Takaful as an Alternative Insurance Instrument for the Investors with Religious Sensitivity

Transcription

1. Chapter 4 TAKAFUL AS AN ALTERNATIVE INSURANCE INSTRUMENT FOR THE INVESTORS WITH RELIGIOUS SENSITIVITY Cumhur ŞAHİN1 INTRODUCTION An extraordinarily turbulent period was seen in the international finance system together with both the global petroleum crisis and the demolition of Bretton Woods system especially in 1973. Right in this period, the need for an alternative insurance occurred in a way that it will address to the believer individuals and be convenient for the religious provisions instead of the traditional insurance business depending on the religious reasons such as the prohibition of interest together with the impact of the transformation of the Islamic banking into a functional situation. As a result of this need and for the purpose of filling the gap in this area, the emergence of the takaful system was inevitable. CONCEPTUAL FRAME OF TAKAFUL The codes of practice of takaful; in other words, Islamic insurance method, are based on the commands and prohibitions of Islamic religion. The purpose in takaful system is to minimize the possible damage under the exposed dangers by uniting the individuals within a certain risk group or to provide the compensation of the losses without allowing them to wreck the lives of the individuals. In this system; also, the aim is to provide the mutual warranty with the principle of undertaking one risk to the account of another instead of making profit (Karayazgan, 2008:109). Besides; the premiums paid by the participants is not for the purpose of loading the risk of the insured to another participant. The purpose here is to show a cooperation activity that will gain the sake of Allah and to operate the social security mechanism by sharing the risk of the insured with other individuals. Because the paid premiums are invested as donations, it shows that a long-term cooperation is aimed (Selçuk, 2014:352). Assistant Professor Dr, Bilecik Şeyh Edebali University Bozuyuk Vocational School, cumhur. sahin@bilecik.edu.tr 1 - 47 -
2. Finance and Accounting I Takaful means “cooperation” in lexical meaning and has derived from “kefalet” being an Arabic rooted word. Takaful has different implementations changing depending on the countries. Three main properties of these implementations are respectively as follows; a-) cooperative insurance in which the non-profit making insurees come together, b-) assessment of the funds collected by the insurance companies in interest-free investment tools, c-) social insurance pool model in which the damages and responsibilities are divided according to the shares of the participants. Although takaful insurance is very novel, it renders all the policy services rendered by the conventional insurance companies. However; it is early yet to conduct an analysis regarding how the collected funds are assessed. Although it is asserted that interest and its derivative investment tools are avoided; because there is no private legal regulation, they sustain their activities according to the current insurance law. For this reason; it is more convenient to conduct an assessment following the legal regulation. TAKAFUL AND OTHER INSURANCE IMPLEMENTATIONS It is beneficial to know the concept and operational principles of the conventional insurance system to be able to comprehend the takaful system better. It will be fruitful to conduct a comparative analysis of the conventional insurance system and takaful system. CONVENTIONAL INSURANCE It is possible to see various insurance and similar implementations in all the societies along history although they are not like today’s insurance implementations in contemporary meaning. The first examples of them are known to have been in Egypt in 4500 BC and afterwards in Babylon in 2250 BC and it could be said that the foundations of insurance business in modern meaning were laid together with the navigation (shipment) insurance in 14th and 15th centuries. The foundation of the conventional insurance business started to be laid as of 19th century in Turkey (Acınan, 2006: 1-5). The main operational scheme of the insurance system is given in Figure 1. Insurees sell their insurance products (policies) in return for the premium cost in the conventional insurance system. The ownership of these collected premiums belongs to the insurance company. The sum remaining after deducting the compensations and necessary expenses such as reassurance costs, damage com- 48 -
3. Finance and Accounting I pensation reserves , operational expenditure and reserve allocation etc. from these premiums in the event of a damage is directed to investment. The profits attained from this investment completely belong to the insurance company. The administration of these collected funds is conducted by the insurance company. In the event that there is an underwriting deficit from the collected premiums, it is necessary for the insurance company to compensate this deficit from its own capital. Table 1. The Differences between Takaful and Conventional Insurance Issue Conventional Insurance Takaful Aim Provide profit to the shareholders Cooperation of participants Process Risk Transfer Sharing risk among participants Profit Plan Profit Maximization Benefit of donators Value Judgments Laws Regulations of Islamic law Owner of the fund Shareholders Participants Administration Company Management Operation responsible Contract Sales contract Risk Partnership Investment Interest processes Interest-free, Profit-loss partnership Money remaining in To the account of the the fund shareholders Benefit of participants is considered Resource: Islamic Shari’ah Research Academy for Islamic Finance (ISRA), 2011 Table 2. First Established Takaful Companies Takaful Company Country Year Islamic Insurance Co.Ltd. Sudan 1979 Islamic Insurance Co.Ltd. Saudi Arabia 1979 Dar Al Maal Islami,Cenevre Switzerland 1983 Takaful Islam Luxembourg Belgium 1983 Takaful Islam Bahmas Bahamas 1983 Syarikat Takaful Malaysia Sdn Bhd Malaysia 1984 Takaful TAIBSdn Bhd Brunei 1993 Takaful IBB Bhd Brunei 1993 MNI Takaful Malaysia 1993 PT Syarikat Takaful Indonesia Indonesia 1994 PT Asuransi Takaful Keluarga Indonesia 1995 Syarikat Takaful Singapura Pte Ltd. Singapore 1995 PT Asuransi Takaful Umum Indonesia 1996 Resource: tekaful.net - 49 -
4. Finance and Accounting I REASONS FOR THE PROHIBITION OF TRADITIONAL INSURANCE Traditional insurance contains problems in religious terms both in terms of containing indirect and direct interest . While the difference between the insured sum and premium amount contains direct interest, the investment made by the insurance on the interest-based transactions causes it to be a transaction based on interest by the policy owner although it is indirect. OPERATIONAL PRINCIPLES OF TAKAFUL SYSTEM While performing its activities, takaful company functions as a custodian or manager based on the power of procuration or partnership. The operations and partners taking policy provide support to the takaful fund. Progress payments are met from the takaful fund and the surplus and deficiency of the insurance are met by the shareholders. A part of the contribution is always assessed as investment fund in the life assurance. The operator uses the funds according to the basis of the power of procurement or partnership. In the event of the surplus or deficiency of the insurance; while the responsibility belongs to the policy owners, the distribution of the profit made from the operation is dependent on the power of procurement or partnership. The working style of takaful is mainly separated into two groups; life assurance which is also called as family takaful and general takaful. If the company is working as partner, the contributions compensated by the owners of the life assurance policy are separated into two as the protection part (takaful fund/progress payments) and saving/investment part. If the company conducts activities with the power of procurement, the contributions are separated into three; a part as the administration expenditure, protection part and investment part. In general takaful, all given contribution is accepted as donation given for protection and while the participants waive from their property rights in a way that it will be beneficial for the takaful fund, the insurance surplus and/or deficiency is a responsibility belonging to the participants (Ayub, 2017: 449). TAKAFUL MODELS An insurance that could be convenient in terms of Islamic religion should contain the properties of cooperation, collaboration and donation within itself. Religious scholars are in a consensus in the issue of the fact that they could be the commercial principles in accordance with the Islamic business principles as well as them. Within this context, religious scholars sometimes develop various models such as power of procurement, partnership and foundation. - 50 -
5. Finance and Accounting I Rather ; the takaful operator has the function of an attorney in terms of the participants in the absolute power of procurement model used in Middle East and gets the fee in the way of a determined percentage (for example, 25% of the participant donations) and all the insurance surplus and/or excess, investment profit and/or loss belong to the policy owners or participants. Fee for the power of procurement is taken for the purpose of meeting all administrative expenses of the company. Fee ratio is previously decided every year by having an interview with the sharia committee of the company. As an incentive, a certain part of the insurance surplus is given to the operator in parallel to the performance level. However; in the event of loss, the mentioned loss belongs only to the participants. Therefore; religious scholars share their doubts regarding this model due to the fact that it is not fair. In the absolute power of procurement model used in Asia-Pacific region in which Malaysia and Indonesia take place, participants and the operator sign power of procurement contact to share the losses within cooperation by the members and also the profit if there is. As in conventional insurance, the profit occurring as insurance surplus is distributed among the company and participants according to a ratio mutually determined (such as 50%-50% or 60%-40%) (Ayub, 2017: 450). THE STATUS AND POTENTIAL OF TAKAFUL INDUSTRY Takaful activities proved themselves right within the period of the first 20 years and the first takaful company of the world was established in Sudan in 1979. Malaysia having a very important place in this issue entered the takaful business in 1984. Takaful sector has made a vast move in the Middle East countries, mainly in Saudi Arabia. When compared to the annual average 5% global growth of the conventional insurance sector, it has shown a dramatic growth by 10%-20%. When the geographical distribution of the takaful companies has been examined; while mostly Middle East countries and Asia-Pacific countries are at the forefront, there are takaful companies even in the countries such as Luxemburg, Trinidad and Tobago that are not Muslim. More than 60 companies rendering takaful services in 24 countries show activities worldwide. These countries are Bahrain, Bangladesh, Brunei, Egypt, Ghana, Indonesia, Iran, Jordan, Kuwait, Luxemburg, Malaysia, Pakistan, Qatar, Saudi Arabia, Senegal, Singapore, Sri Lanka, Sudan, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates and Yemen (Ayub, 2017: 454). Global takaful market has reached 19 billion $ as of the end of 2017. Estimations show that the market will grow by 13% annually in the period of 2017-2023 and the market will increase to 40 Billion $ in 2023 (https://www.researchand- 51 -
6. Finance and Accounting I markets .com/research/b9zk3d/global_takaful?w=5, access date 16.10.2018) Takaful products address to all economical shareholders both in individual and in corporate level for the purpose of meeting the short and long term financial needs of various groups in the society. In addition; when considered in global level takaful system is unfortunately away from the success level it has reached in Islamic banking. There are two main reasons for this. These are as follows: 1) An enormous investment is needed to be able to compete with the conventional insurance sector. 2) As in the example of Malaysia, modifications should be made within regulative frame to be able to give opportunity for takaful to be able to compete with the conventional industry under equal conditions. Takaful has a potential for the systems convenient for Islamic law and especially Islamic banking. There are low insurance intensity (premium per person) and low penetration (premiums as the percentage of the gross national product) in Islamic countries. The main reason for this is the fact that most of Muslims have a prejudice that insurance is not convenient in Islam and that this system does not have any alternative in the current situation. Together with the development in Islamic banking, there has been an increase in leasing (financial renting) and housing loan requiring takaful. Moreover; there is a need for takaful in the events of individual policy situations such as motor vehicles, health and family security. This potential could be put in action if awareness is raised by conducting trainings and contact meetings related to the qualifications of takaful system and especially the life takaful. Only a limited number of families have attained takaful policy until today. Only Bank Aljazira in Saudi Arabia in Middle East geography renders various private safe-deposit (family) takaful services such as retirement, marriage, education and protection for general public and corporate customers. Other takaful companies rather deal with mixed activities. Islamic operators should be open for a number of people and groups staying away from insurance in the past for religious reasons. Islamic banks could put the potential into use and demand to complete the Islamic finance cycle faster in this way. Well-capitalized associated takaful companies could be established as long as there is no legal limitation in the markets and countries in which no applicable takaful opportunity is existent. The actual aim of these companies could be to render takaful services to the Islamic banks by taking the religious provisions into consideration. Furthermore; it is possible for them to conduct other market transactions. - 52 -
7. Finance and Accounting I HARDSHIPS OF TAKAFUL The main structure of the insurance implementations allowed by the Islamic law is accepted to be generally based on the principle of the mutual cooperation of the community members by the religious scholars . What will be done is to improve, re-arrange and develop the current operational structures in terms of models and procedures. Working on many conceptual problems has a great significance to establish trust and ensure the adoption of this kind of insurance implementations in this way. Complete obedience to the requirements of the concept of donation and coverage of the foundation institution in the agreement of takaful for being away from the religious objections should be taken to the forefront by the takaful operators. Other problems necessary to be solved are sufficient capitalization, providing opportunities for the competence of takaful operators with classical operations and fund investment methods in accordance with Islamic law, standardization/adaptation of transactions and the construction of legal and regulatory structure for the healthy operation of the sector (Ayub, 2017: 455). What is more important than them, the main hardship faced by takaful sector, is to raise awareness regarding the concept itself. It is necessary for the majority of the religionist section staying away from insurance for religious reasons to be sure that making insurance against disasters in accordance with the religious principles is not forbidden in any way. A religious consultation committee or a consultant and periodical religious checks are imperative for each takaful company; this is an imperative both to ensure the convenience to Islamic law and also to ensure the trust of the public about religious issues. Takaful operations generally provide general business policies. The real potential is existent in the family takaful or safe-deposit takaful needed by the implementers to mobilize the public in Islamic societies. A trustworthy financial basis is needed for this. Mixed companies have the advantage of rendering annual products giving opportunity for preliminary cash flow needed for successful takaful activities and providing expense and surplus value. On the other hand; family takaful programs are the companies requiring cash in the first years of their operational establishment. This problem could be solved by the operations that will provide benefit in the following years to themselves by reinforcing their capital structure. In addition to them; conducting activities side by side with conventional insurance operations in a competitive environment is a hardship in itself. Takaful companies should render new products and services in terms of price, quality and delivery time. They should work with an innovative understanding together with - 53 -
8. Finance and Accounting I the most professional expertise by avoiding from wrong implementations . Policy makers should also support the takaful operators and be proactive to ensure the operations to increase their competitive power and conduct their activities in accordance with the religious provisions. Keeping the educated, experienced and equipped labor force with awareness is also another important hardship for the developing takaful sector. It is possible for the takaful insurance to be adopted in the eyes of large public masses thanks to the devoted, experienced and well-educated personnel dedicating themselves only to their jobs and professions. Although problems related to education are not so much in the area of Islamic banking, it is very hard to find equipped personnel with sufficient education in takaful. Within this direction, they should work in a proactive way by cooperating with the takaful companies of the securities and exchange commissions in the countries in which the educational classes and Islamic finance services of IRTI, AAOIFI and central banks have been developed (Ayub, 2017: 456). Furthermore; when the globalization process of the financial services is taken into consideration, takaful products should have standardization. The efforts of İFKMDO and IFHK are imperative as in the Islamic banking for the purpose of preparing the performance standards in a way that they will firstly be in accordance with the religious provisions to be able to ensure the standardization of the services and structures that could be given within the frame of mutual help. Besides; it is important to terminate the differences in viewpoints related to the takaful models. The reason for this is that the shareholders will be confused when the drawbacks and opinion differences once emerge and in this way, the growth of the newly developing sector will be interrupted. The religionists and implementers should cooperate based on the power of procurement-foundation model closest to the religious provisions for preventing the occurrence of this situation and adaptation of the implementation. On the other hand; the quantitative insufficiency of the long term investment tools with convenience to Islamic law in the current markets hardens the assessment of the collected funds and causes to the increase in the costs. Especially the long term sukuk exports to be away from satisfactory dimensions negatively affects the development of the life assurance product (due to financing with short term investment tools) called as “family takaful”. Naturally; this situation causes to the increase in the re-investment risks of the companies due to the maturity mismatch. On the other hand; non-existence of sufficient Islamic financial tools in the capital market results in the exchange risk undertaking of the companies due to keeping waste fund or overseas investments. - 54 -
9. Finance and Accounting I RESULTS AND SUGGESTIONS Today ’s conventional insurance applications cause especially the individuals with high religious sensitivity to approach the classical insurance system with doubts. Therefore; takaful system has an important potential as an alternative insurance instrument that could address to these people. The past of takaful in Turkey is very novel. As the recognition of the system increases, adaptation to the competitive conditions of the market will be fast and therefore; in parallel to this, the market share will increase in time. The actions necessary to be taken to increase the market share are as follows: Firstly; the legislation infrastructure regarding participation insurance should be reinforced. Within this scope; the establishment of a structure such as “Participation Insurance Consultation Board” or similar ones within the body of T.R. Prime Ministry Undersecretariat of Treasury working in coordination with the Administration of Religious Affairs will be beneficial in terms of the formation of the theoretical background of the system and in this way, the functionality of the system in the future will increase. Also; being able to render competitive products to the customers and the efficient promotion efforts will also be able to make highly significant contributions. As the reliability, service quality and recognition of the companies rendering takaful insurance service in the market increase, there will be an orientation towards takaful from the conventional insurance companies controlling almost all of the market in current condition. Furthermore; the activation of the takaful operations with which the participation insurance companies could perform business together in the industry and variation of the participation insurance products as well as increasing the informatics infrastructure and individual capital quality of the participation insurance companies could be considered as the activities that could increase the interest in the takaful insurance. REFERENCES Acınan, H. (2006). Sigortanın Temel Prensipleri. İstanbul:Aviva Sigorta Baskısı Altıntaş, K. M. (2016). Katılım Bankacılığı Çerçevesinde Alternatif Bir Sigorta Sistemi: Tekafül Sigorta Sisteminin Türkiye’de Uygulanabilirliği. AİBÜ Sosyal Bilimler Enstitüsü Dergisi, 16(2), 115-142. Aslan, H. (2015). Türkiye’de Tekafül (İslami Sigorta) Uygulamaları: Problemler ve Çözüm Önerileri. International Journal of Islamic Economics and Finance Studies, 1, 93-147. Ayub, M. (2007). Understanding İslamic Finance. (Suna Akten Çürük ve Raif Parlakkaya, Çev. Ed.). İstanbul: İktisat Yayınları. Islamic Shari’ah Research Academy for Islamic Finance (ISRA), 2011 Karayazgan, A. (2008). Takaful (İslami Sigorta). Sigorta Araştırmaları Dergisi, 4, 109. Selçuk, M. (2015). İslâmî Bir Sigorta Deneyimi Olarak Tekâfül. IV. Congress of Graduate - 55 -
10. Finance and Accounting I Studies Turkey , 14-17 May 2015, Kütahya. Ustaoğlu, M. (2014). Alternatif faizsiz sigortacılık uygulamaları ve gelir seviyesine göre kamu bilincinin değerlendirilmesi: Ampirik analiz. Siyaset, Ekonomi ve Yönetim Araştırmaları Dergisi, 2(2), 109-130. http://tekaful.net/?page_id=78, access date 13.10.2018) https://www.researchandmarkets.com/research/b9zk3d/global_takaful?w=5, access date 16.10.2018) - 56 -