Comparative study of the principles of Takaful insurance and Commercial insurance: Saudi Arabia as a case study

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Introduction
The flexibility of the Islamic financial sector in combination to the global crisis with the growth of oil wealth in the Middle East has allowed the Islamic financial industry to grow at a very high speed.
As per the Islamic development Bank the total assets of the Islamic financial industry is expected to increase by 1.5 trillion dollars in the year 2012. Resultantly, some developed and the developing countries all over the world are seeking to form an industry with a sound regulatory infrastructure and proper investment opportunities. The Islamic countries all over the world have developed the Islamic financial industry at a very high speed in which Saudi Arabia is regarded as a pioneer in the existing conventional system of finance (Nazir and Noor 2018). The present paper focuses on the Takaful insurance principles in comparison to the principles of commercial insurance.

Structural comparison between the insurance principles
Takaful operators and the insurers are different in terms of their important conceptual paradigms. The commercial insurance comprises an undertaking in which the insurer is the owner in exchange of the consideration to make payment that is either insured or depends on the happening of a particular event. On the other hand, the operators of Takaful are Islamic by nature and they are dependent on the notion of social solidarity, joint indemnification and cooperation of the losses of its members. As part of risk management, it can serve to hedge against the risk of a loss and can replace the risk of a large loss with a small contingent loss. However, in commercial insurance, the aspects are structurally very different and they are contrary to the Shariah principles of law. It is opposite to the reliance on the will of ALLAH by avoiding His will. They are however allowed to take steps in which the risk can be minimised. Thus, it can be said that in a commercial contract there is a commutative contract that unduly limits the ambiguity and uncertainty. It entails the concept of Riba (Interest) which is absolutely prohibited in Islam. Other prohibited concepts that are included in the commercial insurance are Maysir and Gharar. Conventional insurance is considered Haram as the insurer has to pay for a loss of human life and they aim to make profits for their stakeholders whom they do not insure. Takaful is a contract that depends on mutual guarantee and cooperation in which the risk is assumed to be voluntarily by the participants in the contract. Depending on such differences, it can be said that there is difference in performance and financial strength of both the insurance companies (Mazahir et al. 2017).

The above-mentioned religious imperatives have generated many types of Shariah compliant companies that support the Takaful principles. The word insurance or banking when prefixed with the Islamic term includes all theories and practices are investigated from the laws of Islam and the values as enshrined in the Holy Book, Quran and Hadith. It is the concepts of al diyah and al aqiqah has given rise to the concepts of Takaful. In Arabic, the term Takful means guarantee that is joint in nature and can be further stated as an agreement in the group of members or participants that are willing to mutually guarantee another for their future losses as against their assets. The important aspect of the Takaful concept is the aim to promote their cooperation, unity and solidarity. Islam completely prohibits Riba, Maysir and Gharar (Alshammari, Alhabshi and Saiti 2019).

The Financial Services Board has also stated the differences between the Takaful undertakings and the commercial insurance undertakings as follows:

  • The Takaful undertakings are formed as hybrids between proprietary and mutual companies as they may have faced conflicts of interest that otherwise would not arise in the commercial insurance.
  • Takaful companies should follow the core principles of Taawun and Tabarru, and the prohibition of Riba
  • An important component that adds differentiates and adds value between the companies of Takaful and commercial insurance is the sharing of risks between the participants of Takaful. This becomes part of the rationale for the practice of creating another account for the activities of the Takaful participants.
  • The shareholders of the Takaful operators shall not bear any responsibility in case there is any deficit or loss that is suffered by the participants (Alshammri et al. 2016).

Conclusion
Thus, it can be said that the incompatibility between the commercial insurance and Takaful insurance contract is related to the compliance with the Shariah rules. The conceptual incompatibility has created many economic and financial differences between the Takaful and the commercial insurance performances. Despite the differences, it has been evident from many researches in the past that commercial insurance companies perform better and maintain a capital that is relatively higher. However, Takaful operators have a more prudent underwriting policies in place that curbs the information and reduces the level of moral hazard by balancing a low level of ratios claim. As far as as the solvency ratios are concerned, Takaful operators pay more attention to general insurance than other commercial insurers who maintain a proper use of capital gains. As part of risk management, it can serve to hedge against the risk of a loss and can replace the risk of a large loss with a small contingent loss. However, in commercial insurance, the aspects are structurally very different and they are contrary to the Shariah principles of law. It is opposite to the reliance on the will of ALLAH by avoiding His will. They are however allowed to take steps in which the risk can be minimised. Thus, it can be said that in a commercial contract there is a commutative contract that unduly limits the ambiguity and uncertainty. It entails the concept of Riba (Interest) which is absolutely prohibited in Islam.

 

References
Alshammari, A.A., Alhabshi, S.M.B.S.J. and Saiti, B., 2019. The impact of competition on cost efficiency of insurance and takaful sectors: Evidence from GCC markets based on the Stochastic Frontier Analysis. Research in International Business and Finance47, pp.410-427.

Alshammri, A.A., Syed Jaafar Alhabshi, S.M. and Saiti, B., 2016. A comparative study of the historical and current development of the GCC insurance and takaful industry. Journal of Islamic Marketing, (just-accepted), pp.00-00.

Hassan, H.A., Abbas, S.K. and Zainab, F., 2018. Anatomy of Takaful.

Mazahir, S.M.M., Ab Rahman, A. and Ramzy, M.I., 2017. AN ANALYSIS OF POLICY COMPATIBILITY BETWEEN CONVENTIONAL INSURANCE AND ISLAMIC INSURANCE POLICIES: A STUDY OF CONCEPTUAL AND OPERATIONAL DIFFERENCES. Jurnal Syariah25(3), pp.481-504.

Nazir, F. and Noor, A.B.M., 2018. An Assessment of Customer’s Preferences on The Selection of Takaful Over Conventional: A Case of Saudi Arabia. Tazkia Islamic Finance and Business Review12(1).

Remli, N. and Rosman, M.M.R., 2018. FIRMS’CHARACTERISTICS: A PRELIMINARY STUDY OF FAMILY TAKAFUL DEMAND IN MALAYSIA. International Journal of Accounting3(14), pp.01-14.

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