Takaful is often presented as a system of cooperation and mutual help. This does not capture takaful realities properly. Islamic insurance schemes were not initiated by people looking for mutual protection against risks of life but by Islamic banks seeking protection for leased assets, collateral and outstanding debt. Most takaful undertakings are not organized as member-centred mutuals, but as hybrids with a profit-oriented shareholding company as the driving force. Regulators have stipulated that the solvency of the participants’ risk fund has to be guaranteed by the takaful operator through an interest-free loan (qar_) in case of need. However, the repayment of a qar_ is highly unlikely in a competitive market. An unrecoverable loan implies the factual transfer of the underwriting risk from the participants to the takaful operator. Contrary to takaful rhetoric, the economic quality and socio-economic impact of takaful and conventional insurance do not differ in substance.
Hiba Allam and Volker Nienhaus
There is a demand for conventional unit-linked life insurance and investment products that not only pay out death benefits or a lump sum at maturity but provide in addition a protection of the invested capital, a guarantee to redeem the units of the fund at maturity at the highest net asset value that the fund has reached over its lifetime (= high watermark), and an option to convert the lump sum into a lifetime annuity. The chapter explores whether such a product could be structured in a shari’ah-compliant manner. Major shari’ah compliance issues are related to the use of stock options that are applied for the capital protection and high watermark guarantee in a conventional setup. But if these issues can be overcome, the operational structure for a shari’ah-compliant alternative would not be very different from conventional patterns. However, the conversion of a lump sum into a lifetime annuity requires a more complex institutional arrangement with a cash waqf, or alternatively a shari’ah-compliant trust, at its core. The overall conclusion of the chapter is that a shari’ah-compliant capital protected high watermark fund with a lifetime annuity option can be structured as a family takaful product. The chapter does not cover market potentials or regulatory aspects.