Role of Takaful (Islamic Insurance) in the Islamic Financial Services Industry

Role of Takaful (Islamic Insurance) in the Islamic Financial Services Industry

Date: 04.04.2008 - 12:28

 

    The Takaful and retakaful businesses play a crucial role in managing and mitigating the risks in Islamic finance. Takaful operators assume an important role as economic or financial intermediaries as they essentially mobilise long-term funds in the form of policy-holder contributions and invest them in the available Shari'ah compliant investments.

 

   • Absence of clear regulatory frameworks, prudential standards and codes of good practice, hinder the Takaful industry's potential for growth and development. Issues and obstacles include lack of legal and regulatory certainty and transparency, and resultant inadequacies in risk management.

 

   • The IFSB will be holding it's 3rd Seminar on the Regulation of Takaful on 27 November 2007. The Egyptian Insurance Sepervisory Authority is hosting the Seminar, which will be held in Cairo.

 

     Kuala Lumpur, June 19,2007 - The strong linkages, interdependence and synergies between the Islamic banking, capital market and Takaful (Islamic insurance) segments of the Islamic financial services industry (IFSI) necessitate a balanced development of these segments in order to develop a robust IFSI. Whilst the banking and capital market segments of the IFSI have seen tremendous growth at regional and global levels, the development of the Takaful segment can be described as rudimentary, particularly the development of the Takaful regulatory framework.

 

      The Takaful and retakaful businesses play a crucial role in managing and mitigating the risks in Islamic finance. Takaful operators therefore assume an important role as economic or financial intermediaries as they essentially mobilize  long-term funds in the form of policy-holder contributions and invest them in the available Shari' ah compliant investments. As custodians of Takaful policy-holders' funds, these operators have an obligation to ensure that not only are the Takaful funds managed and invested on sound basis and in accordance with Shari'ah rules and principles, but also managed at par with the standards of their counterparts in the industry. Underpinning all this is the need for the Takaful operators to act responsibly, transparently and ethically within the ambit of both Shari' ah and international principles as this is crucial to instill confidence in the industry.

 

     In the absence of clear regulatory frameworks, prudential standards and codes of good practice, the potential of the Takaful industry for growth and development may be stunted by related obstacles such as a lack of legal and regulatory certainty and of transparency, and resultant inadequacies in risk management. These obstacles need to be given immediate attention in order to facilitate the development of the Takaful industry, as failure to remove them would have a negative impact on the pace of development of the entire IFSI.

 

     For these reasons, it is now time for a focused strategy to put in place for the development of the Takaful industry by:

 

    1. developing a suitable regulatory and supervisory framework for the Takaful industry that reinforces the affiliation of the various industries within the IFSI; and

    2. adapting the relevant legal, governance, information and liquidity infrastructure for insurance so that it caters for the Takaful industry by accommodating the specificities of Islamic finance.

 

    Recognising the need to debate these issues, the Islamic Financial Services Board (IFSB) is organising it's 3rd Seminar on the Regulation of Takaful on 27 November 2007 in Cairo, Egypt which the Egyptian Insurance Supervisory Authority is hosting.

 

 

Note to the Editor:

 

    1. Takaful is based on the principle of co-operation and mutual help for the good of the society at large. Currently there are at least three Takaful models that are widely used, based on the contractual forms of mudaraba, wakalah and waqf or combinations of these. Whilst the existence of these models demonstrates the flexible and practical nature of Takaful principles, they also raise the questions of contractual relationship between parties and their respective rights and obligations, as well as the need to ascertain the types of risk peculiar or common to each model.

 

    2. The Council of the Islamic Financial Services Board (IFSB), in March 2006, amended the IPSB Articles of Agreement to enable insurance and securities regulatory authorities to join the IFSB as Full Members. With this amendment, Full Membership is now available to:

 

   I. Supervisory authorities responsible for the supervision of banking, securities and insurance or Takaful industry of each sovereign country that recognises Islamic financial services, whether by legislation or regulation or by established practice, and

 

   II. inter-governmental organisations that have an explicit mandate for promoting Islamic finance and markets.

   The inclusion of the securities and insurance/Takaful industry players in the IFSB' s scope has broadened the focus of the IFSB - allowing it to initiate the development of industry standards encompassing the whole spectrum of the Islamic financial services.

 

    The Islamic Financial Services Board (IFSB), which is based in Kuala Lumpur, was officially inaugurated on 3rd November 2002 and started operations on 10th March 2003. It serves as an international-standard setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance. Inadvancing this mission, the IPSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Islamic Shari'ah principles, and recommend them for adoption.

 

    The 125 members of the IFSB include 33 regulatory and supervisory authorities as well as International Monetary Fund, World Bank, Bank for International Settlements, Islamic Development Bank, Asian Development Bank, and 87 market players operating in 22