Takaful Insurance and Its Impact on Enhancing Economic Growth in the Kingdom of Saudi Arabia During the Period (2010–2021)

Noha Almanea
Qassim University, Qassim, Kingdom of Saudi Arabia
Correspondence to: 141133@qu.edu.sa

DOI: https://doi.org/10.70389/PJEC.100005

Additional information

• Ethical approval: N/a
• Consent: N/a
• Funding: No industry funding
• Conflicts of interest: N/a
• Author contribution: Noha Almanea – Conceptualization, Writing – original draft, review and editing
• Guarantor: Noha Almanea
• Provenance and peer-review:
  Unsolicited and externally peer-reviewed
• Data availability statement: N/a

Keywords: Takaful insurance, Saudi Arabia, Economic growth, islamic finance, Vision 2030.

Peer Review
Received: 9 November 2024
Revised: 16 February 2025
Accepted: 19 February 2025
Published: 8 March 2025

Introduction

According to a report issued by the Saudi Central Bank, the Takaful insurance segment is one of the fastest-growing sectors in Saudi Arabia, where the total Takaful insurance premiums reached about SAR 42.03 billion in 2021. This indicates that, with continued government support, the importance of Sharia-compliant financial protection is increasingly being acknowledged. This study defines Takaful insurance in Saudi Arabia, its legal basis, and its contribution to economic growth. The study also looks at the challenges and opportunities facing the Takaful insurance industry and discusses future growth prospects in light of rapid technological development and economic growth. The pie chart reflects that medical insurance has considered the lion’s share in the total premium transacted, given the ever-growing interest in the medical insurance line. During the research process, it has also been observed that Takaful emerges as one of the industries effectively contributing towards creation and localization, whereby 74% of Saudi manpower will proceed to the Takaful Sector for employment by 2030. The research problem is also informed by the fact that, despite the rapid growth of the Takaful insurance sector within the Kingdom of Saudi Arabia, its contribution to non-oil Gross domestic product (GDP) remains minute; hence, the question of what extent it will go toward increasing economic growth to the Kingdom of Saudi Arabia.

The study questions are as follows:

1. What is the real size of the Takaful insurance market, its development, and its challenges in the Kingdom of Saudi Arabia?
2. To what extent does Takaful insurance contribute to economic growth within the Kingdom of Saudi Arabia?
3. What are the prospects for developing the Takaful insurance sector in the Kingdom of Saudi Arabia, given Vision 2030?
4. What policies and legislation are required to develop Takaful insurance’s role for sustainable economic growth in KSA?

This study is based on a primary hypothesis, which concerns the poor participation of Takaful Insurance in the GDP within KSA for the period between 2011 and 2021. This article intends to give a thorough review of the Takaful sector in the KSA economy and its contribution towards the attainment of sustainable economic development, especially with the establishment of KSA’s Vision 2030, aiming at diversifying sources of income and boosting the non-oil sector. This research depended on GMM in investigating the relationship between Takaful insurance and economic growth during the period 2010–2021, depending on its data from its secondary source represented in the Saudi Monetary Fund in attaining this objective where the study is divided as follows: The first pillar addressed the concept of Takaful insurance and its legal foundations. The second pillar examined the current state of the Takaful insurance market in the Kingdom of Saudi Arabia. The third pillar focused on the influence of Takaful insurance on economic growth within the Kingdom. Finally, the fourth pillar explored the potential for advancing the Takaful insurance industry in Saudi Arabia, highlighting future growth opportunities, consumer awareness, insurance culture enhancement, regulatory improvements, and the integration of technology in developing Takaful insurance products and services to boost operational efficiency.

The First Pillar: The Concept of Takaful Insurance and Its Legal Foundations

First: Definition of Takaful Insurance

Islamic Takaful insurance can be understood through several complementary concepts. Linguistically, Takaful consists of two words: “Tamīn” meaning guarantee and assurance, and “Takaful” meaning guarantee and solidarity. This linguistic meaning embodies the essence of providing security through mutual cooperation between the participants. Technically, Takaful can be viewed as an integrated system. In this context, Takaful is a cooperative system in which a group of individuals cooperate to create a common fund to compensate those who have suffered losses due to insurable risks. This concept highlights the collective and cooperative nature of Takaful.¹ From another perspective, Takaful can be viewed as a contract between a Takaful insurance company (on behalf of a group of subscribers) and a natural or legal person. Under this contract, this person undertakes to obtain insurance, voluntarily pays an insurance premium, and, in return, is compensated in the event of a loss according to the terms of the contract. This definition clarifies the contractual aspects and mutual obligations in Takaful insurance.²

From an economic perspective, Takaful insurance can be defined as a mechanism for distributing risks among a group of participants so that everyone bears any losses incurred by any of them. This concept emphasizes the economic role of Takaful insurance in managing and distributing risks.³ From a Sharia perspective, Takaful insurance is viewed as a form of cooperation in righteousness and piety and embodies the principle of social solidarity in Islam. Takaful insurance aims to protect against risks, save costs, and prevent losses based on donations and cooperation by the provisions of Islamic Sharia.⁴ From an organizational perspective, Takaful insurance can be understood as a risk management model based on the separation of the management of insurance operations (carried out by insurance companies) and the ownership of insurance funds (owned by participants). This concept entails a distinctive organizational structure for Takaful insurance.⁵ Consequently, Takaful insurance incorporates the cooperative system, legitimate contracts, economic mechanisms for risk management, and a unique institutional model that portrays its multifaceted nature while adhering to the principles and objectives of Islamic Sharia law.

As noted, one type of Islamic insurance rests on the principle of cooperation among the insured, where scribe individuals or companies pay an agreed sum to a shared fund to meet certain risks that might affect any members. It differs from traditional Insurance because it does not engage in Sharia’s interests and uncertainty. The remaining funds surplus that are not consumed are shared among the participants or paid to meet any possible liability incurred. Takaful insurance companies are not, however, the owners of such surpluses. A fundamental difference between Takaful and ordinary insurance is that the Takaful insurance companies do not own the funds; instead, they operate based on the management of the funds placed in a Sharia-compliant manner. However, in conventional insurance, the primary risk-bearing funds are owned and further invested to generate profits, which exposes them to risks of loss if the investment does not cover the insurance outgo.⁶

Second: The Difference Between Takaful Insurance and Traditional Insurance

Table 1 summarizes the differences between Takaful insurance and traditional insurance.

Table 1: The difference between takaful insurance and traditional insurance.
Takaful Insurance	Traditional Insurance	Comparisons
It is based on mutual assistance, risk sharing, and compliance with Islamic law.	It is based on transferring the risk from the individual to the insurance company.	Basic principle
The fund is jointly managed by the participants (contributors).	The company bears all risks and pays claims from its funds.	Fund management
Surpluses are distributed to subscribers (shareholders).	The company retains all profits and surpluses, building a profit pool.	Distribution of profits and surpluses
Investments are only made in channels that comply with Islamic Sharia.	All types of investments are available, as there are no restrictions on investment channels.	Investments
It does not include elements of usury, embezzlement, or gambling.	It may include elements of usury, embezzlement, and gambling.	Prohibited items
Risks are distributed and shared among the fund’s shareholders.	The traditional insurer bears the risk.	Take risks
Part of the insurance premium may be refunded in some cases.	The insurance premium may rarely be refunded.	Insurance premium refund
Takaful operators are committed to the principle of transparency.	Mostly, document Holders know how their money is spent.	Transparency
It is often structured as an investment product.	It usually only Protects against death.	life insurance
Adheres to Islamic law and government regulations.7	Only needs to comply with government regulations.	Compliance with regulations
Source: The researcher’s work is based on the information contained in the following: Kuala Lumpur: Differences between family takaful & conventional life insurance

Third: The Legal Foundations of Takaful Insurance

Islamic Takaful insurance is based on the established principles of Sharia law. It is a purely voluntary arrangement that aims to spread risk and work together to share responsibility in the event of a disaster. Participants contribute money, and those who suffer losses are compensated. Two types of interest-free Takaful insurance exist: Riba al-Fadl and Riba al-Nasee’ah. Shareholder contracts are interest-free, and the funds raised through contributions are not invested in interest-bearing transactions. This is consistent with Islamic law, which prohibits all interest-bearing transactions. Moreover, the parties to the Takaful insurance contract are the shareholders, and it does not involve risk or gambling and, therefore, does not prejudice the shareholders’ ignorance in determining their interests. This is different from traditional commercial insurance, which is recognized by law.⁸ As for investing subscribers’ money, this is done by the provisions of Islamic Sharia in the areas of good management and avoiding uncertainty (Al-Nahr). The money of the company owner (the founder) is separated from the money of the subscribers (the insurance group), and the investment returns are shared between them. The founder cannot participate in the surplus of the insurance business.⁹ To ensure that all activities and operations comply with Islamic Sharia provisions, the Takaful Company is subject to Sharia supervision by the company’s exclusive Sharia Supervisory Board. On this jurisprudential and cooperative basis, Islamic Takaful insurance is free from the prohibitions of traditional commercial insurance and is achieved by the provisions of Islamic Sharia.¹⁰

Fourth

Takaful insurance models applied in the Kingdom of Saudi Arabia. The Takaful insurance models applied in the Kingdom of Saudi Arabia can be divided as follows:

Agency Model (Pure Agency)

Under this model, the Takaful company operates the Takaful fund as an agent for the participants and receives a specific commission in return. The Takaful company does not interfere with the participant’s investment returns or insurance surpluses. The legal issues associated with this model include the following. The relationship between the participant and the fund changes from endowment to speculation.

• The legitimacy of the company charging a certain agency fee (some see this as a guarantee of return).
• Ownership of Takaful funds and Takaful surplus becomes a problem.

Accounting for the mutual surplus: Some consider it a profit and not a surplus.¹¹

Speculation Model

In this model, the Takaful company operates the Takaful Fund as a Mudarabah, with the participants being Rab Al-Mal (the capital owners). The company Takaful participates in the profits earned through investments in the fund at an agreed percentage. This model deals with the following legal problems:

• Insurance profit is not regarded as increased capital, and profit stems from speculation.
• The distribution and the ownership scope of the insurance profit shall be between the company and the subscriber. The subscriber shall not own the surplus but shall possess it.
• The net relationship between the subscriber and the fund shifts from a net gift fund to a net capital fund. So does the subscriber–the fund changes from a gift to net capital.¹²

Endowment Model

The Takaful Waqf was established based on a charitable fund in this model. The Takaful company manages this fund as a trustee of the fund. This model was created to overcome the problems of the previous two models. However, this model suffers from the following legal problems. The nature of the relationship between the ownership of the surplus funds of the Takaful surplus of the participants and their disposal thereof. The Takaful insurance model, as applied in the Kingdom of Saudi Arabia, has several legal and technical problems, especially regarding surplus Takaful funds and their disposal. This has led to the need to explore new Takaful insurance models regulated by the rules of Islamic Sharia and serve this purpose.¹³

The Second Pillar: The Reality of Takaful Insurance in the Kingdom of Saudi Arabia

The Kingdom of Saudi Arabia has shown great interest in Takaful insurance and is one of the leading countries in this field. The document explains that the Takaful insurance market in the Kingdom is one of the Gulf’s largest and fastest-growing Takaful insurance markets thanks to the implementation of the Takaful Insurance Companies System, its technical regulations, and the formula of Takaful insurance products. The Kingdom’s commitment to implementing the Takaful insurance formula has significantly impacted the reality of this sector. This commitment has reduced the number of insurance companies operating in this sector, and those who adhere to the principles of Islamic Sharia will continue to operate in this sector. This is one of the most important steps taken by the competent authorities in the Kingdom to regulate and develop the Takaful insurance sector.¹⁴

Notably, medical and motor insurance dominate the Takaful insurance sector in the Kingdom due to the compulsory demand from individuals for these two insurance services. However, the contribution of these two sectors (medical and motor insurance) to the non-oil GDP is still very small, indicating that the Takaful insurance sector is a small part of the Saudi economy. Several indicators of the Saudi Takaful market’s performance can also be observed. The Saudi Takaful market is one of the fastest-growing markets in the GCC, but the non-oil sector’s contribution to GDP is still very small. Due to mandatory demand, Takaful insurance penetration is high in some sectors, such as healthcare and automotive. Takaful insurance companies have been found to follow different management models, including Wakala (agency), Mudarabah (profit sharing), and Waqf (donation). The appropriate model is chosen based on the preferences of the Takaful insurance company and its subscribers and the country’s regulatory framework.¹⁵

First: The Emergence and Development of Takaful Insurance in the Kingdom

Takaful insurance arose due to social and economic changes in the Kingdom of Saudi Arabia, particularly the development of a financial system that sought to observe Islamic teachings. This form of insurance has experienced remarkable changes since the 1990s, especially in shifting the focus toward providing a legal solution for insuring without violating usury and uncertainty, which contradicts Islamic teachings. Insurance regulation in the Kingdom of Saudi Arabia began with the enactment of the Cooperative Medical Insurance Law of 1999. This regulation emphasized the cooperative spirit and mutual aid that is expected of the participants in the insurance scheme and managed the interaction between insurance companies and members in the context of Islamic Sharia Law.¹⁶ The regulation organized the insurance business more comprehensively and set a clear framework for companies wishing to provide this type of service. The regulation included a 3-year transitional period for existing companies to adapt to the new standards, which allowed many local and foreign companies to enter the Saudi market, with the number of licensed companies reaching 31 companies by the end.¹⁷

Development of Takaful Insurance in the Kingdom

The impressive growth of the Takaful insurance sector in Saudi Arabia is due to government legislation and initiatives that encourage the expansion of the sector. For example, the Saudi Financial Services Authority (SAMA plays a pivotal role in regulating the insurance sector and ensuring compliance with the provisions of Islamic Sharia. An independent Sharia Board has also been established to oversee the insurance business and ensure that it is conducted in a manner that is compatible with Islamic Sharia.¹⁸ Challenges faced by Takaful in the UK included a lack of public awareness of the benefits of Takaful and initial technical and regulatory hurdles. However, these challenges were gradually overcome through government efforts and initiatives to increase confidence in the Takaful system.¹⁹

With the implementation of Saudi Arabia’s Vision 2030, the Takaful sector is expected to grow further. The vision aims to achieve sustainable economic development based on diversifying sources of income, including the insurance sector. Moreover, the vision aims to enhance the role of this type of insurance in supporting economic growth and financial stability for individuals and companies. Takaful insurance is a system that combines Islamic principles with modern financial applications. Due to governmental support and stringent Sharia regulations, Takaful insurance has effectively delivered financial protection for individuals and companies in the Kingdom of Saudi Arabia.²⁰

Secondly, the size of the Saudi Takaful Insurance Market

The Saudi Central Bank just released a report with exciting news: The insurance sector in Saudi Arabia is anticipated to grow by 14.6% in 2023, generating approximately SAR 14.9 billion in total premiums. This increase is primarily attributed to the rising significance of Saudi Takaful insurance, which currently constitutes 2.38% of the non-oil GDP. Furthermore, the Arab Monetary Fund emphasized the global Takaful insurance market’s substantial valuation of US$30 billion, reflecting the favorable influence of increasing interest in Islamic finance and supportive government initiatives.²¹

Third: Types of Takaful Insurance Products Available in the Saudi Market

Takaful insurance covers various aspects of life and non-life insurance while adhering to the provisions of Islamic Sharia, and several insurance products are sold in the Saudi market to meet the needs of individuals and companies.

Cooperative Medical Insurance: This sector considers more than half of the total insurance premiums in the Saudi market and includes medical insurance products for individuals and companies. It is one of the most important insurance products in the Kingdom of Saudi Arabia, as it provides comprehensive medical coverage for Saudi citizens and residents, including patient care, emergency care, and hospitalization.

Vehicle Insurance: Vehicle insurance is one of the most popular insurance products in Saudi Arabia, especially liability insurance, which covers accidents caused by insured vehicles. This type of insurance is expected to increase in Saudi Arabia with the number of cars sold.²²

Among other risks, fire, natural disasters, and theft threaten personal property and houses, so homeowner insurance covers these events. For companies as well as individuals, it’s accessible. Engineering Insurance is crucial for businesses in the construction sector. It provides some coverage against many risks that could crop up even during, before, or after construction projects are finished. Professional indemnity insurance covers professionals, from lawyers to doctors, for possible legal difficulties resulting from alleged mistakes or oversight of nature in their jobs. This type of insurance provides protection regardless of your location. It encompasses reimbursement for international medical expenses and compensation for lost luggage.²³

Fourth: Challenges Facing Takaful Insurance in the Kingdom

1. Among the obstacles facing Islamic Takaful insurance in the Kingdom—hence limiting its contribution to economic development in the Kingdom—are:
2. Public Awareness: Public awareness of takaful insurance ideas is lacking compared to normal insurance. This type of insurance has less possibility of wide acceptance since many people misunderstand its nature and reason.
3. In many countries with Takaful insurance, a lack of thorough legislation restricts sector development and makes it challenging for businesses to meet legal standards.
4. Technical Challenges: Takaful insurance needs custom financial and management tools consistent with Islamic Sharia. Consequently, knowledge of techniques must be developed to handle financial risks in line with Islamic Sharia.
5. Competition from conventional coverage: Conventional insurance is a strong competitor since its acceptance and pervasiveness in world markets. Takaful firms find it hard to appeal to clients who are used to traditional insurance.²⁴

Strategic Vision to Address These Challenges

1. Bringing local knowledge: Awareness initiatives should be undertaken to highlight the benefits and value of Takaful insurance. Such initiatives can support accurate knowledge among the general public and drive demand for this insurance.
2. The government needs to create a complete and unified legal system that encourages Takaful insurance and offers a fair and competitive legal environment for traditional insurance.
3. Financial innovation: Takaful Insurance has to be creative in creating new lines of products aligned with market demands and Shariah standards while enhancing operational and technical savvy.
4. Interinstitutional cooperation: Takaful insurance firms need to partner with other Islamic financial institutions to offer combined solutions and share knowledge to help the Takaful insurance sector grow.²⁵

Pillar III: The Impact of Takaful Insurance on Economic Growth in the Kingdom of Saudi Arabia

First: The Role of Takaful Insurance in Promoting Investment and Diversifying Sources of Income

Takaful insurance helps to improve investment and broaden ones of revenues by doing the following:

1. Investment asset and investment portfolio diversification Takaful assets under management (AUM) in Saudi Arabia in 2022 are expected to be split among real estate (35%), equities (30%), Islamic bonds (25%), and other real estate assets (10%), totaling USD 20 billion. Globally, AUM in Takaful should top USD 3 trillion by 2023, spread over a broad and Shariah-compliant portfolio.
2. Improving long-term investment and saving level. The yearly growth rate of Takaful savings premiums in Saudi Arabia from 2018 through 2022 was 15%. Internationally, emerging markets had an annual growth rate of Takaful premiums of approximately 12% over the same span. This aids in the development of wealth and long-term capital.
3. Supporting financial inclusion and access to funds.. In 2021, 25% of Saudi Arabian adults had Takaful accounts, contrary to 14% in non-Muslim nations. Worldwide, this number has reached 21% in Muslim countries, highlighting Takaful’s contribution to advancing financial inclusion and access to financial and insurance protection. Improving stability from a financial and economic aspect: Takaful insurance in Saudi Arabia covered 70% of losses in case of catastrophes or crises in 2020. Internationally, this figure reached 65% during the same time in developing regions, relieving some of the load on individuals and institutions and helping maintain financial and economic stability.²⁶ Hence, Takaful insurance enhances financial inclusion and economic stability by diversifying sources of income and investment, not only in the Kingdom of Saudi Arabia but also globally. These benefits make Takaful an effective tool for economic development and sustainable development.

Second: The contribution of Takaful Insurance to Creating Job Opportunities and Localizing Jobs

Vision 2030’s economic transformation depends on the Saudi Takaful insurance sector, which is key to the rapidly growing financial sector to create more jobs for its citizens. The growth rate of this sector is unlike any other government’s demand for jobs in every sector.

Giving you opportunities to work

The 2023 Saudi Central Bank report talks about the insurance industry in Saudi Arabia, with almost 43 billion Saudi riyals. Most of this is Takaful insurance, which shows the massive growth of the industry and the growing need for a qualified workforce to cover the growing demand. The Ministry of Human Resources states that the Takaful insurance sector offers around 14,000 direct jobs and that the percentage of Saudi labor in the industry has increased due to the growing reliance on Takaful insurance to 74%, according to statistics from the General Directorate of Statistics 2023.²⁷

Localization of labor

As part of the government’s efforts to localize the financial sector, the number of Saudis working in the Takaful insurance sector is expected to exceed 10,000 by 2024. Percentage of Saudis working in the insurance sector: According to the Saudi Arabian Monetary Agency report for 2023, the percentage of Saudis working in the insurance sector, including Takaful, is expected to increase from 70% in 2021 to 74% in 2023 and 80% in 2030.²⁸ Expansion of Insurance Products Diversification of insurance products and introducing innovative solutions are expected to increase the demand for specialized staff. This is expected to create up to 5000 jobs by 2030 in the Takaful sector alone.²⁹

Third: The Impact of Takaful Insurance on the Stability of the Financial System and Risk Management

The stability and risk management of the financial system are greatly influenced by Takaful Insurance, which distributes risks equally among participants through the principles of participation and cooperation. Tataful insurance avoids usury and speculation, making the financial system more resilient to financial shocks.

Temporal insurance impacts financial system stability.

1. A Takaful insurance fund is established, which means the risks are spread among all participants instead of one person or company. This prevents the possibility of insolvency due to major accidents or unexpected risks.
2. The fund’s stability and ability to provide insurance without affecting the rights of participants are maintained.³⁰

Takaful takia insurance: This type of insurance offers supplementary financial security. Reliable companies can avoid concentrating on all the risks and be more resilient to major financial shocks. This is done by shifting some of the risk to other companies. 2022, the Takaful market is anticipated to reach USD 30 billion from 2017 to USD 19. This rise corresponds to the rising demand for Islamic financial services that adhere to Sharia law in various countries, including Saudi Arabia. From 2023 to 2028, the CAGR is projected at 10.2%, indicating an increase in the role of takaful in improving financial system stability.

The responsibility of Takaful towards risk management.’

Through its role in risk management, Takaful Insurance enhances risk effectiveness by promoting the shared responsibility of risk sharing. Companies can use this mechanism to control risk more consistently and avoid concentrating on risk.³¹ To measure the impact of Takaful insurance on economic growth in the Kingdom of Saudi Arabia, the regression equation was formulated as follows: Using a statistical program such as R, we can create the following equation:

Where:

• GDP is the dependent variable.
• INV, UN, INF, and INS are the independent variables.
• β0 is the fixed limit.
• β1, β2, β3, and β4 are the regression coefficients of the independent variables.
• εIt is a random error.

After estimating the parameters using the least squares method, the final equation for the linear regression will be as follows:

The variables can be described as follows:

• 1.  INV (Investments): This variable represents total investments as a percentage of GDP.
• 2.  GDP (Gross Domestic Product): This variable represents GDP growth rate at constant prices.
• 3.  UN (Unemployment): This variable represents the unemployment rate as a percentage of the total labor force.
• 4.  INF (Inflation): This variable represents the annual inflation rate based on the Consumer Price Index.
• 5.  INS (Insurance): This variable represents the total insurance premiums in billion riyals.

In a simple linear regression equation, GDP will be the dependent variable, while INV, UN, INF, and INS will be the independent variables. According to the outputs of the program (R), the unit root test was performed to ensure the stability of the time series described in Table 2.

Table 2: Unit root test results for time series variables.
Variable	Test Method	Test Value	Lag Order	p-value	Conclusion
INV (Investments)	Augmented Dickey-Fuller	−1.595	9	0.473	Stationary
GDP (Gross Domestic Product)	Augmented Dickey-Fuller	−1.884	6	0.328	Stationary
UN (Unemployment)	Augmented Dickey-Fuller	−1.706	4	0.418	Stationary
INF (Inflation)	Augmented Dickey-Fuller	−2.171	2	0.216	Stationary
INS (Insurance)	Augmented Dickey-Fuller	−0.757	6	0.825	Stationary

We noticed that all variables are stationary at the 5% significance level from the unit root test results, implying no unit root in the data. Using the generalized moment method GMM# Download the necessary packages

• Library (gmm)
• library (sandwich)
• Create a GMM model

View form results summary(model)

1.  Model parameter estimation results (Table 3).

Table 3: Model parameter estimation results.
Variable	Coefficient	Std. Error	t-value	p-value
(Interce pt)	1.7985	2.1837	0.8236	0.4195
INV	0.2362	0.0821	2.8782	0.0083
UN	−0.5969	0.2866	−2.0829	0.0475
INF	−0.2072	0.1064	−1.9472	0.0641
INS	0.0633	0.0306	2.0701	0.0489

2.  Diagnostic test of the model (Table 4).

Table 4: Diagnostic test of the model.
Test	Statistics	p-value
Sargan Test	2.4394	0.6556
Autocorrelation Test (AR1)	−1.8174	0.0690
Autocorrelation Test (AR2)	0.2207	0.8252

This study aims to analyze the relationship between a set of independent variables and GDP using the generalized least squares method (GMM). Annual data for a set of key economic variables from 2010–2021 were used.

Model Parameter Estimation Results

The results of the model showed that GMM shows that the investment variable (INV) has a positive and statistically significant effect on GDP. It is estimated that a 1% increase in investment will increase GDP by about 0.2362% at the 1% significance level. This means that investment plays a pivotal role in promoting economic growth. For the unemployment variable (UN), it had a negative and statistically significant impact on GDP. According to estimates, a 1% increase in the unemployment rate will lead to a decrease in GDP of about 0.5969% at the 5% significance level. This result emphasizes the importance of maintaining low unemployment rates for sustainable economic growth. The inflation variable (INF) negatively and statistically impacted GDP. According to estimates, a 1% increase in the inflation rate will decrease GDP by about 0.2072% at a significance level of 10%. This result emphasizes the importance of controlling inflation rates to achieve stable economic growth. Finally, the results showed that the insurance variable (INS) positively and statistically impacted GDP. It is estimated that increasing total insurance premiums by SAR 1 billion will increase GDP by about 0.0633% at 5% significance level. This result indicates that the insurance sector has a positive role in supporting economic growth.

Diagnostic Test Results

A set of diagnostic tests were conducted to verify the validity of the estimated model. First, Sargan conducted a test to test the validity of the instruments used in the model. The results showed that the p-value of the test was 0.6556, which is greater than the 5% significance level, which means that the null hypothesis that the instruments used are valid is not rejected. Furthermore, autocorrelation tests (AR1 and AR2) were performed to check that this aspect has no problem. The results showed that the p-value for both AR1 and AR2 was greater than the 5% significance level, confirming no problem in the autocorrelation of the residuals. Through the results of the model GMM, it can be concluded that investments and insurance have a positive and significant impact on GDP, while unemployment and inflation have a negative and significant impact. These results emphasized the importance of enhancing investments and the insurance sector and maintaining low unemployment and inflation rates to achieve sustainable economic growth.

Prospects for Developing the Takaful Insurance Industry in the Kingdom of Saudi Arabia

The Takaful insurance industry in Saudi Arabia has witnessed remarkable development over the past years, thanks to a combination of factors, including the increasing demand for Sharia-compliant products, continued government support, and the growth in the use of financial technology. Takaful insurance represents a significant opportunity for future growth in the Saudi market due to its principles of cooperation and solidarity, which are consistent with the Islamic culture of the Kingdom.

Future Growth Opportunities for the Saudi Takaful Insurance Market

(a) Increased demand for Sharia-compliant products: Takaful insurance is Sharia-compliant and is increasingly popular among Saudi individuals and businesses. With the growing awareness of the importance of Islamic financial solutions, many are seeking Takaful insurance services as an alternative to conventional insurance. According to the Saudi Central Bank report for 2021, total insurance premiums amounted to SAR 42.03 billion, of which medical insurance accounted for 59.7%, and this growth is expected to continue as the population grows and demand for medical insurance and savings increases.³²

(b) Saudi Vision 2030 and government support: The Saudi government seeks to diversify income sources and invigorate the non-oil sector via “Vision 2030,” and the Takaful sector is a significant component of this initiative. The Saudi government substantially supports the Takaful sector by establishing a robust infrastructure and regulatory framework, facilitating future growth. This assistance has augmented both domestic and international investment in the Takaful sector and enabled growth prospects.³³

(c) Increase opportunities for saving and investment: Takaful insurance provides savings and investment opportunities for both individuals and businesses. With the growing awareness of the importance of long-term financial planning, Takaful insurance is expected to gain popularity. The trend towards offering innovative products such as protection and savings insurance is helping to expand the customer base and increase revenues for companies operating in this sector.³⁴

Legislation and Regulations Necessary to Enhance the Growth of the Takaful Insurance Sector

(a) Flexible legislation and regulations are needed to enable companies to operate in an efficient and competitive environment and facilitate the growth of the Takaful sector in Saudi Arabia. The Saudi Central Bank (SAMA) is on the regulatory framework to ensure the sustainability and stability of the Takaful sector. The main regulations are as follows:

• Sharia compliance procedures: All Takaful insurance products must be based on Sharia principles. To enhance trust between customers and companies, authorities must establish clear mechanisms to monitor compliance with these Sharia standards.³⁵
• Enhancing competition: To develop and expand the insurance sector, mergers and the entry of new, smaller insurance companies should be encouraged. These measures will improve service quality and expand the customer base.

(b) Promoting workforce localization: As part of Vision 2030, the UK is committed to localizing the workforce across all sectors, including Takaful. Localization creates new job opportunities for Saudis and builds local expertise to manage risks and challenges associated with the sector. According to a report by the Ministry of Human Resources, the percentage of Saudization in insurance companies will rise to 77% by 2021.³⁶

The Role of Technology in Developing the Takaful Insurance Industry

(a) Digital innovation in the Takaful insurance industry is a key element in developing the Takaful insurance industry in Saudi Arabia. Digital transformation enhances customer experience by providing advanced electronic services and improves internal operations and organizational efficiency. For example, introducing digital technologies such as artificial intelligence and big data analytics can improve the risk assessment process and optimize administrative and insurance processes according to individual needs, such as online payment of claims and providing smartphone applications that allow customers to purchase insurance policies and submit claims easily. The system can improve administrative and insurance processes according to individual needs. The digital insurance platform will also enable the Takaful insurance system to reach a wider audience, including individuals in remote areas and those without bank accounts, increasing the spread of Takaful insurance and enhancing financial inclusion in the Kingdom.³⁷

(b) Use of AI and big data analytics AI and big data analytics are powerful tools to support the expansion of Takaful business in Saudi Arabia: Using AI, insurance companies can accurately analyze customer data and customize insurance products to suit different needs. AI can also help insurance companies develop pricing and customer selection models. It can also improve pricing and customer selection models. For example, by understanding customer behavior and predicting potential risks through big data analytics, insurance companies can make more accurate decisions about risk assessment and setting insurance premiums. Furthermore, AI can simplify and speed up internal processes such as claims management and fraud detection. Machine learning techniques can identify unusual patterns that indicate potential fraudulent claims, thereby reducing the costs associated with false claims and improving the stability of the insurance system in the Kingdom.

(c) The role of financial technology (FinTech) in expanding the scope of Takaful insurance coverage: Financial technology contributes to the expansion of the Takaful insurance customer base in the Kingdom of Saudi Arabia. FinTech offers innovative solutions that empower institutions to deliver services with enhanced speed and flexibility. Customers can now effortlessly and swiftly enroll in Takaful programs and remit premiums online via digital platforms and e-wallets. The proliferation of digital payment methods enables institutions to access previously untapped segments of society, particularly the unbanked and underbanked populations.³⁸ Moreover, FinTech companies contribute to building long-term relationships and customer satisfaction in the Saudi market by providing analytical tools to accurately analyze customer needs, improve customer experience, and provide customized services.³⁹

Conclusion

This study examined in detail the actual and potential status of the Takaful insurance industry in Saudi Arabia during the period 2010–2021 and its impact on economic growth. Thus, several important findings and recommendations were reached. The rejection of data analysis using the generalized moments method (GMM) indicated that the Takaful insurance industry did not contribute effectively to the economic growth in the Kingdom of Saudi Arabia during the study period. The results showed that Takaful insurance contributed positively and significantly to the economic growth of the Kingdom of Saudi Arabia. Based on the data, it is evident that the Takaful insurance sector in Saudi Arabia is growing rapidly, with total Takaful premiums reaching SAR 42.03 billion in 2021, reflecting the growing awareness of the importance of financial protection through compliance with Islamic Sharia. Furthermore, Takaful contributes positively to job creation and localization, with 74% of Saudis working in the Takaful sector by 2030. Moreover, Takaful plays an important role in promoting investment, diversifying income sources, stabilizing the financial system, and managing risks.

Despite this positive growth, this study recommends strengthening the laws and regulations governing the Takaful sector to provide a favorable regulatory environment for its sustained growth. It also emphasizes the need to develop the latest Takaful products and services to meet the needs of consumers and enhance the growth of the Takaful sector. The results encourage improving consumer awareness and insurance culture in Saudi Arabia to increase demand for Takaful insurance products. It recommends encouraging investment in the sector and diversifying financing options available to the sector to increase the contribution of the Takaful insurance sector to economic growth. Finally, the study pointed out the importance of improving the technical infrastructure of the Takaful insurance industry to increase its operational efficiency and better serve its customers. In summary, this study highlighted the important role Takaful insurance plays in sustainable economic development in the Kingdom of Saudi Arabia, especially in light of Vision 2030. Enhancing this role will require joint efforts between the government and the private sector to improve the regulatory and legislative environment and raise the level of insurance awareness and insurance literacy.

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Cite this article as:
Almanea N. Takaful Insurance and Its Impact on Enhancing Economic Growth in the Kingdom of Saudi Arabia During the Period (2010–2021). Premier Journal of Economics 2025;2:100005

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