Reviving Takaful: Reflections on the Islamic New Year

by Admin IFG Progress


12 January 2024

Authors: Ibrahim Kholilul Rohman [1] and Nada Serpina [2]

As the Islamic New Year approaches, it is an opportune time to reflect on the principles of hijrah (migration) and their application in the realm of economics, particularly within the context of the growing Shariah economy.  In Islamic teachings, hijrah is divided into two aspects. The first aspect, known as “makaniyyah,” relates to “place.” An example of this is the migration of the Prophet Muhammad from Mecca to Medina. The second aspect is called “hijrah haliyah,” which pertains to changing behavior as a transformative process to strengthen faith and become a better individual.

From an economic standpoint, the changing behavior aspect of hijrah aligns with the global rise of the Shariah economy, where the halal industry has emerged as a vital pillar of growth both globally and domestically. Projections from the Dinar Standard indicate that Muslims worldwide will spend up to USD 2.8 trillion on halal products by 2025. Indonesia, with its sizable Muslim population of 229.6 million in 2020, has the potential to lead the halal industry. The State of the Global Islamic Economy Report 2022 reveals that Indonesia’s sharia economic indicators continue to improve, with the country ranking fourth globally. It is also one of the largest consumers of halal products, accounting for 11.34% of global halal expenditure.

However, despite the significant growth in the overall Shariah economy, the insurance or takaful sector has faced challenges. In Indonesia, Shariah insurance represents the smallest sector of the Islamic finance industry, comprising only 2.52% of its assets. While there are 15 full-fledged Shariah insurance companies in Indonesia, there are 43 Shariah Business Units (SBUs) that still need to spin off by the 2024 deadline.

The performance of Indonesia’s takaful industry, as shown by IFG Progress study, has remained below that of conventional insurance, with total assets growing at a 1.8% Compounded Annual Growth Rate (CAGR) between 2018 and 2022. The Shariah insurance penetration rate in Indonesia also remains low at 0.19% of GDP, despite the country’s Muslim population constituting 87% of the total population.

There are significant challenges on both the demand and supply sides of the Shariah insurance industry. On the demand side, literacy rates in the Shariah insurance industry are notably lower compared to the conventional insurance industry. From the supply side, there is a lack of product differentiation, with Shariah insurance products often resembling conventional counterparts, merely Islamized versions. Furthermore, the Shariah insurance industry lacks optimal support from the Shariah finance ecosystem and regulations, particularly in investment-related matters. The performance of Shariah investment instruments and unit-links remains below that of their conventional counterparts.

During the period from 2017 to 2021, the gross contribution (premiums) from the Shariah insurance industry recorded significant growth of 14% annually. This growth was mainly driven by the performance of Shariah life insurance contributions, which saw an average increase of 16% per year (CAGR 2017-2021). However, similar to conventional insurance, the growth in gross claims for Shariah insurance outpaced the growth in contributions, averaging 42% per year, with the highest increase coming from the life insurance sector at 51% per year (CAGR 2017-2021). Although the nominal contribution amount is still higher than the claims, the substantial increase in claims, nearly three times that of contributions, can potentially impact future underwriting surplus.

Drawing lessons from Malaysia, where the Shariah insurance industry has experienced rapid growth, a competitive Shariah financial sector ecosystem and robust regulatory framework have been key factors. Malaysia has strategically placed investments in Shariah private debt securities and equity, with a majority in corporate sukuk, benefiting from a well-developed sukuk market, which ranks second globally in terms of issuances.

At the messo level, the Islamic insurance industry in Malaysia is one of the leading players in the global Shariah insurance industry, with a contribution of over 70% in the Southeast Asian region. The significant growth of Malaysia’s Shariah insurance industry is evident in the continuous positive growth in premium penetration and assets over the past 10 years. Interestingly, there has been a substantial increase in premium penetration in both life and general insurance during the pandemic period, from 2020 to 2021. This can be attributed to the growing awareness among the public about the importance of insurance in providing financial protection. Additionally, the increase in premium penetration is supported by incentives provided by insurers and takaful operators (ITOs), who have implemented re-pricing strategies to alleviate the financial burden for policyholders.

From the regulatory perspective, Bank Negara Malaysia, the central bank and financial services authority, has implemented regulatory transformations in the Shariah insurance industry over the last decade. These include spinning off Shariah insurance business units from conventional insurers and establishing a strong regulatory framework with provisions and regulations related to guidelines, licenses, operations, market conduct, and governance. These changes have led to significant improvements in the number of Shariah insurance companies and asset growth.

Indonesia can expect a similar journey in the future, as the Financial Services Authority pursues the Sharia Unit Separation Work Plan, mandating the complete spin-off of SBUs from conventional insurers by 2024. However, specific challenges need to be addressed, such as capital requirements, human resources capacity, infrastructure, limited investment activities, and the implementation of branding and awareness strategies for SBUs.

By addressing these challenges and learning from Malaysia’s best practices, Indonesia can pave the way for a thriving takaful industry, contributing to the growth of the Shariah economy and providing ethical and responsible financial services aligned with Islamic principles.

This article was published in with the title “Reviving Takaful: Reflections on the Islamic New Year”. Click to read: Reviving ‘takaful’: Reflections on the Islamic New Year – Fri, July 21, 2023 – The Jakarta Post

[1] Senior Research Associate at IFG Progress and Lecturer at SKSG Universitas Indonesia

[2] Research Associate at IFG Progress


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