View source for Takaful by Capt. M. Jamil Akhtar

Hailey Collage o f Banking & Finance

     Punjab University- Lahore.

           13th August, 07

       Takaful

An emerging niche market

                    By:

                    Capt. M. Jamil Akhtar Khan

                             ACII, MCIT, Master Mariner

                    Chief Executive Officer

                    TAKAFUL PAKISTAN LIMITED


         Outline of Presentation

 Introduction to Takaful

 Objections to Conventional Insurance

 Difference b/w Conventional Insurance & Takaful

 Takaful Through Time

 Takaful Models

 Takaful Types

 BancaTakaful

 ReTakaful

 Foundations of Takaful in Pakistan

 Takaful Prospects in Pakistan

 Challenges to Takaful

 Introduction to TAKAFUL PAKISTAN LIMITED


Introduction to

    Takaful


          Meaning of Takaful

 Takaful comes from the Arabic root-word

  ‘kafala’ — guarantee.

 Takaful means mutual protection and joint

  guarantee.

 Operationally, takaful refers to participants

  mutually contributing to a common fund with

  the purpose of having mutual indemnity in

  the case of peril or loss.


        Reference — Al Quran:

 “Help (ta’awan) one another in furthering

  virtue (birr) and Allah consciousness

  (taqwa) and do not help one another in

  furthering evil and enmity”. Al Maidah:

  verse 2 (5:2).

 Takaful is a form of mutual help (ta’awun)

  in furthering good/virtue by helping others

  who are in need / in hardship .


       Reference – Hadith:

 “tie the camel first, then            submit

  (tawakkal) to the will of Allah”

  The hadith implied a strategy to

  mitigate/reduce risk.

 Takaful provides a strategy of risk

  mitigation/reduction       by    virtue    of

  collective risk taking that distributes risks

  and losses to a large number of

  participants. This mitigates the otherwise

  very    damaging       losses,    if   borne

  individually.


      Declaration by Shariah scholars

   rendering conventional insurance un-

                   Islamic

 Fatwa issued in Judicial Conference held in

  Makkah in Shaban 1398 AH.

 Verdict of Supreme Court of Egypt on Dec.

  27, 1926.

 Unanimous resolutions and fatwa by Ulama

  in the Muslim League Conference in Cairo

  in 1965.

 Unanimous decision by Muslim Scholars in

  seminar held in Morocco on May 6, 1972.


   Judicial Opinions and Fatwas

   confirming validity of Takaful

 Fatwa issued by Higher Council of Saudi

  Arabia in 1397 A.H.

 Fatwa Issued by the Fiqh Council of Muslim

  World League in 1398 A.H.

 Fatwa issued by the Fiqh Council of the OIC

  in 1405 A.H. (1985).


  Fiqh Academy Resolution 1985

• Islamic Fiqh (science of Shariah) Academy, emanating

  from the Organization of Islamic Conference, meeting in

  its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul-

  Thani, 1405 A.H. (Dec 1985) issued a Resolution which in

  summary stated the following:

• The commercial Insurance contract… is prohibited

  (Haraam) according to the Shariah.

• The alternative Takaful contract which conforms to the

  principles of Islamic dealings is Halaal, being the contract

  of cooperative insurance, which is founded on the basis of

  charitable donation and Shariah compliant dealings.


      Basic Elements of Takaful

 Mutuality and cooperation.

 Takaful contract pertains to Tabarru’at as against

  mu’awadat in case of conventional insurance.

 Payments made with the intention of Tabarru

  (contribution)

 Eliminates the elements of Gharrar, Maisir and

  Riba.

 Wakalah/Modarabah basis of operations.

 Joint Guarantee / Indemnity amongst participants

  – shared responsibility.

 Constitution of separate “Participants’ Takaful

  Fund”.

 Constitution of “Shariah Supervisory Board.”

 Investments as per Shariah.


        Main drivers of Takaful

 Piety (individual purification)

 Brotherhood (mutual assistance)

 Charity (Tabarru or contribution)

 Mutual Guarantee

 Community well-being as opposed to profit

  maximization.


Objections to

Conventional

 Insurance


             Insurance Defined

 Definition of an Insurance Contract

    “An agreement whereby one party, the insurer, in

     return for a consideration, the premium, undertakes

     to pay to the other party, the insured, a sum of

     money or its equivalent in kind on the happening of

     a specified event, which is contrary to the insured’s

     financial interest”

 Subject-matter of an Insurance Contract

    “… what is it that is insured in a fire policy? Not the

     bricks and materials used in building the house, but

     the financial interest (i.e. money) of the insured in

     the     subject-matter       of      insurance     …”

     (Lord Justice Brett in Castellian v. Preston – 1883)


     Objections to Conventional

                    Insurance

 Scholars view the insurance contract as an

  exchange contract – money is being exchanged for

  money over time.

 This brings about the problem of gharrar (which

  leads to maisir) and in investments aspect, riba.

 Elements of:

   • Uncertainty – Gharrar

   • Gambling – Maisir

   • Interest – Riba

   • UW + Investment Profit belongs to the

     Company

 Note that the Scholars do not object to insurance

  per se but only to certain weaknesses in the

  insurance contract.


         Uncertainty – Gharrar

 Conventional insurance contract is basically a

  contract of exchange (mu’awadat) i.e. buying and

  selling whereby policy (indemnity) is sold as goods,

  with the premium as the price or consideration.

 The consideration must be certain for exchange

  contract.

 Gharrar in insurance contracts pertains to

  “deliverability” of subject matter, i.e. uncertainty as

  to:

    Whether the insured will get the compensation

      promised?

    How much the insured will get?

    When will the compensation be paid?

 Thus, it involves an element of uncertainty in the

  subject matter of the insurance sales contract, which

  renders it void under the Islamic law.


            Gambling – Maisir

 “Insurance is a contract upon speculation. Good

  faith forbids either party from concealing what he

  privately knows, to draw the other into a bargain,

  from his ignorance of that fact, and his believing to

  the contrary” (Lord Mansfield in Carter v. Boehm

  – 1766).

 The insured loses the money paid for the premium

  when the insured event does not occur.

 The company will be in deficit if claims are higher

  than premium.


             Interest – Riba

 “ …. Allah has permitted trading and

  forbidden riba” (Al Baqarah 2 : 275).

 Insurance funds are invested in financial

  instruments which contain the element of

  Riba.


         Comparing Takaful to Conventional Insurance

Issue                  Conventional Insurance  Takaful

Organization Principle Profit for shareholders Mutual for participants

Basis                  Risk Transfer           Co-operative risk sharing

Value Proposition      Profits maximization    Affordability and spiritual

                                               satisfaction

Laws                   Secular/Regulations     Sharia plus regulations

Ownership              Shareholders            Participants

Management status      Company Management      Operator

Form of Contract       Contract of Sale        Cooperative,

                                               Islamic contracts of Wakala or

                                               Mudarbah with Tabar’ru

                                               (contributions)

Investments            Interest based          Sharia compliant, Riba-free

Surplus                Shareholders’ account   Participants’ account


Takaful Through Time
                 Takaful through Time

 Origins in the First Constitution of Madina.

 It evolved and continued in one form or the other

  throughout the Abbaside period and even later during the

  Ottoman empire.

 Serious efforts were made in modern times, in 1970s to

  come up with an Islamic alternative to the conventional

  insurance.

 The first Takaful company was set up in Sudan in 1979,

  almost simultaneously followed by another one set up in

  Bahrain.


           Takaful through Time… (Cont’d.)

 There are now 85+ Takaful companies in over 25

  countries.

 The total insurance premium of OIC countries for 2004

  was USD 50 Billion; of this, Takaful contribution

  accounts for 5% (i.e. USD 2.5 Billion). This is expected to

  increase to USD 15 Billion by 2015.

 Poor Insurance penetration in the Muslim countries (<1%

  of GDP).

 Average growth rate higher than conventional insurance

  companies (around 25%).

 Non–Muslims increasingly opting for Takaful products for

  commercial benefits.



Takaful Models
            Mudaraba Model

 The surplus is shared between the

  participants with a takaful operator. The

  sharing of such profit (surplus) may be in a

  ratio 5:5 , 6:4 etc. as mutually agreed

  between the contracting parties. Generally,

  these risk sharing arrangements allow the

  takaful operator to share in the underwriting

  results from operations as well as the

  favourable performance returns on invested

  premiums.


                                                                           Profits

                                                                        attributable

            Mudaraba Model                                                    to

                                                                       Shareholders

                                                                        Company’s

                                                                         Admin. &

Company                                                                   Mangt.

                                                                         Expenses

                          Investment     Profit

                              By         From

                            Company   Investments

                                                                            Company’s

                                                                            Share from

                                                                               Surplus

               Takaful

                             General General      Operational

             Contribution                                     Surplus

Participant                  Takaful Takaful       Cost of

               paid by                             Takaful

                                                              (Profit)

                              Fund     Fund

             Participant

                                                                           Participant’s

                                                                                Share

                                                                           from Surplus


              Wakala Model

 Cooperative risk sharing occurs among

  participants where a takaful operator earns a

  fee for services (as a Wakeel or Agent) and

  does not participate or share in any

  underwriting results as these belong to

  participants as surplus or deficit. Under the

  Al- Wakala model, the operator may also

  charge a fund management fee and

  performance incentive fee.


                  Wakala Model

                                                          Mudarib's’

                  Wakala                Profit              Share               Management           Profit/Loss

 Company           Fee                  From               of PTF’s

                                                                                   Expense          attributable to

                                    Investments           Investment

  (Capital)    (30% to 35%)                                                    of the Company       Shareholders

                                                           Income

   Takaful

 Contribution                          Investment by                      Investment Income Sharing

     paid                              the Company                            on Mudaraba Basis

by Participant

                            General                               Operational                             Surplus

Participants’                                      Investment        Cost of               Surplus      Distribution

                            Takaful                  Income         Takaful/

                                                                                 Reserves

                                                                                           (Profit)          to

Takaful Fund                 Fund                                  ReTakaful                           Participants


                 Wakala -Waqf Model

It is a WAKALAH model with a separate legal entity of WAQF in-

    between.

   The relationship of the participants and the operator is directly

    with the WAQF fund. The operator is the ‘Wakeel’ of the fund

    and the participants pay contribution to the WAQF fund by way

    of Tabarru.

   The contributions received would also be a part of this fund

    and the combined amount will be used for investment and the

    profits earned would again be deposited into the same fund

    which also eliminates the issue of Gharar.

   Losses to the participant are paid by the company from the

    same fund.

   Operational expenses that are incurred for providing Takaful

    services are also met from the same fund.


                          Wakala-Waqf Model

    Share            SHARE          H O L D E R S’     F U N D (S.H.F.)

   Holder

                                           Mudarib’s         Management

            Wakalah     Investmen        Share of PTF’s       Expense of      Profit/Loss

             Fee              t           Investment             the

                          Income            Income             Company

  Takaful

 Operator

                                 Investment by

                                  the Company

WAQF                  Operational                           Claims &

                     Cost of Takaful     Investment         Reserves      Surplus

                      / ReTakaful          Income                        (Balance)

                    P A R T I C I P A N T S’ T A K A F U L F U N D

                                            (P.T.F.)

Participant


Models – The beauty of Islam lies

              in its

          plurality … !


                                       ISLAM

  AQIDAH                             SHARIAH                               AKHLAQ

Faith & Belief                  Practices & Activities                  Moralities & Ethics

                    IBADAH                              MUAMALAT

               Man-to-God Worship                    Man-to-Man Activities

                                 Political                 Economic                  Social

                                 Activities                Activities               Activities

                                                       Risk Management

                                                            Takaful


         General Takaful Types

 General Takaful – offers all kinds of non-

  life risk coverage. It is normally divided into

  following classes:

           Property Takaful

           Marine Takaful

           Motor Takaful

           Miscellaneous Takaful


      Types of Family Takaful

 Term Life Takaful

 Whole Life Takaful

 Endowment Takaful

 Universal Takaful

 Marriage Plan

 Education Plan


     Takaful Policy Document /

Participants’ Membership Document

    Preamble:

    This is to acknowledge that the applicant (hereinafter called the

     'Participant'), as more fully described in the schedule hereto:

    i.       Is accepted as a member of the Participants' Takaful Fund

     (hereinafter called the 'Fund') operated by Takaful Pakistan Limited

     (hereinafter called the 'Company').

    ii.      Being a member of the Fund, he/she is acknowledged as a

     beneficiary under the attached Indemnity Policy of the Fund, and of the

     benefits declared by the Fund from time to time under this policy, in

     accordance with the Waqf rules governing the Fund.

    iii.     Subject to the participant continuing as a member of the Fund

     and complying with his/her undertaking under his/her declaration

     made in the proposal form, he/she is indemnified by the Fund as one of

     its beneficiaries against the perils/events described, in the manner and

     to the extent as stated hereunder.


     Takaful Policy Document /

Participants’ Membership Document

    Duration:

      Normally policies are issued for the duration of

       twelve months.

      Extended coverage on project policies.

      MARINE POLICY : The membership under this

       document shall be for the period of _________

       months. However, the benefits under this

       document, except Surplus if any, shall cease on the

       arrival of goods at destination.


     Takaful Policy Document /

Participants’ Membership Document

    Cancellation Clause:

    This Policy may at any time be terminated at the

     option of the Company, on 14 days' notice to that

     effect being given to the Participant at his last known

     address. In that case, the Participant shall be GIVEN

     an amount equivalent to a ratable proportion of the

     contribution for the unexpired Period of Policy from

     the date of such cancellation. This Policy my also be

     terminated at any time at the request of the

     Participant, in which case the Participant will be

     PAID an amount equivalent to the actual contribution

     made initially by him/her, less the amount worked as

     per the following scale applicable to the period during

     which the policy has been in force:


     Takaful Policy Document /

Participants’ Membership Document

    TAKAFUL OPERATOR'S FEE

    The Company shall deduct Takaful Operator's fee out

     of the Contribution received under this Policy. Such

     fee shall be based on the Wakala principle since the

     Company hereby acts as a Wakeel on behalf of the

     Fund.

    INVESTMENT MANAGEMENT SHARE

    The Company shall act as a Mudarib for the purpose

     of managing the investment of the Participant's

     Contribution. As such, the Company stands entitled to

     a share in the investment income thereof as Mudarib.


     Takaful Policy Document /

Participants’ Membership Document

    SURPLUS DISTRIBUTION

    If, at the end of the period of Policy stated in

     the Schedule, there is a surplus in the General

     Takaful Fund, the same shall be distributed

     among the Participants. Provided that, in case

     the Participant has made any claim or

     received any benefits under this Policy, that

     claimed amount shall be deducted from the

     net amount worked out as due to the

     Participant.


            BANCATAKAFUL

 Background

 Range of Products

      Savings      →       Personal     Accident,

       Homeowners’       Comprehensive,     Credit

       Cards, etc.

      Financing,   Individuals → Car Ijarah,

       Housing Musharika, Mortgage Takaful.

      Financing, SMEs → Trade Credit Takaful,

       Business, Office, Equipment, Assets.

      E-Commerce


    BANCATAKAFUL (…Cont’d.)

Advantages of BancaTakaful:

     Facilitation Desk / Equipment.

     Fast Turnaround Time.

     One-Stop shop for Clients.

     Concept of Islamic Financial Supermarket.

     Value Added Services.

     Law of Large Numbers.

           Lower Contribution Rates.

           Attraction for Depositors.

     Synergy.


                       ReTakaful

 Currently few ReTakaful companies worldwide offering a

  relatively small capacity:

     Sudan (1979) National Reinsurance.

     Sudan (1983) Sheikhan Takaful Company.

     Bahamas (1983) Saudi Islamic Takaful and ReTakaful

      Company.

     Bahrain/Saudi Arabia (1985) Islamic Insurance and

      Reinsurance Company.

     Tunisia (1985) B.E.S.T. Re

     Malaysia (1997) ASEAN ReTakaful International.

     Dubai (2005) TakafulRe by ARIG.

     Lloyds of London to have a ReTakaful Syndicate in 2007.

     SwissRe has formed a separate ReTakaful Pool

     MunichRe to form a separate ReTakaful Pool

     Provision in Takaful Rules – 2005.


         T I M E L I N E – T A K A F U L I N      P A K I S T A N

                  Objectives           Report by the             Takaful

                  Resolution             Council                  Rules

       1949                    1992                     2005

                     1983                  2000                   2006

Review by Council            Insurance                     TAKAFUL

of Islamic Ideology          Ordinance                    PAKISTAN

                                                           LIMITED


    Takaful Prospects in Pakistan

 97% Muslim population.

 Demand for insurance increasing with increase in

  per capita income.

 Personal lines insurance business (leasing, health,

  Medicare) growing at a higher rate than other

  conventional classes.

 Islamic banking on sound footing with support of

  the Govt.


        TAKAFUL - TARGET MARKET

 People who do not insure due to

  religious reasons.

 People who insure and are insensitive to

  religious reasons.

 People who currently do not insure at all.


           Challenges to Takaful

 Skepticism.

 Lack of uniformity in Shariah decisions.

 ‘Windows’ issue.

 Regulatory issues.

 Capacity constraints      due   to    inadequate

  ReTakaful.

 Limited Investment avenues.

 H.R. issues.


   Introduction to

TAKAFUL PAKISTAN

     LIMITED


   TAKAFUL PAKISTAN LIMITED

 Takaful Pakistan is a joint venture of prestigious local

  & foreign institutions, including:

       House Building Finance Corporation.

       Emirates Global Islamic Bank.

       Arif Habib Securities.

       Sitara Chemicals.

       Emirates Investment Group (Sharjah).

       Al-Buhaira National Insurance Co. (U.A.E.)

 Large initial paid-up Capital.


 TAKAFUL PAKISTAN LIMITED … (Cont’d.)

 Managed by dedicated professionals, committed to the

  cause.

 ReTakaful arrangements with a consortium            of

  internationally reputed ReTakaful operators.

 Shariah Board comprises of eminent scholars.

 BancaTakaful and MicroTakaful products.

 We intend to be the trend-setter for excellent Clients’

  Servicing, Operational bench marks and prudent

  Underwriting practices.


                 Conclusion

 Takaful defined.

 Comparison with conventional insurance.

 Takaful Models

 Takaful Types

 BancaTakaful

 ReTakaful

 Takaful Pakistan Limited


Thank you for your attention