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Step into another world: Takaful insurance

Coming from a Christian country I cannot say I had too much experience with the Islamic way of doing business, until I met Meerna Mroueh who is currently the Associate of the HPO Center in the United Arab Emirates (UAE), based in Abu Dhabi. She brought me into contact with a very interesting concept, Takaful, and the for me new world of Takaful insurance. Takaful, derived from a verb, means that people provide support to one another, and hence, it entails ideas of interdependence, love for one another and solidarity in society. From an economic point of view Takaful is defined as: “A mutual guarantee or assurance based on the principles of al-Aqd (i.e. contract) provided by a group of people living in the same society against a defined-risk or catastrophe befalling one’s life, property or any form of valuable thing” (Farooq et al. (2010, p. 68).

Islamic finance is an interesting field of research, as it represents an alternative to conventional finance for Muslims. It is a way of conducting finance based on the principles of Islam and prohibition of interest. Islamic finance can be divided into two areas: Islamic banking and Islamic insurance. Technically, the difference between Takaful and conventional insurance is that Takaful is based on Shariah law, whereas conventional insurance is not. To conform to Shariah law, Takaful insurance must be policyholder-oriented and not shareholder-oriented. The contract must provide certainty that the length of the policy period is finite, and the size of the premium and benefits from the policy are known beforehand. The past decade has seen an increasing demand in Takaful insurance, because of the strongly growing Muslim population in the world; this population consisting mainly of young people who are far more open to taking out insurance contracts (particularly from Takaful insurance companies) than older generations; and the massive construction projects in the Gulf region for which Shariah-compliant insurance is needed.

However, despite these positive developments, the growth rate of Takaful insurance fell from the double-digits to a single-digit rate and the total volume of Takaful insurance recently stayed well short of predictions. This caused Meerna to wonder what the causes could be for these rather disappointing results and she decided to make this the topic of her DBA research. A quick inventory revealed that increased worldwide competition, operational issues and the lack of qualified staff were negatively affecting the performance of Takaful companies in the UAE. So Meerna wanted to know whether these Takaful companies could be turned into HPOs, using the HPO Framework, so they could increase their organizational performance. From an Islamic perspective, organizational performance relies on several criteria such as product and service outcomes or accomplishments, productivity of goods and services, effectiveness and efficiency and proficiency. The key point is that a Muslim must be hardworking and efficient. This is the concept of itqan, or professionalism, in Islam which means: Allah loves his servant who can do his work well and performs it in perfect manner. The Arabic word itqan is used to indicate the level of quality work, and should therefore be highly correlated with the HPO concept. Thus, the state of performance at the level of itqan is required by Islam, as all Muslim professionals should be sincere in their actions and strive to excel in their work at all times. So there was enough grounds to look into more detail in the question Which factors and accompanying characteristics from the HPO framework are applicable to Takaful insurance companies?

To obtain an answer to the research question, for each of the characteristics of the five factors from the HPO Framework we examined the theory on Takaful, to evaluate whether Takaful organizations could theoretically address these HPO characteristics with ease or with difficulty. We used three possible outcomes for each characteristic: positive, indicating that the nature of Takaful will make it easy to strengthen this HPO characteristic; negative, meaning that the nature of Takaful is such that strengthening this HPO characteristic will be difficult or nearly impossible; and neutral, which means that there is no difference between Takaful and non-Takaful companies so it will be as easy or difficult for each type of company. In Exhibit 1 the results of our fascinating comparison are given. Fascinating, because it required us to go deep into Islamic and specifically Takaful insurance culture to make a considered evaluation.

Step into another world: Takaful insurance

Exhibit 1: Matching the HPO factors and characteristics with Takaful industry characteristics

Exhibit 1 shows that some of the HPO factors are (fairly) easy to strengthen in Takaful insurance companies while others will be more difficult. The results of our comparison are currently being tested by Meerna on Takaful organizations in the UAE (specifically Abu Dhabi and Dubai) to evaluate whether Takaful organizations in practice can address the HPO factors easily or with difficulty. Hopefully the case companies will be able to apply the HPO Framework as this will help their managers to focus on what is important to increase their organizations and sustain it. Then the Takaful organizations will start gaining and maintaining their competitive advantages by noticing the existing opportunities and threats in the market so they can develop the necessary strategies and use them in an effective way. Moreover, managers will be able to improve the quality of their employees and assist the decision makers to monitor and evaluate the (financial and non-financial) performance of their organization to take necessary actions. We will keep you posted on the results!

More information:

Meerna Mroueh and André de Waal (2018), “Is the high performance organization framework applicable to Takaful insurance companies?”, Journal of Islamic Accounting and Business Research, Vol. 9, No 1, pp. 77-90

Marco Schreurs

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