Total premiums have increased from BDT1.4 billion (US$16.9 million) in 2004 to BDT10.6 billion (US$128.5 million) in 2010, constituting 15% of total premiums of the insurance sector.

From only one non-Life Takaful operator in 1999, the existing six fully-fledged Takaful operators and 13 window operations of conventional insurers now offer a wide range of life and non-life Takaful products matching with those available in conventional insurance. With the progress achieved so far, the Takaful industry will be well positioned to become an increasingly important component of the Islamic financial system in Bangladesh.

Takaful players in the market showed much dynamism and resilience during the last six years (2004-2010) as evidenced by the enhanced ability to compete, sustain growth and profitability.

Combined with reinforced institutional capabilities, the foundations are well in place for the industry to strengthen its competitive positioning and evolve in the face of highly challenging financial environment. Key performance indicators of the Takaful industry in Bangladesh can be seen in Table A below.

In an environment of greater competition and changing dynamics in the domestic Takaful industry, the forward momentum in terms of growth in premiums, especially in Family Takaful, has been outstanding.

The Takaful industry has in general made significant progress in broadening and deepening its product mix in the market to meet the diverse needs of customers. The Takaful industry has also deployed a more focused business strategy to increase market penetration.

It appears that the Takaful industry has emerged as a viable sector within the prism of broader financial services. Leveraging on these fundamentals, the Takaful industry can be expected to play its important role with greater significance, both as a viable provider of financial security and risk transfer mechanism for the general public, businesses, as well as an important institutional investor in the economy.

Currently, efforts are being made to increase public awareness of Takaful. This is of particular importance to the Takaful industry as the market penetration of the total population is still very low. Despite the impressive growth of the Takaful industry in Bangladesh, it has faced a few challenges.

Challenges
Islamic life insurance companies are facing difficulties as they are required to follow the conventional insurance acts, rules and regulations.

The present government is keen to frame its policies in line with secular principles and is not likely to consider the proposed Takaful Act. As a result, Takaful operators cannot operate in the same level playing field.

For example, the Insurance Act provides for a 30% compulsory investment in government securities and bonds. While the government securities (interest-based) provide interest from 8-10% depending on the period, the Islami Investment Bond (BGIB) issued by the central bank provides profit to Islamic insurance companies of between 3-4% only. Investment returns of Islamic insurance companies thus became 60-75% less than their competitors in the conventional insurance space due to the compulsory investment portfolio.

Furthermore, in the stock market, Islamic insurance companies are under an obligation to invest funds with Shariah compliant companies.

Shariah compliant companies are not plentiful, which restricts the investments within a limited circle and forcing them to receive lower rate of returns. But the biggest problem is the regulatory requirement to invest 30% of investable funds with government securities and bonds.

The funds, which are invested in Shariah compliant Islamic bonds, are reinvested by the central bank to Islamic banks in the country, who hold excess cash liquidity and seldom need to buy Islamic bonds.

Therefore, the major portion of the funds of BGIB remains idle without investment. Hence, this poses a disadvantage for the Islamic insurance companies.

To address this issue, immediate steps need to be taken. Regulators must find ways to enlarge the investment areas of 30% compulsory investable funds.

This could perhaps be done by way of investing in Mudarabah term deposits with Shariah compliant banks, purchasing Islamic unit funds and trading in Shariah compliant shares in the capital market, etc.

In addition, profit-bearing public private joint investments, the issuance of profit-bearing development bonds and Sukuk all need to be considered.

Neither the regulatory body nor the central bank have yet taken any tangible initiative to address these issues. Alternatively, the government could allow Takaful companies to invest only when Islamic bonds and funds can be utilized properly.

Under the present situation, it is necessary that the Central Shariah Council for Islamic Banks and the Central Shariah Council for Islamic Insurance put forward their joint cause with the regulatory body, the central bank and the ministry of finance in order that the Takaful operators can play a more effective role in the insurance sector.

The Insurance Act 2010 provides for the appointment of Shariah consultants for proper functioning of the Insurance Development and Regulatory Authority. The government formed the five member board for the regulatory body with effect from January 2011, although the Act was passed in March 2010. Typical bureaucratic slow process, coupled with doldrums prevailing in the political environment, are causing much delay in making the new law effective and thus to frame appropriate rules and regulations for both the insurance and Takaful Industry.

A strong Shariah framework will definitely enhance consumer confidence and will provide Takaful operators greater flexibility and the opportunity to be innovative within the boundaries of Shariah.

A proposed Shariah framework should allow the operators to follow any of the prevailing operational models and combination of the models based on the Shariah concepts of Wakalah, Mudarabah, etc. The rules of investments for Takaful should allow operators to adhere to the principles of Islam as well as to operate on a level playing field.

Conclusion
Good performance, better growth and the viability of Takaful is now an established fact, be it in Bangladesh, Malaysia, Saudi Arabia, the UAE, Bahrain, Oman, Qatar or Kuwait. Therefore, to ensure its long-term viability, Takaful operators and the regulators in respective countries need to play a more effective and prudent role to ensure financial management of assets and funds. Solvency regulation for Takaful is a necessity.

Kazi Md Mortuza Ali is a managing director at Prime Islami Life Insurance. He can be contacted at
[email protected]
.