Takaful - Moving Beyond Shari’ah Compliance

• The statement means that Islamic finance and Takaful should not stop at simply asking:
• “Is this product Shari’ah-compliant?”
• Instead, institutions should also ask:
• Does this product benefit customers?
• Does it help society?
• Does it support the economy?
• Does it protect the environment?
• Does it create long-term sustainable value?
• This is what is meant by shifting the current paradigm beyond compliance.

What Does “Beyond Compliance” Mean?

• Shari’ah compliance remains the minimum requirement.
• But institutions are encouraged to go further by creating:
• Social value
• Economic value
• Environmental value
• Financial inclusion
• Sustainable business opportunities

Example

A Takaful operator develops a normal Family Takaful product.

If it only focuses on compliance:

• The contract avoids riba
• The investment is Shari’ah-compliant
• The product follows Takaful principles

If it goes beyond compliance:

• The product is made affordable for lower-income families
• Digital technology is used to reduce cost
• Part of the investment supports green Sukuk
• Customers receive financial education
• The product helps strengthen family financial resilience

Simple Idea

Compliance = Make sure the product is permissible

Beyond compliance = Make sure the product is also useful, sustainable and beneficial

How This Creates More Business Opportunities

• By looking at wider social and economic needs, Takaful operators can develop new products for groups that may previously have been ignored.

Examples

• Micro-Takaful for low-income households
• Crop Takaful for farmers
• Cyber Takaful for small businesses
• Green Takaful linked to sustainable projects
• Digital Takaful for underserved communities
• Health protection for vulnerable groups

Simple Process

Wider social needs → New Takaful products → New customers → New business opportunities

Benefits to Financial Consumers

• Customers may receive:
• More affordable products
• Better protection
• More relevant products
• Easier digital access
• Better long-term value

Example

• A low-income family that previously could not afford protection may now access Micro-Takaful through a mobile application.

Benefits to Wider Stakeholders

• The benefits are not limited to the customer who buys the product.
• Wider stakeholders may include:
• Employees
• Investors
• Communities
• Small businesses
• Governments
• Future generations
• The environment

Example

• A Takaful operator invests in a renewable-energy Sukuk.
• The operator earns investment income.
• The project creates jobs.
• The community receives cleaner energy.
• The environment benefits from lower emissions.

So one financial decision can create benefits for many stakeholders.

Benefits to the Economy

• A value-based Takaful industry can support:
• Business growth
• Employment
• Financial inclusion
• Sustainable investment
• Economic resilience

Example

• SME Takaful protects small businesses against major losses.
• If a fire occurs, the business can recover faster.
• Employees keep their jobs.
• Suppliers continue receiving orders.
• The local economy remains active.

Easy Way to Remember

Traditional approach:

“Is it Shari’ah-compliant?”

Beyond-compliance approach:

“Is it Shari’ah-compliant, financially sustainable and beneficial to customers, society, the economy and the environment?”

Simple Formula

Shari’ah Compliance + Positive Impact + Sustainability = More Business Opportunities + Wider Stakeholder Benefits

Takaful - Future Growth and Key Success Factors

• The Takaful industry is expected to continue growing strongly in the future.
• Positive market projections are likely to attract more participants and institutions into the industry.
• Future growth may include:
• More conventional insurers opening Takaful windows
• More Retakaful operators
• Possible development of Retro-Takaful
• Greater product innovation
• Wider use of technology

1. Expansion of Takaful Windows

• More conventional insurance companies may establish Takaful windows.
• A Takaful window allows a conventional insurer to offer Takaful products through a separate Shari’ah-compliant arrangement.
• The Takaful operation must maintain proper separation of:
• Funds
• Investments
• Accounting
• Shari’ah governance

Example

• ABC Insurance already provides conventional motor insurance.
• It establishes a Takaful window to offer Motor Takaful.
• The Takaful business must be managed according to Shari’ah requirements.

Simple Idea

Growing Takaful demand → More insurers may open Takaful windows

2. More Retakaful Players

• As Takaful operators take on larger risks, they need more Retakaful support.
• Retakaful helps Takaful operators share large risks and reduce the burden on the Participants’ Risk Fund.

Example

• A Takaful operator covers a factory worth RM1 billion.
• It does not want to retain the entire risk.
• Part of the risk is shared with a Retakaful operator.

Simple Process

Participant → Takaful Operator → Part of risk → Retakaful Operator

Simple Idea

More Takaful business → Greater demand for Retakaful

3. Possible Development of Retro-Takaful

• In the future, the industry may also develop Retro-Takaful.
• Retro-Takaful allows a Retakaful operator to share part of the risks it has accepted with another Retakaful provider.
• This creates another layer of risk sharing.

Example

• Takaful Operator A transfers part of a large risk to Retakaful Operator B.
• Retakaful Operator B considers the risk too large to retain completely.
• It transfers part of the risk to Retakaful Operator C.

Simple Process

Takaful → Retakaful → Retro-Takaful

Simple Idea

Retro-Takaful helps Retakaful operators manage very large risks

Key Factors for Successful Takaful Operations

4. Transparency

• Takaful operators must ensure that their processes are clear to participants.
• Participants should understand:
• How contributions are allocated
• How much goes into the Participants’ Risk Fund
• What fees are charged
• How claims are paid
• How investments are managed
• How surplus and deficit are treated

Example

• Ahmad contributes RM1,200 to a Takaful plan.
• The operator clearly explains:
• Tabarru‘ amount
• Wakalah fee
• Investment portion
• Treatment of surplus

Simple Idea

Participants should know how their money is managed

5. Innovation of More Takaful Products

• Takaful operators need to develop products that respond to new and changing risks.
• Innovation helps Takaful remain competitive and relevant.

Possible New Products

• Cyber Takaful
• Climate-risk Takaful
• Micro-Takaful
• Crop Takaful
• Livestock Takaful
• SME Takaful
• Digital Takaful
• Health-related Takaful

Example

• More businesses depend on online systems.
• A Takaful operator develops Cyber Takaful to protect against data breaches and cyberattacks.

Simple Idea

New risks → New Takaful products

6. Sustainable Takaful Models

• Future Takaful models should be financially sustainable.
• The Participants’ Risk Fund should be able to meet:
• Claims
• Reserves
• Expenses
• Other obligations
• Operators should avoid structures that repeatedly create deficits.

Example

• If contributions are consistently too low, claims may exceed the available fund.
• The operator may repeatedly need to provide Qard.
• This would not be sustainable over the long term.

Simple Idea

Good pricing + Strong reserves + Effective risk management = Sustainable Takaful

7. Inclusive Takaful Models

• Takaful should be accessible to a wider range of society.
• Protection should also reach:
• Low-income families
• Farmers
• Rural communities
• Small businesses
• Underserved groups

Example

• A Takaful operator offers Micro-Takaful for RM10 per month.
• It provides basic death and accident protection to lower-income families.

Simple Idea

Inclusive Takaful = Affordable protection for more people

8. Harnessing Technological Advancement

• Technology can improve the efficiency and accessibility of Takaful.
• Digital technology may help with:
• Online applications
• Digital payments
• Automated underwriting
• Claims processing
• Fraud detection
• Customer service
• Data analysis

Example

• Ahmad has a motor accident.
• He submits his claim through a mobile app.
• Photos and documents are uploaded electronically.
• The claim is processed more quickly.

Simple Idea

Technology → Lower cost + Faster service + Better customer experience

9. Robust Shari’ah Governance

• Strong Shari’ah governance is essential for the future of Takaful.
• Innovation and technology must still comply with Shari’ah.
• The Shari’ah Committee should review:
• Product design
• Contracts
• Investments
• Fees
• Claims
• Surplus treatment
• Fund management

Example

• A Takaful operator wants to launch a new investment-linked product.
• The Shari’ah Committee reviews:
• Investment assets
• Contract structure
• Fees
• Risk-sharing arrangement
• The product is only approved if it complies with Shari’ah.

Simple Idea

Innovation must always remain within Shari’ah principles

Overall Future Direction

The future success of the Takaful industry depends on:

• More Takaful windows
• More Retakaful capacity
• Possible Retro-Takaful development
• Greater transparency
• More innovative products
• Sustainable business models
• Inclusive protection
• Better technology
• Strong Shari’ah governance

Easy Way to Remember

Growth + Transparency + Innovation + Sustainability + Inclusion + Technology + Shari’ah Governance = Successful Future for Takaful

Takaful - Key Challenges: Actuaries, Investments, Efficiency and Economies of Scale

• The Takaful industry faces several challenges that may affect its future growth and competitiveness.
• Important challenges include:
• Shortage of qualified actuaries who understand Takaful
• Limited Shari’ah-compliant investment opportunities
• Need to improve operational efficiency
• Difficulty achieving sufficient critical mass
• Need to benefit from economies of scale
• Need for continued market development and appropriate regulation

1. Need for More Muslim and Takaful-Specialised Actuaries

• An actuary is a professional who uses:
• Mathematics
• Statistics
• Probability
• Financial modelling
• Risk analysis

to estimate future risks and financial obligations.

• Actuaries play an important role in both insurance and Takaful.
• However, Takaful also requires professionals who understand:
• Shari’ah principles
• Tabarru‘
• Participants’ Risk Fund
• Surplus and deficit
• Qard
• Family and General Takaful structures

Simple Idea

Actuary = Person who calculates and analyses risk so that Takaful can be priced properly.

2. Why Actuaries Are Important for Pricing

• Takaful contributions should not be set randomly.
• The actuary estimates:
• Probability of claims
• Expected number of claims
• Expected size of claims
• Operating expenses
• Required reserves
• Possible future liabilities
• These calculations help determine an appropriate Takaful contribution.

Example – Motor Takaful

Suppose an actuary studies 10,000 drivers.

The actuary estimates:

• Expected claims = RM6 million
• Expenses and reserves = RM2 million
• Additional safety margin = RM1 million

Total amount required:

RM9 million

The operator therefore needs to collect enough contributions from the participants to support approximately RM9 million of expected requirements.

Simple Process

Risk data → Actuarial calculation → Appropriate contribution → Stronger Takaful fund

3. Why Takaful Actuaries Need to Understand the Spirit of Takaful

• A conventional actuary may understand risk pricing very well.
• However, a Takaful actuary should also understand that Takaful is based on:
• Mutual assistance
• Risk sharing
• Fairness
• Shari’ah compliance
• Pricing should therefore balance:
• Financial sustainability
• Affordability
• Fair treatment of participants
• Adequacy of the Participants’ Risk Fund

Example

If an operator charges contributions that are too low:

• Participants may initially be happy.
• However, the fund may later be unable to meet claims.
• Frequent deficits may occur.
• The operator may repeatedly need to provide Qard.

If contributions are too high:

• Takaful becomes unaffordable.
• Fewer people may participate.
• The purpose of mutual protection may be weakened.

Simple Idea

Good Takaful pricing = Affordable + Fair + Sufficient to support claims

4. Contributions Need to Be Invested

• Participants’ contributions are not necessarily kept entirely in cash.
• Part of the available funds may be invested in Shari’ah-compliant investments.
• Investment returns can help strengthen the relevant Takaful funds.

Investments Can Help With

• Future claims
• Reserves
• Long-term obligations
• Investment-related benefits
• Overall financial sustainability

Simple Process

Contributions → Takaful fund → Part invested → Shari’ah-compliant return generated

5. Investment Needs of General Takaful

• General Takaful normally covers risks such as:
• Motor
• Property
• Fire
• Marine
• Business risks
• Claims may arise relatively quickly.
• Therefore, General Takaful operators usually need investments that are:
• Relatively liquid
• Low risk
• Easily converted into cash

Example

• A Motor Takaful fund may have claims every day.
• The operator cannot place all available money into investments that cannot be sold for ten years.
• It needs enough liquid assets to pay claims when required.

Simple Idea

General Takaful → Claims may arise soon → Need more liquid investments

6. Investment Needs of Family Takaful

• Family Takaful may involve much longer periods.
• Participants may remain in a scheme for:
• 10 years
• 20 years
• 30 years or longer
• Therefore, Family Takaful operators may need suitable long-term Shari’ah-compliant investments.

Example

• Ahmad joins a 25-year Family Takaful plan.
• The operator needs investments that can generate appropriate returns over a long period.
• Long-term Sukuk may therefore be more suitable than keeping everything in short-term cash deposits.

Simple Idea

Family Takaful → Long-term obligations → Need suitable long-term investments

7. Limited Range of Shari’ah-Compliant Investment Instruments

• One challenge is that the range of available Shari’ah-compliant investment products may be more limited than the conventional investment market.
• Takaful operators cannot simply invest in every financial instrument.
• Investments must comply with Shari’ah.

Conventional Insurer May Invest In

• Conventional bonds
• Interest-bearing deposits
• Other conventional instruments

Takaful Operator Must Seek

• Sukuk
• Islamic money-market instruments
• Shari’ah-compliant equities
• Islamic funds
• Other approved Shari’ah-compliant assets

Simple Idea

Takaful has fewer investment choices because investments must comply with Shari’ah.

8. Why More Islamic Investment Products Are Needed

• A wider range of investment products would help Takaful operators better manage:
• Return
• Risk
• Liquidity
• Duration
• Future claims
• Different Takaful funds require different investment characteristics.

Example

A Family Takaful operator needs:

• Long-term investments

A Motor Takaful operator needs:

• More liquid short-term investments

Therefore, the Islamic capital market should provide a wider variety of:

• Short-term instruments
• Medium-term instruments
• Long-term Sukuk
• Sustainable investments
• Different risk levels

Simple Idea

More Shari’ah-compliant investment products → Better management of Takaful funds

9. Need to Improve Efficiency

• Another challenge is improving the operational efficiency of Takaful operators.
• Efficiency means providing protection and services while controlling costs.

Operators Need to Reduce

• Administrative expenses
• Distribution costs
• Claims-processing costs
• Manual processes
• Unnecessary overheads

Operators Can Improve

• Technology
• Digital distribution
• Automated claims
• Staff productivity
• Risk management
• Customer service

Example

Traditional claims process:

Customer visits branch → Paper documents → Manual assessment → Slow payment

Digital claims process:

Customer uploads documents online → Automated processing → Faster assessment → Faster payment

Simple Idea

Lower cost + Faster service = Greater efficiency

10. Critical Mass

• Critical mass means reaching a sufficiently large number of participants and contributions for the Takaful operation to become more efficient and financially sustainable.
• A very small Takaful operator may have difficulty because its fixed costs are spread over only a small number of participants.

Example – Small Operator

Suppose a Takaful operator has:

• 10,000 participants
• Annual fixed operating costs = RM10 million

Average fixed cost per participant:

RM10 million ÷ 10,000 = RM1,000

Now suppose the operator grows to:

• 100,000 participants

With the same RM10 million fixed cost:

RM10 million ÷ 100,000 = RM100 per participant

The cost per participant falls significantly.

Simple Idea

More participants → Costs spread across more people → Lower average cost

11. Economies of Scale

• Economies of scale occur when the average cost of providing a service decreases as the organisation becomes larger.
• Large Takaful operators may benefit because major fixed costs can be spread over many more participants.

Fixed Costs May Include

• IT systems
• Headquarters
• Regulatory compliance
• Shari’ah governance
• Actuarial systems
• Digital platforms
• Claims infrastructure

Example

A Takaful operator spends:

RM20 million on a digital platform

If it serves:

• 20,000 participants → RM1,000 cost per participant

If it serves:

• 200,000 participants → RM100 cost per participant

The same technology supports many more customers.

Simple Idea

Larger scale → Lower average cost → Greater competitiveness

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12. Why Only a Few Operators May Currently Enjoy Economies of Scale

• Larger and established operators may already have:
• Large customer bases
• Strong distribution networks
• Established technology
• Strong brands
• Greater contribution income
• Smaller operators may have:
• Fewer participants
• Higher average costs
• Less bargaining power
• Smaller investment portfolios
• Higher distribution costs per participant

Simple Idea

Large operator → Costs spread widely

Small operator → Same types of costs spread over fewer participants

13. How Market Expansion Can Help

• As the Takaful market grows:
• More people participate
• Contribution pools become larger
• Risks can be spread across more participants
• Operators can achieve critical mass
• Average operating costs may fall

Example

A Takaful operator grows from:

50,000 participants → 500,000 participants

The operator may be able to:

• Spread technology costs
• Negotiate better service-provider rates
• Invest more efficiently
• Improve product pricing
• Strengthen risk diversification

Simple Idea

Market growth → Larger participant pool → Better efficiency and stronger risk sharing

14. Role of Proper Regulation

• Appropriate regulation is important for the healthy development of the Takaful industry.
• Regulators can help ensure:
• Financial stability
• Adequate capital
• Fair treatment of participants
• Proper fund management
• Effective Shari’ah governance
• Transparent product structures
• Strong risk management

Example

• A regulator may require Takaful operators to maintain sufficient capital and reserves.
• This reduces the risk that an operator becomes unable to meet its obligations.

Simple Idea

Good regulation → Stronger operators → Greater participant confidence

Overall Challenges

Human Capital Challenge

• Not enough specialised Takaful actuaries.
• Need more training and professional development.

Investment Challenge

• Limited range of Shari’ah-compliant investment products.
• Need more suitable short-, medium- and long-term instruments.

Efficiency Challenge

• Operators need to reduce costs and improve service.

Scale Challenge

• Operators need enough participants to achieve critical mass and economies of scale.

Regulatory Challenge

• Appropriate regulation is needed to support growth while protecting participants.

Easy Way to Remember

Actuaries

Calculate risk → Determine appropriate contribution

Investments

Contributions → Shari’ah-compliant investments → Returns help strengthen funds

Critical Mass

More participants → Larger pool → Greater efficiency

Economies of Scale

Larger operation → Lower average cost

Regulation

Proper rules → Stable and trustworthy Takaful industry

Simple Formula

Skilled Actuaries + More Islamic Investments + Greater Efficiency + Critical Mass + Economies of Scale + Proper Regulation = Stronger Takaful Industry

Takaful - Sustainability, SDGs and Maqasid al-Shari’ah

• The Takaful industry should not focus only on providing financial protection.
• It should also help strengthen the sustainability of the wider financial ecosystem.
• Takaful operators are encouraged to take a more proactive approach in achieving the objectives of Maqasid al-Shari’ah.
• This means considering wider social, economic and environmental outcomes when designing:
• Products
• Business strategies
• Investment policies
• Internal policies

1. Strengthening the Sustainability of the Financial Ecosystem

• A sustainable financial ecosystem is one that can continue operating effectively over the long term.
• Takaful operators can contribute by:
• Managing risks responsibly
• Investing in sustainable activities
• Supporting financially vulnerable groups
• Avoiding activities that create long-term harm
• Developing products that strengthen social and economic resilience

Example

• A Takaful operator invests in Shari’ah-compliant renewable-energy projects.
• The investment may generate financial returns while also supporting:
• Cleaner energy
• Reduced pollution
• Long-term environmental sustainability

Simple Idea

Takaful should protect people today without creating harm for society tomorrow.

2. Proactive Approach to Maqasid al-Shari’ah

• Maqasid al-Shari’ah refers to the broader objectives and purposes of Shari’ah.
• These objectives aim to:
• Bring benefit to people
• Prevent harm
• Protect essential human interests
• Takaful should therefore not only react after a loss occurs.
• It can also help prevent risks and improve resilience before losses happen.

Example

• A Crop Takaful operator does not only pay farmers after floods.
• It may also support:
• Weather-monitoring technology
• Flood-risk education
• Better agricultural practices
• Early-warning systems

Simple Idea

Maqasid-based Takaful = Protection + Prevention + Long-term benefit

3. Integrating Sustainable Development Goals - SDGs

• Takaful operators can incorporate the Sustainable Development Goals (SDGs) into their business models and policies.
• The SDGs focus on improving:
• Social well-being
• Economic development
• Environmental sustainability
• Many of these objectives are consistent with the broader aims of Maqasid al-Shari’ah.

Areas That Takaful Can Support

• Poverty reduction
• Good health
• Financial inclusion
• Sustainable cities
• Climate protection
• Responsible investment
• Economic opportunity

4. Example - Poverty Reduction

• Takaful operators can develop Micro-Takaful for lower-income households.
• Affordable protection can help families recover from:
• Death of a breadwinner
• Accident
• Illness
• Property loss

Example

• A low-income family pays a small monthly contribution.
• The breadwinner dies unexpectedly.
• The family receives a Takaful benefit.

Connection

• Supports social protection
• Reduces financial hardship
• Supports the objective of protecting life and wealth

Simple Idea

Micro-Takaful → Financial resilience → Social sustainability

5. Example - Health and Well-Being

• Takaful operators can provide affordable health-related protection.
• They may also encourage:
• Preventive healthcare
• Health screening
• Wellness programmes

Example

• A Family Takaful plan rewards participants who attend regular health screenings.
• The aim is to reduce health risks before serious illness occurs.

Simple Idea

Prevent illness where possible, not only compensate after illness happens.

6. Example - Environmental Protection

• Environmental sustainability is consistent with the Shari’ah objective of preventing harm.
• Takaful operators can:
• Avoid investing in environmentally harmful businesses
• Support green Sukuk
• Develop climate-related Takaful products
• Encourage environmentally responsible behaviour

Example

• A Takaful operator invests in a Green Sukuk that finances solar-energy projects.
• The operator earns a return while supporting lower carbon emissions.

Simple Process

Takaful funds → Green Sukuk → Renewable energy → Financial return + Environmental benefit

7. Example - Climate and Disaster Protection

• Takaful operators can develop products for:
• Flood
• Drought
• Storm
• Crop loss
• Livestock loss
• These products help communities recover from climate-related disasters.

Example

• A farmer’s crops are destroyed by severe drought.
• Crop Takaful provides financial assistance.
• The farmer is able to restart production.

Simple Idea

Climate risk → Takaful protection → Faster recovery

8. Socio-Economic Development

• Takaful can support wider socio-economic development by:
• Protecting small businesses
• Supporting farmers
• Promoting financial inclusion
• Providing affordable protection
• Investing in productive sectors
• This helps strengthen households and businesses.

Example

• A small business obtains SME Takaful.
• A fire damages its premises.
• The Takaful benefit helps the business reopen and retain its employees.

Result

• Business survives
• Employees retain jobs
• Local economy remains supported

Simple Idea

Takaful protection can support both individuals and the wider economy.

9. Preservation of Life on Earth

• Sustainability also involves protecting resources for future generations.
• Takaful operators can consider the long-term effects of:
• Investments
• Business activities
• Product design
• This is consistent with the idea that humans should avoid causing unnecessary harm to the environment and society.

Example

A Takaful operator chooses between:

• Investing in a highly polluting company
• Investing in a Shari’ah-compliant clean-energy project

A sustainability-focused approach would favour the investment that provides financial return while creating less environmental harm.

10. Bringing Benefit and Preventing Harm

• A central objective of Shari’ah is to:
• Promote benefit
• Prevent harm
• Therefore, sustainable Takaful should consider whether its activities:
• Improve people’s lives
• Reduce vulnerability
• Protect the environment
• Strengthen economic stability
• Avoid long-term social or environmental damage

Simple Idea

Maqasid al-Shari’ah = Create benefit + Prevent harm

Overall Relationship

Maqasid al-Shari’ah

→ Provides the ethical and Shari’ah objectives

SDGs

→ Provide global sustainability goals

Takaful

→ Can translate these objectives into practical products, investments and policies

Example

Maqasid objective: Protect wealth and life

SDG objective: Reduce poverty and improve well-being

Takaful action: Develop affordable Micro-Takaful

Easy Way to Remember

Traditional Approach

Loss happens → Takaful pays claim

Proactive Sustainable Approach

Identify risk → Prevent harm → Provide protection → Invest responsibly → Support long-term recovery

Simple Formula

Maqasid al-Shari’ah + SDGs + Sustainable Takaful Practices = Stronger Social, Economic and Environmental Impact

Final Simple Idea

Takaful should not only compensate losses; it should also help create a more resilient, sustainable and beneficial society.

Takaful - Value-Based Intermediation (VBI) and Value-Based Intermediation for Takaful (VBIT)

• Malaysia introduced important value-based frameworks to strengthen the role of Islamic finance and Takaful.
• These frameworks are:
• Value-Based Intermediation (VBI) – introduced in 2017
• Value-Based Intermediation for Takaful (VBIT) – introduced in 2021
• Both frameworks are guided by the objectives of Maqasid al-Shari’ah.
• They aim to create positive and sustainable outcomes for:
• The economy
• Society
• The environment
• Financial stakeholders

1. Value-Based Intermediation (VBI)

• VBI is a broader framework mainly associated with Islamic financial institutions, especially Islamic banks.
• It encourages financial institutions to move beyond simply earning profit and meeting minimum Shari’ah requirements.
• The institution should also consider whether its activities create a positive and sustainable impact.

Main Objectives of VBI

• Support economic development
• Improve social well-being
• Protect the environment
• Promote responsible financial practices
• Generate sustainable financial returns
• Support the objectives of Maqasid al-Shari’ah

Simple Idea

VBI = Shari’ah-compliant finance + Positive economic, social and environmental impact

2. Example of VBI

• An Islamic bank provides financing for a solar energy project instead of financing an environmentally harmful project.
• The project:
• Generates renewable energy
• Creates employment
• Supports economic development
• Reduces environmental damage
• The bank also earns a Shari’ah-compliant financial return.

Simple Process

Islamic financing → Renewable energy project → Financial return + Economic benefit + Environmental benefit

3. Value-Based Intermediation for Takaful (VBIT)

• VBIT applies the value-based principles specifically to the Takaful industry.
• It provides guidance for Takaful operators on how to implement value-based practices in their products and operations.
• It applies to:
• Family Takaful operators
• General Takaful operators
• Retakaful operators

Simple Idea

VBIT = Applying VBI principles specifically to Takaful

4. Main Objectives of VBIT

• Develop Takaful products that provide wider benefits to society.
• Improve financial inclusion.
• Encourage sustainable business practices.
• Protect vulnerable groups.
• Promote responsible investment.
• Create long-term value for participants and other stakeholders.
• Ensure Takaful operations remain consistent with Maqasid al-Shari’ah.

5. Example of VBIT

• A Takaful operator develops Micro-Takaful for low-income families.
• Participants pay a small affordable contribution.
• The product provides basic protection against:
• Death
• Accident
• Disability
• The operator still manages the product sustainably while helping underserved communities.

Why This Is VBIT

• It is Shari’ah-compliant.
• It creates positive social impact.
• It improves financial inclusion.
• It can still provide sustainable financial returns for stakeholders.

Simple Process

Affordable Takaful → Low-income families protected → Social impact + Sustainable business

6. VBI and VBIT Are Driven by Maqasid al-Shari’ah

• Both VBI and VBIT are influenced by the broader objectives of Shari’ah.
• These objectives include protecting:
• Life
• Wealth
• Intellect
• Family/progeny
• Religion
• Therefore, financial institutions should consider not only whether a transaction is technically permissible, but also whether it contributes positively to society.

Simple Idea

Shari’ah compliance tells us whether something is permissible.

Maqasid al-Shari’ah also asks whether it creates beneficial outcomes.

7. Three Main Elements of VBI and VBIT

Shari’ah Compliance

• Products and operations must comply with Shari’ah principles.
• They must avoid prohibited elements such as:
• Riba
• Gharar
• Maysir
• Prohibited business activities

Positive Impact

• Financial activities should provide benefits to:
• Customers
• Communities
• Society
• Environment
• Economy

Sustainable Financial Return

• The institution must still remain financially viable.
• It should generate sufficient returns to:
• Continue operating
• Pay expenses
• Maintain financial stability
• Reward relevant stakeholders

Simple Formula

Shari’ah Compliance + Positive Impact + Sustainable Financial Return = VBI / VBIT

8. Why Sustainable Financial Return Is Important

• VBI and VBIT do not mean that Islamic financial institutions should ignore profitability.
• A bank or Takaful operator must remain financially strong.
• Without sustainable financial returns:
• It may not survive
• It cannot continue serving customers
• It cannot expand its positive social impact

Example

• A Takaful operator provides Micro-Takaful at an affordable price.
• At the same time, it uses digital technology to reduce operating costs.
• This allows the operator to:
• Help low-income customers
• Keep contributions affordable
• Remain financially sustainable

Simple Idea

Social benefit must be balanced with financial sustainability.

9. VBI vs VBIT

VBI

• Broader framework.
• Mainly focuses on Islamic financial institutions.
• Encourages sustainable impact on:
• Economy
• Community
• Environment

Example

Islamic bank finances renewable-energy project

VBIT

• Specifically designed for the Takaful industry.
• Provides guidance for:
• Family Takaful
• General Takaful
• Retakaful
• Focuses on how Takaful can create value beyond simply paying claims.

Example

Takaful operator provides affordable Crop Takaful to small farmers

10. Overall Purpose

• VBI and VBIT aim to create a more sustainable Islamic financial ecosystem.
• Islamic banks and Takaful operators are encouraged to:
• Remain Shari’ah-compliant
• Generate financial returns
• Create positive social impact
• Support economic development
• Protect the environment
• Serve wider stakeholder interests

Easy Way to Remember

VBI = Value-based approach for Islamic finance

VBIT = Value-based approach specifically for Takaful

Simple Formula

VBI / VBIT

→ Shari’ah Compliance

→ Positive Economic Impact

→ Positive Social Impact

→ Positive Environmental Impact

→ Sustainable Financial Return

Final Simple Idea

VBI and VBIT encourage Islamic finance and Takaful to go beyond “Is it Shari’ah-compliant?” and also ask “Does it create sustainable value for society, the economy and the environment?”

Takaful - VBI, VBIT and Moving Beyond Shari’ah Compliance

• Initiatives such as Value-Based Intermediation (VBI) and Value-Based Intermediation for Takaful (VBIT) can strengthen the role and impact of Islamic Financial Institutions (IFIs).
• These initiatives encourage Islamic finance and Takaful institutions to move beyond simply meeting the minimum requirements of Shari’ah compliance.
• Instead, institutions are encouraged to create positive and sustainable outcomes for:
• Customers
• Investors
• Businesses
• Communities
• Society
• The wider economy

1. Strengthening the Role of Islamic Financial Institutions

• VBI and VBIT encourage IFIs to consider the wider impact of their financial activities.
• Islamic financial institutions should not focus only on:
• Profitability
• Legal requirements
• Basic Shari’ah compliance
• They should also consider whether their activities contribute positively to:
• Society
• Economic development
• Environmental sustainability
• Financial inclusion

Example

• A Takaful operator could develop affordable Micro-Takaful for lower-income households.
• The product remains Shari’ah-compliant while also providing social benefits to underserved communities.

Simple Idea

Shari’ah compliance + Positive social impact = Stronger Islamic financial institution

2. Strengthening the Sustainability of the Financial Ecosystem

• VBI and VBIT can help create a more sustainable Islamic financial system.
• Sustainability means considering long-term effects rather than focusing only on short-term profits.
• Islamic financial institutions can support:
• Responsible businesses
• Sustainable projects
• Socially beneficial activities
• Environmentally responsible investments

Example

• A Takaful operator invests its funds in Shari’ah-compliant green Sukuk.
• The Sukuk finances renewable-energy projects.
• The operator earns a Shari’ah-compliant return while supporting environmental sustainability.

Simple Process

Takaful funds → Green Sukuk → Sustainable project → Financial return + Positive environmental impact

3. Transforming the Islamic Finance Industry

• VBI and VBIT can help transform Islamic finance from being viewed merely as an alternative to conventional finance.
• Islamic financial institutions can instead become institutions that actively create:
• Economic value
• Social value
• Environmental value
• Long-term stakeholder benefits

Simple Idea

Islamic finance should not only ask:

“Is this transaction Shari’ah-compliant?”

It should also ask:

“Does this transaction create beneficial and sustainable outcomes?”

4. Moving Beyond Compliance

• Shari’ah compliance remains essential.
• Moving beyond compliance does not mean reducing Shari’ah requirements.
• Instead, it means adding broader objectives on top of Shari’ah compliance.

Basic Approach

Shari’ah-compliant? → Yes

Then also consider:

• Does it benefit customers?
• Does it support society?
• Is it environmentally responsible?
• Is it economically sustainable?
• Does it contribute to the objectives of Shari’ah?

Simple Idea

Compliance is the foundation, not necessarily the final objective.

5. Creating More Business Opportunities

• A broader value-based approach can create new opportunities for Islamic banks and Takaful operators.
• Institutions can develop products for customers and markets that may previously have been underserved.

Examples

• Micro-Takaful for lower-income households
• Crop Takaful for farmers
• Green Takaful products
• Digital Takaful
• Protection for small businesses
• Sustainable investment products

Simple Idea

Wider social needs → New products → New business opportunities

6. Benefits Beyond Financial Consumers

• VBI and VBIT do not focus only on the direct customer.
• They consider a wider group of stakeholders.

Stakeholders May Include

• Participants
• Employees
• Investors
• Businesses
• Suppliers
• Communities
• Governments
• Future generations
• The environment

Example

• A Takaful operator finances environmentally sustainable projects.
• The benefits are not limited to the operator or participants.
• The wider community may benefit from:
• Cleaner energy
• Employment opportunities
• Better environmental conditions

Simple Idea

Islamic finance should create value for customers AND wider society.

7. Making Islamic Finance and Takaful More Proactive

• By combining:
• VBI
• VBIT
• Shari’ah compliance

Islamic financial institutions can become more proactive rather than reactive.

• Instead of waiting for customers to experience financial problems, institutions can develop products that help:
• Prevent hardship
• Improve resilience
• Support sustainable development
• Protect vulnerable communities

Example

• Instead of only compensating farmers after a disaster, a Takaful operator could combine:
• Crop Takaful
• Weather technology
• Risk-prevention education
• Digital monitoring

This can reduce losses before they occur.

Simple Idea

Proactive Takaful = Protection + Prevention + Sustainable support

8. Larger Investor Base

• A stronger emphasis on sustainability and social impact may attract more investors.
• Potential investors may include:
• Islamic investors
• Ethical investors
• Sustainability-focused investors
• Institutional investors
• International investors

Example

• A Takaful operator demonstrates:
• Strong Shari’ah governance
• Good financial performance
• Responsible investments
• Positive environmental and social impact
• This may attract investors who are interested in both financial returns and responsible investment.

Simple Idea

Shari’ah compliance + Sustainability + Strong performance → Wider investor interest

9. Greater Mainstream Relevance

• Islamic finance and Takaful should not only appeal to Muslim customers.
• Products based on:
• Ethical finance
• Mutual assistance
• Sustainability
• Social responsibility
• Financial inclusion

may also appeal to non-Muslim customers and investors.

Example

• A non-Muslim customer may choose a Takaful product because:
• It is competitively priced
• It is transparent
• It invests responsibly
• It promotes mutual assistance

Simple Idea

Takaful can appeal beyond the Muslim market.

Overall Relationship

Shari’ah Compliance

→ Ensures Islamic principles are followed

VBI

→ Encourages Islamic financial institutions to create wider positive value

VBIT

→ Applies similar value-based principles specifically to the Takaful industry

Together:

Shari’ah Compliance + VBI + VBIT

→ More sustainable institutions

→ More innovative products

→ Greater social and economic impact

→ Wider investor base

→ Greater mainstream relevance

Easy Way to Remember

Traditional Focus

“Is the product Shari’ah-compliant?”

Value-Based Approach

“Is it Shari’ah-compliant AND does it create positive value for society, the economy and the environment?”

Simple Formula

Shari’ah Compliance + Value Creation + Sustainability + Social Impact = Stronger Future for Islamic Finance and Takaful

Takaful - Digitalisation and Takaful-Tech

• Takaful operators need to make better use of technology and digital infrastructure.
• Digitalisation can help Takaful operators:
• Reduce operating costs
• Improve efficiency
• Provide faster services
• Improve customer experience
• Reach more customers
• Maintain Shari’ah compliance more effectively

Simple Idea

Technology → Lower cost + Better service + Wider access

1. Why Technology Is Important for Takaful

• Traditional Takaful operations may involve:
• Physical branches
• Paper applications
• Manual claims processing
• Face-to-face sales
• High administrative costs
• Digital technology allows many of these activities to be carried out online.

Examples

Customers may be able to:

• Apply for Takaful online
• Pay contributions digitally
• Upload claim documents through an app
• Check certificate details electronically
• Communicate with the operator through online channels

Simple Idea

Manual process → Digital process → Faster and cheaper operation

2. Cost Efficiency

• Technology can reduce the cost of distributing and managing Takaful products.
• This is especially important for:
• Micro-Takaful
• Low-income customers
• Rural customers
• Small-value Takaful products

Example

Without digitalisation:

• Takaful operator needs physical branches
• Staff manually process applications
• Customers submit paper documents
• Higher administrative costs

With digitalisation:

• Customer applies through mobile phone
• Documents uploaded electronically
• Payment made online
• Application processed automatically

Simple Idea

Lower operating cost → More affordable Takaful products

3. Better Customer Service

• Digital platforms can provide customers with:
• Faster applications
• Faster claims
• Easier access to information
• 24-hour access to services
• More convenient payments

Example

• Ahmad has a minor motor accident.
• Instead of visiting a branch:
• He opens the Takaful mobile application.
• Uploads photos of the damaged car.
• Submits the claim electronically.
• Tracks the claim status online.

Simple Process

Accident → Mobile claim submission → Digital assessment → Faster claim processing

4. Takaful-Tech / Islamic Insurtech

• Takaful-tech refers to the use of technology to improve the delivery of Takaful products and services.
• It is similar to insurtech in conventional insurance, but Takaful-tech must operate in accordance with Shari’ah principles.

Technology May Be Used For

• Digital sales
• Automated underwriting
• Claims processing
• Customer verification
• Data analysis
• Fraud detection
• Mobile payments
• Online customer service

Simple Idea

Takaful + Technology = Takaful-Tech

5. Impact of COVID-19

• The COVID-19 pandemic accelerated the use of digital financial services.
• Customers became more comfortable purchasing insurance and Takaful products online.
• Physical movement restrictions encouraged companies and customers to rely more heavily on digital platforms.

Example

Before COVID-19:

• Customer may visit a branch to buy Takaful.

During and after COVID-19:

• Customer may prefer:
• Website
• Mobile app
• Online banking
• Digital Takaful platform

Simple Idea

COVID-19 → Greater reliance on digital channels

6. Growing Customer Preference for Online Channels

• Research referred to in the text showed strong interest in digital insurance channels in countries such as:
• Malaysia
• Indonesia
• Customers may prefer online channels because they are:
• Easy to access
• Convenient
• Faster
• Potentially cheaper
• Digital channels can be particularly useful for lower-income and underserved customers because operators may be able to provide products at lower distribution costs.

Example

A low-income customer may not live near a Takaful branch.

Instead:

• Uses a smartphone
• Compares available products
• Applies online
• Pays a small contribution digitally

Simple Idea

Online access → Easier access to Takaful for underserved customers

7. Digital Insurers and Takaful Operators - DITOs

• Bank Negara Malaysia introduced a framework initiative relating to Digital Insurers and Takaful Operators (DITOs).
• The objective was to encourage new digital-focused insurance and Takaful providers.
• These operators are intended to deliver products mainly through:
• Digital channels
• Electronic platforms
• Technology-based business models

Simple Idea

DITO = Insurance or Takaful operator designed mainly around digital delivery

8. Purpose of the DITO Framework

• The framework was intended to establish requirements for new digital insurers and Takaful operators.
• These operators should have strong business ideas or value propositions.
• A major objective is to improve services for the underserved market.

Underserved Market May Include

• Lower-income households
• Rural communities
• People with limited insurance/Takaful access
• Small businesses
• Customers who may not use traditional financial channels

Example

• A digital Takaful operator develops a simple Micro-Takaful product.
• Customer joins using only a smartphone.
• Monthly contribution = RM10.
• No physical branch is required.

Simple Process

Digital operator → Lower distribution cost → Affordable product → More underserved customers reached

9. Supporting Financial Inclusion

• Digital Takaful can support financial inclusion.
• Financial inclusion means giving more people access to useful and affordable financial services.
• Technology can allow Takaful operators to serve customers who were previously too expensive or difficult to reach.

Example

A farmer in a rural village may not have access to a Takaful branch.

Through a digital platform:

• Farmer registers using a phone
• Purchases Crop Takaful
• Pays contribution electronically
• Receives claim payment digitally if a covered loss occurs

Simple Idea

Digital Takaful → More people can access financial protection

10. More Competitive Takaful Products

• Digitalisation can increase competition in the Takaful industry.
• Operators may compete by offering:
• Lower costs
• Faster service
• Simpler products
• Better digital applications
• More personalised protection

Example

Two Takaful operators offer similar Motor Takaful.

Operator A:

• Paper application
• Branch visit required
• Claim takes several weeks

Operator B:

• Online application
• Digital payment
• Mobile claims
• Faster processing

Customers may prefer Operator B because of convenience.

Simple Idea

Better technology → Better competition → Better products for customers

11. Innovative Business Models

• Technology allows Takaful operators to develop new ways of providing protection.
• Examples may include:
• Fully digital Takaful
• On-demand protection
• Micro-Takaful through mobile applications
• Usage-based products
• Embedded Takaful within banking or e-commerce services

Example

• Ahmad purchases airline tickets online.
• During checkout, he is offered Travel Takaful.
• He selects the protection digitally.
• His Takaful certificate is issued immediately.

Simple Idea

Takaful protection can be integrated directly into digital transactions

12. Technology and Shari’ah Compliance

• Digitalisation must not weaken Shari’ah compliance.
• Takaful operators must ensure that:
• Digital contracts are Shari’ah-compliant
• Investments remain Shari’ah-compliant
• Fees are transparent
• Participants understand the arrangement
• Funds remain properly separated
• Automated processes follow approved Shari’ah rules

Example

• A digital platform automatically invests participants’ funds.
• The system must ensure that investments are only made in approved Shari’ah-compliant assets.

Simple Idea

Digital innovation must still operate within Shari’ah requirements

13. Main Benefits of Digitalisation for Takaful Operators

• Lower operating costs
• Faster processing
• Wider customer reach
• Better data management
• Improved underwriting
• More efficient claims handling
• Better fraud detection
• Greater customer convenience
• More affordable products
• Better access to underserved communities

14. Main Benefits for Customers

• Easier application process
• Faster access to protection
• Lower transaction costs
• More convenient contribution payments
• Faster claims
• Better product comparison
• Greater access for customers outside major cities

Simple Idea

Digital Takaful benefits both the operator and the participant

Overall Example

Suppose XYZ Takaful develops a fully digital Micro-Takaful product.

Traditional method:

• Customer visits branch
• Completes paper application
• Staff manually process documents
• High administration cost

Digital method:

• Customer applies through mobile app
• Identity verified electronically
• Contribution paid online
• Certificate issued automatically
• Claims submitted digitally

Result:

• Lower operating costs
• Faster service
• More customers reached
• Product becomes more affordable

Easy Way to Remember

Technology Helps Takaful Operators

• Reduce costs
• Increase efficiency
• Reach more customers
• Improve service
• Develop innovative products

Digital Takaful Helps Customers

• Easier access
• Faster applications
• Faster claims
• Lower-cost protection
• Greater convenience

Simple Formula

Takaful + Digital Technology + Shari’ah Compliance = Takaful-Tech

And the main objective is:

Use technology to make Takaful more efficient, affordable, competitive and accessible.

Takaful - What Is a Subsidy?

A subsidy is financial support given by another party to help reduce the cost of a product or service.

In Takaful, a subsidy may come from:

• Government
• NGO
• Charity
• Development organisation
• Other supporting institution

Example

Suppose the real cost of Crop Takaful is:

RM100 per month

But a low-income farmer can only afford:

RM40 per month

The government may pay the remaining:

RM60

So:

Farmer pays RM40 + Government subsidy RM60 = RM100 total cost

Why Subsidies Are Used

• Make Takaful more affordable
• Help lower-income people obtain protection
• Support farmers and vulnerable communities
• Encourage more people to participate

Main Problem

• If the scheme depends too much on subsidies, it may become difficult to continue if the government or NGO stops providing the money.

Simple Idea

Subsidy = Someone else helps pay part of the cost so the customer pays less.

Takaful - Role of Micro-Takaful, Crop Takaful and Livestock Takaful

• Takaful can play an important role outside traditional trade and financial activities.
• One important area is providing affordable protection to lower-income communities.
• This can be done through:
• Micro-Takaful
• Crop Takaful
• Livestock Takaful
• These forms of protection are especially useful because lower-income households may have limited savings and may struggle to recover after a major financial loss.

1. Micro-Takaful

• Micro-Takaful is a low-cost, simple form of Takaful designed mainly for:
• Lower-income individuals
• Vulnerable households
• Small informal businesses
• It provides small-scale or “bite-sized” protection at an affordable contribution level.
• The objective is to provide basic financial protection rather than large benefits.

Example

• Ahmad is a low-income worker and the main breadwinner for his family.
• He joins a Micro-Takaful plan with a small monthly contribution.
• Ahmad dies unexpectedly.
• His family receives a Takaful benefit.

Why It Is Important

• Without protection, Ahmad’s family may suddenly lose its main source of income.
• They may struggle to pay for:
• Food
• Rent
• Education
• Medical expenses
• Daily living costs

Simple Idea

Small affordable contribution → Basic financial protection for low-income households

2. Crop Takaful

• Crop Takaful protects farmers against financial losses affecting their crops.
• Farmers are exposed to risks such as:
• Flood
• Drought
• Storm
• Excessive rainfall
• Pest damage
• Other adverse weather events
• A poor harvest can destroy a farmer’s main source of income.

Example

• Fatimah is a small rice farmer.
• She spends RM20,000 preparing and planting her crop.
• A severe flood destroys most of the rice before harvest.
• Without protection, she may lose almost all of her investment.
• Under Crop Takaful, she may receive financial assistance for the covered loss.

How It Helps

The benefit may help her:

• Buy seeds for the next season
• Repair damaged farming equipment
• Pay household expenses
• Restart farming activities

Simple Idea

Bad weather destroys crop → Farmer loses income → Crop Takaful helps farmer recover

3. Livestock Takaful

• Livestock Takaful protects farmers or livestock owners against losses involving animals.
• Possible risks include:
• Disease
• Accident
• Natural disaster
• Death of livestock
• Certain other covered losses

Example

• Hassan owns 20 cows.
• The cows are an important source of:
• Milk
• Meat
• Income
• A disease outbreak kills several of the animals.
• Hassan suffers a major financial loss.
• Livestock Takaful may provide compensation for the covered loss.

How It Helps

The benefit may allow Hassan to:

• Replace livestock
• Restart production
• Maintain his income
• Avoid falling into serious financial difficulty

Simple Idea

Livestock lost → Farmer loses valuable productive assets → Takaful helps restore financial capacity

4. Why These Groups Need Takaful More

• Lower-income individuals usually have:
• Less savings
• Fewer financial assets
• Limited access to credit
• Less ability to absorb unexpected losses
• Therefore, even a relatively small financial disaster can have a serious effect.

Example

For a wealthy household:

• RM10,000 loss may be difficult but manageable.

For a poor household:

• RM10,000 loss may mean:
• Loss of livelihood
• Debt
• Inability to pay rent
• Inability to buy food
• Children leaving school

Simple Idea

The less financial cushion a household has, the more damaging an unexpected loss can be.

5. Importance of Shari’ah-Compliant Protection

• Many lower-income communities in Muslim-majority areas may prefer financial protection that complies with Shari’ah.
• Takaful can therefore provide an alternative to conventional microinsurance.
• The arrangement can combine:
• Mutual assistance
• Affordable protection
• Shari’ah compliance

Simple Idea

Financial protection + Mutual assistance + Shari’ah compliance

6. Main Challenge – High Operating Costs

• One major difficulty is that these products may not be very attractive commercially to Takaful operators.
• The contributions collected from low-income participants are usually small.
• However, the cost of providing the service can still be high.

Costs May Include

• Setting up branches or local service points
• Employing staff
• Marketing
• Collecting contributions
• Processing claims
• Providing customer education
• Using technology
• Monitoring farms or livestock

Example

Suppose:

• 10,000 Micro-Takaful participants each contribute RM10 per month.
• Total monthly contributions = RM100,000.

But the operator may still need to pay for:

• Staff
• Administration
• Technology
• Claims processing
• Distribution

If these costs are too high, the scheme may not be commercially sustainable.

Simple Idea

Small contributions + High administration cost = Profitability challenge

7. Philosophical Challenge – Should Takaful Operators Profit From the Poor?

• There is also an ethical or philosophical concern.
• Some argue that Takaful operators should not make excessive profit from low-income participants.
• This creates a difficult balance.

The operator needs enough income to:

• Pay staff
• Maintain systems
• Process claims
• Remain financially sustainable

But at the same time:

• Contributions must remain affordable.
• The operator should avoid exploiting financially vulnerable participants.

Simple Idea

Takaful must balance commercial sustainability with social responsibility.

8. Learning From Microinsurance

• Micro-Takaful can learn from conventional microinsurance programmes.
• Many microinsurance schemes rely heavily on external financial support.
• Support may come from:
• Governments
• Charities
• NGOs
• International development organisations

Example

• Actual cost of providing coverage = RM30 per month
• Participant can only afford = RM10 per month
• Government or NGO pays the remaining RM20

This makes the product affordable.

However, the problem is:

What happens if the subsidy stops?

9. Crop and Livestock Schemes Often Depend on Subsidies

• Crop and livestock insurance schemes are frequently expensive because:
• Many farmers may be affected by the same event at the same time.
• A major drought or flood can create very large claims.
• Therefore, governments often subsidise the schemes.

Example

A drought affects an entire agricultural region.

• Thousands of farmers suffer losses simultaneously.
• Claims may become extremely large.
• Participant contributions alone may not be enough.

Government support may be needed to keep the scheme operating.

Simple Idea

Large correlated agricultural losses → High claims → Subsidies may be necessary

10. Sustainability Problem

• Heavy dependence on government or NGO subsidies creates a long-term sustainability concern.
• If the scheme only survives because a benefactor continuously provides money, it may fail if that financial support ends.

Example

For five years:

Government subsidy → Crop Takaful remains affordable

Then:

Government stops subsidy

The operator may have to:

• Increase contributions
• Reduce benefits
• Stop the scheme

Simple Idea

Subsidised today does not always mean financially sustainable tomorrow.

Main Challenges

• Low contribution amounts
• High operating and distribution costs
• Difficulty reaching rural communities
• Lack of awareness about Takaful
• High claim exposure in agriculture
• Ethical concern about profiting from vulnerable groups
• Dependence on government or NGO subsidies
• Long-term sustainability

Possible Ways Forward

• Use technology to reduce distribution costs.
• Offer products through:
• Mobile applications
• Banks
• Cooperatives
• Mosques
• Community organisations
• Use simple and standardised products.
• Partner with governments and NGOs.
• Develop more sustainable subsidy structures.
• Improve risk assessment and agricultural data.
• Use Retakaful to help absorb very large agricultural losses.

Simple Idea

Lower costs + Better technology + Strong partnerships + Retakaful support = More sustainable Micro-Takaful

Easy Way to Remember

Micro-Takaful

Protects low-income households

Example:

Breadwinner dies → Family receives financial assistance

Crop Takaful

Protects farmers’ crops

Example:

Flood destroys rice crop → Farmer receives compensation

Livestock Takaful

Protects farmers’ animals

Example:

Disease kills cattle → Farmer receives financial assistance

Main Challenge

People need affordable protection, but providing that protection can be expensive.

Simple Formula

Low-income participants + High vulnerability + Affordable Takaful = Strong social benefit

but

Low contributions + High operating costs + Dependence on subsidies = Sustainability challenge

Takaful - Can Takaful Entirely Replace Conventional Insurance?

• Takaful is designed as a Shari’ah-compliant alternative to conventional insurance.
• However, Takaful may not be able to replace conventional insurance in every situation.
• There are two main limitations:
• Risks involving non-Shari’ah-compliant activities
• Very large or catastrophic risks that may exceed the capacity of a Takaful fund

1. Takaful Cannot Cover Non-Shari’ah-Compliant Activities

• Takaful protection must itself comply with Shari’ah.
• Therefore, Takaful generally cannot provide protection for businesses, products or premises whose main activities are prohibited under Shari’ah.

Examples

• Brewery
• Produces alcohol.
• The core business activity is not Shari’ah-compliant.
• Therefore, the brewery itself would generally not be eligible for Takaful protection.
• Conventional interest-based mortgage business
• Operates on riba-based financing.
• Takaful should not be structured to support or protect the prohibited activity itself.
• Casino
• Operates through gambling or maysir.
• Therefore, the casino business would not normally qualify for Takaful protection.

Simple Idea

Shari’ah-compliant risk/activity → May be covered by Takaful

Non-Shari’ah-compliant activity → Generally not covered by Takaful

2. Some Permissible Risks Are Still Difficult for Takaful to Cover

• Some risks are Shari’ah-compliant and can theoretically be covered by Takaful.
• However, they may be difficult to cover because the possible claim amount is extremely large.
• These are often called large risks or catastrophic risks.

Examples

• Aviation risks
• Marine risks
• Large industrial plants
• Major infrastructure projects

3. Aviation Risk Example

• A Takaful operator provides protection for a commercial aircraft.
• The aircraft may be worth hundreds of millions of ringgit.
• Accidents are relatively rare.
• But if a major accident occurs:
• The aircraft may be completely destroyed.
• Passenger liabilities may arise.
• Third-party liabilities may also arise.
• A single claim could therefore be enormous.

Example

Suppose:

• Aircraft value = RM400 million
• Potential passenger and liability claims = RM300 million
• Total potential exposure = RM700 million

Even if the probability of an accident is low, one accident could require a payment of hundreds of millions of ringgit.

Simple Idea

Low probability → Very high possible loss

4. Marine Risk Example

• A cargo ship may carry:
• Expensive machinery
• Oil
• Electronics
• Large quantities of commercial goods
• A serious accident could result in:
• Loss of the ship
• Loss of cargo
• Environmental damage
• Third-party liability

Example

A vessel carries cargo worth:

RM800 million

If the ship sinks, the resulting claims could be extremely large.

Simple Idea

Marine accident may be uncommon → But one loss can be huge

5. Claim Frequency vs Claim Severity

Two concepts are important:

Claim Frequency

• Means how often claims are expected to happen.

Example

Motor accidents occur relatively frequently.

Therefore:

Motor Takaful → Higher claim frequency

Claim Severity / Quantum

• Means how large the claim may be when it occurs.

Example

A commercial aircraft crash may be rare, but the amount payable can be extremely high.

Therefore:

Aviation → Lower claim frequency + Very high claim severity

6. Where Takaful Works More Comfortably

• Takaful tends to work more easily where:
• Claims occur with a reasonably predictable frequency.
• The amount of each claim is manageable.
• Losses can be spread across a sufficiently large group of participants.
• One individual claim is unlikely to exhaust the participants’ risk fund.

Example – Motor Takaful

Suppose:

• 100,000 participants join a Motor Takaful fund.
• Many small and medium-sized accidents occur during the year.
• Most claims are manageable relative to the total size of the fund.

Because claims are spread across many participants, the Takaful fund can plan for them more effectively.

Simple Idea

Many predictable, manageable losses → Easier for Takaful fund to absorb

7. Why Very Large Risks Are Difficult

• Takaful relies on a common pool of participants’ contributions.
• If one single claim is extremely large, it could seriously weaken or even exhaust the fund.
• This creates a capacity problem.

Example

Participants’ Risk Fund = RM500 million

One aviation claim = RM450 million

If the fund had to bear the entire claim itself:

• Most of the fund could be used for one event.
• Less money would remain for other participants’ claims.
• The financial stability of the fund could be threatened.

8. Role of Retakaful

• Retakaful helps solve this problem.
• A Takaful operator does not have to retain the entire large risk.
• It can share part of the risk with a Retakaful operator.

Example

Suppose a Takaful operator provides coverage for an aircraft with potential exposure of:

RM700 million

The Takaful operator may decide:

• Retain RM100 million itself
• Transfer/share RM600 million with one or more Retakaful operators

Therefore, if a large claim occurs, the financial burden is shared.

Simple Process

Participant → Takaful Operator → Part of large risk → Retakaful Operator

Simple Idea

Retakaful increases the capacity of Takaful operators to cover very large risks.

9. Why Retakaful Is Important for Industry Growth

• Without sufficient Retakaful capacity, Takaful operators may be unable to cover:
• Aircraft
• Ships
• Large factories
• Power plants
• Major infrastructure projects
• Retakaful allows the Takaful industry to participate in larger and more complex risks.

Example

Without Retakaful:

Takaful operator capacity = RM100 million

With Retakaful:

Takaful operator + Retakaful support = May cover risks worth several hundred million ringgit

Easy Way to Remember

Takaful Cannot Cover

• Activities that are fundamentally non-Shari’ah-compliant
• Examples:
• Casinos
• Breweries
• Riba-based businesses

Takaful Can Cover but May Struggle With

• Very large permissible risks
• Examples:
• Aviation
• Marine
• Large infrastructure

Why?

• Claims may occur rarely, but when they occur, the amount can be enormous.

Solution

Takaful + Retakaful → Larger risk-sharing capacity

Simple Formula

Manageable risks → Takaful can normally handle

Huge risks → Takaful + Retakaful needed

So, Takaful can replace conventional insurance in many areas, but its ability to do so depends on Shari’ah permissibility and sufficient financial/risk-sharing capacity.