Demand for takaful and microtakaful in Malaysia

This thesis examines three main ideas that focus on takaful and microtakaful demand in Malaysia using a mixed methods approach. Takaful is Shariah-compliant insurance that is based on a mechanism of shared responsibility, cooperation and mutual assistance. The importance of takaful and microtakaful in transferring risk across related parties in the event of loss attracts research in this area as there is a lack of empirical evidence in developing countries, specifically in the Malaysia context. The first essay investigates why the demand for microtakaful is low in Malaysia using a qualitative study. Microtakaful is a distinctive form of micro-insurance that is geared and customized towards meeting the needs and circumstances of low-income populations who require protection from unforeseen financial misfortunes and difficulties. Findings suggest an interactive model: that low demand in microtakaful schemes is influenced by three interconnected issues: affordability, customer awareness and perception, as well as past shock experience. In addition, this study identifies important elements regarding the takaful basis risk issue and customer complaints issue as a result of clients’ past experience. The model highlights the interplay between these three issues and challenges existing research that focuses solely on conceptual research on microtakaful demand among low-income households in Malaysia. The first empirical chapter exhibits the factors determining the demand for takaful and microtakaful that are related to financial protection among households, to understand the demand for takaful and microtakaful. Probit regression is used to examine why some people participate in takaful and some do not; this is done through a questionnaire survey. Additionally, this study examines the impact of risk-coping mechanisms on respondents and shock experience on takaful and microtakaful demand. The findings reveal variables that are statistically significant for takaful and microtakaful demand but have a positive or negative impact on explaining why some people join takaful and some do not. The next empirical chapter investigates trust in takaful. Building trust plays a central role in the financial services system. This third essay examines the influence of socio-demographics, socio-economics, risk coping mechanisms, financial inclusion and social capital on trust in takaful using a household survey of 526 respondents. The findings show that gender, marital status, income and employment have a negative significant impact on trust in takaful. Interestingly, ROSCA plays an important role in increasing or decreasing trust in takaful. Therefore, this empirical chapter provides a new understanding of why some people trust and some people doubt takaful. This new understanding should help to improve predictions of the demand for takaful in Malaysia by exploring trust in takaful.