Bankatakaful

With increased interest of financial institutions investing in takaful entities today, bankatakaful is a must for the two entities to synchronize their resources for optimum results. As the relationship between the takaful operators and financial institutions are through equity partnership, it is very effective to promote bankatakaful products via the bank’s distribution channels as both parties share common objective i.e. satisfying the same shareholders. Ultimately, bankatakaful business will lead to satisfying the same stakeholders particularly the customers.

What is Bankatakaful?

Bankatakaful is similar to bancassurance under conventional insurance with the main different that the insurance products promoted through the banks under bankatakaful are Shariah compliance. “Bancassurance is the provision of insurance and banking products and services through a common distribution channel and/or to the same client base.” In simple terms, it is the distribution of Islamic insurance products via the banks distribution channels.

Bankatakaful is described as marketing suitable takaful products to the customers of the bank. The marketing of bankatakaful products can be executed in four different ways, at least:

1. Separate Sales Force

Takaful operator utilizes its sales force to market suitable takaful products based on bank generated leads. Under this approach, the bank will segment it’s huge customers database according to certain categories such as age, income level, occupations, etc. The information comprising of key data is then forwarded to the takaful operator for their follow up with the customers either through direct (telemarketing) or agency channel. Here, the bank need not incur any marketing cost whilst obtaining the commission for each takaful case secured. The main setback using this approach is with respect to the confidentiality of the bank’s customers data. There is also a threat to the bank of losing the customers, ultimately, as takaful operator may offer products akin the bank’s products, such as investment linked products, retirement plans, or merely savings plan as in endowment type of policies. Therefore, the bank shall consider the above factors thoroughly prior to the partnership with a takaful operator.

2. Integrated

Bank utilizes its sales force to market takaful products to its customers. To ensure optimum benefits for bankatakaful under this approach, the bank needs to ensure that their sales force are properly trained to acquire the necessary knowledge and skills on the takaful products. This can be achieved by requiring the staff to sit for the basic examination in the insurance/takaful syllabus known as Pre-Contract Examination (PCE) in Malaysia conducted by Malaysia Institute of Insurance (MII). As the sales force may also need to promote the bank’s products such as loans/financings, unit trust, savings, etc., there will exist an element of competition between takaful and bank’s products within the same organization. The sales force employed by the bank are well trained in the bank’s products therefore promoting takaful products may become their lowest priority due to their lack of expertise or experience. On the other hand, once the sale person becomes expert and competent in takaful products, his time may mainly spend for promoting takaful products at the expense of the banks products or business. One way to minimize the competition as mentioned above is to introduce separate production target for each different product. Specifically, the incentives program for the sales team shall be designed in such a way that he achieves all the targets set for each product of the bank and takaful.

Under this approach, the bank still maintain full control of their customers database without the need to share them with takaful operator.

3. Hand in Glove

Takaful operator deploys its sales force at bank branches to promote takaful products to banks customers. Here, the takaful staff is taking over the responsibilities of convincing the bank’s customers for takaful products. They act like any other bank’s staff at the branch with limited responsibilities merely to promote takaful products. One of the issues commonly raised is on the expenses incurred by the takaful staff at the branch such as telephone, stationeries, utilities, etc. It may not be a clearly transparent on the actual exact expenses incurred by the takaful staff at the bank’s premise. This will lead to a dispute on the sharing of costs for common expenses such as electricity, IT equipments, office space, etc. In this business model, Takaful operator is exposed to a risk of losing control of its staff and ultimately resignation. The environment of the bank will directly or indirectly influence the behavior of the Takaful staff which will depart him from his original culture of the takaful company.

Ultimately, whatever approach to be decided shall be based on a comprehensive Cost Benefit Analysis (CBA) which determine each party’s return on investment (ROI).

Among the three methods, it is not uncommon for banks to adopt the integrated method to embark on bankatakaful. One of the main reasons which influence the bank selection is the protection of its customer’s confidentiality information. With this approach, the bank will mobilize its sales force at all levels to maximize the promotion of takaful products alongside with its products.

In return, the bank will obtain fees in the form of commissions based on certain percentage of contribution (premium) paid by the customers. The commission’s structure usually varies by products and in Malaysia; it is governed by guidelines issued by Bank Negara Malaysia meant for bankatakaful business. For instance, the maximum allowable commission for single contribution family (life) takaful products is only 10%. On the other hand, for individual family products usually promoted by agents, the bank will only receive commissions equivalent to the basic commission without any over-riding commissions usually enjoyed by the agency leaders. As for the general takaful products, the amount of commissions payable to the bank is equivalent to the amount payable to individual general agent who promotes similar product. We will discuss more on these issues under the chapter of Regulatory Aspects.

Therefore, under the Malaysian environment, the bank will benefit equivalent amount payable to individual agents except those payable to agency leaders under family takaful business.

Bankatakaful Products

Before suitable takaful products for bankatakaful can be developed, we need to understand the basic business operations within the bank environment. There are several types of products or services offered by bank. We can simply classify them under two broad categories, namely financing and non-financing related products. Some of the financing related products are those involve in the purchasing of properties, real estates, and automobiles, personal financing, commercial loans, credit cards, overdraft, etc. However, most Shariah-based banks nowadays have replaced the financing concept with other concepts such as leasing (Ijarah) and partnership (Musyarakah) with similar ultimate objective to customer perceptive. The discussion on those concepts is beyond the scope of this paper.

As for the non-financing related, it is commonly known as wealth management business unit in the bank. This strategic business unit promotes personal investment products such as unit trust and savings type which promise attractive returns to customers to meet their financial objectives upon reaching certain period of time.

Based on the above common type of bank products, it is easier for us to match with the best takaful products generally available in most takaful companies. In most situations, both general and family takaful products are appropriate to protect the interest of the bank.

As a start, let us focus into those categorize as financing related products of the banks.

1. Residential ‘financing’

Two main risks affecting the interest of the bank are:

i. loss of life of the customer – may lead towards non servicing financing; and

ii. damage to the residential properties – leading towards loss of future income to the bank.

Under the first risk, the bank can eliminate its exposure by packaging the financing with Mortgage Reducing Term Takaful (MRTT). Brief description of MRTT is as follows:

Name of takaful product:	Mortgage Reducing Term Takaful
Benefits:	Undertake to settle outstanding amount of financing at the point of covered events
Covered events:	Death and Total Permanent Disability
Pricing consideration:	Based on original amount of financing, term of financing, profit margin, construction period, contribution financing and age of the customer
Underwriting aspect:	Subject to health conditions of the customer.
Enhancing customer value:	Free personal accident, hospital income benefits, and return of contribution
Benefit to bank	Protection against non-servicing financing
Benefit to customer	Free from the risk of property being auctioned

Most common perils which cause damage to the property are fire which can be protected by Houseowner / Fire Takaful policy. The fire may also cause damage to the content of the property and subsequently resulting in loss of future income to the bank during the reconstruction of the property. These two risks are covered under Householder and Consequential Loss policies. Below is brief description of the policies:

Name of takaful product:	Houseowner / Fire Takaful
Benefits:
Covered events:
Pricing consideration:
Underwriting aspect:
Enhancing customer value:	Free personal accident, hospital income benefits, and return of contribution
Benefit to bank	Protection against non-servicing financing
Benefit to customer	Free from the risk of property being auctioned

Name of takaful product:	Householder Takaful
Benefits:
Covered events:
Pricing consideration:
Underwriting aspect:
Enhancing customer value:	Free personal accident, hospital income benefits, and return of contribution
Benefit to bank	Protection against non-servicing financing
Benefit to customer	Free from the risk of property being auctioned

Name of takaful product:	Consequential Loss Takaful
Benefits:
Covered events:
Pricing consideration:
Underwriting aspect:
Enhancing customer value:	Free personal accident, hospital income benefits, and return of contribution
Benefit to bank	Protection against non-servicing financing
Benefit to customer	Free from the risk of property being auctioned

2. Car Financing

It was reported in the local Malaysian media on January 31, 2006 that there have been 111 fatal accidents involving motorists during the last week of January 2006 due to significant surge in number of motorists traveled on the road as a result of long holidays. Assuming that 50% of them still owe the banks amounting to RM50,000 for their car financing, it means that the banks may simply face non-servicing loans amounting to approximately RM2.8 million in the next few months from January 2006. On the hand, if the banks had imposed a mandatory condition for all its customers to incorporate group credit term takaful product in their car financing, the outstanding loans will be fully settled by the respective takaful operators. As a result, the banks are saved from the risk of non-performing loans. Under leasing (Ijarah) as well as partnership (Musyarakah) concepts, the bank is faced with the risk of losing future income in the event of the customer’s death. Similarly, group credit term takaful will protect such loss of future income by indemnifying the total future amount payable to the bank at the point of death of the customer.

Concept of Takaful

Takaful is an insurance concept which is based on Islamic Muamalat and fully adhere to all rules and regulations pertaining the Shariah Laws. It is a mutual arrangement between parties in which they agree to provide material assistance to one another or a group, in time of a misfortunate. This concept, in fact, has been practiced for over 1400 years ago. In principle, Takaful is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants who subscribe to the schemes. In an nutshell, it is the provision of shared contributions to help those who are in need. In a nutshell, Takaful is a concept based on solidarity and brotherhood.

These fundamentals are based on the sayings of Prophet Muhammad s.a.w. (hadith). Some of the examples are:

Basis of Cooperation
"Allah will always help his servant for as long as he helps others."
(Narrated by Imam Ahmad and Imam Abu Daud)

Basis of Responsibility
"The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected."
(Narrated by Imam al-Bukhari and Imam Muslim)

"One true Muslim (Mu'min) and another true Muslim (Mu'min) is just like a building whereby every part in it strengthens the other part."
(Narrated by Imam al-Bukhari and Imam Muslim)

Basis of Mutual Protection
"By my life, which is in Allah's power, nobody will enter Paradise if he does not protect his neighbour who is in distress."
(Narrated by Imam Ahmad)

Based on the above hadith, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs.

Takaful Industry in Malaysia

Takaful is a fast growing industry in Malaysia and globally. Many organisations had invested significantly in this sector to ensure that they have a piece of the pie whilst things are still hot. In Malaysia, there are currently 9 takaful licenses had been issued by Central Bank of Malaysia to run takaful business. Namely, Syarikat Takaful Malaysia (1984), Takaful Nasional Sdn Bhd (1993), Mayban Takaful (2001), Takaful Ikhlas Sdn Bhd (2003), Commerce Takaful (2005), HSBC Amanah Takaful (2006) and BSN Prudential Takaful (2006) whilst Hong Leong Takaful and MAA Takaful had yet to commence their business operation. Out of those in business, Takaful Ikhlas is the only takaful operator without a financial institution within it's group where it is wholly own by a domestic reinsurance company, namely MNRB Holding Bhd. Below are the stakeholders from the banking sector related to takaful operator:
1. Bank Islam Malaysia Berhad (Syarikat Takaful Malaysia)
2. Mayban Fortiss (Takaful Nasional Sdn Bhd & Mayban Takaful)
3. CIMB (Commerce Takaful)
4. HSBC Bank (HSBC Amanah Takaful)
5. Bank Simpanan Nasional (BSN Prudential Takaful)
6. Hong Leong Bank (Hong Leong Takaful)

With a financial institution within the group, the takaful operator has better opportunity to synergize their resources to optimize business opportunities amongst captive market thru cross selling. This is a trend seen globally which is known as bankatakaful or bancassurance in the conventional sector. We will discuss further on the opportunities available in the bankatakaful under specific topic of bankatakaful within this blog.

When the first takaful commenced business in 1984, the authority had set RM10 million as the minimum paid up capital. Today, however, the minimum requirement had increased 10 times to RM100 million mainly to ensure that the solvency margin of the operator is always met without much difficulties. As for the shareholding structure, there is no specific guidelines set by Central Bank provided that they meet with the minimum requirement on the capital and perhaps with significant local interest in the entity. We can notice that the investors are broadly from private investors, banking, insurance as well as reinsurance company.

The authority is gearing their monitoring and regulation on takaful industry to ensure that the operators are ready to face with stiffer challenges upon new foreign players involvement. New technologies and marketing strategies are introduced by those players leading towards higher market penetration and retention. Local players, therefore, are expected to change their business plans and strategies mainly to ensure that they are always versatile to changes in tandem with market needs and expectations. Furthermore, the Government had set all the necessary infrastructure to position Malaysia as the Islamic financial hub in Islamic banking and Takaful to attract foreign investors as well as moving ahead.

In terms of products development, the industry had moved in tandem with the conventional pattern where the family or life takaful products had dominated the portfolio mix (73 : 27). Family products are preferred due to its long term in nature for a sustainable income stream for the company as well as the intermediaries. Besides, family agency has becoming an important distribution channel in the industry perhaps due to the commonly known perception of "insurance is bought and not sold". Whilst other channels are still significant in their contributions overall, family agency is used by the operator mainly to reach the retail and untap market in the most cost effective manner.

It is not uncommon to hear that takaful is only for Muslims. Like the Islamic financing, takaful is a product which can satisfy everybody from "cradle to graveyard". Today we can see many non-Muslims walk into a takaful branch to obtain takaful policies. Eventhough the percentage is still insignificant, aggressive awareness campaign by all relevant parties can increase the participation from those market segment tremendously in the near future.

During early days of takaful in Malaysia, the takaful products are distributed only through the branches and takaful desks situated within the group's premises such as Tabung Haji and Bank Islam. The environment has changed significantly where the products are now distributed by various distribution channels such as agency, brokers, bankatakaful, internet, direct, strategic alliances as well as branches. Similar to most other industries, the internet marketing has yet to result in favorable outcome perhaps due to the rampant internet abuse by hackers leading towards 'internet phobia phenomena' in the society. We will share some internet marketing initiatives which can be adopted.

One of major obstacles faced by takaful industry previously is with respect to the availability of investment instruments which are Shariah compliant. This is very critical as the investment returns must be free from any Riba' (or interest) element. The Government had since then increased their initiatives to ensure that there are enough Islamic investment instruments available for the industry to subscribe. Eventhough the quantity and quality are still far behind as compared to the conventional instruments, we foresee more new instruments to be introduced by private as well as public sector in the near future.