1. Role of Takaful in Islamic Finance By: Capt. M. Jamil Akhtar Khan ACII, MCIT, Master Mariner Managing Director The Universal Insurance Company Ltd. 4 th International Conference on Islamic Banking & Takaful, Lahore November 2, 2010.

2. Outline of Presentation Takaful Defined Takaful Defined Historical Perpective Historical Perpective Takaful today Takaful today Islamic Finance Versus Conventional Banking Islamic Finance Versus Conventional Banking Exposures in Islamic Finance Exposures in Islamic Finance Coverage of exposures ― BancaTakaful Coverage of exposures ― BancaTakaful Cutting Edge…! Cutting Edge…! The Universal Insurance Company Ltd. The Universal Insurance Company Ltd. Conclusion Conclusion

3. Takaful defined

4. Takaful comes from the Arabic root-word ‘kafala’ — guarantee. Takaful comes from the Arabic root-word ‘kafala’ — guarantee. Takaful means mutual protection and joint guarantee. Takaful means mutual protection and joint guarantee. Operationally, takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or loss. Operationally, takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or loss. Meaning of Takaful

5. Reference — Al Quran: “Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2). “Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2). Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in need / in hardship. Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in need / in hardship.

6. Reference – Hadith: “tie the camel first, then submit (tawakkal) to the will of Allah” “tie the camel first, then submit (tawakkal) to the will of Allah” The hadith implied a strategy to mitigate/reduce risk. The hadith implied a strategy to mitigate/reduce risk. Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to a large number of participants. This mitigates the otherwise very damaging losses, if borne individually. Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to a large number of participants. This mitigates the otherwise very damaging losses, if borne individually.

7. Takaful – Historical Perspective

8. Takaful through Time Origins in the First Constitution of Madina. Origins in the First Constitution of Madina. It evolved and continued in one form or the other throughout the Abbaside period and even later during the Ottoman empire. It evolved and continued in one form or the other throughout the Abbaside period and even later during the Ottoman empire. Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional insurance. Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional insurance. The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up in Bahrain. one set up in Bahrain.

9. Takaful Today There are now around 180+ Takaful companies in over 40 countries. There are now around 180+ Takaful companies in over 40 countries. The total insurance premium of OIC countries for 2006 was USD 75 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 3.5 Billion). This is expected to increase to USD 12 Billion by 2015. The total insurance premium of OIC countries for 2006 was USD 75 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 3.5 Billion). This is expected to increase to USD 12 Billion by 2015. Poor Insurance penetration in the Muslim countries (<1% of GDP). Poor Insurance penetration in the Muslim countries (<1% of GDP). Average growth rate higher than conventional insurance companies (around 25%). Average growth rate higher than conventional insurance companies (around 25%). Non–Muslims increasingly opting for Takaful products for commercial benefits. Non–Muslims increasingly opting for Takaful products for commercial benefits.

11. Takaful Prospects in Pakistan 97% Muslim population. 97% Muslim population. Demand for insurance shall increase with increase in per capita income. Demand for insurance shall increase with increase in per capita income. Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other conventional classes. Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other conventional classes. Islamic banking already on sound footing. Islamic banking already on sound footing.

12. People who do not insure due to religious reasons. People who do not insure due to religious reasons. People who insure and are insensitive to religious reasons. People who insure and are insensitive to religious reasons. People who currently do not insure at all. People who currently do not insure at all. Takaful – Target Market

13. Islamic Finance Versus Conventional Banking Conventional banking is money lending. Conventional banking is money lending. Islamic finance is partnership in trading. Islamic finance is partnership in trading. Ijara financing – Rental agreement Ijara financing – Rental agreement Musharaka/Mudaraba – Partnership Agreement Musharaka/Mudaraba – Partnership Agreement Murabaha – Sale with profit Murabaha – Sale with profit Salam – crop financing Salam – crop financing Istasna – manufacturing finance Istasna – manufacturing finance

14. Exposures in Islamic Finance In Islamic finance, full or part ownership is retained by the bank. In Islamic finance, full or part ownership is retained by the bank. This entails considerable exposures for the banker in the various forms of its trade financing. This entails considerable exposures for the banker in the various forms of its trade financing. The banker lacks hands-on expertise for several of such trading exposures. The banker lacks hands-on expertise for several of such trading exposures. Takaful as a means for hedging such exposures. Takaful as a means for hedging such exposures. Takaful exists even independently of Islamic Finance but Islamic Finance depends upon Takaful…!

15. BancaTakaful and Coverage of Exposures Background Background Range of Products Range of Products Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc. Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc. Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful. Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful. Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets. Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets. E-Commerce E-Commerce

16. Bancatakaful (…Cont’d) Advantages of BancaTakaful: Facilitation Desk / Equipment. Facilitation Desk / Equipment. Fast Turnaround Time. Fast Turnaround Time. One-Stop shop for Clients. One-Stop shop for Clients. Concept of Islamic Financial Supermarket. Concept of Islamic Financial Supermarket. Value Added Services. Value Added Services. Law of Large Numbers. Law of Large Numbers. Lower Contribution Rates. Lower Contribution Rates. Attraction for Depositors. Attraction for Depositors. Synergy. Synergy.

17. CUTTING EDGE… ! CuttingEdge…! Cutting Edge…!

18. Investment Income Operational Cost of Takaful / ReTakaful Claims & ReservesSurplus (Balance) P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.) Mudarib’s Share of PTF’s Investment Income Wakalah Fee Investmen t Income Management Expense of the Company Profit/Loss S H A R E H O L D E R S’ F U N D (S.H.F.) Participant WAQF Takaful Operator Share Holder Wakala-Waqf Model Investment by the Company

19. THE UNIVERSAL INSURANCE COMPANY LIMITED The Company has entered 50 th year of its operations. The Company has entered 50 th year of its operations. Majority shares are held by the prestigious ‘BIBOJEE Group of Companies’. Majority shares are held by the prestigious ‘BIBOJEE Group of Companies’. The Company is listed in all the stock exchanges of Pakistan. The Company is listed in all the stock exchanges of Pakistan. It is an ‘A’ rated general insurance company. It is an ‘A’ rated general insurance company. Duly certified as ISO 9001 compliant. Duly certified as ISO 9001 compliant. Managed by dedicated insurance & finance professionals, the Company has an extensive country-wide branch network. Managed by dedicated insurance & finance professionals, the Company has an extensive country-wide branch network. The Company is now planning to expand its operations by setting up Islamic insurance windows/branches in strategic regions. The Company is now planning to expand its operations by setting up Islamic insurance windows/branches in strategic regions. In addition to dealing in all classes of general insurance business, In addition to dealing in all classes of general insurance business, we are focusing on providing Micro-insurance we are focusing on providing Micro-insurance at grass-roots level. at grass-roots level.

20. Conclusion Takaful introduced Takaful introduced Takaful through Time Takaful through Time Takaful – current perspective Takaful – current perspective Islamic Finance and Conventional Banking Islamic Finance and Conventional Banking Exposures in Islamic Finance Exposures in Islamic Finance Cutting edge – The Takaful advantage! Cutting edge – The Takaful advantage! The Universal Insurance Co. Ltd. The Universal Insurance Co. Ltd.

21. Thankyou for your attention captain.jamil@uic.com.pk