Islamic financial system was initially evolved as a
form of financial intermediation for the Islamic community to conduct
financial transactions that conform to Islamic tenets.
Today, the Islamic financial industry has gained
wider acceptance and appreciation and has expanded beyond the
traditional borders of the Muslim-based economies to the major
industrial economies to become an integral component of the global
In a global environment that has become
increasingly challenging, an environment that is subject to the
powerful forces of change, and that is characterized by volatile and
unstable market conditions, Islamic finance has emerged as a
competitive and resilient form of intermediation.
Although Islamic finance is still at the early
stage of development, it has experienced rapid expansion and is fast
emerging as a viable and robust form of financial intermediation with
The development of an Islamic financial system
needs to include the respective components comprising the Islamic
banking, insurance (takaful) industry and the Islamic capital markets,
given the strong linkages, interdependence and synergies among these
components in the system. The spectrum of participants and the
diversity of instruments are among the key attributes in creating the
enabling environment for a dynamic Islamic financial system.
In the initial stage during the early years of the
development of the Islamic financial system, the focus of attention
was on the development of the Islamic banking system and to expand the
number of players and volume of activity. The evolution of an
appropriate financial structure would need to take into account the
role of the financial system in the economy and the objectives that
need to be achieved. In the contact of an emerging market economy, the
financial system is a means to an end.
The appropriate financial structure, particularly
in emerging market economies, need to be designed to meet the
requirements of the economy. The financial system needs to be in a
position to support the real sector, changing and evolving with the
changing needs of the economy.
The key constituents within the Islamic financial
system, which includes the Islamic financial institutions as well as
the capital and money markets need to be firmly reinforced by the
legal and regulatory framework that adequately address the unique
characteristics of the industry. These intra-dependent key components
ultimately form the enabling environment for the Islamic financial
services industry to effectively play its role as an efficient conduit
for mobilizing resources and channeling them to productive purposes.
The absence of any one of the components could
reduce the effectiveness and efficiency and could affect the viability
and sustainability of the system.
While the Islamic banking system plays an important
role in mobilizing deposits and providing financing, the development
of the capital market allows the corporate sector to source their
long-term financing needs based on Islamic principles. In addition, it
would increase the range of Islamic financial instruments available to
meet the demand of the Islamic investors. In the absence of a
comprehensive Islamic financial system with financial services based
on Shariah principles, the development of Islamic banking and
insurance would be hindered.
The government would need to assume an important
role in the development of the Islamic financial system. The role of
the government is, amongst others, to provide the enabling environment
and put in place from the outset the necessary infrastructure through
the formulation of a comprehensive set of legal and regulatory
framework for Islamic banking and insurance. In addition, this
framework needs to be reinforced by a Shariah framework to ensure that
all financial transactions are Shariah-compliant. Islamic financial
operations would thus need to be based not only on best practices, but
also to satisfy the tenets of the Shariah.
For Islamic banking and insurance to be
sustainable, compliance with Shariah principles alone is not
sufficient. In the long run, customers and businesses demand for
quality in the products and services that Islamic finance offers. This
is the challenge for Islamic banking and insurance, to be able to
provide a comprehensive range of Islamic financial products and
services that are not only innovative and competitive but Shariah
TAKAFUL (ISLAMIC INSURANCE) INDUSTRY
Takaful as a system of Islamic insurance is based
on co-operation and mutual help for the good of the society at large.
Although takaful has been in the market for more than 20 years, it has
yet to make significant inroads. It should, however, be noted that
although the conventional insurance market is deeply entrenched in
several of the Muslim countries, the percentage of the Muslim
population insured is relatively low. The market penetration level is
very low, notably less than 5 per cent in many Muslim countries.
POTENTIAL GROWTH IN TAKAFUL INDUSTRY
Takaful industry in some Muslim countries has
emerged as a fast growing industry in the insurance sector since its
introduction in 1985. It has reached more than six per cent of the
total assets of the insurance sector. In the same period, the takaful
operators have offered a wide range of family and general takaful
The establishment of an adequate number of takaful
operators in the Muslim and non-Muslim world is also crucial to
provide the groundwork for the setting-up of more retakaful operators,
in terms of sustaining business support and providing the economies of
scale in order for the retakaful industry to develop.
Currently there is still a dearth in the number of
players providing the retakaful facility, resulting in takaful
operators ceding to conventional reinsurers. While this has become a
common practice, ideally more competitive retakaful operators who
provide reinsurance in accordance with Shariah principles need to be
established so that the takaful industry should not depend
indefinitely on conventional reinsurance as the conduit to which they
can mitigate risk. More importantly, retakaful operators ultimately
serve to strengthen and enhance the financial capacity of the takaful
industry, and the synergistic by-products emanating from the
interactive business alliances would contribute towards the overall
betterment and robustness of the Islamic financial system.
Indeed, there is much to be gained by the takaful
operators in particular, and the Islamic financial industry in
general, by having access to an adequate and competitive market of the
retakaful facility. It is therefore important to increase the
collaborative efforts and examine plausible ways to address this gap
in the takaful industry.
The Islamic banking and insurance should strive to
add value towards enhancing greater integration to the economy and the
financial system. To harness the potential fully, genuine endeavours
to develop and innovate Islamic financial instruments and activities
that are able to fulfil the changing requirements of the economy and
the emerging needs of the contemporary global marketplace need to be