Within HH Sheikh Mohammed's vision for Dubai to become the capital of the Islamic economy, an important pillar is also Dubai becoming the capital of Islamic finance.
One of the key expected drivers of growth in the insurance market is the continued development of the takaful insurance market. Takaful differs from conventional insurance as it adheres to the tenants of sharia law. Where conventional insurance is a buy and sell contract between insured and insurer, takaful is an arrangement whereby a group of individuals mutually insure each other, acting as both insured and insurer simultaneously.
According to the State of the Global Islamic Economy 2014-15 report, the global takaful market is worth $28 billion, with GCC countries contributing 62% of gross takaful premiums. However, if you compare this to the global conventional insurance values, it represents less than 1% of total volumes internationally. There have been numerous challenges identified within the takaful insurance market. One challenge is the lack of standardization via a certification body on what constitutes a permissible takaful product. In recognition of this, the UAE is poised to take one of the largest steps in 3Q2015 by establishing a federal sharia board composed of Muslim scholars that pass religious decrees on whether a financial product conforms with Islamic tenants. A second main challenge to the development of takaful is the low penetration rate across all lines of insurance in the Muslim world. This is attributed to the lack of education on insurance products, as well as the common belief that insurance products are not sharia compliant. Not only this, but localized takaful insurance companies have to compete with major international brands with much stronger market recognition and reputation. All in all, takaful insurance companies are facing an uphill battle in the development of this market. However, through education and standardization, there is plenty of opportunity to capitalize on this untapped market.
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