INCEIF Chief Academic Office Datuk Prof Syed Othman Alhabshi recently delivered a keynote address to participants at a two-day ‘Takaful Network Seminar’ in Colombo, Sri Lanka. The seminar was hosted by Amana Takaful and jointly organised by the Federation of Islamic Insurance and Takaful Companies (FOIITC), the Global Takaful Group (GTG) and the International Cooperative and Mutual Insurance Federation (ICMIF).
FOIITC/GTC/ICMIF Takaful Network Seminar 21/11/11 – 23/11/11
Theme: Returning to Our Roots: Realizing Our Potential
ETHICAL UNDERPINNINGS FOR TAKAFUL AS A WAY FORWARD
- Takaful or Islamic Insurance has been around for more than three decades. It started in Sudan in 1979 and over the years it has spread to almost every major continent of the world, except the Americas and Australia. There are more than 300 operators of Takaful, many of whom are individual companies although the window operations are abound in Indonesia. In the last few years, we have seen the establishment of reTakaful companies that would expand the capacity of Takaful operators. Some are individual companies, others are window operations of renowned Reinsurance companies such as Munich Re, Lloyds and Swiss Re.
- Ernst & Young World Takaful Report 2011 mentioned the growth rate for Takaful companies as exceeding 30% for the year 2011. This forecast is based on the current achievements of Takaful companies all over the world with different rates of growth for each region.
- Essentially, the services Takaful operators provide are not very different from those of the conventional insurance companies. Both the conventional and Islamic insurance receive payments from customers for some particular risk and pay out compensation when the risk materializes. For example, for risks involving motor vehicles, the customer will be paid compensation when an accident occurs.
- The difference between conventional and Islamic insurance is not only in terms of the roles of the operators, but also the contractual obligations of the operator and the customers. The conventional insurance receives and owns the premium and in return indemnifies the customers from the perils of the stipulated risk. The contract is bilateral between the company and the customer and the compensation is only paid conditional upon the occurrence of hazard. Such a contract is not permissible in Shariah because what the customer pays for is only delivered on condition the hazard materializes. If the hazard does not materialize, the insurance company takes all the premiums that have been paid. The contract such as this is invalid in the eyes of Shariah because it is a bilateral contract that contains ambiguity or gharar. Since ambiguity or uncertainty cannot be eliminated, in other words gharar exists because we cannot know for certain whether the customer will face any hazard or not, the contract of Takaful has to be modified so as to be permissible even if gharar exists.
- Three elements namely riba or interest, gharar or ambiguity and maisir or gambling that are strongly prohibited by Shariah exist in Takaful. Riba arises out of the financial investments that are done by the insurance companies. This can be overcome by investing in Shariah-compliant asset classes. Gharar or ambiguity will continue to exist in Takaful operations anyway. The reason is the Takaful operator would only pay compensation if the hazard materializes. It is exactly the same as insurance company. In order to overcome this problem, the Shariah scholars have suggested unilateral contract to be adopted and not a sales and purchase contract of the conventional insurance. The contract is one where the participants agreed to participate in an arrangement where they pool some money to be used to pay out compensation to those who face the hazards. It operates using the principle of ta’awun or helping one another by giving donation or tabarru’at to the pool of risk fund. In this way, the compensation payment comes from the pool of risk fund although it is conditional on the hazards occurring. Finally the maisir is eliminated once the tabarruat comes into the picture. Once this is done, the Takaful becomes Shariah compliant.
- Although Takaful is in accordance with Shariah, we need to be conscious of the fact that we cannot just be Shariah compliant. This is because Islam is comprehensive, permeating all aspects of our lives. Essentially Islam comprises three main components, namely Theology, Shariah or the Law and Morality and Ethics, each influencing the other in all their ramifications. Theology is the creed or belief system which anchors on the concept of Unity or the Oneness of Allah. Everything comes from Him, belongs to Him and will return to Him. We depend completely on Him, He is completely independent of us. We owe Him everything and He owes us nothing. That is the relationship between Him and us based on the Unity concept. The Shariah or the Law is divine and is meant to steer us towards finding the truth. The Shariah is necessary in order to ensure that society adheres to the strict injunctions of Islam. Finally the Morality and Ethics guides us towards what is right and what is wrong. It is the code of conduct that governs the rules of behaviour not only as individuals, as a son or daughter, as husband or wife, as a father or mother but also as a member of the society. In other words it again covers all aspects of our lives, in whatever capacity or role we play.
- Takaful operations have to take cognizance of all three components of Islam that has been very briefly described above. As an entity or company, it cannot escape from all three components. The Unity concept is still very much applicable to the Takaful company in terms of the defined relationships it has to develop with all its stake holders. Essentially, the company must provide the best service to all its stakeholders. For the shareholders who have invested huge sums of capital, it is not just the good dividends that must be distributed but more importantly to ensure that the company is run very well, its reputation and image is well protected in the eyes of its stakeholders and the public at large. The customers get excellent services not only in terms of the quality products, value for money, quality services rendered both during and after sales. The company has to demonstrate that it is not just doing business for business sake, but it is providing value services to its customers who would feel they deserve the treatment they get. The company has other stakeholders such as the regulators, the bankers, investment or asset management houses, etc that it has to deal with. It has therefore to develop and nurture the right type of relationships that would make their dealings very smooth and easy.
- The Shariah requirements must be complied not only in terms of rules and procedures but more importantly in terms of the spirit of the law. Compliance here is not met because it is a requirement but more because of the willingness to comply. Hence there is need to enhance the understanding and knowledge of the Shariah especially among its senior management who will be able to guide those supporting them, rather than leaving everything to the Shariah Boards. It is no longer acceptable to say that I am not a Shariah scholar and hence I do not need to know the Shariah. It should be encumbered upon the senior management to have at least a working knowledge of Shariah to remain in the Takaful industry.
- Morality and Ethics seem to be a personal matter. Probably because it is difficult to ascertain whether someone has passed the fit and proper test in order to hold positions in a Takaful company. I strongly feel this is essential because it would not be proper for someone who breaches all codes of morality and ethics and still remains in a Shariah based company or organisation. Whilst the Unity concept defines the relationships and rules of behaviour, the Shariah determines that those relationships and rules of behaviour are fully complied, it is the ethics and morality that wraps up the individual into a truly upright, righteous and pious personality who is considered fit and proper to manage a Takaful company. I may be putting very high standards here, but I truly believe this is the crux of the matter and the financial crisis that we have seen over the last five years or so is the natural result of individuals who have no value for morality, ethics and integrity. I do not think anyone can deny this.
- This crisis is of such magnitude that no country or business can be spared. It is also very complex that so far we have not heard of any real solution to the problem. Five years after it started, it is still rolling on, bringing to their knees, the powerful and the not so powerful. Strangely enough, the most powerful of all became the principle cause and victim. When the most powerful fall, it will drag down a good number of others as well. Lately, I attended a talk by some consultants who liken the crisis as a black swan, a metaphor which describes a very rare happening of huge magnitude. The take away was that this crisis which is currently affecting Greece, Portugal, Spain, Ireland and Italy will not only affect the other European countries but eventually will affect the whole world.
- 11. Unless we have the proper discipline, transparency and integrity, of course not to forget the efficiency and effective implementation of our plans, we cannot escape from the problem that the West has faced. But that is not all. Have we so far applied the Shariah wholeheartedly into our Takaful operations, for that matter other Islamic institutions as well. I have my doubts still. What we really need is to revisit our companies and review the vision, mission, strategies and plans and see if we have actually fully employed what the Shariah wants us to do. Are we doing business for business sake or are we providing the best service to our customers? Many management books have proven that companies that apply positive values in their operations tend to be sustainable for decades. Companies that turn from good to great seem to have excellent leaders who combine the professional will and personal humility.
- At the moment we do not cater for perils that are classified as Act of God. This is truly copying from the insurance practices. Act of God is actually a test from Allah to see if we are patient enough to face it. One of the difficulties faced by insurance and Takaful companies when faced with such natural calamities is the difficulty to forecast the impact or the cost of such a disaster. The question is, would it not be possible if the victims are compensated not in full but even a certain proportion of what he or she suffers from. Would that not help? Lately I happen to visit a house rented by a very poor family who manages to live from hand to mouth. It was some weeks after a huge flood had just covered the area. Almost all the furniture that they had was destroyed. The family could not afford to buy a new set at all. How would they go through life with the quality they could afford before the flood? In Thailand, more than 2 million people were affected by flood that has been going on for some time.
- I think the Shariah has taught us enough to embrace all the positive values that can turn our companies from good to great, if only we apply them comprehensively. As the sayings go, “Fish rots from the head”, “If the head is a snake, then the body has to be a snake as well”. We need true leaders that combine professional will and personal humility who can be role models for our companies. We cannot afford anything less.
- Let me conclude with the following: Islamic finance is about doing good for ourselves and for others. Al-Ghazali succinctly expressed three ways of dealing with others, thus: “In respect of other men, a man stands in one of three classes: (a) he may take the place of just and generous angels, namely by exerting himself for their ends through compassion and the desire to fill their hearts with gladness; (b) with regard to other men, he may occupy the position of animals and inanimate objects, namely where they receive neither benefit nor harm from him, or (c) with regard to them he may occupy the position of scorpions, snakes and harmful beasts of prey, from which men expect no good while fearing the evil they may cause. If you cannot reach the sphere of the angels, at least try not to fall from the level of animals and inanimate things to the ranks of scorpions, snakes or beast of prey. If your soul is content to come down from the highest heights, at least do not let it be content to be hurled into the lowest depths. Perhaps you will be saved by the middle way where you have neither more nor less than what suffices”.
- Reflecting on what Al-Ghazali pointed out, what has been happening in the market such as insider trading, creative accounting, breach of single customer limit or single sector limit, corruption, collusion, improper marketing, etc. are practices of people who certainly cannot belong to the position of just and generous angels, probably not even that of the position of animals and inanimate objects from whom people receive neither benefit nor harm. What is left is the third category. Let us not be among them.
Syed Othman Alhabshi
20th November 2011
The keynote address by a number of industry websites. The links are: