Adnan Zaylani Mohamad Zahid: Leading in a disruptive world
revolutionising Takaful
Keynote address by Mr Adnan Zaylani Mohamad Zahid, Assistant Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the Takaful Rendezvous 2019 "Leading in a Disruptive
World - Revolutionising Takaful", Kuala Lumpur, 8 October 2019.
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I am delighted to join all of you today at the 2019 Takaful Rendezvous. This is an important
gathering for the finance and business community to exchange ideas on the opportunities and
issues facing the global takaful industry. Our backdrop today is of an economy and environment
that has seen remarkable changes and challenges that emerge in just a short period of time.
While we have thought the financial crises of recent times were safely behind us, the global and
domestic economy has been beset with an escalating trade war that has rippled far. This has
affected the trade and investment climate worldwide and could bring about large downside risks.
Malaysia's economy will not be spared from this fallout.
At the same time, we have a growing sense of urgency to deal with environmental challenges.
Globally, the focus is shifting towards climate change and sustainability. Closer to home, we
have just experienced an episode of the country's now, alarmingly, annual haze seasonality.
Undoubtedly, each one of us can feel the impact and risks from environmental degradation on
the quality of our daily lives. It will not be long from the time when we can clearly see its negative
impact to the economy and financial stability. On a positive note, technology has transformed
virtually every aspect of our lives - the way we interact with each other, consume our needs,
follow the news, and navigate our movements. By 2018, more than half of the global population
have become internet users. Here in Malaysia, almost 90% of Malaysians are internet users, and
more than half of these users conduct banking and financial activities online. Digitisation and
technology adaptation is already making significant inroads in providing new solutions going
forward and has become a key strategy for us to enhance financial inclusion and also protection.
While this means financial institutions now have greater avenues to reach consumers, it also
entails greater exposure to emerging vulnerabilities and risks such as cyber and technology
risks. This needs to be properly managed, otherwise it can potentially trigger grave systemic
consequences.
In addition, there are also the gradual and structural changes that we cannot ignore. Over the last
20 years, the global population has more than doubled to reach 7.5 billion. This has posed
significant challenges for policy makers and governments to appropriately allocate capital and
finite resources. Every country including Malaysia is experiencing ageing population growth and
will be affected by demographic changes either today or in future years. Declining share of
working-age population and higher number of old-age dependents will strain the healthcare
systems and place an upward pressure on costs of pension schemes. The design of financial
protection has to evolve and, for many underserved segments, financial protection has become
even more pressing. Islamic finance and takaful should therefore embrace its transformative
role, responding to these evolving needs, rather than merely reacting to past and existing
demand. It is thus imperative for takaful industry to be agile and adapt to these changes.
In my remarks today, I will outline three dimensions that offer significant opportunities for the
transformative role of takaful:
First, takaful can be a key enabler for the Muslim economy;
Second, it can be a solution of choice for Malaysians; and
Third, it can also be a game-changer in empowering financial resilience.
Takaful as a key enabler for the Muslim economy
For hundreds of years, merchants and traders have relied on arrangements based on mutual
assistance to protect each other against the perils of sea travels, damage to property and other
forms of misfortunes. Marine protection schemes, similar to the schemes offered in Edward
Lloyd's coffee shop more than 330 years ago, can be traced back to the Islamic civilisation of the
Ottoman Empire. One could argue that such protection arrangements were part of the
ecosystem that made such empires the marine superpowers of their times. Fast forward to
modern times, households and businesses continue to experience various risk events that could
impact their lives, financial capabilities and assets. From nature-driven risks to man-made risks,
these risks will directly impact those we protect and cover in increasingly significant ways.
The Muslim economy, in particular, is one of the fastest growing economies worldwide, driven by
the exponential growth of Muslim population demanding Shariah-compliant products and
services. Globally, the Muslim population itself is expected to grow twice as fast as the
nonMuslim population. The global halal market is expected to reach USD9.71 trillion by 2025 - more
than 20 times the size of Malaysia's economy. The global Islamic finance assets on the other
hand have already surpassed USD2 trillion last year. All these present significant opportunities
for the takaful industry to provide protection and risk management solutions - be it for trade or
goods in transit, for protection of physical or financial assets, and for the protection of human
livelihoods. Yet, the global takaful growth ranges at only around 4% last year. While the number
of takaful operators has increased to 306, the global takaful industry still accounts for less than
1% of the global insurance market. This calls for serious attention and more concerted efforts by
the takaful industry worldwide to ideate and introduce solutions that can support the progress of
the Muslim community. Indeed, we should also recognise that this lack of protection and
coverage is holding back the economic development of the Muslim community, and it is
incumbent upon us to do more to improve this.
Takaful as a solution of choice for Malaysians
Here in Malaysia, the dual financial system which also includes conventional insurance and
takaful market, is well-entrenched. The operating environment presents both opportunities and
challenges for the takaful industry. Undoubtedly, it must compete and present a viable alternative
to the conventional insurance. At the same time, it has a unique value proposition that can meet
the Muslim demand and Shariah requirements. The sustained demand for takaful, especially
among Muslims, has contributed towards the industry's steady growth - from 3% market share a
decade ago to almost 18% in 2018.
The growth potential for takaful industry remains clear and promising. In 2018, almost half
(45.8%) of the Malaysian population have yet to obtain protection. Based on a recent demand
survey, 46% of Malaysian households and 48% of businesses responded that they are unaware
about the comprehensive range of solutions that the takaful industry is able to offer. To reduce
this gap, as an industry, takaful operators must collectively elevate the prominence of takaful and
its capabilities to be a solution of choice for Malaysians. I wish to suggest three pathways for
this aspiration to be realised:
First, by offering good value solutions to customers;
Second, by adopting innovative tools and effective distribution strategy;
Third, by inculcating and
sound understanding of financial protection prudent
financial behaviours among Malaysians.
Allow me to elaborate on these . Firstly, the takaful industry has the advantage of a business
model that is grounded on the values of mutual assistance and solidarity. Unlike
insurance, which is premised on the buying-and-selling of risks at a premium, takaful advocates
for value propositions that consumers are likely to find unique and take comfort in. Risk-sharing
mechanisms in takaful, which entail greater participation of consumers in the scheme with
possible rewards in the event of no claims, will appeal to many. The underlying mutuality principle
allows for exploration of innovative business models that can constructively disrupt the existing
risk-transfer modality. Value-adding services that complement the takaful offerings should also
be optimised in designing solutions that are compatible and meaningful for consumers.
The initiative this year to expand the application of value-based intermediation (VBI) to takaful is a
positive step forward for the industry to promote good value solutions. The takaful industry in
Malaysia has established the Task Force under the oversight of the Malaysian Takaful
Association (MTA), to spearhead this development. Intuitively, we would already expect that
takaful is consistently aligned with VBI. Nonetheless, we will be looking forward to the
stewardship that the takaful industry can offer in innovating impactful financial protection
solutions and developing framework of business practices that are solidly grounded in fairness
and incorporate sustainability principles.
Secondly, the takaful industry must optimise the use of technology and digital
infrastructures to provide premier service quality to consumers. Globally, we do see the
insurance and takaful sector as one of the sectors that can benefit the most from innovative
technologies such as data analytics, robotics, artificial intelligence (AI), blockchain and cloud
computing. App-based insurance platforms which leverage on AI have been established to
identify interests of consumers in providing niche coverage. Parametric insurance using
geospatial support and big data to validate legitimate claims by farmers have been rolled-out in
many parts of the world. These are all examples of technology reinvigorating the
"business-asusual" means of providing protection.
From our own engagements with SMEs in particular, businesses often cited that complicated
and lengthy procedures remain among the top reason for not purchasing takaful. This is not a
new challenge and the solutions are available for takaful operators to deploy. More targeted
investment into enhancing operational capabilities is paramount for takaful operators to stay
competitive. Efforts should continue to be undertaken by the industry to provide seamless
customer experience by digitising operational processes, expanding distribution outreach and
also upskilling the intermediaries.
We also continue to be open to new proposals and would encourage players to test innovative
business models and solutions in Malaysia. To date, 80 applications have been submitted under
the Financial Technology Regulatory Sandbox - of which, 12 relate to insurance and takaful
services. As we facilitate viability testing of these propositions, we have been gathering data and
experience that will allow us to make evidence-backed regulatory adjustments, for new and
incumbent market players to operate under a regulatory framework that is more
riskproportionate. This will cater for new designs of offerings and business modality, while remaining
effective in promoting financial soundness and stability.
Nonetheless, what we have seen thus far can only be characterised as digitisation of existing
delivery channels and services. Going beyond this, we have yet to see true disruptions. For
takaful operators, staying competitive in a digital world will require far more than just direct sales
channel or automated processes. It requires a rethinking of the fundamentals and principles of
takaful, for which digital technology can be a catalyst. Takaful operators must rethink their
sources of revenue, operational efficiency and talent strategy to reap the opportunities of digital
disruptions. It is also important to rethink the business model and the role that takaful operators
can play in a digital ecosystem that has transcended geographical boundaries. Digital disruptors
such as virtual or peer-to-peer takaful provider that is tech-enabled might be able to overcome
many pain points experienced by the industry in more efficient ways. The buzz right now in the
financial industry is around digital banks. Nonetheless, this can swiftly turn to digital insurers or
takaful operators. Such development could be the next phase that could further enhance the
quality and pricing of services delivered, while also penetrating new areas for the industry to
achieve our protection goals. This development could provide the impetus for exponential growth
in insurance and takaful penetration in the country.
Thirdly, the industry must take greater responsibility to educate consumers and inculcate
Almost half of respondents in
understanding about the importance of financial protection.
the 2018 Financial Capability and Inclusion Demand Side Survey cited lack of product
understanding to be the key reason for not purchasing life insurance and family takaful. While
there are attempts to publicise takaful offerings, these efforts remain fragmented and lack of
focus on advocating greater appreciation and understanding about the value of protection.
Households and businesses remain unaware and uninformed in making decisions relating to
financial protection. Recognising this persistent challenge, the Bank and the Securities
Commission recently spearheaded the establishment of the Financial Education Network and the
launch of the National Strategy for Financial Literacy to increase the impact of financial education
initiatives and to elevate financial literacy among Malaysians. Efforts to improve financial literacy
will also require industry associations to drive the development of best practices for industry-wide
adoption. In this regard, the Malaysian Takaful Association should be consistently proactive and
agile in responding to emerging opportunities and resolving impeding industry issues.
Takaful industry as a game-changer in empowering financial resilience
As Malaysia advances towards the shared prosperity vision, it is crucial to ensure balanced and
inclusive growth. The takaful industry has a critical role in enhancing the socio-economic
wellbeing of Malaysians. This vision cannot be achieved without addressing the specific needs of the
lower income group. According to a study by Khazanah Research Institute, people in the lower
income category now have lesser residual income. The cost of living burden is the heaviest for
lower income households, who spend 94.8% of their income on basic expenditure. Not much is
left for savings or for financial protection in the event of misfortune. Overcoming the issue of
affordability requires long-term and broader measures to grow people's income. In the interim,
we can think of social finance as a vehicle to bridge this gap. The integration of social finance
instrument in takaful solutions in a more structured and scalable manner can have
transformative impact in making financial protection more affordable for society. Waqf, sadaqah
and zakat are examples of social finance instruments which can be embedded in the design
structure of takaful products. Mainstreaming the integration of social finance can unlock
commercially viable financial protection to be extended to those who are most vulnerable in our
society. This is definitely a unique value-added feature that can drive innovation in the area of
inclusive protection.
In designing solutions to cater for the lower income segment, the takaful industry can capitalise
and leverage on the principles of Perlindungan Tenang initiative, which promote protection
solutions that are affordable, accessible, easy to understand, easy to buy and claim, as well as
offering good protection value. Admittedly, the uptake by the industry to date has not been
satisfactory. Many players cited business viability and distribution model to be among the critical
challenges in advancing this initiative beyond corporate social responsibility. This is something
that takaful operators, as an industry, would need to overcome. We will need to apply
unconventional thinking and take bold steps to create an ecosystem that is more enabling for
microtakaful solutions to be implemented in a sustainable manner. On the Bank's part, we have
initiated a review of the relevant regulatory framework to spur the development of inclusive
protection. A consultative paper will be issued by end of the year for industry to give its feedback.
Conclusion
As the takaful industry matures, all stakeholders will continue to set higher expectations.
Consumers today expect seamless experience and quality service in every aspect of the
business operation. Shareholders, of course, expect financial entities to offer sustainable returns
on investments while exploring innovative business opportunities. Regulators expect financial
institutions to adopt business strategies and operational models that are sustainable and
valueadding to the economy and society.
The window of opportunity for takaful to deliver meaningful propositions for all its stakeholders is
wide open. The takaful industry must step up with strong stewardship towards meeting these
expectations. I believe the discussion at this conference today can help us better navigate the
path towards purposeful transformation of the takaful industry. I look forward to engaging
dialogues ahead and productive sessions with all of you. Thank you.