The 15th Malaysia
International Halal Showcase 4-7 April 2018 Malaysia International Trade and Exhibition Centre (MITEC), Kuala Lumpur

Blog

Why You Should Choose Takaful
22 January 2017

Islamic financial sectors have boomed at an alarming rate in the past decade. Although there is a slowing down of growth, it is important to analyse how Takaful insurance works in comparison to the conventional insurance sector, since there is still an inherent value to the service and product itself. One of the major differences between Takaful and traditional insurance is that the former relies on a principles of trusteeship and mutual cooperation while the latter only focuses upon commercial interest. A conventional insurance company normally invests its funds to earn interest and it also lends money to life insurance policyholders on interest and in case of delay or default in repayment, a penalty interest is charged. The excessive interest at times becomes equal to the surrender value of the policy. At this stage, the company conveniently writes off the policy value against the bloated loan outstanding in its books. Islamic scholars deem the practice of depriving the policyholder of his hard earned money cruel and unfair exploitation. On the other hand, mere investment in the interest bearing instruments renders the operation of an insurance company out of line with Sharia regulations. A conventional insurance companies focus on interest means it is profit-oriented, which can come at a loss of the insure themselves. This also inherently means that Takaful insurance is free from interest (Riba), gambling (Maysir). When it comes to the management of accounts, Takaful companies practice full segregation between the Participants Takaful Fund account and the shareholders' accounts. Traditional insurance companies however implement policies where the premium paid by the Policyholder is considered as income to the company, belonging to the shareholders. This practice of traditional insurance companies tend to create a perverse and harmful for companies to drastically increase premium in order to satisfy the needs of their shareholders. Hence, to avoid this unwanted consequence, Takaful companies ensure that the accounts are segregated. Furthermore, Takaful companies also provide further benefits to the Participants since any surplus is in the Takaful Fund is shared among Participants only, and the investment profits are distributed among Participants and shareholders on the basis of Mudaraba or Wakala models. This is drastically different from conventional insurance, where all surpluses and profits belong to the shareholders only, again creating the problem of perverse incentive mentioned in the paragraph above. Since Takaful insurance is heralded as the Islamic way to do insurance, how and where the insurance company invests also matters. Takaful insurance companies utilize the Plan Owners’ and shareholders’ capital to invest in Sharia-compliant industries, companies or sectors. This means that, unlike conventional insurance, there is no possibility that the capital would be invested in sectors that involve gambling or haram products, which puts the minds Muslim plan owners and shareholders at ease. Islamic insurance companies require considerable capital investment to become established, yet relatively nascent companies often have a harder time to generate profits and deliver healthy returns to their investors, which might sometimes the deceleration of growth in the Takaful sector. However, as elaborated above, there are still a lot of benefits to accrue from Takaful insurance as compared to conventional insurance companies, making it a sector still worth keeping an eye out for.