INTRODUCING TAKAFUL IN THE UNITED STATES: PROSPECTS AND

POSSIBILITIESBy: Camille Paldi

CEO of FAAIF

INTRODUCTION The aim of this presentation is to reveal the

potential of takaful or Islamic insurance in the United States as a product for the mass consumer market.

The objective of this presentation is to show the methods and procedures available to successfully introduce Islamic insurance in the USA.

INTRODUCTION The global takaful industry has been

recording double-digit growth every year in the past few years.

Insurance giants such as AIG, Allianz, Swiss Re, and Hannover Re are now offering takaful.

AIG introduced takaful products in the US in

2008.

MUSLIMS IN THE USA Native-born American Muslims are primarily

African-American and minorities.

Many American Muslims converted to Islam during the last 70 years and follow the teachings of the Nation of Islam (NOI) rather than Sunni or Shiá Islam.

The United States also hosts a large number of Muslim immigrants.

OBSTACLES TO TAKAFUL The biggest challenge in introducing takaful

and Islamic finance in the US is the First Amendment of the US Constitution, which prohibits the making of any law respecting an establishment of religion or impeding the free exercise of religion.

Furthermore, under the Establishment Clause, the government cannot draft legislation that gives preferential treatment to any one religion.

ESTABLISHMENT CLAUSE CHALLENGESEstablishment Clause challenges are

analyzed under a three part test.

1- the statute must have a secular legislative purpose;

2-its principal or primary effect must be one that neither advances nor inhibits religion; and

3-the statute must not foster an excessive government entanglement with religion.

MURRAY V GEITHNER In Murray v Geithner, a case was filed against the

Federal government challenging the permissibility of bailout money provided to AIG under the Emergency Economic Stabilization Act (EESA) legislation on the basis that it violated the Establishment Clause.

EESA was used to purchase $40 Billion in AIG shares.

AIG conducts takaful business in Bahrain and the US, so it was alleged by the plaintiff that tax dollars were going towards the financing of Shariáh products and activities.

MURRAY V GEITHNER Using the three part Establishment Clause

test, the court found that the EESA legislation and the AIG bailout was made for a secular purpose and did not violate the First Amendment of the Constitution.

However, businesses may hesitate to enter the US takaful market out of fear of similar lawsuits being filed against them.

DISADVANTAGE Furthermore, Islamic financial institutions

may be at a disadvantage in the United States as conventional institutions may access federal funds, while Islamic financial institutions may not as in the case of the EESA legislation.

INSURANCE REGULATORY REGIME In addition, the insurance regulatory regime

in the US may hinder the introduction of takaful.

The US has a state-regulated insurance system whereby each state determines its own licensing requirements for insurers.

In order to obtain a license, a company must demonstrate that it has the experience and management capability to run the company and show that it is financially sound.

INSURANCE REGULATORY REGIME Insurers are also required to justify their

premium rates.

In addition, companies must fulfill the solvency requirements set by the state.

Furthermore, there may be limits on the types and concentration of investments made with held reserves.

INSURANCE REGULATORY REGIME Since the members in a takaful

arrangement agree to insure one another and share in risks and profits, there may be some obstacles in establishing the company as a financially sound insurance provider and in justifying tabarru or donation amounts.

Further exacerbating the situation is that in takaful, in case of a potential insolvency, the shareholders fund must provide an emergency loan to meet the existing claim obligations.

INSURANCE REGULATORY REGIME Furthermore, in terms of solvency, capital

requirements in the US may not take into account the separation between policyholder and shareholder funds.

FOREIGN SHARIÁH BOARD Another obstacle includes the fact that

setting up a state or federal Shariáh Board for the takaful fund may contravene the separation of church and state.

However, it may be possible to outsource this function to foreign countries.

JIHAD PREVENTION ACT Furthermore, it seems to be the trend that

each state is taking action to ban Shariáh law.

For example, the Jihad Prevention Act introduced in Colorado may deter the establishment of Islamic finance in the United States.

ALTERNATIVE ARRANGEMENTS One option is to draft neutral legislation

that would redefine solvency requirements, taking into account that certain insurers may choose to structure the division between shareholder and policyholder funds differently.

HOLY BOOK BANKING Another option is to introduce Islamic

finance as a form of Holy Book Banking in the United States, which incorporates the teachings of the Bible, Torah, and the Qu’ran, thereby circumventing the Establishment Clause and potential violations of the First Amendment of the US Constitution. In this way, the introduction of takaful and Islamic finance in the US will not be seen as giving preference to any one religion.

CONCLUSION Although there are many obstacles to the

introduction of Islamic finance in the US, if properly presented and marketed, there is a huge potential for Islamic finance and Holy Book Banking in the United States.