Takaful - Commercialisation of Takaful

The pooling of risks is one of the most important mechanisms in Takaful. By combining the contributions of many participants into a common fund, financial losses suffered by individual participants can be shared across the group. This makes large individual losses more manageable and reflects the principle of mutual assistance encouraged by Shari’ah.

In Takaful, the tabarru’ contribution is not intended to operate in the same way as a conventional insurance premium. It represents a donation to the common risk pool so that participants who suffer a covered calamity can receive financial assistance from that fund. Therefore, the underlying idea is that participants help one another rather than simply purchasing risk protection from an insurer.

However, modern Takaful has become increasingly commercialised. Most Takaful operators are established as commercial companies that require substantial private capital to begin operations. Shareholders provide this initial capital and naturally expect the business to generate an appropriate return on their investment.

The need for shareholder capital arises because Takaful is a capital-intensive business. A new operator requires significant funds before it can even build a sufficiently large participant base. Capital is needed for licensing requirements, technology systems, employees, actuarial services, underwriting, claims management, marketing, branch networks, Shari’ah governance, and regulatory compliance.

For this reason, establishing Takaful as a completely pure mutual arrangement without initial outside capital can be difficult. Participants may eventually create a large common pool, but the operator still needs money at the beginning to establish the business and support its operations before sufficient contributions are collected.

Example

Suppose a new Takaful operator wants to begin operations.

Before receiving enough participant contributions, it may already need:

RM50 million for regulatory capital, systems, staff, offices, marketing, and operational infrastructure.

If there are no shareholders, donors, or other providers of initial capital, it may be very difficult to establish the Takaful operation.

The commercial nature of modern Takaful can create a conflict between social objectives and shareholder objectives. Shareholders normally expect the operator to generate profit and provide a return on their capital. As a result, the operator may naturally focus more heavily on customers and products that are financially attractive.

This can limit access to Takaful for certain segments of society, especially:

• Low-income households
• Rural communities
• Small farmers
• Informal workers
• Small businesses
• People requiring very small or low-margin protection products

These customers may genuinely need financial protection but may not generate sufficient commercial returns for a shareholder-driven Takaful operator.

Example

A Takaful operator may have two possible markets.

Market A

• High-income urban customers
• Average contribution = RM5,000
• Low distribution cost
• Strong profit potential

Market B

• Low-income rural customers
• Average contribution = RM100
• Higher distribution cost
• Lower profit margin

A commercial operator may naturally prefer Market A because it provides a better financial return to shareholders, even though Market B may have a greater social need for protection.

This illustrates how commercialisation can restrict financial inclusion. Takaful is based on mutual assistance, but commercial pressures may cause operators to prioritise profitable customers rather than communities that have the greatest need for protection.

One possible alternative is the establishment of not-for-profit Takaful operators funded initially by benefactors, donors, foundations, waqf institutions, governments, or socially responsible investors. These parties could provide the initial capital required to establish and operate the Takaful scheme without demanding the same level of financial return expected by ordinary commercial shareholders.

A not-for-profit Takaful operator does not mean that the organisation operates as a charity or continuously gives free protection. It must still be financially sustainable. Contributions must be sufficient to cover claims, expenses, reserves, administration, technology, and other operating costs.

The difference is that the primary objective would not be to maximise returns for shareholders. Instead, the priority would be to provide sustainable Takaful protection to communities that need it, while ensuring that the operation can financially support itself.

Simple Example

Suppose a not-for-profit Takaful operator receives:

RM20 million in contributions

Its annual costs are:

• Claims = RM12 million
• Operating expenses = RM5 million
• Reserves = RM2 million

Total requirements:

RM19 million

Remaining amount:

RM1 million

The operator does not need to distribute this RM1 million as shareholder profit. It may instead retain it to strengthen reserves, improve services, reduce future contribution rates, or expand protection to underserved communities, depending on the applicable Takaful structure.

Therefore, “not-for-profit” does not mean “no surplus” and does not mean “charity.” It means that the organisation is designed primarily to sustain the Takaful scheme and serve participants rather than maximise shareholder returns.

The key distinction is the priority of the institution.

A commercial Takaful operator may need to balance:

Participant Protection + Business Sustainability + Shareholder Return

A not-for-profit Takaful operator would focus more strongly on:

Participant Protection + Financial Sustainability + Wider Social Access

This approach could help Takaful return more closely to its original principles of mutual assistance, solidarity, and social protection, while still operating in a professionally managed and financially sustainable manner.

Easy Way to Remember

Commercial Takaful

= Needs shareholder capital

= Shareholders expect returns

= Greater pressure to focus on profitable markets

Not-for-Profit Takaful

= Initial capital may come from donors or benefactors

= Must still cover its own costs

= Priority is sustainable protection rather than shareholder profit

Simple Formula

Risk Pooling + Tabarru’ + Mutual Assistance = Core Takaful Principle

But:

Commercialisation + Shareholder Return Pressure → Possible Reduced Access for Low-Profit Segments

Possible alternative:

Donor Capital + Sustainable Operations + No Profit-Maximisation Objective = Wider Takaful Access