Non - bank Financial Intermediation 223
Issues and Challenges for the Takaful Industry
The takaful industry is growing fast and it is expected to grow even fur-
ther. Features of takaful are attractive not only to those who wish to com-
ply with Shari’ah but are equally attractive to conventional customers who
are attracted to the cooperative and ethical nature of takaful. As with any
emerging market, the industry faces several challenges, some of which are
common to the Islamic fi nancial industry as a whole. These include a lack
of fi nancial engineering, a shortage of human resources, an inadequate risk -
management framework, and a lack of liquidity. However, there are several
industry - specifi c challenges, as discussed below.
■ (^) Reinsurance plays a critical role in the conventional insurance indus-
try in that it allows insurance companies to protect themselves against
excessive risk and to spread risk across the industry. There no such
facility for the takaful, which has limited the opportunity to expand the
business. Shari’ah rules make it diffi cult for takaful operators to uti-
lize conventional reinsurers. While in some cases Shari’ah scholars have
allowed the use of conventional reinsurers, it is not a preferred option.
■ (^) Global brands such as Munich Re, Hannover Re and Swiss Re, together
with regional players like Takaful Re and MNRB Retakaful, have con-
tributed to enhancing the Islamic reinsurance capabilities. Today, there
are nine fully fl edged re - takaful operators, mostly in Malaysia, which
is widely acknowledged as being at the forefront of regulations for the
industry. Indeed, the Southeast Asian model is widely considered to be
a blueprint for all insurers — local operators and international players
alike — who have the desire to explore takaful (Jaffer 2010a).
■ (^) The success of the takaful business is dependent on its asset - management
skills and therefore requires typical fi nancial products and tools to
construct and manage effi cient portfolios. In this respect, the lack of
short - term Shari’ah - compliant instruments and the lack of liquidity in
the market pose serious challenges for takaful operators. The issue of
liquidity needs to be addressed for the benefi t of the Islamic fi nance
industry as a whole. Without the tools to manage portfolios against
market and liquidity risks, operators cannot offer competitive products
in the market.
■ (^) The takaful industry is comparatively new among other Islamic fi nan-
cial services. It faces several challenges in gaining entry to markets in
which the regulatory and supervisory environment favors conventional
insurance business but is not very well suited for takaful. In relation to
fi nancial reporting standards, both AAOIFI and IFSB have helped by
defi ning the industry standards necessary to promote this business in
countries interested in expanding this sector.
■ (^) As mentioned earlier, takaful products have been primarily geared
towards property insurance, and growth in the area of life insurance
has been slow because of continuing suspicions that it may entail an