View source for Takaful by Dr. Muhammad Imran Usmani

Dr. Muhammad I

        SECP Tak


            Presentation Outline

9 Conventional Insurance

9 How Qimar & Riba exist in Conventional In

9 Definition of Takaful

9 Mudarabah Model

9 Wakalah Model

9 Wakalah based on Waqf Model

9 Application of Takaful


             Conventional Insurance

Definition

“A way to provide security / and compensation 

      is valuable in the event of its loss, damag

   destruction based on the principle of risk tak

                        speculation”


             Conventional Insurance

Two Aspects of Insurance

According to Shariah rules there are two aspect

Conventional Insurance, namely:

    1. Conceptual Aspect

    2. Practical Aspect

So far as the Concept of Insurance is concerned

cover the risk of loss, or “fortunate many helpin

unfortunate few”.

This concept is not only recognized, but also

appreciated and rewarded by Islam.


               Conceptual Aspect

Why this Concept is rewardable?

                                        Al-Maidah v

 "Help ye one another in righteousness and pie

      help ye not one another in sin and ranco

Principles of Muwalat, Maaqil, and Kafal

establishment of Islamic welfare state by t

Prophet (SAW), Waqf and Tabrru are exam

recognition of this concept.


                 Practical Aspect

Second Aspect of Insurance is practical Aspect,

forbidden due to two reasons:

        1. Qimar or Maisir

        2. Riba

Since these two things have been clearly prohi

Islam, they cannot be justified on the conceptu

aspect of helping victims of various accidents o

losses.


                      Practical Aspect

Quranic view on Gambling & Risk

O believers! Intoxicants and gambling and Al Ansab 

sacrificed for idols) and Al Azlam (arrows for seeking

decision) are an abomination of Satan's handiwork. S

them in order that you may be successful. Satan wa

excite enmity and hatred between you with intoxican

gambling and hinder you from the remembrance of A

from prayer. So, will you not then abstain? (Al Maid


                 Practical Aspect

How Qimar & Riba exists ?

QIMAR or MAISIR has been clearly prohibite

Quran and Hadith of the Holy Prophet (SAW).

Maisir has two basic elements which cause to p

namely:

   1. Gharar

   2. Khatar


                        Khatar

 “Taleequl milki al alkhatr, wal mal fil jani

 To stipulate/conditionalize the

  ownership/profitability on uncertain event,

  whereas money is involved in the both sides

 However, if money is not involved from both 

  i.e. one party voluntarily (without any

  compensation) declares “We shall compensat

  on a particular event of loss”, it would not be

  Maisir.


                         Gharar

Gharar literally means “Uncertainty”

Forms of Gharar :

 Any bilateral transaction in which the liability 

  party in the transaction is either uncertain or

  contingent.

 Consideration of either is not known.

 Ultimate outcome of any one party is uncerta

 Delivery is not in the control of the obligor.

 Payment form one side is certain, but from th

  side is contingent.


               Gharar & Khatar

Presence of Gharar and Khatar makes Qimar,

Speculation, Gambling and Conventional Insur

prohibited.


                        Qimar

Indication of Presence of Qimar in a trans

 If in any transaction one party’s profit is

  dependent on the loss of the other then this

  indication that the transaction involves Qim

                                             Qim

 In the permissible modes of business any pr

  loss is equally shared & is fair to every part

  example, in partnership (Musharakah) both 

  parties share profit & loss. Similarly in other

  like sale, purchase, hiring or leasing each p

  considerations are certain.


            Conventional Insurance

Problems

 The participant contributes a small amount of

  premium in a hope to gain a large sum - Kha

 The participant loses the money paid for the

  premium when the insured event does not oc

  Gharar.

 The company will be in deficit if the claims ar

  than the amount contributed by the participa

  Gharar.


                         Riba

 The element of Riba (Interest) exists in lend

  borrowing funds/investments at fixed intere

  other related practices in the investment act

  of the conventional insurance companies


         The Solution

Islamic Cooperative Insuranc

          ( Takaful)


                         Takaful

 Takaful is an Arabic word that means

  “Guaranteeing each other"

 It is a system of Islamic Insurance based on 

  principle of TA’AWUN (mutual assistance) a

  TABARRU’ (Gift, Give away, donation) wher

  risk is shared collectively by the group

  VOLUNTARILY.

 This is a pact among a group of members or

  participants who agree to jointly guarantee a

  themselves against loss or damage to any of

  as defined in the pact.


           Models of Takaful

1. Mudarabah Model

2. Wakalah Model (hybrid of Wakalah &

Mudarabah)

3. Wakalah based on Waqf Model


                  Mudarabah Model

 The participant and the operator enter into a

  Mudarabah contract from the beginning of the

  relation, for indemnification and share of the

  underwriting results.

 The Surplus is shared between the participant

  the takaful operator in an agreed ratio.

 This model allows the takaful operator to shar

  underwriting results from operations as well a

  favorable performance returns on invested

  premiums.


                 Mudarabah Model

Shariah Concerns

 The relation between the participants is that 

  tabarru’ and not Mudarabah, “Profit Sharing” 

  applied here. Donation cannot be Mudarabah

  at the same time.

 In a Mudarabah contract, a profit is to be gen

  to be distributed. Profit is not the same as ‘S

  (excess pf premiums over claims, reserves a

  expenses) and in the insurance context no de

  can be generated by definition.


                  Mudarabah Model

Shariah Concerns

 The sharing in underwriting surplus itself is

  something which is similar to making this into

  commercial business venture and not a mutu

  contract for assistance and protection.

 The requirement to provide Qard Hasanah (in

  a deficit) in a Mudarabah contract by definitio

  against the concept of Mudarabah which is a 

  sharing contract and a Mudarib cannot be a

  guarantor.


                    Wakalah Model

 Cooperative risk sharing occurs among the

  participants whereas the takaful operator ear

  for services (as a Wakeel or Agent).

 The operator earns an upfront deductible fee a

  shares the profit of investments, it does not sh

  the results of underwriting.


                       Waqf Model

 In order to eliminate the element of “Mayser”,

  concept of ‘Waqf’ and ‘Tabarru’ is incorporated

  relation to this participants shall agree to relin

  as “donation” certain amount of money.

 The Takaful Fund, consisting of the contributio

  as Tabarru, will be further invested by the Co

  based on the principle of Islamic modes of Tra

  through which the element of interest (riba) w

  replaced.


                                       Waqf Model

                   TAKAFUL OPERATOR          SHARE OF

 COMPANY                FEES FOR                               MANAGEMENT

                                          PROFIT FOR THE

                    ADMINISTRATION                              EXPENSES OF       A

                                             COMPANY

                       EXPENSES                                  COMPANY

                      25% TO 30%

                                                  40%

       INITIAL

                                                         PROFIT SHARING ON

     DONATION BY

                                                          MUDARABHA BASES

    SHAREHOLDERS

   TO CREATE WAQF

        FUND

                   WAQF                     PROFITS FROM

                               INVESTMENT

                                             INVESTMENT

                                 BY FUND

                                                   60%

                 DONATION         WAQF

PARTICIPANT                                   WAQF        OPERATIONAL

                  PAID BY         FUND

                                               FUND          COST OF        SURPLUS

               PARTICIPANT        75%

                                                             TAKAFUL

                                    TO

                                                           /RETAKAFUL

                                  70%


                     Waqf Model

Basic Features

 A Waqf Fund is established by the shareholde

  Takaful Company through the contribution of 

  amount’ (part of the Capital) to compensate t

  beneficiaries or participant of Takaful scheme.

  Ceding amount of the Waqf will remain invest

 Any person by signing the proposal form,

  contributing to the Waqf and subscribing to th

  documents shall become the member of the W

  fund.


                     Waqf Model

Basic Features

 The Waqf fund shall work to achieve the follo

  objectives:

     a. To extend financial assistance to its

          members in the event of losses.

     b. To extend benefits to its members stri

          accordance with the Waqf Deed.

     c.   To donate to Charities approved by th

          Shariah Supervisory Board


                      Waqf Model

Basic Features

 The    Waqf   Fund    will lay  down    the  ru

  distribution of its funds to the beneficiaries 

  decide how much compensation should be g

  a subscriber/member .

 The Waqf will become owner of all contributi

  has the right to act as a legal entity as per it

  for investment, compensations and dealing 

  surplus amounts.


                    Waqf Model

Basic Features

 The Takaful Company may distribute the surp

  amounts on the following three basis:

     a. A portion of surplus should be kept as

        reserve to mitigate the future losses.

     b. A portion of surplus should be distribut

        among the participants to differentiate

        from the conventional insurance proce

     c. A portion of surplus should be utilized 

        the charitable purposes every year.


                    Waqf Model

Basic Features

 As per the rules of the Waqf, if the 

  liquidated, the outstanding balance, after pa

  dues and payables, will be utilized to ch

  purposes.

 The Takaful company, while managing th

  Fund, will play two different roles simultane

    a. Operator/Manager

    b. Mudarib


                    Waqf Model

Basic Features

 As Operator/Manager, the Takaful Compa

  perform all functions necessary for the op

  of the Waqf against a Wakala fee to be d

  from the Contributions of the Participants.

 As Mudarib of the fund, the Takaful Comp

  manage the investment of the excess fund

  Waqf into Shariah compliant investments 

  participate in the profit of the fund’s inve

  at a fixed ratio of profit.


                    Application

Takaful can be used to cover :

     Property e.g. house, factory, mosque, of

     Vehicles (car, motorcycle etc..)

     Goods ( For Import or Export )

     Valuables

     Health, accidents and Life