Risk Management in
Islamic Financial Instruments
10
The first takaful operator was the Islamic Insurance Company, which opened in Sudan in 1979.
Currently, takaful operators are concentrated in Malaysia, Sudan and Bahrain, which have the
most developed regulatory environment for takaful ( 10 Year Framework 34). Takaful is the
smallest Islamic asset class with USD 15.2 billion in 2011 and, thus, represents only 1.1% of
global Islamic finance assets. Between 2007 and 2011, the global takaful market had a CAGR of
19.1% (“GIFF 2012 Executive Summary” 1).
In 2010, global Takāful contributions reached USD8.3 billion. Although the actual to-date
contribution is subject to uncertainty, the industry estimates the global total contribution to be
at USD12 billion in 2012, with an average annual growth of 20%. At present, the Takāful
market is highly concentrated in Malaysia and the GCC states. Between 2008 and 2010, in
South-East Asia and Bangladesh, the industry showed a CAGR of 32.4% and 27.9%,
respectively.
1.4.1 Driving Factors
Several factors have contributed to this growth: (a) Growing demand for Sharī`ah-compliant
products, (b) Growth of ReTakāful capacity, (c) A more efficient distribution channel of Takāful
products, (d) Growth in other financing products such as housing financing, (e) The
introduction of micro-Takāful across the world to penetrate the poor sections of society.
1.4.2 Challenges and Recent Developments
Takaful is the most underdeveloped asset class in Islamic finance. Takaful lacks Shariah
guidelines, even on the most basic issues. There is a lack of harmonization amongst
jurisdictions with takaful operators, and operators use different terminologies and have
different views on the concept of takaful. Further development of takaful is expected to
increase assets under management and the number of clients. As banks and clients become
less risk-adverse, they also become more competitive. However, these aspects of growth will
be hampered unless there is a proper legal and regulatory framework. In many jurisdictions,
takaful is placed under the same conditions and expectation as conventional insurance.
Treating takaful and conventional insurance as equals puts takaful at a competitive
disadvantage. With the rise in popularity of microfinance, micro-takaful has also been
considered prime to take on a larger role in Islamic finance ( 10 Year Framework 35-37).
The international community has begun to recognize more of the merits and advantages of
Islamic finance. According to the GIFF 2012 report, each asset class was expected to grow
during 2012. Growth in the Islamic finance industry was expected due to 1) an increasing
awareness of Islamic finance and growing confidence in its viability as an alternative to
traditional practices, 2) an increase in the number of countries adopting Islamic financial
practices, and 3) increasing demand for Shariah-compliant products and investments (“GIFF
2012 Executive Summary”).
Furthermore, during the recent global financial and European Debt crises, Islamic finance
institutions fared better compared to traditional banking institutions. Three of the