Malaysia Takaful Industry: Challenges and Hopes

					         Malaysia Takaful Industry: Challenges and Hopes


       The Takaful industry in Malaysia started to gain momentum when, in October
1982, the Malaysian government formed a special task force to explore the viability of
setting up an Islamic insurance company. Out of that study and based on its
recommendations, the Takaful Act 1984 was gazette and came into force thereafter.

       Since then the Malaysian Takaful industry has shown remarkable growth since
its inception slightly more than two decades ago. Indication to the need for Takaful
players to further strengthen its position in the industry and be more prepared for the
challenging economy was intensified by the Bank Negara Malaysia to chart the direction
and recommendations to strengthen the financial industry.

       Among challenges faced by the Malaysian Takaful industry were the increased
competitions as a result from globalization and financial liberalization; adapting
technological advances, and to meet the needs of more sophisticated and well informed
customers. In order to compete in the global market, the Malaysian Takaful industry
must be represented by strong Takaful players represented by sufficient expertise and
strong will.


      Today, the global Takaful industry has some 110 operators, with combined total
assets and contributions (premium) of about USD 1.5 billion and USD 600 million
respectively. Clearly, these figures are insignificant compared to the global Muslim
population of more than one billion.

      Obviously, Takaful presents vast opportunities and a massive market for its
products. Malaysia is a leader in this industry among non-Arab countries. For instance,
in Malaysia, Takaful represents a USD 143 million market or 27% of the total insurance
market in the country compared to Asia Pacific countries which have a USD 50 million
(9%) market, Europe and US (USD 6 million or 1%), and Arab countries (USD 340
million or 63%).

                                     Figure One
                     Share of Potential Muslim Market by Region

                             Source: Oliver Wyman (2008)

       Malaysia is always viewed as the center of product excellence in the realm of
Islamic banking and finance. All the major players are in the industry, for example CIMB
Aviva, Prudential BSN, Allianz, Kuwait Finance House and Manulife to name a few. This
means big brands on the supply side have come in. Distributors like Citibank, HSBC
Amanah, ABN Amro, Standard Chartered Saadiq and Maybank Etiqa are also coming
into play. Therefore, the distribution and supply sides have big brands, which is usually
a sign that the industry is progressing from its infancy stage to the mid-market growth
phase. The big brands must have come in for a reason. They must have done their
calculations and seen potential in the industry. Some mergers are also taking place.
Prudential BSN, for example, recently bought Al-Jazeera‟s Takaful business in Saudi
Arabia while Solidarity teamed up with MAA in Malaysia.

       In Southeast Asia, apart from Malaysia, Brunei and Indonesia are also seen as
major players in the Takaful market, while Singapore and Bangladesh in South Asia
have also come onboard of late. Smaller Southeast Asian players include the
Philippines and Thailand.

       Takaful is derived from the Arabic word „kafalah‟ which is a pact that guarantees
individuals in a group against loss or damage sustained by any one of them. Taking the
cue from this, the Malaysian Takaful Act 1984 defines Takaful as “a scheme based on
brotherhood, solidarity and mutual assistance which provides for mutual financial aid
and assistance to the participants in case of need whereby the participants mutually
agree to contribute for that purpose”.

       In other words, Takaful refers to a group of people investing in a fund that can be
drawn on to support an affected party. As it originates from an Islamic concept, one of
the greatest challenges facing the Takaful industry is the misconception that it is for
Muslims only. Sadly, this misconception was self-inflicted because in its initial launch,
Takaful was promoted as an “Islamic” product by Muslims and for Muslims. Hence, the
Halalness of the product is what attracted or being propagated to the Muslim customers,

rather than the beauty and the benefits of the Takaful products vis-à-vis its conventional

      Uniquely, Takaful products have attracted even the non-Muslim communities,
despite the obvious religious and cultural differences. The corporate sector and
multinationals are also subscribing to Takaful products. Nonetheless, the interest shown
by non-Muslims and the support of Muslims is not enough to promote the awareness
and the growth of Takaful and what it has to offer. It is this lack of awareness that
presents one of the greatest challenges to the development and growth of the national
and global Takaful industry.

                                    Table One
               Difference between Conventional Insurance and Takaful

       Conventional insurance                                  Takaful
 Governed by secular law                    Compliant with Syariah and Islamic
 Risks are assumed by the insurer           Risks are shared by Takaful fund
 Insurance funds are owned by the           Takaful funds are owned by participants
 insurer                                    while
                                            operator‟s fund is owned by Takaful insurer

 Investments are not generally restricted   Investments of Takaful funds are free from
 from featuring an interest element         interest (riba) element

 Surplus in the funds belongs to the        Surplus/deficit in the Takaful funds belong
 insurer                                    to

 No Syariah board                           Takaful company has its own Syariah

      Another challenge is in meeting expectations. The financial strength, stability and
standards of conventional insurers are established and known. These conventional
insurers have been in the industry for many years and their service levels are perceived
better than those of Takaful operators. Thus, the players need to overcome negative
perceptions of Takaful and prove to the market that its operators are capable of

providing competitive services that are on par with or better than conventional insurance

       One way to do this is to offer a wider range of Takaful products as an alternative
to those offered in the conventional market. Furthermore, the needs of the lower income
groups must also be addressed. One that comes to mind is to offer micro-Takaful, which
is a concept of providing affordable cover to the poor. Scholars have always had
differing opinions on the management of Takaful. This is a global issue, so streamlining
their opinions on what is acceptable in Takaful terms will help improve penetration and
eliminates confusions among the operators, specifically the public as a whole. This
situation is currently being overcome, thanks to the development of a more acceptable
model such as „wakalah‟, which is helping Takaful operators expand beyond their home

       In doing so, the Takaful industry must design new and innovative products that
meet client and market expectations, failing which its growth will be stifled. A change in
mindset is also a pre-requisite to grow beyond bigger and become a global player. The
ten-country Association of South East Asian Nations (ASEAN), with its 500 million
populations, presents a vast opportunity to expand the Takaful markets.

       A major challenge in achieving this and growing the industry is the fact that there
is a dearth of human resources that is well versed in Takaful to facilitate its expansion in
a more cohesive manner. The constant need to identify qualified Takaful talents has
forced operators to recruit personnel from conventional insurers, and retrain them to
take up the Takaful challenge. But this means spending considerable amounts of time
and money to re-educate them on the difference between both concepts.

       Regulations such as those which require Takaful operators to ensure compliance
through the Syariah Council before any product can be marketed are often a cause of
delays. Clearly, it is in the best interest of the Takaful industry to speed up the process.
In the meantime, operators are forced to design several products at a time and release
them in stages to remain competitive and relevant in the global financial industry.


       Takaful or Islamic insurance is a concept whereby a group of participants
mutually guarantee each other against loss or damage. Each participant fulfils his or her
obligation by contributing a certain amount of donation or „tabarru‟ into a fund, which is
managed by a third party, the Takaful operator.

       In the event of loss or damage suffered, the Takaful operator will disburse the
funds accordingly to its participants. Any surplus is paid out only after the obligation of
assisting the participants has been fulfilled. Through this principle, Takaful operates as
a protection and profit sharing venture between the Takaful operator and the

       Globally, the Takaful industry has been growing rapidly, appealing to both
Muslims and non-Muslims. The industry is expected to grow by 15 to 20% annually, with
contributions expected to reach USD7.4 billion by 2015. Currently, there are more than
110 Takaful operators worldwide.

       Malaysia has achieved significant milestones in the development of its Takaful
industry. With the enactment of the Takaful Act 1984 since then, Malaysia‟s Takaful
industry has been gaining momentum and increasingly recognized as a significant
contributor to Malaysia‟s overall Islamic financial system.

      As in 2008, total assets of Malaysia‟s Takaful industry amounted to USD2.8
billion, with market penetration of 7.2%.2 Takaful assets and net contributions
experienced strong growth with an average annual growth rate of 27% and 19%
respectively from 2003 to 2008.

                                    Figure Two
                Different Challenges in Various Worldwide Markets

                            Source: Oliver Wyman (2008)

      Malaysia continues to progress and build on the industry‟s rapid development by
inviting financial institutions across the world to establish Takaful and retakaful
operations in Malaysia to conduct foreign currency business. The rapid liberalization of
Malaysia Islamic financial industry has encouraged foreign institutions participation in
Malaysia, thus creating a diverse and growing community of domestic and international
Takaful operators. There are currently eight Takaful operators and two retakaful
operators, with five foreign participations from the United Kingdom, Bahrain, Germany
and Japan. These Takaful operators conduct both domestic and foreign currency


      The global economic environment in 2009 has showed brisk growth despite the
slight slowdown in the US economy due to a slump in the housing sector affecting
consumer spending. There was notable rapid industrialization in comparably less
developed economies such as China and India, while the European Union enjoyed
renewed economic growth momentum.

      Takaful Ikhlas Sdn Bhd is always looking at the impact of the globalization and
local economic environments in the recent and coming years. Through it all, Takaful
industry in Malaysia has always remained strong and vibrates.

      Currently, domestic economies have integrated into regional and global
economies in a healthy and active spirit of globalization and Islamic finance has
emerged and proved to be a global force to be reckoned with.

      The Malaysian economy has benefited from the efforts of the Bank Negara and
of the government to strengthen the institutional infrastructure of the Islamic financial
industry. This is in line with Malaysia‟s emerging and recognized status as a centre of
Islamic industry and finance. The Islamic finance industry in Malaysia has proved to be
a viable and noteworthy component of the financial system as a whole. It comprises

almost 25% of Malaysia‟s gross national product. This encompasses wholly-Islamic
financial institutions as well as Islamic banking schemes housed within conventional
financial institutions. Additionally, the emergence of diverse players in the Takaful
industry has contributed to greater efficiency and productivity as companies face
increased competition nationally and globally.

       The measures announced by the Malaysia‟s Prime Minister for the recent Budget
2009 have shown to provide incentives that are encouraging and advantageous for the
Islamic finance industry. The budget announcement of the Employee Provident Fund‟s
channeling of RM7 billion into Islamic fund management companies is a positive move
for key players in the Islamic finance industry, so is the provision for non-resident
consultants with Islamic finance expertise to be qualified for tax exemption. Additionally,
Islamic fund management companies are given the authority to be owned by non-
Malaysians, which provides the impetus – together with the other incentives and
measures for a renewed inflow of interest and investment into the dynamic and steadily-
growing Malaysian Islamic finance industry.

       From a consumer perspective, Islamic finance has endeared itself to non-Muslim
sectors of the market, thanks to universal Islamic finance principles of profit-sharing as
well as the prohibition of collection and charging of interest. This phenomenon has
grown globally too, as consumers and conglomerates see the advantages and benefits
of engaging Islamic financial institutions for conventional business systems.

       The globalization in finance industry is a challenging one. Takaful Ikhlas Sdn Bhd
has viewed it as an opportunity for transformation in preparation for future growth.
Within this environment, Takaful Ikhlas Sdn Bhd has managed to perform while facing
an external environment of increasing competition and technological advances. The
company is undergoing a process of laying a foundation that is strong enough to endure
any new challenges. Takaful Ikhlas Sdn Bhd, as one of major players in the Islamic
finance market, was faced with issues that threatened to place uncertainty where

confidence once reigned. Increased volumes of business are the aim of many
                                    Figure Three
                       The Takaful IKHLAS Model of Business

                  Source: Takaful Ikhlas Sdn Bhd Annual Report 2008

      Takaful Ikhlas Sdn Bhd has grown steadily over the years.        With company
restructuring of the new systems and people : management, personnel and structural
systems included, the company is prepared and equipped to face stiff international
Islamic financial competition for a portion of the growing globalize market and demand
for Islamic financial instruments worldwide.


         International Islamic financial and Takaful industry has brings a number of
significant operational challenges and changes compared to conventional insurance
models. In strategic management perspective for instance, policy management systems
will need to be adapted significantly to cope with product design, investment
management, and financial administration for example, tracking the policy-by-policy
surplus share calculations.

         In order to compete globally, Takaful Ikhlas Sdn Bhd must realize that not all
aspects can be „copy-pasted‟ across countries as there are clearly significant country-
specific elements of detailed product design, marketing, and regulatory approval.
However, there are also real and valuable commonalities, and we see this as an area in
which Takaful players building a multi-geography business to be able to create
competitive advantage through scale economies.

         As noted above, the main focus of worldwide competitive interest in Takaful has
been a small number of markets, particularly in Malaysia with several incumbents and
several international insurers trying to enter.

         Broadly, there are three types of Takaful business which is likely to enter the
worldwide and global market. There are existing single-country incumbents, new start-
ups, and existing cross-border and global players.

      Each will have different competitive advantages:

      a) Existing single-country incumbents, who will benefit from an existing „umbrella‟
         brand name, but who may need to consider the branding impact of targeting a
         different customer segment with a distinct proposition; and who also will need to
         overcome the challenges in establishing a compliant operating model from

b) New startups, which may have some Takaful experience from backers who have
   existing Takaful operations in the Middle East or Southeast Asia, but will have
   little in-market experience in any given country and will have an urgent need to
   develop end consumer branding and channel relationships

c) Existing cross-border and global players, which can been seen as best placed to
   build a genuine cross-border business model, benefiting from incumbency
   positions in multiple markets worldwide and potentially able to design and exploit
   a scalable Takaful model but at the same time, will need to determine how much
   of the Takaful model is truly common across different markets; and how a
   Takaful model should best be tailored to both market conditions and their
   particular brand positioning in each local market

   It is too soon to know which of these types of insurer will prove most successful
in the Takaful if the history of insurance is anything to go by, most likely there will be
success stories within each business model. However, whatever model is chosen,
insurer wanting to succeed in Takaful will need to think carefully about how to build
sustainable competitive advantage.


       The top-line global growth potential for Takaful, arising from Muslims „switching‟
out of non-Takaful products, new business from Muslims and from the non-Muslim
„ethical‟ sector is clear and has already been discussed. However, given the competitive
nature of insurance markets, making bottom-line profits will depend on successfully
addressing multiple elements of what is a new and different business model. New
entrants will need to understand the demographics of the target segments; the
organizational and risk management challenges for example, in how to create a viable
asset-liability management strategy, the cost implications of setting up a parallel fund
and management infrastructure and the potential for and sustainability of premium

       These challenges are not trivial, especially in the highly competitive global
Islamic markets. However, given the distinctive nature of the Takaful product and the
innovative ways in which it can be structured and sold, there is definite profit potential
for Takaful Ikhlas Sdn Bhd Malaysian to build a credible brand, structure the correct
offer, create an appropriate organizational model, and learn from the existing successful
competitors in worldwide markets.

       Indeed, Takaful offers a unique opportunity to access an untapped profit pool of
Islamic and non-Islamic customers, across countries, in life and non life insurance, and
in both the primary and reinsurance markets.

       But for Takaful Ikhlas Sdn Bhd, it is the time to act now. The foreign based
companies are waking up to the potential for Takaful, with new announcements almost
weekly. Given the size of the prize and the strong first-mover advantage, the
opportunities will not remain uncontested for long. Those who stake out the ground
today could dominate this large and growing segment for many years to come.


      In order to achieve success in global market, Takaful Ikhlas Sdn Bhd depends
very much on the ability to innovate and provide enhanced value proposition for
consumers. Takaful needs to cater both Muslim and non Muslim markets. They need to
explore new approach to have competitive the edge in the market and they have to
expand for regional expansion for higher business growth and synergies diversification
to broaden revenue source, marketing plan and expand overseas markets. Companies
would need to upgrade productivity and have new technology. It is suggested that a
strategic alliance is a cooperative strategy in which firms combine some of their
resources and capabilities to create a competitive advantage such as joint venture.
However, innovation need not be limited to material benefits only. There are customers
who would perceive spiritual benefits to be of value too. The key is to understand what
the targeted customers consider to be of value from their perspective.


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Description: Among challenges faced by the Malaysian Takaful industry were the increased competitions as a result from globalization and financial liberalization; adapting technological advances, and to meet the needs of more sophisticated and well informed customers. In order to compete in the global market, the Malaysian Takaful industry must be represented by strong Takaful players represented by sufficient expertise and strong will.