Takaful Insurance: A Critical Evaluation of Takaful Business in the UAE and its Prospects for Growth

Abstract

In 1979, the first Takaful insurance was established in Sudan as an alternative option of conventional insurance which is impermissible by Sharia Compliance. The business witnessed a dramatic prosperity during the mid-years of operation in terms of a double-digit growth and increased number of operators. However, this optimistic trend has significantly declined during the last 5 years, mainly in the GCC region which is the home market of Takaful. For rigorous comparability with conventional insurance companies, the UAE market has been chosen as a subject study in this research. Unlike conventional finance, business ethics in Islamic Finance is a case of mandatory religious duty. Using this premise, the case study investigates challenges, constraints and prospects experienced by Takaful business in UAE, as an Islamic financial product. Insights have been drawn from Theory of Constraints (TOC) and Principal Agent Theory for critical analysis of data that was collected from primary and secondary sources. Qualitative-driven mixed research method is used and interviews were held with two business leaders in the UAE along with regulator, Sharia scholar, independent lawyer and two academic researchers. Necessary statistics about Takaful were obtained from secondary sources such as Alpen Capital, Milliman, A.M. Best, Earnest & Young, Badri and the UAE Insurance Authority’ Annual Reports. It has been found that the current structure of Takaful model brings complicated challenges. The concept of conditional donation and imposing Qard Hasan have converted the model into conventional, ineffective corporate governance mechanism, failure of regulatory system to capture the specificities of Takaful and incapability of Sharia scholars to innovate and promote Takaful products of which all work opposite to upward direction of the business. Many recommendations have been proposed to a) convert the hybrid commercial model into Mutual Takaful; otherwise, b) crucial changes are required from business leaders at all organizational levels in terms of operational, regulatory and Sharia Scholarity reforms. Regardless of crucial constraints the business face in its origin markets, taking into account the number of Muslims, the attractive regulatory system which support mutuality and the current call for ethical business, Takaful business could have its way to be established and flourished in western countries. This research provided a comprehensive study about Takaful from its social historical roots to its modern commercial application. This research has made a contribution to the discipline of insurance finance by investigating takaful system and highlighting challenges that are facing the business in the UAE market as a case study. Further areas of researches have also been outlined in this research.