are created, there comes a need to market or promote them to attract masses to participate through many distribution channels; the most common ones being agency, banks, brokers and direct channel. So now, takaful operators do not just need to manage money belonging to participants as well as provide help by paying benefit upon any defined mishaps, they also need to ensure profits are generated for their stakeholders and in
A takaful company is set upon the basis of ta’awun, an Arabic word which means helping one another. Competition among takaful operators exists not realizing that in Islam, the emphasis is on cooperation and not competition.
addition, compete with not only non-shariah compliant insurance companies but also other shariah compliant takaful operators. Competition among takaful operators exists not realizing that in Islam, the emphasis is on cooperation and not competition. The Quran says,
“Then strive together (as in a race) towards all that is good.”
(Al Baqarah: 18).
With pressure to perform well in order to generate profit and to compete, standard operating procedures have been set. Product pricing would embed certain expectations of future income and expenses calculated based on past experience as well as profit factor as assumptions. Contributions are pre-calculated for a certain amount of benefits to be payable upon mishaps. Underwriting rules are set to avoid anti-selection and to ensure that only healthy individuals are accepted into the scheme, so as not to jeopardize the fund. Strategies are set and expected to be executed. Marketers are employed to promote the products. Targets and production become important as a mean to measure the profitability of the venture; and so on, so forth. So, where are we now? Where are takaful operators in the eyes of Shariah? Do they still exist with the primary intention of helping those in need, or have that intention become secondary, after profit-making? Are takaful operators doing the right thing if profit-making is their primary intention and competing among each other becomes the practice? These are some of the questions that takaful operators need to ask themselves, some of which will be answered in my next few articles.