takaful supplement - assaif · takaful supplement supported by malaysia — the international...

Takaful Supplement

Supported by

Malaysia — The International Islamic Financial Center

CONTENTS

Overview of Takaful Industry in Malaysia T1

Takaful Industry in Malaysia: Performance and Key Developments T2

MTA’s Roles and Functions T3

Exciting Times for Takaful T6

MARC’s Approach to Rating Institutions Offering Takaful T11

Corporate Governance for Takaful T13

Conventional Insurers Slow to Capitalize on Takaful Potential T16

Targeting Double-Digit Growth T19

Takaful Glossary T22

to the FWU-Group

We wish to thank all our bank distribution and Takaful

product partners for this important achievement and

success.

FWU-Group is a leader in international Bancatakaful,

Shari’ah compliant investments and web based point of sale

and administration systems. FWU-Group is also an Observer

Member of the Islamic Financial Services Board (IFSB).

FWU-Group’s main competitive advantages in supplying

tailor made “white label” Family Takaful Savings, Education

& Retirement plans include:

Please contact:

Dr. Manfred J. DirrheimerChairman of the Board of FWU-Group� +49.89.74 85 [email protected]

Sohail JafferFWU-Group Partner� +352.26 197-701f +352.26 [email protected]

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Welcome

� Regular and lump sum contributions

� Open investment architecture embedding active risk-control anddynamic fund allocation

� Sophisticated web based application handling and policy administrationsystem

� Structured Re-Takaful solution with a major global reinsurance company

Bank distribution partners already exist in the Middle East and the Emergingmarkets.

The FWU-Group offers local support through its regional offices in Dubaiand Kuala Lumpur.

Winner of the Euromoney Islamic Finance Award

for Best Takaful Provider

www.MIFmonthly.com Page T1

MIF monthly 2008 Supplement Series TAKAFUL SUPPLEMENT

The Takaful industry in Malaysia originated with the enact-ment of the Takaful Act 1984. Syarikat Takaful Malaysia was the first Takaful operator in Malaysia. It began opera-tions in 1985. Before 2006, there were only three local Takaful companies oth-er than Takaful Malaysia: Takaful Nasional, Takaful Ikhlas and Mayban Takaful. The Takaful market share then was revolving at 4% to 5%. In 2006, this risen up to around 6.5% Shahril Azuar Jimin, execu-tive vice-president of Etiqa Insurance & Takaful, highlighted the reason for the increase. “Malaysia’s Takaful industry is forecasted to improve in 2008 with RM3 billion gross contributions for both family and general business, as com-pared to RM2.4 billion last year,” said Shahril., citing the four new licenses is-sued by Bank Negara Malaysia (BNM) in 2006, effectively doubling the num-ber of Takaful operators in the region. The new Takaful operators are permit-ted to have foreign equity interest of up to 49% to encourage the liberalization of the financial services industry.”

Mergers and joint ventures Shahril also noted that last year, Mayban Takaful merged with Takaful Nasional and was re-branded

as Etiqa Takaful. Aviva also bought into Commerce Takaful, which became CIMB Aviva Takaful. Foreign interest in the local Takaful industry further heightened when Solidarity (a Bahrain-based operator) teamed up with MAA to set up MAA Takaful. Wan Zamzuri Wan Ahmad, chief marketing officer of MAA Takaful, is anticipating further growth in the lo-cal Takaful industry, with total family Takaful premiums as at year 2007 leap-ing to more than RM1.3 billion. “This year onwards, I foresee growth will be significant as well. Although MAA Takaful only started operations at the end of last year, with more than 10,000 agency members, we will contribute to the high growth of the Takaful indus-try,” he said. Sharil also commended, BNM’s invitation to qualified reTakaful players to set up in Malaysia. “Under this initiative, reTakaful operators licensed by the central bank will be able to conduct their business in ringgit and international currencies,” Shahril pointed out. Last year saw the incorpora-tion of the first reTakaful company in Malaysia — MNRB reTakaful Berhad. “All this has effectively increased the industry’s revenue to 8.2% of total in-surance sector revenue,” he observed.

Non-Muslims also keen Besides the increasing number of players and institutional develop-ments in the industry, Takaful operators are also broadening their customer base to include non-Muslim customers. On the attraction of Takaful to non-Muslims, Wan Zamzuri explained: “As for MAA Takaful, I can safely say at least 40% of our customers so far are non-Muslim. There are a few plus points for them, including surplus sharing and higher transparency in conducting busi-ness. Under our model, if at the end of the financial year there is a surplus in our risk investment account (i.e. fewer claims than reserves), we will share this at a 50:50 ratio with the policyholders. Policyholders will get more if there is a surplus. Whereas in conventional insur-ance, the company takes 100% of the surplus.” In conclusion, the Takaful in-dustry is enjoying fairly robust growth in the Malaysian market although some-what lagging behind the banking sector, despite having started in Malaysia at around the same time. BNM’s decision to allow foreign ownership in local Takaful firms and the establishment of reTakaful firms will propel the Takaful industry in Malaysia to greater growth in the coming years.

Overview of Takaful Industry in MalaysiaBy Shabnam Mokhtar

Managing Arfa’eza A.AzizEditor [email protected] Editor Shabnam Mokhtar [email protected]

Senior Copy Koay Sook Kuan Editor [email protected]

Deputy Editor Nazneen Abdul Halim [email protected]

Production Manager Hasnani Aspari [email protected]

Marketing Manager Deepa Kaliperumal [email protected]

Newsletter Manager Karen Ann D’cruz [email protected]

Financial Controller Faizah Hassan [email protected]

Deputy Publisher Geraldine Chan& Director [email protected]

Managing Director Andrew Tebbutt [email protected]

Managing Director Andrew Morgan& Publisher [email protected]

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DisclaimerAll rights reserved. No part of this publication may be reproduced, duplicated or copied by any means without the prior consent of the holder of the copyright, requests for which should be addressed to the publisher. While every care is taken in the preparation of this publication, no responsibility can be accepted for any errors.

The Publishing Team

Page T2 | MIF© Monthly

MIF monthly 2008 Supplement SeriesTAKAFUL SUPPLEMENT

Major indicators of the Takaful industry continue to show positive performance since 2002. The industry is beginning to realize the vast potential within the Takaful market, and the trend is expected to continue. The Takaful industry in Malaysia has proven to be strong and viable with an average growth of 14.2% of the total net contributions of RM1.7 billion over the past five years. The total assets of the industry also recorded impressive growth of 13.7% over the last five years to RM6.9 billion in 2006. The market penetration rate of 5.6% in 2005 and 6.8% in 2006 denotes a significant Takaful market that can be tapped.

Key industry developments The growing significance of the Malaysia Takaful industry is further reflected by the following key developments in the industry for the past three years:

Strengthening regulatory framework, with focus on corporate governance and consumer protection Enhancement of the enabling environment conducive to the growth of the Takaful industry continues to be a key strategic focus. In recent years, prudential regulations were strengthened with a greater focus on corporate governance including specifying the minimum expectations, roles and responsibilities of the Takaful operator’s board of directors, auditors and appointed actuaries. Regulations were also focused on enhancing disclosure as well as

maintaining fairness for better protection of the consumers. To facilitate market development, guidelines on family Takaful products and guidelines on medical and health Takaful business were issued.

Increasing product dynamism The past years have seen the establishment of new Malaysian Takaful operators, mostly joint ventures between insurers, both domestic and multinationals, and other financial institutions. These new players are expected to bring new experience and skills, stronger financial backgrounds and greater network to the Takaful industry, thus increasing its sophistication and competitiveness. In addition to providing Takaful coverage to the masses via plain vanilla family Takaful products, the new Takaful operators also focus on the financially savvy and higher net worth individuals by promoting and marketing investment-linked products. This development was apparent in 2006, where out of 30 new family Takaful products introduced in the market, 53% were investment-linked Takaful products. The majority of the products (88%) were from new players. The most well-received products were the capital protected single contribution plans.

Facilitating expansion of international business The promotion of interna-tional Islamic financial business is further boosted with the launch of the Malaysia International Islamic

Financial Center (MIFC) initiative aimed at expanding inter-regional trade and cross-border investment flows. MIFC broadened the Malaysian Takaful landscape by allowing for-eign financial institutions to carry out international currency business in Islamic finance with non-residents in Malaysia or abroad. Existing and new players have the opportunity to establish interna-tional Islamic banks, international Takaful operators (ITOs) and inter-national currency business units. New licensees have the option of incor-porating these entities into the form of a locally incorporated entity or a branch. Capital requirement and licence fees for ITOs are as per the table below. An attractive tax package in terms of a 10-year tax exemption beginning from 2007 has also been granted.

Widening reTakaful sector Acknowledging the need to develop institutional infrastructure that supports the Takaful industry, two reTakaful licenses were recently issued to eligible operators. Strong and qualified local and foreign players are also invited to apply for reTakaful licenses and Malaysia as the operational center. These reTakaful licensees will reduce the Takaful operators’ dependency on conventional reinsurance support and meet the demand for reTakaful support by Takaful operators. More importantly, the licensing of new reTakaful operators in Malaysia will ensure that technical knowledge, particularly in Takaful and reTakaful underwriting, is made more readily available as part of the effort to promote product development and innovation.

Takaful Industry in Malaysia: Performance and Key DevelopmentsBy Bank Negara Malaysia

Capital requirement and license fees for ITOs

Incorporated entity Branch

Minimum paid-up capital of RM10 million Minimum net working fund of RM10 million

Annual registration fee of RM5,000 Annual registration fee of RM5,000



Malaysian Takaful Association (MTA) was established in December 2002 under the Malaysian Societies Act of 1966. It is a mandatory association, as spelt out in the Takaful Act 1984, where all Takaful operators in the country are required to be members of MTA before they can commence operations. Its roles and functions are similar to those of other associations such as General Insurance Association of Malaysia (PIAM) and Life Insurance Association of Malaysia (LIAM), which are also mandatory associations for the conventional general and life insurance companies. The objectives and powers of MTA are spelt out in its Constitution, and if one were to summarize it in one sentence, it is essentially to promote the interests of its members and the exercise of self-regulation within the Takaful in-dustry. Being a trade association with such legal constitution, MTA works actively with other stakeholders in the industry, such as the Central Bank of Malaysia (Bank Negara Malaysia), PIAM, LIAM and other related trade associations as well as government min-istries that have an effect on the Takaful and insurance industry generally. When MTA was first formed, there were only four Takaful operators as members. Almost six years on, there are 10 corporate members and three individual members. Corporate members of the association comprise:

1. Syarikat Takaful Malaysia Bhd (1985)

2. Etiqa Takaful Berhad, previously known as Takaful Nasional (2007)

3. Mayban Takaful Berhad (2002)4. Takaful Ikhlas Sdn Bhd (2003)5. CIMB Aviva Takaful Berhad (2005)6. Prudential BSN Takaful Berhad

(2006)7. HSBC Amanah Takaful (M) Sdn

Bhd (2006)8. Hong Leong Tokio Marine Takaful

Bhd (2006)

9. MAA Takaful Berhad (2007)10. MNRB Retakaful Berhad (2007)

For now, all Takaful operators hold composite licenses, i.e. they are licensed to transact both general and family (life) Takaful businesses. This poses a challenge for MTA.

How it began The Takaful industry in Malaysia started to gain momentum when, in October 1982, the Malaysian government formed a special task force to explore the viability of setting up an Islamic insurance company. Out of that study and based on its recommenda-tions, the Takaful Act 1984 was gazett-ed and came into force thereafter.

At first glance, there does not appear to be much difference between conventional insurance and Takaful. Indeed, in terms of concept, there is none as both use the long established understanding “pool of the many to help the unfortunate few”. As mentioned earlier, MTA is dedicated to promoting the interests of its members and the exercise of self-regulation within the Takaful industry. It was clearly spelt out in a Road Map Brainstorming Session that was held in 2006 that set the direction and focus of the association. A four-pronged strategy was laid out with the objective of achieving a 20% share in the overall insurance in-dustry by 2010. The focus, among others, is on branding, awareness and commu-nication, shared services through lever-aging of technology, investment oppor-tunities and relations with regulators. These strategies are deemed achievable and close co-operation among members to make it work was sought.

Inter-Takaful agreement But foremost in the minds of the regulators was the commitment of MTA members on the implemen-tation of the Inter-Takaful Operators Agreement (ITA), which was long overdue as the signing of this impor-tant document had been postponed several times. The ITA essentially sets a common standard among all opera-tors to regulate on and control matters related to pre-contract examination for agents, agency registration system and code of ethics, and compliance of the general Takaful tariff for motor and fire businesses. The implementation of the ITA would certainly make the industry stronger in terms of streamlining mar-ket practices among operators as well as harmonizing the Takaful and conven-tional insurance industry. The infrastructure supporting the ITA is now being formed. An ad-

MTA’s Roles and FunctionsBy Malaysian Takaful Association

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The ITA essentially sets a common standard among all operators to regulate on and control matters related to pre-contract examination for agents, agency registration system and code of ethics, and compliance of the general Takaful tariff for motor andfire businesses



hoc committee has been set up to spe-cifically look into this area. And MTA is working hard to ensure that this docu-ment is signed by end-March 2008.

Activities accomplished The year 2007 was particularly hectic. Other than the monthly management committee meeting, the MTA secretariat was also involved in projects such as the third International Convention on Takaful and ReTakaful 2007, Takaful Shariah Colloquium and Workshop, 12th Global Takaful Group Meeting and a host of other activities involving the various stakeholders. All these activities were essentially to promote the interests of Takaful operators at the industry level. The present lack of public awareness of Takaful is another matter of concern among operators. This in turn led to the penetration rate for Takaful products among the Malaysian population to hover at around 7%, as compared to almost 39% for conventional insurance (2007). However, as specified in the long-term 2010 RoadMap strategy, an ongoing public awareness campaign is already in place and more activities in this respect will be launched.

MIFC initiative The Malaysian government launched the Malaysia International Islamic Financial Centre (MIFC) ini-tiative in August 2006, with the aim of turning the country into an interna-tional Islamic financial center. Through this initiative, it was recognized that there is an urgent need to create a more vibrant, innovative and competi-tive Islamic financial services industry in Malaysia. It will be a waste if the opportunities and incentives afforded under this initiative are not taken by the Takaful operators. For one, operators will have the opportunity to set up international currency business units (ICBUs) to con-duct Takaful business in international currencies and enjoy a 10-year tax ex-

emption. This is applicable for reTaka-ful business as well. It is, however, up to the individual operators to decide if going international via the MIFC initia-tive is the way forward. With the advent of more Takaful players in the market, it is anticipated that greater challenges and more demanding tasks lie ahead for MTA. The secretary foresees that there will be a tremendous

increase in activities once the ITA is consummated. This will in turn help the industry grow in a more systematic and orderly manner.

article continued...

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Sohail Jaffer began his career as an audit partner with PwC Africa before joining Citibank London as vice-president, eventually becoming a partner at FWU Group, an independent financial services group headquartered in Munich, Germany. A well-known figure in the Takaful industry, he has a wealth of experience in accounting, banking and business development, which has helped him conclude major bank distribution deals for FWU. FWU has operations in Europe and the Middle East. Recently, it opened a regional head office in Kuala Lumpur. Last December, FWU also obtained an

investment advisory license from the Securities Commission (SC), allowing the group to broaden its activities in Malaysia. In an hour-long interview with MIF Monthly in FWU’s office at Plaza Sentral, Sohail shared his vision for the Takaful industry. Also present was Huan Woon Han, managing director of FWU Group Malaysia, who has over 25 years of banking experience. Moving up the corporate ladder from credit officer to bank general manager, Huan has gained invaluable experience and knowledge in all facets of business planning and strategizing in the retail and wholesale banking sectors. Below are excerpts from the interview.

What is the main activity of FWU? Sohail: FWU focuses on two main activities: bancassurance (distribution of insurance products by banks) and asset management. Within the bancassurance (bancatakaful) space, we are active in three markets: Europe, i.e. Germany (where our headquarters is based), France and Italy. Outside Europe, we are active in the Middle East — Saudi Arabia, Kuwait and the UAE. Recently, we also inked an agreement with a major Takaful operator in Pakistan. Currently, Malaysia serves as our regional head office in Asia. Our international business model consists of entering into a long-term strategic cooperation agreement with a major national Takaful operator in each market, like Takaful Ikhlas in Malaysia, and jointly developing the bancatakaful business locally.

What products do you offer? Sohail: We have three lines: savings, annuity and a home finance

scheme. With the savings product, the client aims to save money for various needs in life — marriage, children’s education and retirement, for example. The annuity product allows a customer who reaches the age of 60 or 65 to enjoy a fixed monthly return throughout his remaining lifetime. This is easy to craft in the conventional space. However, it is challenging to develop a Shariah compliant annuity program and this is what we are working on. Finally, the home finance scheme. If you recall, in a Shariah compliant house financing, the bank buys a property on the customer’s behalf and leases it to him with an option to buy at the end of the lease. For example, the bank purchases a house for RM300,000 and in 15 years’ time, the customer has the option of buying the property at RM500,000. That means the customer has to find RM500,000 in 15 years. The question is, how do you accumulate capital to meet the obligation? We will come up with an investment-linked program to save money for that liability in the future. This product is known as a home finance investment-linked scheme. In the conventional UK market, this is known as the endowment mortgage, where in order to repay the loan, the customer would have an investment-linked program. In our case, we are looking at a Shariah compliant investment-linked program for a Shariah compliant house financing. At the end of the day, within the bank segment, we are focusing on the middle-income group, known as the mass affluent. Different markets would have different income ratios to define mass affluent. What may define the mass affluent in Malaysia is different from the mass affluent income ratio in the Middle East. For example,

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Exciting Times for TakafulFWU Group’s Sohail Jaffer and Huan Woon Han say the Takaful industry has high potential with several markets waiting to be tapped. They share their strategy and vision with Shabnam Mokhtar.



the mass influent in the Middle East may be defined as a customer who has disposable assets of US$100,000. Here, a customer with the same amount of assets might be considered a private banking customer, not mass affluent. We focus on the mass-affluent segment because you would need to have the capacity to purchase an annuity product or house. Thus, the middle-income customer segment is our major market via the bank.

Why does a Shariah compliant annuity render it challenging to create?Sohail: It is challenging because a conventional annuity program is developed using the discount factor. Say you have RM100,000 today and we anticipate your life expectancy to be 25 years more to age 60. What we have to figure out is how much income the investment will provide over the 25 years, and what would be the monthly amount paid over the remaining lifetime. In order to pay the client a fixed income over his remaining life, the fund will invest largely in bonds that will pay a certain coupon (interest) rate. In a Shariah compliant annuity, we cannot invest in bonds that pay interest. Thus, the challenge is to find a long-dated (25 to 30 years) Shariah compliant instrument that provides stable income.

What is your target market? Sohail: Basically, our products are aimed at financial intermediaries, which include banks and independent financial advisers (IFAs, or brokers as some call them). However, there are not many IFAs in emerging markets. Maybe there are more IFAs in Hong Kong and better developed markets such as Taiwan, South Korea and Japan. In emerging economies like China, India, Indonesia, Malaysia and Thailand, banks play a major distribution role. We don’t deal with the end retail customer, only with distributors. For us, the customer is a bank and not the end user itself. Our relationship stops at the bank level when we sign a

distribution agreement with the bank. This is known as a business-to-business transaction.

Why would banks want to buy a white-label product and not develop/manufacture their own? Sohail: The main reason is due to economies of scale; which means that larger organizations can produce goods and services at a lower cost. Some banks have their own insurance company but it is mainly confined to a single bank distributor. Other banks are unlikely to buy from a bank-owned insurance company due to competitive reasons. For example, a bank would not want its customers’ data to be known to the life company of another bank as there could be cross-selling of products to the purchasing bank’s customer. Therefore, banks have to think twice if they want to manufacture their own product. Are there economies of scale, i.e. would they have a critical volume of buyers if they manufactured their own? If there is no critical volume, it doesn’t make economic sense to manufacture. It therefore boils down to a decision of make or buy. Does it make more economical sense to make and distribute or to buy it from another supplier and distribute? The determining question is, ‘What margin will I get?’ As the margin in distribution is better than manufacturing, several banks have moved towards distribution, understanding their customers and cross-selling other products to them. This is better than trying to manufacture everything. It is also a question of competitive advantage — ‘Will I have a competitive price through my own manufacturing unit or by buying from outside where the manufacturers (AIG, Allianz) are global players with global capacity with a huge production platform?’

Huan: Banks would also have to consider whether they have the technical

skills to manufacture the product and if it is worth diverting from their scope, i.e. their core competencies. It is best to focus on one’s strength rather than try to do everything.

How do you ensure efficient service to both the bank and the end customer then? Sohail: The system that you have must be supportive. In our case, we use a web-based point of sale and administration system that the insurance company and bank can use. This system facilitates the sale and makes it convenient for the customer. The system covers everything from processing the application form, policy illustration and printing of policy certificate to the calculation of NAV on a daily basis. So, if a customer approaches the bank, say, after six months and asks for his policy value, the relationship banker can report the NAV of his policy which the customer can use as collateral.

Huan: In a nutshell, our system replaces the insurance agent’s role. In a traditional system, it is difficult to locate the insurance agent after the sale has been concluded. Under our system, the customer just needs to visit the branch where he purchased the policy and


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convey his request — either a change of address, partial withdrawal or any relevant request at all. The relationship banker merely needs to enter the request into the system, unlike the current one where the customer has to fill in a form; like order taking. The policyholder will not know when the form will be submitted, attended, processed and updated. In our system, you could do it on the spot. If it needs approval, the system will forward it to the wakeel (Takaful operator) for approval. The best part is that the request is captured in the system. Once this is done, the audit trail will be there. If we synchronize it with the MIS (management information systems) of the bank, then the relationship bankers could track any outstanding requests. Thus, by no means the customer’s request will be left unattended.

How would the end user benefit from the system you offer? Sohail: Our family Takaful investment-linked plan offers what we call life cycle products. It aims to help the end user save money according to his needs at different stages in life. For example, a customer may start saving at 25 for marriage. He gets married at 32 and then starts saving for the education of his children. At 45, he may start thinking about retirement and wants to top up the state pension with a private retirement plan. Within the life cycle, the cus-tomer may want to increase the premi-um when he has more money (after a job promotion, for example) or reduce it when he has less money (due to un-employment, for example). In another case, a customer may have the option to choose how much money to put into eq-uity (risky asset) and non-equity (non-risky asset). He comes back later want-ing to change this percentage. In some markets, we offer the end user a packaged investment profile consisting of conservative, balanced and growth portfolio where the equity exposure var-ies from 20% (in conservative) to 80%

(in growth). A customer may want to switch portfolios during the life cycle. In the case of a system-based approach, a customer can walk in and request a decrease in premium from RM500 to RM300, for example. The next collection date, the customer would only have to pay RM300. He may come back after six months and ask to increase the premium from RM300 to RM700 and it would be done at a click of the mouse. Let me use my own example to illustrate what happens in a paper-based approach. I have put my money in an investment-linked policy and for the last six months, I have been contacting my bank to ask them about my options if I wish to switch investment. As markets are going down, I do not see any change in my policy unit value because my monthly contributions are placed into a fund that is losing money. For six months, I have been trying to contact them but I have not received anything.

In conclusion, a system-based approach is easier to manage, track, control and monitor, which would translate into convenience for the end user. If it is a paper-chase approach with no system, customers would be in my situation right now. Even with a major company in the European market, I’ve been chasing them for the last six months to switch my fund and I have not received any response.

Is FWU the first to use the system-based approach? Sohail: I would say FWU is one of the pioneers. We are not the only one, but one of the early firms that developed a proprietary web-based point of sale and administration system. Say you would like to obtain X amount of money in the future, a policy illustration system would indicate how much you have to pay now. There are other similar systems out there. However, our system covers A to Z which calculates the sales incentive of the financial adviser, calculates the portfolio net asset valuation and tracks the status of pending application, for example. We are not the only system provider, but we have a comprehensive system for our investment-linked plans.

What added value does FWU offer? Sohail: First of all, we offer product development, process innovation and customization. The banks are our eyes and ears. They are the ones who know their customers. So, as a provider, one has to listen to what the bank wants. If they say this particular product feature has to go in or be dropped, then the provider should not insist, ‘This is the way I do it so this is the way you take it.’ That is not customization. However, customization also does not mean that we start building a completely different product. If we look at a car, for example, the chassis is the same for all BMW3 series. The accessories on the car, however, could be different.


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However, customization also does not mean that we start building a completely different product. If we look at a car, for example, the chassis is the same for all BMW3 series. The accessories onthe car, however, could be different



The same applies when we customize our product according to a bank’s needs. For example, in a Takaful product, the accessories would take the form of rider benefits: the disability benefit, accident plan and travel plan. Some banks want it while others think it’s a distraction. Some banks say, ‘Just keep it simple. Give us only an investment-linked plan with Takaful (life) protection on it. Nothing else.’ Keep it simple so it’s easier for the customer to understand. The requests depend on the bank’s experience. If they are already a mature player in bancatakaful and are accustomed to dealing with these additional features, then it is common for them. If a bank has limited experience in bancatakaful, they want a simple product first. Just like a baby — first you have to crawl, walk and then run. Secondly, we offer an open investment architecture design, which means we invest the money on a best-of-breed approach in third-party mutual funds. For example, in Europe, we could be investing in Fidelity and Merrill Lynch. They are not our funds. If the banks have their own fund, they could also incorporate their fund in the portfolio.

Does that mean FWU will be the fund manager as well? Sohail: It depends on the market we operate in. If the regulations allow, we will be the fund manager. However, as I said before, we adopt a multi-manager approach (which is known as the best-of-breed approach). We select good funds based on a quantitative (computerized) fund selection model at the beginning of a month. We will rebalance at the start of the following month. The model works similar to a football team. First, we select the best fund (similar to the main players in a football team). As we know, even if we have the best main players, we would also have five or six reserve

players. If one player is injured or not performing, they would be replaced.

What other added value does FWU offer? Sohail: We have an attractive commission structure that is competitive with other products of the bank because otherwise, the product will not move off the shelf regardless how good it is, since the economics are not right for the distribution partner (the bank). If the bank’s unit trust product pays an upfront fee of 3% to 4% while the Takaful product does not pay a similar fee, it will difficult for a bank to commit its resources to sell a product that is paying an inferior commission compared to other products on the shelf. Just like a supermarket that will not be excited about selling a product if it earns an inferior margin compared to a product in a similar category. In addition, our reinsurance is based on a pure reTakaful agreement. In a reinsurance agreement, this

surplus is only shared between the reinsurance company and the life insurance company. The bank customer receives nothing. In a reTakaful agreement, the wakeel (i.e. trustee — Takaful operator) is acting on behalf of the policyholder and thus the surplus is shared/given as a bonus to the policyholder. Normally, it’s not shared between the Takaful operator and reTakaful company because the Takaful operator has already charged a wakalah fee. So, they could not now come in and want a share of the surplus.

Why did you decide on a regional office in KL? What benefits were offered? Huan: First and foremost, KL offers a strategic location to cover the major markets we want to penetrate in Asia including Indonesia, Brunei, Hong Kong, China and India. It also offers various facilities like human capital and IT infrastructure. In addition, Bank Negara Malaysia (BNM) has provided infrastructure and incentives to transform Malaysia into the regional hub for Islamic banking. We enjoy Multimedia Super Corridor (MSC) status under the realm of shared services. We enjoy various tax benefits and other perks like flexibility in the recruitment of expatriates. We also do not have to abide by the local ownership requirement. The government allows 100% foreign ownership for MSC companies. Furthermore, the cost of operation (salary, rental) is more economic in Malaysia than Singapore.

Does having a regional office in KL mean you will not set up elsewhere in the region? Huan: If the regulator allows all support to be channeled from KL, we will do it because of the proximity of the places — it’s only a few hours’ flight to all these nearby countries. Why


continued...



incur extra cost for a similar office in another country?

The KL office has been in operation for a year now. How challenging has it been to set up in Malaysia? Huan: FWU had its physical presence incorporated in KL on the 28th February 2007. In terms of setting up and applying for the license, we would say it was a challenge but it was not that tough because we have the sup-port of the regulators (BNM, the SC) and MDeC (Multimedia Development Corporation), which facilitated the process.

For staff recruitment, apart from the investment representative, oth-er personnel were easily available in our human resource market. All our current staff have the necessary bancassurance experience and compliant background. Investment reps are fairly scarce so the salary was exorbitant for those who had the license. So we did the reverse. We hired those who had the necessary qualification but not the li-cense and gave them six months to pass the two examinations as required by the SC. This is how we recruited two invest-ment reps. It’s a win-win situation for both parties because it is cheaper for us and is a good opportunity for them to get the necessary license.

Which other markets in Southeast Asia are you focusing on? Outside Southeast Asia and the Middle East, where do you see potential? Sohail: In Malaysia, AmIslamic is our first distributor. We signed the agreement last year and will launch products this year. In the UAE, we have six distributors (five banks and one regional IFA) and in Saudi, National Commercial Bank is our distributor. In addition, we are also exploring India as it has about 150 to 200 million Muslim population. This is another market that we may consider for expansion. We are also in talks with Egypt, Turkey and Morocco to start businesses there. Takaful has huge potential. Moody, Standard & Poor’s and Fitch estimated that Takaful premium today is worth US$2.6 billion to US$4 billion and is forecasted to grow by 2015 to US$7 billion (Moody’s forecast) or US$20 billion (S&P’s). The growth rate of the industry is thus exponential (growth from US$4 billion to US$20 billion). Although the industry is forecasted to grow exponentially, it is still relatively small compared to the trillion-dollar global insurance industry. The two major markets are Southeast Asia and the Middle East.

However, we would say potential lies in Europe, France and Germany, where the Takaful penetration rate is really low. Huan: In East Asia, we are seeing a lot of potential in Indonesia and Brunei. Penetration is still low in this part of the world. Malaysia has 6% Takaful market penetration with a population size of 10% compared to Indonesia, which has an even lower penetration; that’s why we see huge potential there. Hong Kong and China are two other markets that provide opportunities in Asia.

Any last words for our readers? Sohail: The Takaful industry has high potential and offers exciting markets to be explored. However, this potential needs to be harnessed carefully and we need a scalable business model. We also need brands that customers are familiar with. All major players are in the industry — Aviva, Prudential, Allianz and Manulife to name a few. This means big brands on the supply side have come in. Distributors like Citibank, HSBC, ABN Amro, Standard Chartered (with their Islamic operation called Saadiq) and Maybank are also coming into play. Therefore, the distribution and supply sides have big brands, which is usually a sign that the industry is progressing from its infancy stage to the mid-market growth phase. The big brands must have come in for a reason. They must have done their calculations and seen potential in the industry. Some mergers are also taking place. Prudential, for example, recently bought Al-Jazeera’s Takaful business in Saudi Arabia while Solidarity teamed up with MAA in Malaysia. Malaysia is viewed as the center of product excellence in the realm of Islamic banking and finance. It is the high-performance benchmark against which the performance of other markets is compared, and we see a lot of opportunities that we can tap into.


In East Asia, we are seeing a lot of potential in Indonesia and Brunei. Penetration is still low in this part of the world.



This article presents an over-view of Takaful and its main concepts, the global development of modern Takaful and an outline of Malaysian Rating Corporation Berhad’s (MARC) approach to rating institutions that offer Takaful (Takaful institutions, or TI). Takaful is Islamic insurance or insurance that is compliant with Islamic beliefs and the Shariah. The essence of Takaful is mutually agreed indemnification or protection; that is, shared financial responsibility for the losses of its co-participants against specified loss events that may be inflicted upon them. Two key Shariah principles applied in Takaful are Tabarru’ (donation) and Ta’awun (mutual cooperation). Contributions from Takaful participants represent the donation to the mutual fund that will be used to indemnify co-participants (mutual indemnification). In turn, the participants/policyholders in a Takaful contract are entitled to a share of the profits earned by the business.

Family Takaful and general Takaful Family Takaful and general Takaful are the Shariah compliant counterparts of conventional life and general insurance respectively. Family Takaful is a combination of a mutual financial indemnity scheme and an investment scheme. In family Takaful, the participant’s contribution is apportioned into a donation representing a financial indemnity (Tabarru’) with the balance deposited into an account for the purpose of the participant’s savings and long-term investment. Examples of family Takaful include individual family Takaful plan, mortgage Takaful, education Takaful and health Takaful. In contrast, general Takaful is solely provided on a short-term mutual

indemnity basis — minus the savings aspect. Should there be a net surplus in the general Takaful fund, it shall be shared between the participants and the operator. Examples of general Takaful include fire Takaful, motor Takaful, marine, aviation and transport Takaful, engineering Takaful and accident Takaful.

Wakalah and Mudarabah models The two Takaful models commonly seen in practice are Wakalah (agency) and Mudarabah, both of which are based on the form of the relationship between participants and the operator. Under the Wakalah model, the operator acts as an agent (wakeel) of the participants of the Takaful funds and is paid an upfront fee to cover operational expenses incurred. The surplus in the Takaful funds, if any, after the operator’s fee belongs to the participants. The operator’s fee (sourced from the fund) is determined in advance with input from the company’s Shariah committee. Meanwhile, under the Mudarabah model, participants are entitled to a share of the profits only when the company is profitable. The investment returns and underwriting profit are shared with the operator. The basis for profit sharing is decided according to a predetermined sharing ratio which has been approved by the Shariah committee of the Takaful

company. In this regard, Takaful may be regarded as a profit-sharing business venture between the participants and the operator.

Main differences between Takaful and conventional insurance Some of the key differentiating characteristics between Takaful and conventional insurance are as follows: The risk or potential loss is assumed by the insurer in conventional insurance. However, in Takaful, the risk of loss is shared by the participants, in a co-operative arrangement. In Takaful, there is a clear segregation of the Takaful funds from the operator’s funds. The Takaful funds are formed from contributions of the participants (participants’ assets) and managed for their benefit by the operator. Underwriting surpluses or deficits are accrued to the funds. Meanwhile, the operator’s funds or the Takaful licensee’s shareholders’ funds are maintained separately. The Takaful operator receives a fee for operating the Takaful funds and may also share investment returns and underwriting results. Takaful funds do not invest in interest (riba)-bearing investments, unlike conventional insurers who do not have this restriction. A Takaful company also needs to have its own Shariah board composed

continued...

MARC’s Approach to Rating Institutions Offering TakafulBy Dr Yuen Boon Jching

Conventional insurance Takaful

Governed by secular law Compliant with Shariah and Islamic principles

Risks are assumed by the insurer Risks are shared by Takaful fund participants

Insurance funds are owned by the insurer

Takaful funds are owned by participants while operator’s fund is owned by TI

Investments are not generally restricted from featuring an interest element

Investments of Takaful funds are free from interest (riba) element

Surplus in the funds belongs to the insurer

Surplus/deficit in the Takaful funds belong to participants

No Shariah board Takaful company has its own Shariah board



of knowledgeable Islamic scholars. The board’s role is to help ensure the modes, policies, sharing ratios and investments of the Takaful company comply with the Shariah.

Modern development of Takaful The first modern Takaful business was set up in Sudan in 1979. Takaful has been estimated to have grown at an average rate of 10% to 20% per annum as compared to the average rate of 5% per annum for conventional insurance. Currently, Takaful companies remain mostly concentrated in the Middle East, Southeast Asia, Iran, Turkey and Sudan. It is believed that more than 60 companies in 23 countries offer Takaful services. Malaysia has been prominent in promoting innovations in Takaful services, and was the first to offer reTakaful services by a reTakaful company operating from Labuan.

Takaful in Malaysia Malaysia’s Takaful Act was enacted in 1984. The country’s first Takaful company (Takaful Nasional) started operations the following year. In 1997, an offshore reTakaful company was set up in Labuan. The national regulator for the Takaful industry is Bank Negara Malaysia, which has issued licenses to eight Takaful companies. Most of the business models of domestic players are based on Wakalah although Takaful Nasional uses a combination of Wakalah and Mudarabah. The domestic Takaful industry is still developing, with low penetration rates (5% for general Takaful). Nonetheless, it has substantial growth potential as reflected in the 2003-05 average growth rate of 17.3% and 22.4% for family and general Takaful, respectively. Fund assets of family and general Takaful as at September 2005 totaled RM4.92 billion and RM830 million, respectively.

Ratings approach MARC’s rating approach to TI rating is to acquire a thorough understanding of the business, operations, management’s objectives, operating environment, future development and accordingly, the risks of the TI. In our view, the environment in which a TI operates will have a significant bearing on its business and financial performance. These will include macroeconomic factors such as GDP growth, inflation and growth sectors/industries. Other environmental factors that may affect assessment of the TI are the stage of the industry’s development, and robustness of the legal and accounting framework. A high level of confidence in credibility and forthcoming support of the regulator and overall robustness of the regulatory framework could also benefit a TI’s rating. A robust regulatory framework would promote a strong risk management culture and build strong capital requirements (especially for the long-term family Takaful lines). The adequacy of reserves will also be assessed against past track records and the industry where available. In MARC’s assessment of the investments of the TI, issues to be considered would include whether it is Shariah compliant. There are also potential concentration issues — for example, the limited investment (Sukuk) instruments available that may also have an impact on overall portfolio credit quality. Institution-specific consider-ations include the intensity of compe-tition, market position and franchise value of the TI, customer base and di-versity, range of product offerings and significance of contributions from com-pulsory lines such as third-party motor protection. MARC also factors in considerations on the TI’s business model, whether it is Wakalah or Mudarabah, tariffs (if any) on participants’ contributions, the profit-

sharing ratio and any capping of the Wakalah fee. As many Takaful institutions are start-up and hence small, the availability of support in terms of resources from a strong parent or group would be an important consideration for such institutions. Surpluses/deficits on the Takaful funds and the continued ability of the operator to be able to generate reasonable returns on its capital would also be assessed. The operator should have the capability to support operations, meet strategic funds growth and also strengthen its capital. In evaluating management strength, MARC would consider management quality and character, level of knowledge, track record and technical competence, planning skills, adaptability, integrity, technical competence, record of Shariah regulatory and internal compliances, management depth, succession planning and level of corporate governance.

Conclusion The Takaful business is set to further expand its role as an alternative to conventional insurance and continues to gain importance and significance. A rating on an institution that offers Takaful would provide the market with a useful means to benchmark the institution against its peers. More importantly, such ratings could help promote high levels of disclosure and transparency as well as provide an impetus to enhance the corporate governance of an institution offering Takaful services.


Dr Yuen Boon Jching is vice-president of

ratings responsible for ratings of conventional and Islamic financial institutions, general and life insurance and others at MARC. He can be contacted at +603 2092 5398 or via email at [email protected]. Visit www.marc.com.my



In managing an organization, there must be systematic and procedural ways to ensure the sustainability and survival of the business in the fast-moving economy coupled with highly competitive market forces. Corporate governance is aimed at enhancing accountability, transparency and trustworthiness. These values are paramount in Takaful operations as well as Islamic financial transactions on a bigger scale. Corporate governance is about the way in which the board of a company oversees the running of the firm by its managers, and how board members are in turn accountable to shareholders, stakeholders and the company. It recognizes the role of market forces in the efficient allocation of resource, socio-economic justice and well-being of all through an integrated role of moral values, market mechanism and good governance. The salient differences between conventional insurance and Takaful operator are:

1. Moral values : Moral uplift aims to change the behavior, tastes and pref-erences of individuals, and thereby complements the price mechanism in promoting general well-being.

2. Hereafter effect : The concept of Hereafter is completely ignored in the conventional practice, but is greatly emphasized in Takaful.

3. Misconception of wealth maximi-zation : In the conventional sense, this is to serve our self-interest through wealth maximization. In Takaful operations, it is not con-fined to serving one’s self-interest in this world alone, but also extended to the Hereafter through faithful compliance with moral values that help rein in self-interest so as to pro-mote social interest.

4. Ethics and values The conventional practice lacks the fact that ethics and values carry into the day-to-day business activities. In Takaful, all resources at the disposal of

the organization are a trust from God, and every individual in the organization will be accountable before Him. There is no other option but to use them in keeping with the terms of trust. These terms are defined by beliefs and moral values. The relationship between Islam and economics cannot be underemphasized as there should be a balance between materialistic notion and religious, moral and humanistic frame of action. Takaful operation is a branch of Islamic economics that serves the need of the public.

Islamic qualities To do that, Takaful must possess and practice such Islamic qualities in its transaction and dealing with its stakeholders. These qualities are found in the corporate governance structure which will guide Takaful companies to attain the highest level of integrity and trustworthiness in the financial market. In a nutshell, Takaful companies are a branch of Islamic economics (Muamalat), which is an offshoot of Islam itself as illustrated on the left. Corporate governance is an important facet of Takaful business philosophy. To put it simply, corpora-tions must exercise greater account-ability when undertaking their business operations, both to their shareholders and the public. It is in fact a system-atic framework that provides a blue-print for Takaful companies to manage themselves in the best interests of the shareholders and to manage risks in an increasingly competitive global econo-my. The Islamic concept of corporate governance stresses three main areas: accountability, transparency and trust-worthiness. The diagram below illus-trates the concept of Islamic corporate governance. Islamic financial transactions have essentially embraced the concept

continued...

Corporate Governance for Takaful By Saiful Bahri Saroni

ISLAM

ISLAM

ISL

AM

ISLA

M

Aqidah

Shariah Akhlaq

Faith & Belief

Practices &

ActivitiesM

oralit

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Eth

ic

Man to GodRelationship

Man to ManRelationship

PoliticalActivities

EconomicActivities

SocialActivities



of corporate governance. More often than not, we need a mechanism that would guide Islamic corporations to fully embrace the importance of corporate governance. The Takaful industry is still fairly new and requires tremendous effort from the regulatory bodies and market participants to cooperate and implement good governance in their day-to-day operations.

What corporate governance entails Corporate governance can be viewed as the financial health tool for management and directors to monitor the health status of the organization. In a way, it guides us to stay on course to remain healthy for a long time. This leads to enhancing corporate governance (appreciation, adoption, implementation and control), which involves collective responsibility among the regulatory agencies, professional bodies, corporate leaders as well as investors and shareholders. The board of directors is entrusted with the conduct and daily management of business activities and commercial feasibility of the venture by using the available assets. Directors are, therefore, subjected to higher standards not only in the technical efficiency of operations, but also the implementation of an efficient

management system through the use of “best practices” developed from high ethical values. A good governance system should consist of a system of structure, operating, controlling, and monitoring a company to achieve the following objectives:

1. Fulfilling long-term strategic goals, building shareholders’ value by establishing a dominant market share and being a leader in a chosen sphere.

2. Considering and caring for the needs of the environment and local community, including the economic and cultural interaction.

3. Maintaining excellent relationship with customers and suppliers in terms of quality of service provided, considerate ordering and account settlement procedures.

4. Maintaining compliance with all legal and regulatory requirements under which the company operates.

Management should be concerned with managing the organization in a highly ethical way and “governance” is about seeing that it runs properly.

A careful observation of corporate governance as described would easily reveal that the central element is primarily and essentially man. In short, corporate governance is basically about the moral and ethical dimensions of managing a company’s business. Thus this drives us to believe that man tends to be swayed from the “desired” action. To ensure that this can be aligned with the objective and purpose of this individual in the orga-nization, we need to adopt a system which would self-correct each “in-tended” action. Corporate governance will pull everyone in the organization to be more objective and committed in managing the organization in a man-ner that will exhibit effectiveness and efficiency. Takaful companies deal with intangible products and require a great deal of transparency to their prospects and clients.

Responsibility and amanah As part of the list of items in corporate governance, trustworthiness creates a long-lasting relationship between the company and clients. Consequently, there should not be any misappropriation or mismanagement of funds in Takaful operations or other types of operations for that matter. Islam also looks into the essence of responsibility, the concept of work, dedication to work and vicegerency or trusteeship. This gives Islamic corporate governance very comprehensive coverage. And Takaful operators are not exempted from such governance.


Isla

m

icCorporate Governance Framew

ork

Accountability

Trustw

orthyTrans

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TakafulOperator Saiful Bahri

Saroni is senior vice-president/chief actuary of Takaful Ikhlas Sdn Bhd. Email

[email protected] or visit www.takaful-ikhlas.com.my

Introducing Takaful IKHLAS.Setting new standards in family and general Islamic financial protection services.Raising the bar in customer service Neither of which is as important to us as being “ IKHLAS” in all that we do for you . We are Takaful IKHLAS, the only progressive Islamic insurer that’s backed by MNRB Holdings Berhad, one of Malaysia’s leading reinsurance companies.

For more information, please visit www.takaful-ikhlas.com.my or call 03-7801 1488ISO9001: 2000 Certificate SG07/1251



Takaful refers to insurance that is offered according to the tenets of Islam as set out in the Quran. It revolves around the philosophy of mutual cooperation, where each policyholder (or contributor) participates in each other’s loss and the Takaful operator facilitates this using its expertise. Double-digit growth in the global Takaful market has enticed some conventional insurers to make a foray into this market. Yet, despite the promise of a market that is not yet fully tapped, many others have been slow to take the plunge. The still-nascent Takaful market has plenty of upside growth, with global premiums projected to soar from US$1.7 billion in 2006 to US$7.4 billion in 2015, based on statistics from Salama Arabic Islamic Insurance Co. Given the upside potential, what’s holding conventional insurers back from adopting and offering Takaful solutions? Many conventional insurers believe their business processes can be used for Takaful. However, simply applying their existing business model with a few minor tweaks incorporated so that they appear to be Shariah compliant doesn’t work. What’s key is understanding that the business processes are different.

Mudarabah versus Wakalah Instead of adopting a single business model as in conventional insurance — where profit maximization for shareholders is key — Takaful operators can adopt one of two business models: Mudarabah and Wakalah. Regardless of which they use, conventional insurers will need to support another IT system in addition to their existing IT set-up, even though

the technology for the two systems could be the same. At the core of both models is the principle of mutual risk-sharing and cooperation. Policyholders — or participants, as they’re known under Takaful — contribute to a pool of funds to protect each other from a defined risk. The defined claims arising from these risks are paid out from their defined pool of contributions and the surplus is distributed among them. Conventional insurance and Takaful share some of the business processes such as quotations, underwriting, claims and reinsurance (or reTakaful). However, the distribution of surpluses is the chief operational difference between conventional insurance and Takaful. In conventional insurance, whether and how much surplus is retained or distributed is at the discretion of the insurer. Moreover, shareholders, and not policyholders, receive a share of the surplus. Under the Mudarabah model, participants share the risk among themselves. While they get a share of the operating surplus — provided any claim they make doesn’t exceed their contributions — predetermined by a Shariah committee, the Takaful operator also gets a share for its underwriting activities. Participants also share the risk and are entitled to a share of operating surplus — again, if claims don’t exceed contributions — under the Wakalah model, but the Takaful operator only earns a fee for his underwriting services and isn’t entitled to any underwriting surpluses.

Special accounts for participants While the business processes are different, conventional insurers need to recognize that these differences must

be captured at module level, requiring that an entirely new IT system be created. That means incorporating the different terminology used in Takaful — for example, “contributions” instead of “premiums”, “participants” instead of “the insured” and “sum covered” instead of “sum assured” — as well as the entire concept of surplus distribu-tion, individual personal accounts and the two different Takaful business types into application software at the outset.

Unlike conventional insurance, Takaful operators must create two special accounts for each participant of a Takaful plan. The contributions of participants are split into these two accounts — a Tabarru fund and an investment fund. As Takaful is about mutual cooperation, the Tabarru fund allows participants to fulfill their religious obligation to provide financial assistance

Conventional Insurers Slow to Capitalize on Takaful PotentialBy S Shankar

Conventional insurance and Takaful share some business processes... but the distribution of surpluses is the chief operational difference between conventional insuranceand Takaful

continued...

WINNER



to fellow participants. That is to say, when Takaful participants contribute to a plan, they are participating under the belief that they are helping others in time of need. Meanwhile, the contributions that go into the investment fund are invested by the Takaful operator in Shariah compliant assets to generate profits that are then shared between the participant and Takaful operator at a pre-agreed ratio. Two lines of business are open to Takaful operators: (i) family — under which children’s

education and health Takaful fall; and

(ii) general — which covers motor, marine and personal accident Takaful.

For these businesses and each fund it maintains, Takaful operators must hold separate sets of accounts. In order to calculate surpluses for their Takaful plans, conventional insurers need to create adequate and specific parameters, which cover claims to be considered, contributions received, payment modes — whether monthly, quarterly, half-yearly or yearly, as well as how to treat long-term policies. Small amounts of surpluses can also be taken on a monthly or yearly basis and put towards benefits.

Given the challenges that adopting Takaful solutions presents, particularly in understanding Shariah principles and driving business based on them, deciding on models to distribute surpluses and being conversant in the Takaful products available, it may be wise for conventional insurers to consider joining forces with existing Takaful operators. They in turn can lend their expertise in designing new products and helping to extend the Takaful suite of offerings.


S Shankar is senior vice-president of insurance business at 3i Infotech Asia-Pacific, a global IT company that provides technology solutions and services for the banking, financial services and insurance industry. He can be contacted via email at [email protected]

Takaful Markets & Products:A Reference Manual

Introduction to Takaful

Risk and RiskManagement

Origins of Takaful

Islamic Law andTakaful Insurance

Takaful Operations

Products and Plans

Effective Sales Presentations

Accounting Treatment for Takaful

Investment of Premiums and Takaful Funds

Re-Insurance and ReTakaful

Profi le of Global Takaful Industry

Conclusions, Trends and Future Challenges

This unique publication is designed for self study and classroom use and offers a comprehensive training and reference resource for the Takaful industry. The manual covers all aspects of developing and offering Takaful products and will prove an invaluable resource for all those involved with Islamic insurance.

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Contents:

In order to calculate surpluses for their Takaful plans, conventional insurers need to create adequate andspecificparameters



There is a lot you can tell from a man’s laugh, and from the sound of Zainudin Ishak’s hearty chuckle, one gets a sense that he is someone who can tackle a challenge head-on while maintaining his cool. Sitting in his office, which boasts a view of the Kuala Lumpur skyline, a flat-screen television running news from Bloomberg and keepsakes accumulated from his travels, Zainudin seems well prepared for a Q&A session with MIF Monthly — even prodding the writer for more questions when the session is over. Zainudin may be all smiles and sprightly, but when it comes down to it, the man means business.

Prior to the joint venture (JV) between CIMB Group and Aviva plc, Zainudin was CEO of Commerce Takaful Berhad, which was under Commerce International Group Berhad (CIG). In January 2007, BCHB Group announced the proposed sale of a 49% stake in Commerce Life Berhad and Commerce Takaful Berhad to Aviva Pte Ltd, which led to the formation of CIMB Aviva, as it is known now. How has your role changed since the JV between CIMB and Aviva? My previous and current role as CEO is more or less the same, except that there are more responsibilities now — I have been tasked to accelerate the company’s Takaful growth within the domestic market, as well as build an international Takaful business within the Aviva structure. The JV has also lifted the expectations of our company shareholders in many ways, citing plans for internationalization. My tasks include ensuring my staff are equipped with the right tools of trade and infrastructure, nurturing a supportive environment and, more importantly, a readiness to be competitive with a world-class attitude, mentality and delivery. We are committed to our stakeholders — the shareholders as well as our customers — and it is my responsibility to ensure that their interests are well taken care of.

The CIMB Aviva brand has yet to be launched. Has a particular date been set for this? The brand yes, but the company itself has been a fully incorporated entity since July 2007. However, in

terms of branding, we really need to find the Aviva look and feel, the CIMB look and feel, and, more importantly, a common cultural theme. It is a work in progress!

How has the JV benefited both CIMB and Aviva as separate entities, and what does each entity bring from a practical perspective? There must be a compelling reason as to why Aviva was first interested to partake in the JV, right? Not because I’m such a charming person (laughs)… it’s simply because they have the capability. We (CIMB Group) had decided earlier on to raise the insurance and Takaful level higher on a group level, so through a process of request for proposal (RFP), we invited about 10 interested bidders — qualified ones, of course — to partake in the exercise, led by CIMB Investment Bank. Three were then short-listed, and eventually, Aviva was chosen as our partner. Keep in mind that it was not because of mere pricing — we had better offers for the 49% stake, but Aviva was chosen on the sheer merit of its capability in giving bancassurance solutions. The JV was announced in late 2006 after a process of due diligence and securing Bank Negara Malaysia (BNM)’s approval. CIMB Group’s collaboration with Aviva will also enable the group to deliver best-of-breed life insurance and Takaful products to its customers. Aviva benefits from CIMB Group’s distribution reach, treasury capabilities and customer base, while CIMB Group can leverage on Aviva’s expertise in designing industry-leading insurance products and processes.

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Targeting Double-Digit GrowthCIMB Aviva CEO Zainudin Ishak says that while statistic are not reflective of the local Takaful industry, the company is on track to record its second year of profitsBy Nazneen Halim



As you said, CIMB has a 51% share. Does that mean CIMB has more say in product development/marketing? I would say it is a marriage of a lovely couple. Not an arranged marriage, but rather through mutual intentions between both parties to combine their strengths. CIMB is quite strong in consumer banking, and Aviva can leverage on the CIMB platform to sell Takaful products. On the Takaful front, Aviva on its own is nothing, CIMB on its own is nothing, but together, it is a formidable and complementary partnership.

What segment are you targeting, and how do you intend to reach them? Being part of the CIMB conglomerate, we would of course target to serve our CIMB clients, and will move to the international markets along with CIMB and the Aviva global network.

As mentioned, Malaysia will be the initial hub for new products. Which markets will you then be targeting? As we secured the license to operate international currency business units (ICBUs) only a few months ago, and are now able to transact non-ringgit structures to non-resident businesses, we are banking on ‘low-hanging fruits’ — places where both companies have a strong presence in terms of distribution — such as Indonesia, Singapore and Brunei for CIMB, and Australia and the UK for Aviva. We can’t simply go to China. In one of his earlier interviews, our group CEO Andrew Moss had said it would be a crime for him to not grow the Takaful business via the Aviva network. This is basically the level of commitment given by Aviva plc in the UK. But — and there is a ‘BUT’ — we have to be domestically strong first before we can replicate our success model here in other countries. I think the problem with some Takaful operators here — despite their foreign presence — is that they are

not really capitalizing on their local position, so their foreign businesses end up bleeding. They also have very expensive models — full-blown subs, so you already have to pump in so much capital, boost human capital and management capabilities.

What about the CIMB-Aviva model, then? Our model basically uses Aviva and CIMB Bank, via white labeling… or, in layman’s terms, the poor man’s model. Therefore, we allow other people to use their brand while selling our products. In Indonesia, for example, Bank Niaga — a subsidiary of CIMB — can market our products or front them for us should there be any legal barriers. The control and claims are, however, still very much administered by us. White labeling also allows us to penetrate countries with stricter regulations, such as Australia and the UK. When we introduce a product, in the UK for instance, we get Aviva UK to secure approval from the Financial Services Authority (FSA) independently. We in Malaysia are the manufacturers — as I said, a low-cost country — as it costs significantly less to develop products here. If products were developed in the UK for example, it would be much more expensive. Cost of doing business there is much higher. Therefore, you can go international without really going international, and by using the existing infrastructure. One Aviva, twice the value — as Moss likes to say. Same infrastructure, double the business.

Do you think Takaful companies can survive if they don’t merge or form JVs? Takaful is from the Arabic word ‘Takafalah’, which means joint guarantee. ‘Joint guarantee’ means we create a pool where we jointly guarantee among ourselves. The concept of

Takaful is the original concept of insurance. Back then, there were no shareholders in the insurance industry. Instead, all agreements were reached on a mutual basis. But insurance evolved, thus the introduction of shareholders. Takaful today has fortunately changed back to being a mutual business. Like all companies, CIMB Aviva is just an operator. We operate a Takaful license at a fee — Wakalah — which we use to pay rental, staff salaries, etc, while the rest of the premium belongs to the participant. If you just concentrate on Malaysia, then you are not extending the concept of joint guarantee, which is the universal concept of Takaful.

Speaking of universal, how do you entice non-Muslims to warm up to Takaful products? What we are selling is beyond ideology, meaning that you don’t have to be a Muslim to participate. We provide strong Takaful solutions regardless of ideology, and it is up to the consumer to decide if the product is superior enough for his use. It is also important to focus on above-average returns, superior customer service and building a trusted brand. Also, we are not here just to make a difference — we are here to make money. Simply put, in Islam, there have to be rewards. We have risk, and then rewards. In one of Prophet Muhammad’s sayings, the reward must be given before your sweat even dries. Instantly. You cannot wait five years to be profitable. You are doing the business now; therefore, you have to be profitable now. In Islam, giving is encouraged. On that principle, we aspired to be profitable in the first year of operations, which is quite a feat. We logged RM5.4 million in 2006 itself. For 2007, we are at the final stage of auditing, and numbers show that we are on track to maintain


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our second year of profits. That’s Takaful for you: equitable, profitable and efficient.

As Takaful is a purely customer-driven product, is there an unhealthy reliance on marketing initiatives? How do you think Takaful operators can increase competitiveness without depending too much on promotions and marketing? For any type of product, insurance or commodities, that targets the man in the street, marketing plays an important role in creating presence and customer awareness. Being new in the market, promotions and marketing activities are important. It’s a necessary investment that we must make to ensure that our brand reaches the point of ‘top-of-mind recall’, and it should continue until the point where knowledge has been adequately disseminated to the mass market. Until then, we foresee our reliance on marketing incentives as a tool to effectively compete for our portion of new businesses.

One assumes it is difficult to attract the younger age groups to purchase insurance products, unless legally required. Therefore, are you targeting this group and how does one accomplish this? There are many categories of potential customers. However, our current concern is to provide solutions to the under-served; people who want to buy insurance but have no one serving them, as opposed to the not-so-keen, mid-20s age group who do not want to buy but are being pushed by us. Middle-aged fellows like me, in a village somewhere, working in a plantation — those are among the under-served. After they draw their monthly salaries, they might have some left over after settling all the other necessary debts. If they fall ill or die prematurely while embroiled in debt, it goes against the grain of being a good Muslim.

As Prophet Muhammad says, when you die, you have to be debtless. This is a powerful way to sell to the Muslim population, but it is not being sold that way…Why? Because there is no medium. This is the industry’s challenge. What the Malaysian Takaful Association must do is to combine resources to jointly finance the campaign to promote Takaful protection. No amount of savings will be enough to compensate a man’s incapacity to build a livelihood.

There are now nine Takaful players in Malaysia, but the Takaful market share still remains at 6%. That’s a long way off the ‘20% by 2010’ target set by BNM. The 6% is from 2005 statistics, and unfortunately, statistics are not easily available. Also, those statistics are rather biased and not representative of the industry as a whole. At that point in 2005, it belonged to only four operators — Syarikat Takaful, Maybank, Takaful Ikhlas and Takaful Nasional (now Etiqa Takaful Berhad). After the approval of the five new players in recent years, I am certain the statistics have improved significantly. If you were to do the

tabulation and look at the pattern now, especially for 2007, and calculate exponentially, you will see that the industry is on track.

Are the regulators providing sufficient support for the domestic Takaful industry? I think the regulators have given all they can to provide the necessary attention — including tax exemptions, flexible rulings from BNM and government publicity efforts. However, because we are relatively new and have a small number of players, we are perceived to be ignored by the regulators, as people had heard less about Takaful in the past. Nonetheless, this is not necessarily a bad thing. I think some of the measures are not applicable to Takaful as much as conventional insurance, due to its nature. I am in charge of commu-nications at the Malaysian Takaful Association, and I organize round-table discussions with BNM’s deputy governor, etc. There are flaws in the way the Takaful industry works, espe-cially the tendency for industry play-ers to wait for BNM. There are a lot of initiatives that we can do on our own, to be honest, and get the central bank to support us instead of waiting for them to supply us with a physical policy and expect tax relief. The industry is too reactive. We should be proactive and set the pace. We should instead include BNM and say, ‘We want to do this, but we have some barriers.’ We will breed mediocrity by just sitting and waiting.

What are your plans, and where do you see the Malaysian Takaful market in the next five years? We want to be the leading Takaful operator in Malaysia. With strong support from BNM, improved customer awareness and competitive products, the Malaysian Takaful market can only get better. Perhaps double-digit growth in the next three to five years.


TakafulGlossaryAAmanah = reliability, trustworthiness, loyalty, honestyAn important value of Islamic society in mutual dealings. It also refers to deposits in trust, where a person may hold property in trust for another.

Average clause = Stipulates that a Takaful fund is only liable for such proportion of the loss as the sum covered bears to total value at risk.

BBay’ al Arboon = deposit-secured saleA sale agreement in which a security deposit is provided in advance as part payment towards the price of the commodity. The deposit is forfeited if the buyer does not meet his obligation.

Bay’ Al Salam = future deliveryA contract whereby the payment is made in cash at the point of contract but the delivery of asset purchased will be deferred to a predetermined date.

Bay’ al ‘Inah = sale and buybackThe sale and buyback of an asset for a higher price than that for which the seller originally sold it.

A seller immediately buys back the asset he has sold on a deferred payment basis at a price that is higher than the original price. This can be seen as a loan in the form of a sale.

CContributions = Monetary contribution provided once or periodically by a participant to a Takaful operator for the purpose of investment and Tabarru’.

Claims = Notifi cation to a Takaful operator that payment of an amount is due under the terms of the certifi cate.

Certifi cate document = An evidence of a contract between a participant and a Takaful operator which sets out the terms and conditions of the particular certifi cate.

Claims ratio = The ratio of net claims incurred to earned contributions.

DDarurah = necessityIn an emergency, Muslims may disregard aspects of Shariah laws in order to save their lives or to preserve the Islamic community.

EExpense rate = The ratio of total expenses for the year (including commissions, salaries, etc) to the sum of total contribution income other than single contribution and consideration for annuities.

Excess of loss treaty = A type of reTakaful treaty which provides that the reTakaful operator pays all or a specifi ed percentage of a loss arising from a particular occurrence or event (frequently of a more or less catastrophic nature) in excess of a fi xed amount and up to a stipulated limit.

Earned contribution = Net contributions less provision for reserves for unearned contribution (RUC) at the year-end income plus the RUC at the beginning of the year.

FFacultative treaty = A reTakaful contract under which a ceding Takaful operator has the option to cede and the reTakaful operator has the option to accept or decline individual risks.

Fard al Kifayah = socially obligatory dutiesA collective duty of Muslims. The performance of these duties (for example, funeral prayers) by some Muslims absolves the rest from discharging them.

This term covers functions which the community fails to or cannot perform and hence are taken over by the state, such as the provision of utilities, or the building of roads, bridges and canals.

Fasid = unsound or unviable or vitiatedA forbidden term in a contract, which consequently renders the contract invalid

Fatwa = religious decree or an authoritative legal opinion based on Islamic law (Shariah)

Fiqh = Islamic jurisprudenceThe science of the Shariah. An important source of Islamic economics.

GGross direct contributions = Contributions on original gross rate charged to clients in respect of direct Takaful business without any deduction for commission or brokerage.

Group family Takaful = Family Takaful (usually without medical examination) on a group of people under a master certifi cate. It is typically issued to an employer for the benefi t of employees, or to members of an association.

Gross direct contributions = Contributions on original gross rate charged to clients in respect of direct Takaful business without any deduction for commission or brokerage.

General Takaful = Protection to participant for losses arising from perils such as accident, fi re, fl ood, liability and burglary.

Gharar = uncertaintyOne of three fundamental prohibitions in Islamic fi nance (the other two being riba and maysir). Gharar is a sophisticated concept that covers certain types of haram uncertainty in a contract. It is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble.

HHalal = lawful, permissibleThe concept of halal has spiritual overtones. In Islam, there are activities, professions, contracts and transactions that are explicitly prohibited (haram) by the Quran or the Sunnah. All other activities, professions, contracts and transactions are halal.

Haram = unlawful, forbiddenActivities, professions, contracts and transactions that are explicitly prohibited by the Quran or the Sunnah. See halal.

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TakafulGlossaryHaq Maliy = rights on the fi nancial assetsHaq Maliy are rights on the fi nancial assets. Examples of such rights are haq dayn (debt rights) and haq tamalluk (ownership rights).

Hibah = giftA gift voluntarily donated in return for a loan provided or a benefi t obtained.

IIncurred but not reported = Losses which have occurred during a stated period, usually a fi nancial year, but have not yet (IBNR) been reported to the Takaful operator as of the date under consideration.

Indemnity = Restoration to the claimant of a loss by payment, repair or replacement.

Investment linked = A contract where the certifi cate benefi ts at any time vary according to the value of the Takaful underlying assets at the time.

Individual Family Takaful = A contract that provides Takaful benefi ts payable to an individual upon death/total permanent disability or periodic income to participant upon retirement.

Ibra’ = rebate/waving of debtWhen a person withdraws the right to collect payment from a borrower.

Ijtihad = effort, exertion, industryA faqhi’s endeavor to formulate a rule on the basis of evidence found in the Islamic sources.

Istisna’ = advance purchase of goods or buildingsA contract of acquisition of goods by specifi cation or order, where the price is paid in advance, or progressively in accordance with the progress of a job. For example, to purchase a yet-to-be-constructed house, payments would be made to the builder according to the stage of work completed.

This type of fi nancing, along with Salam, is used as a purchasing mechanism, and Murabahah and Bai Bithaman Ajil are for fi nancing sales.

JJu’alah = stipulated price for performing a service. Applied by some in Islamic banking. Bank charges and commission have been interpreted to be Ju’alah by the jurists and thus considered lawful.

KKafalah = guaranteeShariah principle governing guarantees. It applies to a debt transaction in the event of a debtor’s failure to pay.

LLoan (with service charge) = Some Islamic banks give loans with service charges. The Council of the Islamic Fiqh Academy has resolved that it is permitted to charge a fee for loan-related services offered by an Islamic bank, provided that the fee relates to service-related expenses.

The service charge can only be calculated accurately after all administrative expenditure has been incurred (at the end of the year). However, it is permissible to levy an approximate charge on the client, and then reimburse/claim the difference when the actual expenses are known.

MMudarabah = An agreement between the entrepreneur and the capital provider in a business venture to share profi t based on an agreed profi t-sharing ratio. Losses are borne by the capital provider.

Medical and Health = A contract that provides specifi ed medical treatment benefi ts such as the cost of hospitalization, Takaful surgical and physician consultation fees against risks of a person being diagnosed with certain illnesses or suffering injury as the result of an accident.

Mortality table = A statistical table showing the death rate at each age, usually expressed as the number of deaths per thousand.

Maysir = gamblingOne of three fundamental prohibitions in Islamic fi nance (the other two being riba and gharar). The prohibition on maysir is often used as grounds for criticism of conventional fi nancial practices such as speculation, conventional insurance and derivatives.

Mu’amalat = economic transactionThe lease of land or fruit trees for money, or for a share of the crop.

Mudarabah = trust fi nancing, profi t sharingAn investment partnership, whereby the investor (the rab al maal) provides capital to the entrepreneur (the Mudarib) in order to undertake a business or investment activity. While profi ts are shared on a pre-agreed ratio, losses are born by the investor alone. The Mudarib loses only his share of the expected income.

The investor has no right to interfere in the management of the business, but he can specify conditions that would ensure better management of his money. In this way, Mudarabah is sometimes referred to as a sleeping partnership.

A joint Mudarabah can exist between investors and a bank on a continuing basis. The investors keep their funds in a special fund and share the profi ts before the liquidation of those fi nancing operations that have not yet reached the stage of fi nal settlement. Many Islamic investment funds operate on the basis of joint Mudarabah.

Mudarib = entrepreneur in a Mudarabah contractThe entrepreneur or investment manager in a Mudarabah who puts the investor’s funds in a project or portfolio in exchange for a share of the profi ts. A Mudarabah is similar to a diversifi ed pool of assets held in a discretionary asset management portfolio.

Murabahah = cost-plus fi nancingA form of credit that enables customers to make a purchase without having to take out an interest-bearing loan. The bank buys an item and sells it to the customer on a deferred basis.

The price includes a profi t margin agreed by both parties. Repayment, usually in installments, is specifi ed in the contract. The legality of this fi nancing technique has been questioned because of its similarity to riba. However, the modern Murabahah has become the most popular fi nancing technique among Islamic banks, used widely for consumer fi nance, real estate, the purchase of machinery and for fi nancing short-term trade.

Muqasah = Debt settlement by a contra transaction.

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TakafulGlossaryMusharakah = joint venture, profi t and loss sharingAn investment partnership in which all partners are entitled to a share in the profi ts of a project in a mutually agreed ratio. Losses are shared in proportion to the amount invested.

All partners to a Musharakah contribute funds and have the right to exercise executive powers in that project, similar to a conventional partnership structure and the holding of voting stock in a limited company. This equity fi nancing arrangement is widely regarded as the purest form of Islamic fi nancing.

The two main forms of Musharakah are: Permanent Musharakah and Diminishing Musharakah. Under the former, an Islamic bank participates in the equity of a project and receives a share of the profi t on a pro-rated basis. The length of contract is unspecifi ed, making it suitable for fi nancing projects where funds are committed over a long period.

Diminishing Musharakah: This allows equity participation and sharing of profi ts on a pro-rated basis, and provides a method through which the bank can keep reducing its equity in the project, ultimately transferring ownership of the asset to the participants. The contract provides for payment over and above the bank’s share in the profi t for the equity held by the bank.

Simultaneously the entrepreneur purchases some of the bank’s equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.

NNet claims = Incurred net claims paid less provisions for outstanding claims beginning of the year plus provisions for outstanding claims at the end of the year.

Net contributions = Gross contributions less all reTakaful contributions payable.

Net investment = Income returns on investments less rates and taxes.

Nisab = exemption limitExemption limit for the payment of Zakat, which differs for different types of wealth.

PParticipants’ account = An account to credit a portion of contributions from the participant for the purpose of investment/savings.

Participants’ special = An account to credit a portion of contributions from the participant for the purpose of Tabarru’.

Proportional treaty = A contract under which a Takaful operator and a reTakaful operator participate proportionately in the contributions and losses on every risk that comes within the scope of the contract.

QQard = loan

Qard Hasan = benevolent loanA loan contract between two parties for social welfare or for short-term bridging fi nance. Repayment is for the same amount as the amount borrowed. The borrower can pay more than the amount borrowed so long as it is not stated by contract.

Most Islamic banks provide interest-free loans to customers who are in need. The Islamic view of loans (qard) is that there is a moral duty to give them to borrowers free of charge, as a person seeks a loan only if he is in need of it.

Some Islamic banks give interest-free loans only to the holders of investment accounts with them; some extend them to all bank clients; some restrict them to needy students and other economically weaker sections of society; and some provide interest-free loans to small producers, farmers and entrepreneurs who cannot get fi nance from other sources.

Qimr = gamblingAn agreement in which possession of a property is dependent on the occurrence of an uncertain event. By implication, it applies to those agreements in which there is a defi nite loss for one party and a gain for the other, without specifying which party will gain and which party will lose.

RRetention ratio = The ratio of net contributions to gross direct and retakaful accepted contributions less retakaful within Malaysia.

ReTakaful operator’s = An amount deposited with or retained by a Takaful operator by way of security for performance Deposit by the reTakaful operator of its reTakaful contracts.

Rider = An attachment to a certifi cate that modifi es its conditions by expanding benefi ts.

Rab al maal = investor in a Mudarabah contract

Rahn = collateralAn arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may be disposed of in the event of a default.

Riba = interestAn increase, addition, unjust return or advantage obtained by the lender as a condition of a loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba. Riba in all its forms is prohibited in Islam.

In conventional terms, riba and “interest” are used interchangeably, although the legal notion extends beyond mere interest.

Riba al Buyu’ = usury of tradeAlso known as riba al fadl.

A sale transaction in which a commodity is exchanged for an unequal amount of the same commodity and delivery is delayed. To avoid riba al buyu, the exchange of commodities from both sides must be equal and instant. Riba al buyu was prohibited by Prophet Mohammad to forestall riba (interest) from creeping into the economy.

Riba al Duyun = usury of debtAlso known as usury of delay (riba al nasia).The usury of debt was an established practice among Arabs during the pre-Islamic period. It can occur as an excess increment on top of the principal, which is incorporated as an obligatory condition of the giving of a loan.

Alternatively, an excess amount is imposed on top of the principal if the borrower fails to repay on the due date. More time is permitted for repayment in return for an additional amount. If the borrower fails to pay again, a further excess amount is imposed, etc.

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TakafulGlossarySSurplus at valuation date = Excess of the Takaful fund carried forward over the actuarial liabilities of a Takaful fund of family Takaful business.

Sadaqah = voluntary charitable giving

Salam = advance purchaseAdvance payment for goods which are to be delivered at a specifi ed future date.

Shariah = Islamic jurisprudenceIslamic cannon law derived from three sources: the Quran, the Hadith and the Sunnah A “Shariah compliant” product meets the requirements of Islamic law.

A “Shariah board” is the committee of Islamic scholars available to an Islamic fi nancial institution for guidance and supervision in the development of Shariah compliant products.

A “Shariah adviser” is an independent Islamic trained scholar that advises Islamic institutions on the compliance of the products and services with Islamic law

TTotal loss = A loss of suffi cient size so that it can be said there is nothing left of value.

Tabarru’ = A portion of participant’s contribution for the purpose of mutual help and used to pay claims submitted by eligible claimants.

Takaful = Mutual guarantee provided by a group of people against a defi ned risk or catastrophe befalling one’s life, property or any form of valuable things.

Tijari = Commercial business.

Takaful annuity = A contract that provides a stream of periodic income upon retirement for a term dependent upon human life.

Tawarruq = reverse MurabahahIn personal fi nancing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan.

Ta’widh = Deliberate delay in payment Penalty agreed upon by the contracting parties as compensation that can rightfully be claimed by the creditor when the debtor fails or is late in meeting his obligation to pay back the debt.

UUnearned contribution = Contributions already received in respect of risks which are still unexpired at the end of the reserves accounting period.

Underwriting profi t/loss = Earned contribution income less net claims incurred, commissions and management expenses.

Ujrah = feeThe fi nancial charge for using services, or manfaat (wages, allowance, commission, etc...)

Urbun = depositEarnest money which forms part payment of the price of goods or services paid in advance, but will be forfeited in the event the transaction is cancelled. The forfeited money is considered as hibah (gift).

‘Uqud al-Mu’awadhat = contracts of exchange.

‘Uqud al-Tabarruat = charitable contracts.

WWakalah = agencyAbsolute power of attorney: where a representative is appointed to undertake transactions on another person’s behalf.

In terms of Takaful operations, Wakalah refers to an agency contract, which may involve a fee for the agent.

Waqf = charitable trustPlural = Awkaf, AwqafAn endowment or a charitable trust set up for Islamic purposes (usually for education, mosques or for the poor). It involves tying up a property in perpetuity so that it cannot be sold, inherited or donated.

ZZakat = religious taxAn obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute among the poor.

There are two types of Zakat: Zakat al Fitr, which is payable by every Muslim who is able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax).

Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned.

Etiqa brings together the combined resources and knowledge of Maybank Insurance Group, Takaful Nasional and Malaysia National Insurance. With three impressive credentials now rolled into one, this gives us greater ability to respond to your needs. More than anything else, we understand that it’s about people. That is the inspiration for everything we do.

Visit etiqa.com.my or call us at 1300 13 8888. For those of you who are overseas, please call +603 2780 4500.

Ahli Kumpulan

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