View source for Introduction to Takaful

6-1 Process Selection and Facility Layout

         OperationsISLAMIC                Management

                                    INSURANCE

                                       TAKAFUL

                                          William J. Stevenson

                                MOHAMMAD FAROOQ

                                  YOUSAF (MB06129)

                                  MOHAMMAD YUSUF

                                   USMAN (MB06107)     8th edition


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                             Introduction to Takaful

•      Takaful originates from Arabic word Kafalah,             which   means

      “guaranteeing each other or joint guarantee”.

•     The Takaful system is based on mutual co-operation, responsibility,

      assurance, protection and assistance between groups of participants.

•      It is a Shariah compliant alternative to conventional insurance.


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                 Introduction to Takaful (cont’)

• For example, individuals can make charitable donations to a common fund from

which they may each draw in the event that they suffer loss to their houses or

livelihoods.

• It was first established in the early second century of the Islamic era with the

purpose of promoting mutual solidarity and co-operation among the          Muslim

community.

•As mentioned in the Qur'an:

 "And help one another in righteousness and piety and do not help one another in

                                   evil deeds and enmity"

                                      (Al Maidah verse 2)


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                     Introduction to Takaful (cont’)

The main characteristic of Takaful is al-Musharakah which means sharing.

 Thus, the word Takaful means shared responsibility, shared-guarantee, collective

assurance and mutual undertakings.

 Islamic insurance embraces the concepts of mutual protection and shared

responsibility which was seen in the practice of paying blood money (diyah)

under the Arab tribal custom.

 This was accepted into Islamic practice on the verdict of the Prophet (peace be

upon him).


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                      Introduction to Takaful (cont’)

It therefore potrays the sincerity and willingness of the group to help and assist

anyone among them in times of need. "Takaful" bears many similarities to co-

operative or mutual insurance.

    Allah will always help His servant for as long as he helps others. (Narrated by

                     Imam Ahmad bin Hanbal and Imam Abu Daud)

Takaful is based on shared aims and co-operation, with each individual benefiting

from any surpluses gained.

 In takaful there are no policyholders; there are contributors who participate

jointly in a fund for their mutual benefit.


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                   Introduction to Takaful (cont’)

 The contributors are owners of the fund and the takaful

company manages the fund on their behalf. Thus, if the

company makes a profit this is shared between the

contributors, and if any of the contributors were to suffer

financial loss they are paid from the takaful fund.


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                       Fairness of Takaful System


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 Principles of Takaful

• Policyholders co-operate among themselves for their common good.

• Every policyholder pays his subscription to help those that need assistance.

• Losses are divided and liabilities spread according to the community pooling

system.

• Uncertainty is eliminated in respect of subscription and compensation.

• It does not derive advantage at the cost of others.


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                       Basic Models of Takaful

                             Mudharaba Model

                                  Wakala Model

                                    Waqf Model


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                              Mudharaba Model

Mudharaba is defined as the contract between one party, known as the

ra’sul mal (capital provider), with another party known as the mudharib

(entrepreneur) where the ra’sul mal provides the capital, and the mudharib

provides the skills in a business venture. When there is profit, it is shared

between the ra’sul mal and the mudharib in a pre-agreed manner. In this

case, the takaful operator is the mudharib, and the participants are the

capital providers. The pure mudharaba model conforms to this definition.

and      is    practiced           mainly   in the Asia-Pacific        region.


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                    Features of Mudharaba Model

• It is practiced mainly in the Asia-Pacific region.

• Shariah committee generally approves the sharing ratio for each year in

advance.

• The sharing of such profit (surplus) may be in a ratio of 5:5, 6:4, 7:3, etc.

• This model allows the takaful operator to share in the underwriting

results from operations as well as the favorable performance returns on

invested premiums.


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                         Pure Modharaba Model

• In a pure mudharaba model, the takaful operator and the participant share direct

investment income only, and the participant is entitled to a 100% share of the

surplus. This model is applicable to family takaful as the fund is entirely

distributed to the participants.

• Under a pure mudharaba model, if there is a loss, the ra’sul mal loses (some of)

his capital and the mudharib loses in terms of effort. Therefore, the modified

mudharaba model is not really mudharaba, and that is why some scholars,

especially in the Middle East do not condone it.


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                    Modified Modharaba Model

• In a modified mudharaba model, the investment income is

ploughed back into the takaful fund, and the takaful company

shares with the participant the surplus from the takaful fund.

• It is important to note that under mudharaba, the takaful

fund belongs to the participants and not the takaful operator.

The takaful operator therefore has no right to a share of the

surplus.


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                              Wakala Model

• The wakala model, commonly used in the Middle East.

• Cooperative risk sharing occurs among the participants

whereas the takaful operator earns a fee for services (as a

Wakeel or Agent).

• The operator earns an upfront deductible fee and shares the

profit of investments, it does not share the results of

underwriting.


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                              Wakala Model (Cont’)

•The surplus of the takaful fund belongs to the members, the

operating company does not have a claim on it under any

circumstances.

• If the takaful operator is to generate a profit from its efforts,

it must manage the operations including salaries, overhead,

selling commissions, sales and marketing expenses, etc.


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                        Wakala Model (Cont’)

Since there is no other benefit to the takaful operator other than the

declared wakala fees, the wakala model “demands” that all other

charges/costs to the program be provided to the participants at the lowest

possible cost level that can be negotiated by the operator on their behalf.

Mudharaba practices are usually preferred for investment aspects of

takaful, while wakala practices are favoured for risk sharing/underwriting

aspects of the operation.


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                              Waqf Model

This non-profit model includes social-governmental owned

enterprises and programmes operated on a non-profit basis

which utilises a contribution that is 100% tabarru (donation)

from participants who willingly give to the less fortunate

members of their community.


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                             Waqf Model (CONT’)

The Takaful Fund, consisting of the contributions paid as

Tabarru, will be further invested by the Company based on

the principle of Islamic modes of Trades, through which the

element of interest (riba) will be replaced.


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      How Waqf Model is Different from other Models

• Waqf, in contrast to wakala and mudharaba, operates as a public

foundation.

• The takaful fund is owned by members in the first two models, in waqf, it

belongs to nobody in particular.

• Any surplus can theoretically be distributed between members in the

first two models, such distribution is not possible in the waqf model,

similar to the build-up of unallocated surplus commonly seen in some

Western European life insurance models.


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      Comments of Justice Muhammad Taqi Usmani

• He feels that waqf is more compatible with the co-operative concept of

takaful as it is created for the very purpose of co-operation.

• He said that if one establishes a fund for takaful, then the fund should

have a       legal entity. So whenever one contributes to this fund, the

contribution is regarded as a contribution for the common good.

• When the waqf fund distributes the funds between the members

according to its own rules, the fund needs to have its own legal entity, and

according Islamic jurisprudence, waqf is an independent entity, hence he

prefers                                      this                    model.