Takaful – Need and some Shariah related Aspects by Muhammad
Takaful – Need and some Shariah related
Aspects
BY
Muhammad Ayub
Insurance?
Sale of an indemnity for a premium: a sale or transfer of risk
for a price, company liable to indemnify;
Exchange of premium payments now for future indemnity in
case of specified events. It implies:
Insurance – a commutative contract! Vs. non commutative /
one-sided transfers (Tabrru‘ or voluntary contributions)
Relationship between operator and the policy holder;
Risk? Shariah rules on risk!
Gharar – absolute uncertainty
Gaps in Islamic Finance
Assets underlying Islamic banking contracts need to be insured (legal
requirement) e.g. Car Ijarah, Shipment of Goods etc.
Costumers criticize: Islamic Banking products avoid Riba, assets are
insured by Conventional Insurance companies which again is
prohibited in Islam.
Also need for Life Insurance e.g. Housing Finance etc. as well as to
offer savings and protection related Takaful products to its
customers.
Takaful is a prerequisite to complete the cycle of Islamic Finance.
Basic Human Rights?
To protect religion (belief)
To protect life
To protect Mal (wealth)
To protect posterity
To protect intellect / talent
Takaful?
Takaful – AAOIFI Definition: Collective undertaking by the participants
to donate, not simply an individual donation;
Takaful: A legalistic structure: Two or more parties providing support to
each other;
Risk sharing instead of risk transfer;
Indemnity? Each participant has an opportunity to be indemnified form T.
Fund (not from outside);
Takaful operator: an insurer / indemnity provider?
Manager of T. operations for providing protection to the members of a
group in the society:
Underwriting: Process of examining, accepting, or rejecting insurance risks;Operator
’d write under risk; acceptance of risk; from?
Risk calculation
Claim processing & payments
Investments
Profit distributor
Corporate governance and R management
Takaful?
Human beings exposed to possibility of meeting catastrophes and
disasters;
Muslims’ belief in Qadha-o-Qadr; but allowed to avoid such catastrophes
and disasters;
Conventional Insurance an option; but
Involvement of Riba, Maisir (gambling) and Gharar
Takaful: social solidarity, cooperation; Every policyholder pays his
subscription in order to assist those of them who need assistance;
Waqf, Mudarabah, Tabarru´ (conditional donation) and mutual sharing of
losses.
Conditional gift for a Consideration: Donation to a risk pool subject to
the condition that policy holder will get compensation for defined /
specified losses from the pool.
Full or partial compensation? Takaful pool can run into a deficit; who to
bear it? Operator or participants; Participants: from where?
Main Takaful Rules
Takaful Payments: donation for protection, and Investment
saving Parts;
Investment: returns distributed on the basis of Mudaraba or
Wakalah;
Protection part: Takaful Fund (for claims)
Underwriting Surplus / loss
Qard –e Hasan by Shareholders in case of need.
Mortality tables and other actuarial requirements
Policyholders :Takaful partners
No Takaful coverage for Shariah banned activities / assets.
Takaful Rules
The participants agree to help one another out of their
contributions at the time when any of them faces any
catastrophe or incurs any defined loss.
The operator and the partners who take any policy
contribute to the Takaful Fund. Claims are paid from the
Takaful Fund and the underwriting surplus or deficit is
shared by the participants.
In life policies a part of the contribution is also kept as
investment fund.
An economic institution whereby the losses of the
unfortunate few are shared by the contribution of the
fortunate many who are exposed to the same risk on co-
operative risk sharing basis.
Deciding Factors
Uncertainty is a factor?
Nature of business: Commutative or non-commutative;
relationship between parties:
Exchange Contracts: must be free from uncertainties in the
counter values;
Premiums – Contributions;
Claims;
Investments
Underwriting surplus or deficit;
Rights and liabilities – in mutual framework.
Liquidation of Company: all reserves pertaining to TF must
be spent on charity (AAOIFI, 26: 5/6).
Covering the Deficits
Participants get indemnity out of the risk pool collectively
owned by all of them;
Technically, compensation has no relationship with the
donation
Participants – commitment to pay further contributions!
Shariah issue: is it voluntary donation?
Principle of mutuality - members also agree to pay further
contributions if needed.
Loan by TO: to be paid out of contributions;
Wakalah fee on the part set aside for repayment of the loan?
Provision of loan – rating and capitalization purposes
Trust concept for such Reserve Account – invoked only in
case of deficit of TF.
Shariah Basis
Al Nahad or Al Nihad as discussed by Imam Bukhari
(RA)
‘Aaqilah’, - an arrangement of mutual help or
indemnification customary; to contribute something
until the loss indemnified
Aaqilah in respect of blood money
Islam accepted principle of reciprocal compensation
and joint responsibility.
OIC Fiqh Academy approved Takaful system in 1985;
exact method of operation left to Shariah scholars and
practitioners
Risk Mitigation in Shariah
“ Tie your camel and then have Tawakkal in Allah”
“To leave your hairs wealthy is better than to leave them
helpless asking people for their needs”
“Love your brothers as you love yourself ”
“Believers support one-another”
Hoarding of wealth is a disliked act;
Savings allowed – at least, no Shariah ruling against it.
AAOIFI’s 9 principles & Shariah Bases
Clause 5 of Standard on T’meen al Islami (Takaful):
Donation of contribution and return thereon to TA for indemnity;
undertaking to bear any deficit;
T.O. maintaining 2 separate Accounts;
T.O. as agent in managing T Account and as Mudarib / Agent for
investments
TA is entitled to T assets / should bear liabilities
Surplus for participants; T.O. not entitled to any share;
In case of liquidation, TF reserves must be spent on charity;
Policy holders to participate in management– rep. in BoD
Adherence to the Shariah tenets; No coverage for Shariah banned items
and activities;
Formulation of S Board- opinion binding on the company; internal unit
for monitoring and audit.
Takaful Process
The contribution in Life Takaful is divided into ‘protection part’ (for
Takaful Fund / payment of claims) and the saving / investment part in
case the Company is working as Mudarib;
if the Company is working on Wakalah basis, contributions would be
divided into three parts, i. e. a part as management fee, protection part
and the investment part.
The protection part works on donation principle; individual rights are
given up in favour of the Waqf.
In the investment part, individual rights remain intact under Mudarabah
principle
In case of general Takaful, the whole contribution is considered as
donation for protection and the participants relinquish their ownership
right in favour of the Takaful Fund
The UWS / UWL belongs to the participants.
Main Takaful Products
Life insurance – Family Takaful:
Whole Life policies
Endowment policies: payable to the insured if he/she is still living on the
maturity date, or to a beneficiary / inheritor otherwise.
Retirement, marriage, education and protection to the
general public and the corporate clients
(While whole life policies promise the face value of the policy
whenever the insured dies, endowment policies are confined to
limited periods).
General / Composite Insurance
Marine, Fire, and Accident (Motor Vehicles, Ships, Aero planes,
etc)
HOW IT IS DIFFERENT FROM INSURANCE
Concept of “Risk Manager” Not “Risk Taker”
Mutual help and Equitable Sharing of results;
Underwriting Surplus belong to Participants – Pool is the
owner of all surplus – could be distributed back to the
participants.
Underwriting Deficit is shared by participants and Takaful
Fund members.
Risk Management
• Underwriting as usual but not owned by the operator
• Ensure Risk premium adequate – not commercially driven
• Retakaful Pool instead of Reinsurance
• Interest free loan by SH (Qard Hasnah)
Investments compatible with Shariah based on Profit Sharing
principles.
TAKAFUL IN THE WORLD
Profile of Global Takaful Industry
The first Takaful company was established in 1979 - the Islamic
Insurance Company of Sudan. Malaysia started in 1984.
Presently 150 Takaful companies in 25+ countries worldwide offering
General and Family Takaful with estimates of Takaful contributions
at over $ 5 billions globally.
Australia Pakistan
Bahrain Qatar
Saudi Arabia
Bangladesh Senegal
Brunei Singapore
Egypt Sri Lanka
Ghana Sudan
Indonesia Trinidad & Tobago
Tunisia
Iran Turkey
Jordan United Arab Emirates
Kuwait Yemen
Luxembourg
Malaysia
MODELS OF TAKAFUL
Following three types of models are available:
Mudarabah Model: TO sharing in investment returns as
also UWS (in family Takaful); but can TO share the UWS? –
a Shariah issue.
Wakalah Model: Upfront fee for TO based on grass
contributions; Performance related bonus from UWS?
Combination of the above two: Wakalah for management
and Mudarabah for investment.
Wakalah with Waqf Model – Shariah Scholars Ijmah in
Pakistan offered some refinements within the Wakalah
Model to address some religious concerns related to the
Wakalah model.
Waqf?
Three Types: Religious Waqf, Philanthropic Waqf and the
Family Waqf.
Retention of a property for the benefit of a charitable or
humanitarian objective, or for a specified group of
people such as members of the donor’s family.
A separate entity which has the ability to accepting or
transferring the ownership
Waqf property cannot be sold; only the usufruct is
assigned to the beneficiaries
A member of a Waqf (donor) can also benefit from the
Waqf
WAKALAH WITH WAQF MODEL
TAKAFUL OPERATOR FEES MANAGEMENT PROFIT / LOSS
COMPANY FOR SHARE OF PROFIT
EXPENSES OF ATTRIBUTABLE TO
ADMINISTRATION EXPENSES FOR THE
COMPANY SHAREHOLDERS
25% TO 30% COMPANY
40%
INITIAL DONATION
PROFIT SHARING ON
BY SHAREHOLDERS
MUDARABHA BASES
TO CREATE WAQF
FUND
PROFITS FROM
WAQF INVESTMENT
INVESTMENT
BY FUND
60%
DONATION WAQF SHARE OF
PARTICIPANT WAQF OPERATIONAL
PAID BY FUND SURPLUS FOR
FUND COST OF SURPLUS
PARTICIPANT 75% TO THE PARTICIPANT
TAKAFUL
70% 100%
/RETAKAFUL
Issues in Mudarabah Model
The relationship: based on Tabarru´ and not Mudarabah;
Profit sharing cannot be applied here. Donation cannot be
the Mudarabah capital at the same time.
Sharing in UWS makes the Takaful contract essentially the
same as conventional insurance in which the SHs become the
risk takers; Mudarabah based Takaful is rather worse because
the Takaful operators / SH take only UWS, but not bear UWL,
if any.
In non-life Takaful, the paid premiums are not returned: In
Mudarabah; has to be returned net of loss.
A Mudarib cannot be a guarantor to the financier; Qard
Hasan by SH not commensurate with Mudarabah rules
Difference between Conv. Proprietary
Insurance and Takaful
Proprietary Insurance Takaful:
Transferring risk in return Company: Manager of the risk
for a premium – gharar, portfolios, not risk bearer
maisir and riba Combination of Tabarrue and
mutual sharing of losses between
Subject matter is an indemnity individual policy holders and the
provided by the insurer pool (T. Fund) on the basis of
Responsibility of policy holders Wakalah and/ or Mudarabah;
Pay premium, liability of the Responsibility: with the T. F.
insurer Premium as contribution;
Obligation to pay the claims US / UD – participants (practices
with insurer vary: Some companies also take
Profit or loss to the operator share in US – do not bear UD
(Mudarabah Model)
Difference…………(Contd.)
Liability of Insurer: Takaful operator simply acts as a
Liable to pay claims from premiums; if manager / admtr of T. Fund and as
needed from the Shareholders funds a Mudarib for investment part of
contributions In L T policies
Access to capital: Cab be legally obliged to ensure
Share capital and debt; solvency of Takaful by giving
interest free loan in case of UWL
Investment of Funds Loan to be paid back from future
No restriction except for prudential
contributions
reasons Access to share capital, but not to
debt – only interest free loan to
the Fund;
Investment: Only in Shariah
compliant avenues
Difference…………(Contd.)
Life insurance policies: Only endowment policies – a
Whole life policies maturity date, specific benefit
in case of death before
Saving products: Endowment
maturity;
policies and pension plans
Shariah bases & Opportunities
Find lots of groups and individuals not taking insurance due
to religious reasons.
Significant increase in the leasing/Ijara and Home Mortgages
Personal lines insurances: Property and Casualty insurance for an
individual as opposed to a business
• Increase in demand due to the need for security.
• More suited for a Takaful operator due to the religious
apprehensions related to insurance by individuals.
Islamic Banks need to complete the cycle.
TAKAFUL MARKET AND COMPETITION
Six full fledge banks working on Islamic basis (Meezan,
Albaraka, BIP, DIBP, EGIB, Daud Commercial).
Twelve conventional banks’ IB operations.
IBBs – 551 branches by end of September, 09.
Share of Islamic banking in Banking system: 5.1%
Islamic banks: Rs. 313 billion
Islamic Banks have a mandated requirement / moral
obligation to insure assets from a Takaful company once
available.
This would provide an automatic market for Takaful
business.
Challenges
Raising awareness among various stakeholders; Ulama – the
mind maker and the public;
Misconceptions need to be dispelled;
HR – E & T; more in-depth understanding of the system
particularly, the Shariah related aspects
Marketing / Distribution– Sale of policies; presently: highly
defective and exploitative.
Developing a fair distribution channel;
Challenge for Islamic banks
Let’s Discuss Takaful
Meaning
Model
Wakalah fees / Sharing Ratio
Surplus
Investments
Covering Underwriting deficit
Shariah Board.
Annual Shariah Audit.
Takaful in Brief
Takaful Company must present a competitive product/service in
terms of price, quality of coverage and delivery time.
Competition against the established conventional insurance
companies and survival.
Professionalism and avoiding malpractices is critical. Takaful
fund belongs to the Participants and NOT to Shareholders.
Consumers need to support Takaful companies as well as to
ensure that they are competitive and operations are Shariah
compliant in all respects.
Only consumers could ensure that Takaful operators operate in
the spirit of mutuality which Takaful is all about.
Thanks
