Feature | Issues and Challenges in Introducing Islamic Insurance (Takaful) Into the Algerian Financial Market: Lessons from Malaysia

ByFares Djafri

Feature | Issues and Challenges in Introducing Islamic Insurance (Takaful) Into the Algerian Financial Market: Lessons from Malaysia

The Islamic insurance sector or Takaful has seen remarkable global growth in many major markets, especially in Muslim dominated countries. However, the development of Islamic finance, particularly Takaful in Algeria appears to have lagged behind. Although there are two Islamic banks operating in Algeria, Takaful is yet to be introduced into the Algerian financial market. We ran a study to investigate the perspective of Algerian experts in Islamic finance and takaful on the issues and challenges of introducing Islamic insurance into the Algerian financial market to address the following questions: What are the benefits of introducing Islamic insurance into the Algerian financial market? What challenges might Algeria face with the introduction of Islamic insurance? And how can the Algerian financial market adopt the Malaysian Islamic insurance framework?

Overview of the Concept of Takaful

Takaful, which constitutes an integral part of the the Islamic financial system, is an alternative model to conventional insurance first introduced in Sudan in 1979 and motivated by the growing needs of Muslim consumers for an insurance protection that is compatible with Shariah principles (Qureshi, 2011).

The Arabic term “Takaful” is derived from the word Kafalah which means “guarantee”. Takaful is based on the principle of mutual cooperation (Ta’awun) and donation (Tabarru’), where the risk is shared collectively and voluntarily by a group of participants (Ismail, 2011). According to Redzuan et al. (2009), the principles of mutual cooperation (ta’awun) and donation (tabarru’) are necessary in order for takaful to be acceptable by Islamic tenets embracing the elements of mutual guarantee and shared responsibility. Participants in a takaful scheme mutually agree to contribute into a takaful fund, through donations, a certain proportion of which contributes to providing financial assistant to any members suffering from loss. Shankar (2008) also noted that takaful is built on the principles of mutual cooperation, where each contributor participates in each other’s loss and, through their expertise, takaful operators facilitate this collaboration.

Algerian Ministry of Finance, Algiers

Algerian Ministry of Finance, Algiers

Takaful is thus an agreement between persons who are exposed to certain risks, to avoid the damage that results from such risks, who pay subscriptions into a pool of funds with a commitment to donate (Tabarru’). Legally, this pool of funds is considered a juristic person with an independent legal personality from which the damage suffered by one of the subscribed members is compensated according to regulations and policies. The pool of funds is often managed by a board of selected policyholders or by the shareholding company. The board or the company – as the case may be – carries out the takaful operations and invests the pools’ assets. The amount of profit earned is then included in a money pool and distributed among the participants. Certain proportions of the contributions are set aside to provide financial assistance to other participants in the event of disaster and loss (Khan, 2011). On the other hand, the relationship between the participants and the conventional insurance company is clearly a Mu’awadah contract (commercial exchange) and its objective is to increase profit (Al Qaradaghi, 2009).

This is different to participants in conventional insurance, who pay out contributions (premiums) to an insurance company which then invests them through interest-based instruments or non Shariah compliant investments. The surplus received from the interest and profit in this case are retained by the company without being distributed amongst the participants, only claims are paid with this surplus (Khan, 2011).

Study Findings

We used qualitative research methods to examine the issues and challenges of introducing takaful in the Algerian financial market. We conducted interviews with five Algerian experts in Islamic finance and collected their opinions and perceptions on the issues and challenges of introducing takaful in Algeria. Experts were selected on the basis of their experience and involvement in various areas related to Islamic finance and insurance. All participants were male and had worked for at least five years in their respective fields. The following are the themes that emerged from participants’ responses.

Economic and Spiritual Benefits of Takaful

All participants reported that Islamic insurance is part of the Islamic finance industry and co-exists with Islamic banking and Islamic capital markets. Participants predicted economic and spiritual benefits if Islamic insurance is introduced in Algeria. The introduction of Islamic insurance will satisfy a big demographic who are looking for Islamic insurance products. Moreover, participants mentioned that Islamic insurance can run in parallel with conventional insurance and it is not necessary for takaful products to operate independently. Existing insurance companies can open windows into Islamic finance and increase returns, instead of marketing to currently insurable customers, they can cater to a new category of customers who are looking for other products compatible with Shariah principles. Respondents had the following to say:

…it is just one of the channels for Muslims to invest their property in a Halal manner, it’s about getting peace of mind, and about sharing the risk which is one of the objectives of the Maqasid Shariah…
…the existing insurance companies can open Islamic windows and they can expand their return…
…if you open up a window people will come to you, then the business will become strong and you can create your own subsidiary…

Advantages of Takaful Over Insurance

In response to the question about the advantages of takaful over conventional insurance, participants discussed their views and perceptions on the main differences between takaful and conventional insurance.

Most of the participants agreed that takaful has an advantage over conventional insurance in terms of the investment return and risk mitigation. By paying subscriptions to Islamic insurance, consumers have opportunities for investment as well as receiving a share of the fund surplus. In other words, the customers of Islamic insurance get an investment return plus the surplus, whereas in conventional insurance there is little opportunity for any return. Respondents had the following to say:

….takaful is in line with the Islamic principles and that would be something that would make the customers believe that they are doing something in accordance with the Islamic belief…
…there will be opportunity for the investment as well as sharing the surplus…
…in conventional insurance you transfer your risk to the company, … it is like you are selling your risk by paying premium but takaful there is no such thing of risk transfer, it is about risk sharing among all participants in the takaful scheme

Challenges of Introducing Islamic Insurance

There was unanimous agreement throughout the interviews that the most important challenge to the introduction of Islamic insurance in Algeria is political will. In other words, the willingness and the support of the government is key for the successful introduction of Islamic insurance into the Algerian financial market. Besides that, respondents highlighted a misunderstanding by the regulators and the central bank of Algeria about the notion of Islamic finance and takaful. As put by one participant:

…the central bank of Algeria, the regulator should understand that takaful is not an ideological kind of industry, it is not based on negative ideas, nor has any extremist tendency, it is not back door to terrorism… it is a financial system that tries to operate accordingly to Islamic principles of fairness……this is understood by predominantly non-Muslims countries, there are institutions providing Islamic finance products in Germany, France, and Britain, all competing with each other to be at the heart of Islamic finance in Europe…

Another critical factor to successfully implementing Islamic insurance that emerged from the interviews points towards the creation of a comprehensive legal framework which should govern the operational processes of takaful operators and define in detail their various rules and requirements. A legal framework should be introduced and laws amended in order to enhance the operational efficiency of takaful businesses, build healthy takaful funds, safeguard the interests of participants, ensure uniformity with Shariah principles, promote fairness and be transparent to protect the interests of participants.
Additionally, respondents noted that the absence of re-takaful companies and real Islamic inter-bank market may constrain the introduction of Islamic insurance in Algeria. As takaful operators might not be able to cover all the risk alone and they need to cede the risk with other takaful operators (Co-takaful) or re-takaful operators. Similar to this finding, Benamraoui (2008) stated that one of the obstacles constraining Islamic finance in Algeria is the absence of a real Islamic inter-bank market, whereby banks are not allowed to raise funds from conventional financial markets as this is not allowed under Islamic law. Of this, respondents had this to say:

…to me the most important challenge is the political will…
…they are afraid Islamic financial market penetration may create some disturbance, an unbalance in the market …people behind the conventional insurance, they won’t like it whether the government is ready to open the doors or not…
…they do not want to create a schism, namely that this is Islamic and this is not Islamic…

Conditions and Perquisites

We also sought to explore participants’ insights about the conditions and pre-requisites to successfully introducing takaful in Algeria. Most participants agreed that in order to introduce takaful in Algeria, there should be authentic support from the government and the enactment of a Takaful Act that would be very clear in terms of licensing, identifying the rights and duties of takaful operators, setting up of subsidiary and branch offices, and maintaining separate funds for takaful fund and shareholders fund. Moreover, there should be a broad publicity campaign to raise awareness, establish audit systems and a Shariah board that can ensure that the products offered by takaful are Shariah compliant. Participants also highlighted the need to harmonize the Shariah law, invite experts and conduct training for staff, develop the infrastructure, and collaborate with international organisations such as The Islamic Financial Service Board (IFSB) and Accounting and Audit Organization for Islamic Financial Institutions (AAOIFI). This is strongly portrayed in the following comments:

…the most important thing which Algeria can learn from Malaysia is the infrastructure…e.g.: the distribution channels, the investment platforms provided for takaful operators, the arbitrators in case of any dispute, and the IT system …
…in Malaysia, they have amended the law to consider tabarru’ as a financial transaction which accepts return and benefit…
…The international corporation…we need to learn from the international standards like AAOIFI, Resolution of Majami` al-fuqaha’
…The support of the government is number one…real support…Malaysia has injected millions for the establishment of INCEI and ISRA… a lot of money has been injected…

Adoption of the Malaysian Framework

Most participants agreed that the adoption of the Malaysia framework in its entirety is not possible, but lessons can nonetheless be learnt from Malaysia. Participants noted that Algerian regulators should look to the potential introduction of some new laws and Acts suggesting that regulators and the central bank of Algeria should sign a Memorandum of Understanding (MOU) to collaborate in the areas of executive training and education in Islamic finance and Islamic insurance. This collaboration will enable the Central Bank of Algeria to send their staff for training and enables Malaysia to deploy its academic and industry services on the ground as well. Some of the interviewees commented:

…I do not think we can adopt but we can benefit from it because Algeria has sensitivity against adoption of foreign policies…
…unless if there is a political desire to benefit they will not adopt but they will come here and they will sign MOU for expertise sharing… they can sign MOU with the central bank, with INCEIF for example as an educational institution…

Takaful Products

Participants reported that most takaful products can be used in Algeria but it is preferable to introduce them on a gradual basis. However, participants mentioned that some products might not be useful, such as educational plans since education is provided free of charge in Algeria. Additionally, participants highlighted that investment linked products cannot be offered in the Algerian financial market because such products are linked to unit and mutual trusts traded in the secondary market, which have not been initiated in Algeria. Therefore, participants agreed that in order to really think about introducing this industry, the Algerian government needs to develop the infrastructure that will include a sound and robust Islamic capital market, regulatory and legal framework.

Conclusion

According to our study, factors that might influence the success of introducing takaful in Algeria span political will, amending the laws, publicity or marketing strategy for the industry, developing the infrastructure and collaborating with international organisations. However, the willingness or the support from the government was considered to be the most important factor for the successful introduction of takaful in Algeria. This support should be followed by enacting a Takaful Act that clarifies terms of licensing, and detailing the rights and duties of takaful operators. A marketing campaign should be enacted to raise public awareness and a comprehensive legal framework should be developed including the amendment of laws to suit the implementation of Islamic insurance. Furthermore, an audit system and Shariah board should be established to ensure that the products offered are Shariah compliant. Finally, collaboration with international organisations is needed particularly in terms of staff training and development.

References

Al Qaradaghi, A. M. (2009). Ta’amine el-Dayn wa el-Thamane. Kurdistan, IRAQ.

Benamraoui, A. (2008). Islamic Banking: The case of Algeria. International Journal of Islamic and Middle Eastern Finance and Management. Vol. 1 No.2, 2008. pp. 113-131.

Ismail, E. (2011). Takaful and Actuarial Practices. Kuala Lumpur: Published by the International Centre for Education in Islamic Finance (INCEIF).

Khan, M. M. (2011). Comparative Analysis of Islamic and Prevailing Insurance Practices. International Journal of Business and Social Science. Vol.2 No. 10

Qureshi, A. A. (2011). Analyzing the Sharia’h compliant issues currently faced by Islamic Insurance. Journal of Contemporary Research in Business. Vol 3, N.5.

Redzuan, H., Abdul Rahman, Z. and Aidid, S. H. (2009). Economic Determinants of Family Takaful Consumption: Evidence from Malaysia. International Review of Business Research Papers. Vol. 5 No. 5. Pp.193-211.

Shankar, S. (2008). Conventional Insurance Slow To Capitalize on Takaful Potential, MIF Monthly, Takaful Supplement.

Note: This article is based on a book chapter published in Contemporary Issues and Development in the Global Halal Industry, the book chapter can be cited as:

Noordin, Kamaruzaman, and Djafri Fares. “Issues and Challenges in Introducing Islamic Insurance (Takaful) into the Algerian Financial Market: Lessons from Malaysia.” Contemporary Issues and Development in the Global Halal Industry. Springer Singapore, 2016. 359-369.

About the Author

Fares Djafri author

Fares Djafri is a PhD candidate and researcher working in the field of Islamic finance at University of Malaya, Malaysia. Previously obtaining a master’s of science (Finance) from the International Islamic University Malaysia (IIUM). Currently, his research interests range from Islamic finance, Islamic insurance (takaful) to management.

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