With globalization, businesses now face the challenge of meeting the growing demand for financial services that align with religious beliefs.
The most significant development in the Islamic finance sector is Takaful, a Shariah-compliant alternative to insurance. Based on shared responsibility and cooperation, Takaful has become a viable option for companies operating in Muslim majority areas.
Let’s Understand Takaful
Takaful, derived from the Arabic root word “Kafala”, means “guaranteeing each other”. In other words, it operates on the principle of transparency. Factors which are prohibited in Islam, such as interest (riba), gambling (maysir), and excessive uncertainty (gharar), are not an issue.
Participants contribute to a shared fund used to support those who suffer a loss, all under the supervision of a Shariah Supervisory Board. In a typical Takaful model, members contribute to a risk pool, and a Takaful operator manages this pool under strict Islamic guidelines.
Funds are invested only when compensating valid claims or providing benefits. After deduction of legitimate operational costs, surplus is returned to members or reinvested in the pool, depending on the Takaful model adopted.
Key Models of Takaful
Several Takaful models are tailored to align with regulations and cultural practices.
The 3 common ones are described below.
Mudarabah (Profit Sharing) Model
In this model, the Takaful provider and members agree to share the profits generated from the pool. The provider acts as a manager and shares a pre-decided percentage of the profits with the participants (members).
Wakalah (Agency) Model
The Takaful operator is purely an agent who charges a fixed fee for their services of managing the fund. Any surplus belongs entirely to members.
Hybrid Model
This is a blend of the 2, allowing greater flexibility in how profits and expenses are dealt with.
Regardless of the details, all 3 models are based on the same core principles: mutuality, shared risk, and full transparency in all transactions.
Why New Companies are Considering Takaful
Takaful’s sudden rise in popularity is due to 5 major factors.
1. CSR Alignment
Since more and more companies today wish to align with corporate social responsibility (CSR) standards, Takaful offers a model that appeals to such businesses seeking religiously compliant financial alternatives.
Find out details about Why Corporate Social Responsibility Matters and how it can be helpful for any business looking to follow ethical business practices.
Eliminating interest and speculation, it is attractive to ethically minded stakeholders.
2. Expanding Muslim Market
With over 1.9 billion Muslims worldwide, there is a rising Islamic awareness in established and developing markets. Enterprises now need to offer services tailored to such areas.
Takaful enables businesses to offer insurance coverage that does not clash with the faith-based values of Muslim partners and consumers, allowing far greater market penetration.
3. Financial Frameworks
Several Islamic states have incorporated Takaful into their financial frameworks and are encouraging both local and foreign firms to adopt this model.
Countries like Saudi Arabia, Malaysia, and the UAE have developed legal supervisory systems for Takaful, making it easier for companies to adhere to the respective national laws and serve local markets.
4. Risk Management for Startups
Takaful has also become appealing to small and medium-sized enterprises (SMEs) since many are underserved by regular insurers.
With lower entry barriers and community-based cooperation, Takaful provides a much-needed safety net for startups that work with limited capital. To learn more about Group Health Insurance for Businesses, visit our blog here.
5. Digital Integration
From mobile apps to blockchain-based smart contracts, modern Takaful operators are embracing digitalization. Takaful is becoming accessible and scalable, and this approach resonates with the needs of modern enterprises, which require automated and real-time insurance solutions.
Takaful Offers Resilience During Economic Shocks
In times of financial crises, conventional insurers prioritize investor returns and solvency ratios, leading to denied claims and increased premiums.
In contrast, Takaful’s risk-sharing model helps it stand out. Surpluses can be saved during good years to lean on during tough times, offering businesses stable long-term protection.
Challenges and Other Considerations
Despite its popularity and growing demand, Takaful faces a few difficulties:
1. Limited Awareness
Businesses today are still unfamiliar with Takaful and how it differs from conventional insurance. This leads to hesitancy when it comes to adoption.
This problem can only be solved through financial literacy programs and industrial collaboration. To know more about how this can be managed, read our blog on How to increase employee trust in insurance plans.
2. Standardization Issues
And let’s not forget about the lack of regulation across states and borders, which is a major obstacle for MNCs hoping to achieve a consistent, uniform coverage in all areas they operate in.
3. Reinsurance Struggles
Takaful managers often face difficulty in accessing re-Takaful (the Shariah-compliant version of reinsurance) markets, especially in areas where such credit facilities are underdeveloped.
4. Perceived Profitability Challenge
Many entrepreneurs figure that Takaful’s investment restrictions are a huge barrier due to Shariah laws, as compared to conventional insurance companies, and lower returns will hinder growth.
Takaful funds cannot be invested in bonds, banks, and other highly lucrative sectors like alcohol and gambling. Overcoming this problem requires innovative halal investment and better fund management.
5. Competitive Market
Takaful providers have to compete with well-established conventional insurers. Their competitors benefit from brand recognition, economies of scale, and decent infrastructure, all of which threaten chances of expansion.
Analysts, however, predict that the global Takaful market could surpass USD 50 billion by 2030, primarily driven by increasing religious awareness and adherence.
Takaful: Sustainability and Scope
As enterprises become more diverse and globally interconnected, integrating Takaful into corporate risk strategies helps companies enhance brand reputation while following regulations in Muslim majority areas.
Takaful is not just a good insurance alternative or commercially strategic; it enables members to invest in Shariah-aligned ventures and transfers risk to the insurer. On top of all that, Takaful is clear proof of how religious traditions and modern enterprise can easily co-exist.
Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.
