UK retail customers sustain a small Islamic banking sector. Why are they are reluctant to buy takaful?
Posted 25 June 2020
Most Islamic finance discussion focuses on banking. However the financial system is about much more than just banking, and insurance is a critical financial service.
The Islamic version of insurance is takaful, and this is of growing significance in Muslim majority countries. For a simple explanation of takaful, see my page "How conventional insurance and takaful differ numerically."
In the UK Islamic banks are now a small but established part of the scene. Takaful for large international risks is also available in the wholesale insurance markets. However it has not taken off at the retail level. In my May 2020 column for the magazine "Islamic Finance News" I asked why. You can read it below.
The UK retail Islamic banking market is small but real. Indeed, meeting the demand for retail Islamic banking motivated the creation of the first Islamic bank in the UK. I expect the UK’s retail Islamic banking industry to endure and to grow steadily.
Conversely, I know of only one attempt to provide retail takaful in the UK, and that was a complete failure for its shareholders.
Takaful companies of course simply provide insurance as everyone understands it, but in a Shariah compliant manner, just as Islamic banks provide banking that is Shariah compliant.
Retail takaful is widely found in Muslim majority countries. It is obviously sustained there by the much larger potential market (compared with the UK) and in some countries benefits from state support. However, there are multiple reasons which together make the UK extremely unattractive for potential retail takaful providers.
Firstly, setting up a small insurance company in the UK is much harder than setting up a small bank. I consider that the skills required to price insurance risk successfully are much higher than those required for the provision of basic retail banking services.
Also, in my view the regulatory burden for providing insurance, especially if you wish to provide life insurance, is greater than if you wish to provide banking.
Secondly, in general, individuals are reluctant to buy insurance. Of course, they are often compelled to do so, for example taking out home fire insurance is demanded by mortgage lenders.
Even more strongly, it is a criminal offence to drive without motor insurance. That is why about a decade ago Salaam Halal Insurance made motor insurance its first takaful product. Unfortunately, the UK’s motor insurance market is intensely competitive, and the company was subscale and had to close down after suffering significant losses.
Thirdly, I believe that, on average, Muslims are even more reluctant than non-Muslim individuals to buy insurance. Quite apart from UK Muslims being poorer than non-Muslims (the propensity to buy insurance increases with income and wealth), there is a religious factor which causes some Muslims to be fatalistic, discouraging them from buying insurance.
I have been unable to find meaningful statistics on fatalism amongst Muslims in the UK. However, in 2012 the Pew Research Centre found very high levels amongst Muslims in most Muslim majority countries. That is consistent with my intuition that fatalism is much higher amongst British Muslims than amongst non-Muslims.
In my 3 February 2017 column I explained the need for life takaful provision in the UK and pointed out its absence. Three years later, the situation has not changed and for the reasons mentioned above I think it is unrealistic to expect retail takaful, especially life takaful, to become available in the UK any time soon.