Category Archives: Takaful

Islamic insurance under IFRS: KPMG – Frontiers in Finance

Islamic insurance under IFRS: KPMG – Frontiers in Finance

Takaful, or Sharia-compliant insurance, is a relatively young market with a potentially huge customer base. With significant growth outside their current major markets of the Middle East and Malaysia, a large number of Takaful businesses are reporting under International Financial Reporting Standards (IFRS), which gives rise to complex accounting and reporting issues. The reason for this complexity goes back to fundamental differences between Takaful and conventional insurance models.

How Takaful works

Islamic finance law abhors any kind of speculation and outlaws uncertainty (Gharar), gambling (Maisir) and usury (i.e. interest, or Riba). Takaful is structured to avoid these prohibited elements, introducing elements of mutual help (Tawaun) and donation (Tabaru).

Policyholders’ premiums — which are treated as donations — make up a fund from which any insurance obligations are met. Takaful operators manage funds and settle obligations in return for an agency fee (Wakala fee), a profi t and loss share (Mudarabah share), or both. Any surplus in the fund belongs to the policyholders. If there is a shortfall in the fund, the operators make an interest-free loan (Qard-e-Hasan) to finance the defi cit.

Why current application of IFRS is problematic for Takaful businesses

A Takaful insurance fund is co-owned by its customers, who jointly agree to take on the insurance risk, and share out any surplus or shortfall arising in the fund. This means that there is no transfer of risk: Takaful participants are effectively both the insurer and the insured. Since Takaful operators never actually own fund contributions, they are essentially in the position of an agent or fund manager.

Despite these key conceptual differences, regulations in many jurisdictions treat Takaful operators exactly the same as conventional insurance companies. This gives rise to accounting and reporting treatments under IFRS which can be at best a poor fit, and at worst fundamentally unsuitable to refl ect Takaful principles.

For example:

  • Definitions under IFRS relating to insurance contracts and insurers do not reflect the risk sharing nature of Takaful contracts: IFRS assume a transfer of risk.
  • In order to present comparable financial information, IFRS largely ignores actual Takaful structures. Contributions from participants are treated as revenue, when it would be more accurate to record them as liabilities. Claims and other expenditure paid out of Takaful funds are recorded as expenses, when in fact they are a reduction of liability.
  • Some Sharia scholars argue that funds received by Takaful operators are fiduciary in nature and therefore should not even be shown on the operator’s balance sheet.
  • The IFRS accounting treatment of agency fees earned by the Takaful operator and charged to the fund can result in a confusing mismatch within the fi nancial statement. This is because fees are deferred in the Takaful fund as an acquisition cost, but recognized upfront in the operator’s income statement as service revenue.

Alongside these and many other complex discrepancies, many Sharia scholars also feel that IFRS does not offer the level of transparency and disclosure required under Islamic law. For example, Sharia principles require total segregation of the participants’ and Takaful operators’ assets and liabilities, and all schemes under the management of one operator must be segregated. This allows a fair share of surplus or deficit to be allocated to the participants of each scheme in a transparent way.

However, in almost all jurisdictions, Takaful businesses have to publish their financial statements on a combined corporate entity level, which can make it difficult for stakeholders to assess and understand results. To get around this problem, many companies reporting under IFRS present a se parate revenue account for each Takaful fund under management along with a separate income statement for the Takaful operator. Some also use columnar balance sheets showing the assets and liabilities of the operator side by side with those of the fund, together with the aggregate balance.

Dialogue required to enhance Takaful’s potential

It’s clear that current application of IFRS for Takaful companies represents an uneasy compromise for the business, customers and Sharia scholars. Yet it is obviously important for Takaful companies to be regulated under international standards if they are to move forward as part of a global industry. To develop a consistent presentation and transparent disclosure that reflects the true essence of Takaful, a productive dialogue between Sharia scholars and the wider industry should continue.

Frameworks already exist which should help provide insight and a basis for future development, including the accounting standards and guidelines for Takaful created by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Malaysian Accounting Standards Board (MASB) and the Central Bank of Malaysia (BNM). With a harmonized dialogue at global level, Takaful can reach its full potential.

International takaful (Islamic insurance) market could be worth $7.7bn by 2012: Ernst & Young

International takaful (Islamic insurance) market could be worth $7.7bn by 2012: Ernst & Young


Takaful is the great success story of this region’s insurance industry, but will it ever catch on in the West, and are its Gulf prospects truly long-term?
From Manama to Malaysia, takaful, or Islamic insurance, is on the rise.While still a relatively immature industry, takaful is looking to ride on the back of the explosive growth of Islamic finance in the Arab world, and increase its share in the global insurance market.

Global accountancy firm Ernst & Young predict that the international takaful market could be worth $7.7bn by 2012, up from a mere $1.4bn in 2004. Last October, the world’s second largest reinsurer Swiss Re said in a report that takaful grew 25 percent a year from 2004 to 2007, while the conventional insurance market posted low double digit growth at 10 percent in the same period.

Half of the market will go Takaful. It could be as high as that; up to 50 percent in five years.Like all Islamic financial products, takaful has to adhere to the strict principles of Sharia law. Income derived from interest is forbidden, along with revenue derived from prohibited activities or trade such as gambling, pornography, and alcohol. Takaful in Arabic means joint guarantee and it works on the basis that a group of people agree to share risk by putting money into investment funds, sometimes through a charitable donation, and then draw on these funds when there is damage or loss to a party.

"There is tremendous opportunity because it [insurance] is very underserved – insurance as a whole is very underpenetrated [in the Gulf], says Dinesh Chandiramani, director of distribution in equity and credit sales at Dubai-based investment bank Arqaam Capital.

"People are looking at decent growth for the sector of around 15 to 20 percent on an annualised basis because there is a nascent market right now which is in the process of being built up. It could grow significantly beyond that if the product is well-received and people start to buy into it," he continues.

Nick Frei, chief executive of Bahraini Islamic insurer t’azur predicts that takaful could have a 50 percent market share in the Gulf’s insurance sector by 2014.
"I firmly believe half of the market will go takaful. It could be as high as that; up to 50 percent in five years" says Frei.

But the rise of takaful has not been plane sailing. It still only makes up a fraction of the global insurance market and the sector’s growth has been hamstrung by a dearth of takaful reinsurers. Some are emerging, such as the Dubai-based Takaful Re, but generally there are too few companies to underwrite the risks of the smaller takaful players.

Therefore, many takaful companies go down the conventional route when it comes to reinsurance, and because of the lack of options available to the industry, it usually comes with Sharia scholars’ approval.

Currently, Malaysia, the world largest Islamic financial centre, is the market leader in takaful. It is home to some of the biggest Islamic operators in the world such as Takaful Malaysia, which aims to capture over half of the market share of the industry in under three years-despite the economic gloom. In comments made by the group’s managing director Datuk Hassan earlier in the month, the industry is worth RM12bn ($3.65bn), with his company’s current share at $1.13bn.

In conventional insurance, risk is sold at a price depending on age, background and financial status, introducing a largely commercial aspect. In takaful, transactions that are deemed to be uncertain are banned.For example, a Western insurance broker will sell risk, such as home insurance, not knowing whether there will be claim on the house.

In the West, insurance companies may invest in ventures which make their money from interest or in sectors that are forbidden by Islam.


Interview with Pervaiz Ahmed, CEO Pak-Qatar Family Takaful Limited

Interview with Pervaiz Ahmed, CEO Pak-Qatar Family Takaful Limited

pak qatar

Shahzaib Khanzada interviewed Pervaiz Ahmed, the director and chief executive officer of the Pak-Qatar family Takaful Limited.
Pak-Qatar Family Takaful Limited is the pioneer of the Takaful family in Pakistan. The company is regarded as a technology-driven shariah-compliant company providing need-based and cost-effective Takaful solutions in Pakistan.

SK: Ten months ago, your company was new and your plans were aggressive, and I had spoken to you back then about how realistic those plans were, keeping the situation of the country in view. What difference have you observed over the last 10 months?

PA: When I first spoke to you 10 months back, we had only just received a license and our company was in its launching phase. We had divided our expansion plans into two parts. Firstly, we thought of developing a company with a complete product range and one that is strong operationally, which means making your own house and order.

The second stage was to go into the market in front of the people, and to present an image that was consistent with the Takaful. The operational phase was very challenging, and we were supposed to do some expansion in the second phase. It was critical at that point in time that we should go out in the market and we did not know what kind of response we were going to receive. Generally when we made plans, we thought we were going to have 4,000 to 5,000 consultants over a short period of time, say three to four years. It generally looked optimistic because no other company had been able to achieve that mark.

Alhamdolillah over this short period of time, we have managed to launch a range of products, both for corporate customers and for individuals and now, we are present in all the major cities of Pakistan. We have opened up our offices in 13 cities so far and we are expanding very rapidly; we even have an office in Azad Jammu and Kashmir (AJK). Almost 800 consultants are working for us, we have trained and developed almost 12,000 to 13,000 people, and on the business side, a significant number of corporate clients have come onboard and are doing business with us and similarly a good number of customers have come onboard too.

By the end of the partial year on the 31st of December 2008, we had done business worth Rs 31 million, which is a very good number for a new company like ours. So now we have a full range of products in place, we consider ourselves one of the major players in the market, comparing our product line with any other established player that has been in the market for 12 years or more.

SK: When the country’s situation is such that, there is an inflationary scenario, an economic slowdown, the disposable income of the people has been hurt badly and they have to think twice even before purchasing the basic necessities; there can be two strategies of doing business. One is to carry out test marketing and taking things slowly. Your company on the other hand penetrated very rapidly and the numbers are all very surprising. What was the reason behind that? How is company so aggressive even during these hard times that Pakistan is going through?

PA: Generally, it happens that when you are strategising, there are always two parts to it. Firstly, the situation at the macro level, then there is the sector that you are focusing upon. Usually a lot of companies make the mistake of moving very cautiously in the desired sector just by considering the situation at the macro level. When we were launching this company, we analysed the market closely and found that the market has a lot of potential. The insurance penetration is very low and Islamic finance is needed in the market, so we should go out in the market regardless of the macro level situation.

Because there are a lot of gaps in the market, during this period the whole world including Pakistan was going through a financial and economic crunch. But some of the companies entered the telecommunications industry and they ended up doing pretty well, so basically we were focused on that sector. The nature of our business is actually long term. For example, when we sign a contract with someone; we always sign it for 15 to 20 years. Secondly, expansion in downtime is always easy because you can get quality human resource from the market, and you get the resources at good prices. Then, expansion does not take much.

I think it was a very focused approach, and we are still focused because of the response that we have received in a short period of time. There is only 0.3 percent penetration of the life insurance sector in Pakistan, which can go up to three to four percent. I believe that even if 10 to 15 more companies come, and work here, they will still have opportunities to make inroads.

SK: What you said happens to be a blessing in disguise because we keep saying that Pakistan’s economic boom started in 2002. If the Takaful had entered the market at that time, it would have progressed a lot better. But you think it is the other way around? If there is an economic slowdown, does it offer benefits of its own too?

PA: Yes of course, it has its own benefits. Pakistan did have an economic boom starting from 2002, but the situation of economic uncertainty in Pakistan has continued since the bomb blast in 1998, and the foreign ministers did not consider this a certain situation. I have been working with some foreign investment companies, and I know that we have now learnt how to live and survive in an environment that is uncertain. So if you are living in an uncertain environment, you learn to live and adapt with that, and it is true that this has some of its own advantages. If you are planning any expansion during a slowdown, and if you are doing it wisely, you can make a fortune out of it.

SK: I was going through your company profile and found it very interesting because all the people related to insurance, whether conventional or Takaful, have started talking a lot about the technologies that the bigger companies are investing in this field.

Others say that when they carry out cost benefit analysis, they don’t think that they is any need to invest in technology. You have actually mentioned in the first line of your company’s description that you want to be a technology-driven, Shariah-compliant company. Why is it so important that you have mentioned it in the first line?

PA: Technology is the heart of all the strategies that we are implementing. We are working in the service industry and generally in the service industry, customers’ satisfaction is considered to be the top most priority. Unfortunately, Pakistan is not a service-oriented country, as compared to the Western countries. So there are two elements to providing satisfactory services to the customers.

Firstly, it is the attitude of the people who are working, and number two is basically the tools. Both of these things are very important. For example, if you have the attitude but you lack the tools, you will not be able to survive in the industry. Similarly, if you have the tools but you lack the attitude, you would not be successful then either.

We have invested millions in our business technology, we brought up our business system from Malaysia, which gave us an edge to offer products and services that even the established insurance companies could not offer in the market. We believe that operation efficiency can only be achieved through technology. We wish to work at a low cost to pass on more benefit to the customers. Customer benefit is directly related to our cost, and without technology this is not possible.

SK: Your strategy seems to work well. Best of luck for your plans and thank you for your time.

PA: You are welcome.

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Pak-Qatar Family Takaful Ltd. to provide Takaful to Meezan Bank housing finance customers

Pak-Qatar Family Takaful Ltd. to provide Takaful to Meezan Bank housing finance customers


Meezan Bank Ltd and Pak-Qatar Family Takaful Ltd have signed an agreement whereby all customers of Meezan Bank’s Housing Finance (Easy Home) will be provided with Shari’ah-Compliant Life Takaful Coverage. Irfan Siddiqui President and CEO Meezan Bank Ltd and P. Ahmed CEO Pak-Qatar Family Takaful Ltd. signed the Takaful (Islamic insurance) Agreement at a ceremony on Tuesday.

According to the agreement, all housing finance customers of Meezan Bank will be provided comprehensive Takaful that will cover not only life but also accidental and natural disability. Moreover, the premium for the first year will be paid by the bank which is to be adjusted later.

The insurance penetration in Pakistan is only 0.3 per cent of its total GDP, which means just 10 to 15pc families are opting out this facility, while in developing countries 60 to 70pc families go for this.

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Islamic Home Insurance Launched in the US

Islamic Home Insurance Launched in the US


When Babar Saeed heard about the first Islamic insurance product in the United States his first response was, “Tell me more and how can I sign up?”  It’s a fact that true Shari’ah compliant insurance has finally arrived in the United States after various groups tried for 25 years. 

But now, building on their innovative track record, Zayan has successfully launched the first Islamic homeowner’s insurance program in the US.  Takaful is the final step in completing the range of Shari’ah compliant financial services offered in the United States and an impressive milestone for American Muslims.   

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