Role of Takaful in Islamic Finance

1. 4th International Conference on Islamic Banking & Takaful, Lahore Role of Takaful in Islamic Finance November 2, 2010. By: Capt. M. Jamil Akhtar Khan ACII, MCIT, Master Mariner Managing Director The Universal Insurance Company Ltd.

2. Outline of Presentation • Takaful Defined • Historical Perpective • Takaful today • Islamic Finance Versus Conventional Banking • Exposures in Islamic Finance • Coverage of exposures ― BancaTakaful • Cutting Edge…! • The Universal Insurance Company Ltd. • Conclusion

3. Takafuldefined

4. Meaning of Takaful • Takaful comes from the Arabic root-word ‘kafala’ — guarantee. • Takaful means mutual protection and joint guarantee. • Operationally, takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or loss.

5. Reference — Al Quran: • “Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2). • Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in need / in hardship .

6. Reference – Hadith: • “tie the camel first, then submit (tawakkal) to the will of Allah” The hadith implied a strategy to mitigate/reduce risk. • Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to a large number of participants. This mitigates the otherwise very damaging losses, if borne individually.

7. Takaful – Historical Perspective

8. Takaful through Time • Origins in the First Constitution of Madina. • It evolved and continued in one form or the other throughout the Abbaside period and even later during the Ottoman empire. • Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional insurance. • The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up in Bahrain.

9. Takaful Today • There are now around 180+ Takaful companies in over 40 countries. • The total insurance premium of OIC countries for 2006 was USD 75 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 3.5 Billion). This is expected to increase to USD 12 Billion by 2015. • Poor Insurance penetration in the Muslim countries (<1% of GDP). • Average growth rate higher than conventional insurance companies (around 25%). • Non–Muslims increasingly opting for Takaful products for commercial benefits.

11. Takaful Prospects in Pakistan • 97% Muslim population. • Demand for insurance shall increase with increase in per capita income. • Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other conventional classes. • Islamic banking already on sound footing.

12. Takaful– Target Market • People who do not insure due to religious reasons. • People who insure and are insensitive to religious reasons. • People who currently do not insure at all.

13. Islamic Finance Versus ConventionalBanking • Conventional banking is money lending. • Islamic finance is partnership in trading. • Ijara financing – Rental agreement • Musharaka/Mudaraba – Partnership Agreement • Murabaha – Sale with profit • Salam – crop financing • Istasna – manufacturing finance

14. Exposures in Islamic Finance • In Islamic finance, full or part ownership is retained by the bank. • This entails considerable exposures for the banker in the various forms of its trade financing. • The banker lacks hands-on expertise for several of such trading exposures. • Takaful as a means for hedging such exposures. Takaful exists even independently of Islamic Finance but Islamic Finance depends upon Takaful…!

15. BancaTakaful and Coverage of Exposures • Background • Range of Products • Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc. • Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful. • Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets. • E-Commerce

16. Bancatakaful (…Cont’d) Advantages of BancaTakaful: • Facilitation Desk / Equipment. • Fast Turnaround Time. • One-Stop shop for Clients. • Concept of Islamic Financial Supermarket. • Value Added Services. • Law of Large Numbers. • Lower Contribution Rates. • Attraction for Depositors. • Synergy.

17. CUTTING EDGE… ! CuttingEdge…!

18. Wakala-Waqf Model Share Holder S H A R E H O L D E R S’ F U N D (S.H.F.) Wakalah Fee Investment Income Mudarib’s Share of PTF’s Investment Income Management Expense of the Company Profit/Loss Takaful Operator Investment by the Company WAQF Claims & Reserves Surplus (Balance) Operational Cost of Takaful / ReTakaful Investment Income Participant P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)

19. THE UNIVERSAL INSURANCE COMPANY LIMITED • The Company has entered 50th year of its operations. • Majority shares are held by the prestigious ‘BIBOJEE Group of Companies’. • The Company is listed in all the stock exchanges of Pakistan. • It is an ‘A’ rated general insurance company. • Duly certified as ISO 9001 compliant. • Managed by dedicated insurance & finance professionals, the Company has an extensive country-wide branch network. • The Company is now planning to expand its operations by setting up Islamic insurance windows/branches in strategic regions. • In addition to dealing in all classes of general insurance business, we are focusing on providing Micro-insurance at grass-roots level.

20. Conclusion • Takaful introduced • Takaful through Time • Takaful – current perspective • Islamic Finance and Conventional Banking • Exposures in Islamic Finance • Cutting edge – The Takaful advantage! • The Universal Insurance Co. Ltd.

21. Thankyou for your attentioncaptain.jamil@uic.com.pk