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.