Is Egypt going takaful?

Salma El-Wardani , Saturday 1 Jan 2011

Islamic insurance has been steadily growing as a "Halal" alternative for commercial insurance that some believe to be illegal and risky

Will Takaful non speculative nature raise Egyptian trust in Islamic finance? Photo credit: Reuters

"If you want to invest in Halal items, with fair interest. If you want to insure your home without opposing God, come and let’s all cooperate and invest in Halal."

So reads a statement on the facebook group page of Saudi Egyptian Insurance House, one of Egypt’s takaful insurance companies, in Latin letters.

Takaful, literally "joint guarantee", is to invest the halal (permitted in Islam) way.

Recent as it is in the Egyptian liberal market, the Islamic laws-compliant version of insurance seems to be slowly but surely growing.

"Facebook is one of our innovative ways to marketing," says Gamal Shehata, the company’s branches and production general manager, from his office in the company's five floor silver building in the Cairo suburb of Dokki.

Egypt has had a bad experience with Islamic finance.

Back in the mid 1980s, Islamic fund management tycoons like Rayan and Al-Saad were accused by the government of investing millions of pounds of Egyptians' savings in a ponzi scheme. Any dividends paid to investors were from their own money or that of other investors rather than from any actual earned profit

Although the government confiscated their local assets, hundreds of millions of Egyptians lost their money.

"One way to attract customers and regain their trust is by combining state-of-the-art marketing tools with word-of-mouth traditional ways," says Shehata, surrounded by decorative Quranic frames, before being interrupted by an attractive veiled young lady, one of the company’s marketers, wearing modern jeans and high heeled boots.

"Our main target is that growing category of Egyptians who are wary of investment and other financial dealings because they think its haram (forbidden in Islam)," added Shehata.

Established back in 2003, with an authorized capital of LE100 million ($17,220,595), as the first Takaful insurance company in Egypt, the Egyptian Saudi House operates according to sharia (Islamic law) whereby the insured is a partner in the end of the year's surplus.

As a corporate insurance entity, the company provides insurance against all manner of risks.

The company’s total assets have grown from LE79.6 million ($13.7 million) in 2007-2008 to LE95.9 million ($16.5 million) in 2008-2009.

The company has been followed into the sector by eight others companies that all started operating in mid 2008, with fifty percent of the capital coming from the Gulf countries.

The new comers quickly prospered to claim, in 2009, a 5 percent stake of the LE8 billion ($1.45 billion) Egyptian insurance market, according to figures released by the Egyptian Financial Surveillance Authority (EFSA).

According to the World Business Institute's International Review of Business 2009 (Islamic Banking Theories, Practices and Insights), the first modern experiment with Islamic banking and financing took place in Egypt back in the 1963. Ahmad El Najjar, an Islamic economist, set up a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr.

The bank proved to be popular and prosperous until it closed in 1967.

The bank, which neither charged nor paid interest, invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors.

In 1972, Mit Ghamr Savings was revived when it became part of Nasr Social Bank which is still in business in Egypt.

In modern times, takaful was revived in 1979 with new companies emerging first in Sudan and Saudi Arabia.

From the mid 1980s the idea spread to the Far East, before gaining momentum among other Arab countries in the last five years.

Abdul Raouf Qutb, chairman and managing director of the Union of Egyptian Insurance Company, told Ahram Online he expects the growth of the takaful insurance sector in Egypt to reach "between 15 and 20 percent by the end of 2013."

Such expectations, say insurance executives, are optimistic.

"I think one main reason for our quick jump in sales is that we have targeted that sector of Muslims who fear halal and haram investment," explains Shehata.

In a nutshell, takaful pools a community's resources with an investment manager or company. Contributors to the fund are then given financial support when they need it.

In essence, there are two kinds of investment tools: Equity-based and fixed income-based, explains Mahmoud Abdallah, chairman of Insurance Public Holding which holds 55 percent of the Egyptian insurance market.

Islamic companies invest only in the first kind of tools, which means sharing risks and variable premiums.

The idea, spiritual as it is, has proved a success worldwide, with cooperative insurance coming as a hostile yet parallel body to the illicit conventional insurance, in which companies deposit premiums in interest-bearing, but risky, investments.

Internationally, total takaful premiums topped $2 billion in 2006 and are estimated to reach US$7.4 billion by 2015, according to a 2008 study entitled ‘The Viability of Islamic Banking and Finance in a Capitalist Economy: A South African Case Study’ in the Journal of Muslim Minority Affairs.

"Clients view their contribution as a “donation” which is transferred to the ownership of the Takaful Waqf Fund and placed in interest-free sharia-approved investment projects including Faisal Islamic Bank, and Egyptian Saudi Finance Bank," adds Shehata.

Each takaful company has a governing body (Sharia Board) that consists of ulamaa (Islamic scholars) to judge if the company’s transactions are consistent with Islamic practice or not.

"Nasr Fareed Wassel (Egypt’s former Mufti) keeps the upper hand in our company when it comes to issues of halal and haram," elaborates Shehata.

But because business is business, the company didn’t miss the chance of taking on a big cigarette company last year, though the item is considered forbidden by Islam.

"The compromise we reached with the board is to sign a medical insurance contract, while avoiding insurance on the company’s assets that are considered haram."

For Islamic life insurance companies, the issue of halal and haram is a constant one, to the point of whether it is even consistent with the fatalistic religion to insure your life.

"We're not preachers, we're doing business," says Saleh Eid, CEO of Egyptians for Takaful Life Insurance Company. "We don’t care who says this is improper as we have our sharia board that says what's ok and what's not."

The company has seen its revenue surge to LE12 million in 2009, from LE1.8 million the previous year.

By the end of 2008, Islamic finance gained a new reputation for stability with the credit crunch and subsequent global recession seeing many lose faith in the capitalist system and its vulnerable financial institutions.

"I think the 2008 financial crisis has caused clients shift from investing in commercial banks and institutions to Islamic companies," adds Shehata. "We have customers who don’t give much attention to issues of halal and haram. We also have Christian clients."

In Islamic finance, derivatives, hedge funds, short-selling and speculation are illicit, haram.

Furthermore, the risk-sharing concept of murabaha, where entrepreneurs are granted capital and share the profits with the bank, brings Islamic companies closer in step with the real economy. 

Advocates say that Islamic banks are untouched by the current crisis due to the nature of Islamic banking, especially its avoidance of the debt trading and market speculation that takes place in European and American banks, according to the Saudi Al-Sharq Al-Awsat daily.

The less risky and more stable practices of takaful companies might go some way to changing Egyptians' suspicion of religious institutions.

At the moment, however, there are twice as many traditional insurance companies, with far larger investments and assets.

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