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Takaful: Concepts and

Models

By

Atiquzzafar Khan

Nov 3, 2009

Al-Huda Workshop

On

Takaful Management

Main Topics

• Introduction of Modern Insurance

• Evaluation of Insurance Business

from Islamic Point of View

• Islamic Alternative: (Review of

Existing Experiences of Takaful)

• Performance of Takaful Industry

Risk and Insurance:

Risk and uncertainty are fundamental

facts of life. All human activities are

subject to risk, which may lead to

financial or physical losses to him.

Insurance is a device to cover the

losses arise due to occurrence of

some undesired event.

Definition of Insurance

Insurance is an economic device

whereby the individual substitutes a

small certain cost (premium) for a

large uncertain financial loss (the

contingency insured against) that

would exist if it were not for the

insurance.

CLASSIFICATION OF

INSURANCE BUSINESS

By Type of Products

i) Life insurance

ii) General insurance

iii) Liability insurance

Nature of Insurance Contract

Aleatory Contract

Unilateral Contract

Conditional Contract

Contract of Adhesion

Principals Governing Insurance

Contract

Principal of Indemnity

Principal of Insurable Interest

Principal of Subrogation

 Principal of Utmost Good Faith

Nature of Insurance Contract

General Insurance

Premium Compensation

Life Insurance

Premium Compensation

Shariah Position of Insurance

Opinion of Shariah scholars is divided

on insurance. We can classify them

into three major groups.

– Those who consider both the

concept and practice of commercial

insurance un-Islamic.

– Those who are in agreement with

the present insurance and find

nothing wrong in it.

– Those who accept the concept of

insurance, but find prohibited

elements in its present practice.

Rulings of Collective Fiqhi

Bodies about Insurance

– Islamic Research Institute of Al-Azhar

Uni.

– Council of Grand Ulama of Saudi Arabia

– Majlis Tahqiqat-e-Shari'yah Lucknow,

India

– Islamic Fiqh Academy of Rabita al-

Aa'lam-e-Islami

– Al Majma’ Al-Fiqhi Al- Islami of OIC

– Council of Islamic Ideology, Pakistan

Major Arguments Against

Insurance

According to these Fiqhi bodies

Conventional Insurance is unlawful

because of involvement of prohibited

elements like,

– Riba (Interest)

– Qimar (Gambling)

– Gharar (Uncertainty, Doubt, Risk)

– Unlawful appropriation of others’ property

– Violation of law of inheritance in case of

life insurance.

Islamic Substitute

 The Islamic Substitute of

Conventional Insurance,

according to these Fiqhi

bodies, may be some scheme

based on mutual cooperation

and Joint Responsibility.

 That alternative is introduced

under the title of Takaful in

recent past.

Takaful in Islam
Hadith of the ProphetSWA

“Tie the camel and

then submit to the

will of Allah”

This hadith implied a need to mitigate risk

Historical Examples of “Takaful”

 Dawania-Mutual indemnification

amongst officers working in the same

department during the rule of Umar

Ibn Al Khattab (the 2nd Caliph)

 Diyyah and Aquilah-Blood money

and the concept of removing

hardship inflicted on the family of the

victim by payment of Diyyah, on a

mutual basis, by the relatives of the

offender

Takaful Pioneers

 Takaful started some 30 years

ago in the Middle East with the

launching of two companies in

1979:

– The Islamic Arab Insurance Co.

(IAIC) in the UAE and

– The Islamic Insurance Co. of Sudan

 But it took some time for the

movement to take shape.

Takaful Pioneers

 Later in 1984, Malaysia played a

pioneering role in setting the

first Legal framework specific to

Takaful (Takaful Act Malaysia).

 This was instrumental in the

successful launching of the

Takaful movement in Malaysia

and in other countries of South

East Asia.

Other Islamic/ Takaful Legislations

 Other markets such as the Sudan

and Iran have Islamic regulatory

environments and became naturally

Takaful markets.

 In Pakistan Takaful Act is enacted in

2005.

 In the Gulf countries specific Takaful

legislations are coming through in

Bahrain and in Saudi Arabia

Takaful Today

From a handful of operators

two decades ago the Takaful

movement has blossomed

into a fast growing

phenomenon in many Muslim

countries with very promising

prospects in other countries

with a large Muslim

community.

Takaful drivers

This movement is driven by

–a strong demand from a public

who would not insure

otherwise (because of religious

beliefs); and

–The successful development of

Islamic banking institutions

providing capital and Islamic

financial instruments for asset

management and investment.

Takaful Drivers

 Islamic banks and financial

institutions play a strategic and

important role in the distribution

of Takaful products (especially

Life Takaful Products).

 Just as Bancassurance played an

important role in the distribution

of personal lines insurance

products Bancatakaful is an

important driver for Takaful.

Takaful Operators

The number of Takaful operators

worldwide is now estimated at:

 150 Takaful companies operating in

40 countries

 10 Retakaful companies

 6 Islamic windows by Conventional

Reinsurance companies

Takaful Premium

 Takaful is one of the fastest growing

segments in insurance (at around

20% pa. on average)

 World Takaful contributions are

conservatively estimated at around

US$ 3billions, of which:

– 60% General Takaful

– 40% Family Takaful

Takaful Geographical Spread

 South& East Asia : 56%

 Middle East : 36%

 Africa: 7%

 Europe, USA & Others: 1%

Definition of Takaful

The word Takaful means joint guarantee. The objective

of Takaful is cooperation and mutual help among the

members of a defined group.

In a practical sense Takaful can be visualized as a

method of joint guarantee among a group of members or

participants against loss or damage that may inflict upon

any of them. The members of the group agree to

guarantee jointly that should any of them suffer a

catastrophe or disaster, he would receive certain sum of

money to meet the loss or damage. All members of the

group pool together their efforts to support the needy.

WORKING OF THE TAKAFUL

BUSINESS: The Malaysian Case

 Takaful Business is based on the concepts of

Mudarabah and Tabarru. Involvement of

these two Islamic forms of business eliminates

the elements of Riba from insurance contract

and convert Gharar into tolerable form.

 In Family Takaful each Takaful installment is

divided and credited into two separate

Accounts namely, the Participants'

Account(PA) and the Participants’ Special

Account(PSA). A substantial proportion of the

installments is credited into the PA solely for

the purpose of savings and investment.

 The balance of the installments is credited into

the PSA as `tabarru' for Sharikah Takaful

Malaysia to pay the Takaful benefits to the

heir(s) of any participant who may die before

the maturity of the contract.

 The amount accumulated in the PA is invested

in various business according to Islamic

financing techniques, and the resultant profits

are divided between the company and the

participants according to the agreed upon ratio,

e.g., 30-70.

 The participant's share is calculated according

to their individual share in the PA, and credited

into their respective accounts, the PA and the

PSA.

Mudarabah Model

Profit Attributed

Family Takaful To Shareholders

Company Company’s Admin

& Manag. Expenses

30%

Takaful Contract Investment Profit

based on Mudarabah 70%

PA PA Payment from

PA

Participant FTF

Payment from

PSA PSA PSA

Payment of claims

Should the Participant die or suffer

Permanent and Total Disability in the fifth

year of participation, Takaful benefit will

be paid in the following manner:-

 i. From Participant's Account =RM 4,890

(RM978 x 5)

profit if any, say RM 400

 ii. From Participants Special RM 5,000

Accounts (RM1000 x 5)

 Total Takaful Benefit Payable RM 10,290

In case the Partcipant survived

Should the Participant survive until

the maturity of his FTP, payment of

Takaful benefit will be made to him

as follows:-

i. From his Participant's Account = RM 9,780

(RM978 x 10)

profit from investment RM 1,800

ii. From Participants Special RM XXXX

Account

Total Takaful Benefit = RM 11,580 +

surplus determined

by Sharikah Takaful.

Mudarabah Model

General Takaful PROFITS

ATTRIBUTABLE TO

SHAREHOLDERS

COMPANY

COMPANY'S

ADMINISTRATION &

MANAGEMENT

EXPENSES

TAKAFUL CONTRACT PROFITS

INVESTMENT BY

BASED ON PRINCIPLE OF FROM

COMPANY

AL-MUDHARABAH INVESTMENT

OPERATIONAL SHARE OF

COST OF SURPLUS FOR

TAKAFUL THE COMPANY

TAKAFUL

GENERAL GENERAL 40% (Example Only)

PARTICIPANT CONTRIBUTI OPERATIONAL SURPLUS

TAKAFUL TAKAFUL

ON PAID BY COST OF TAKAFUL (PROFIT)

FUND FUND 60% (Example Only)

PARTICIPANT

OPERATIONAL SHARE OF

COST OF SURPLUS FOR THE

TAKAFUL PARTICIPANT

Wakalah Model

COMPANY MANAGEMENT PROFIT / LOSS

TAKAFUL ADMIN & MARKETING SHARE OF PROFIT

EXPENSES OF ATTRIBUTABLE TO

EXPENSES 25% TO 35% FOR THE COMPANY

COMPANY SHAREHOLDERS

40%

TAKAFUL

CONTRACT BASED INVESTMENT PROFITS FROM

ON PRINCIPLE OF BY FUND INVESTMENT

AL-WAKALAH

60%

OPERATIONAL COST

OF TAKAFUL /

RETAKAFUL

TAKAFUL GENERAL

PARTICIPANT GENERAL SHARE OF

CONTRIBUTIO TAKAFUL OPERATIONAL COST SURPLUS

TAKAFUL SURPLUS FOR

N PAID BY FUND OF TAKAFUL (PROFIT)

FUND THE PARTICIPANT

PARTICIPANT 65% TO 75%

OPERATIONAL COST

100%

OF TAKAFUL

Waqf Model
Definition of Waqf

 Waqf is an Arabic word and it means

to stop to withhold and not to let go.

 In technical meaning Waqf means to

allocate or donate some property or

cash for a specific purpose to get

pleasure of Allah and not to let it go

through consumption or sale.

 The Waqf property comes into

ownership of Allah (SWT) and Waqif

will have no property rights on it.

 Waqif has right to set the rules

for Waqf and manage the

Waqf.

 Waqf may be general purpose

or specific purpose, like

Waqf ‘Ala al Aulad or

Waqf ‘Ala al Aqarib.

 In Islamic Law Waqf is a legal

entity

Waqf Model

COMPANY TAKAFUL OPERATOR FEES FOR MANAGEMENT PROFIT / LOSS

SHARE OF PROFIT

ADMIN & MARKETING EXPENSES EXPENSES OF ATTRIBUTABLE TO

FOR THE COMPANY

25% TO 35% COMPANY SHAREHOLDERS

40%

PROFIT SHARING ON

INITIAL DONATION BY MUDARABHA BASES

SHAREHOLDERS TO

CREATE WAQF FUND

Waqf Waqf INVESTMENT PROFITS FROM

BY FUND INVESTMENT

TAKAFUL 60%

CONTRACT BASED

ON PRINCIPLE OF

AL-WAKALAH OPERATIONAL COST OF

TAKAFUL /RETAKAFUL

TAKAFUL

SHARE OF

PARTICIPANT CONTRIBUTION WAQF FUND SURPLUS

WAQF FUND OPERATIONAL COST OF SURPLUS FOR

PAID BY 65% TO 75% TAKAFUL (PROFIT)

THE PARTICIPANT

PARTICIPANT

OPERATIONAL COST OF 100%

TAKAFUL

 A Waqf Fund would basically be a

separate legal entity to which the

Shareholders would initially make a

donation to establish the Waqf Fund.

 The donation can be of any reasonable

amount (Shariah Board may specify such

an amount).

 The objectives of the Waqf fund would be

to provide relief to participants against

defined losses as per the rules of the

Waqf fund.

In this modified Wakala Model with Waqf, the

relationship of the participants and of the

operator is directly with the Waqf fund. The

Operator is the Wakeel of the Waqf Fund and

the participants pay one sided donation to

the WAQF fund (not conditional) which also

eliminates the issue of Gharar. The WAQF

fund rules may define the sharing of surplus

and other rules under which it would operate

but there is no obligation to distribute

surplus. Further the Qard would be given by

the shareholders to the WAQF entity and not

to individuals as in the typical Wakalah

model.

The Challenges ahead

 Despite a remarkable breakthrough

and a dynamic and sustained

growth, there are challenges facing

the Takaful industry.

The business model dilemma

 The existence of three business models:

Mudharabah (Profit & Loss sharing)

Wakala (agency contract with a

performance fee element to replace

surplus sharing)

Wakala with Waqf model

 Could create an uneven / unfair business

environment to operate

 Need to reach a consensus internationally

on a common and standard Takaful

business model

Future Outlook

 Despite the remarkable growth rate

recorded by the Takaful industry,

penetration is still far below the

enormous market potential offered

by the Muslim community worldwide

(23% of the total world population).

Growth Outlook

 World Muslim population is estimated

at 1.5 billions, of which around 97%

are based in Asia and Africa.

 A two-digit growth in the range of

15% to 20% can be reasonably

sustained for at least the next 10

years in the existing markets (Far

and Middle East).

New Takaful Frontiers

 Markets like Europe, North and Latin

America, Central Asia, Australia

where large Muslim communities live

are huge untapped reservoirs;

 The recent opening towards “Islamic

windows” in the banking sector in

Europe is likely to be followed by

“Takaful windows” initiatives.

Takaful Products to Non-Muslims

 Takaful Products are not exclusive to

Muslims.

 Competitively priced and sold

through the right channel it could

attract any consumer irrespective of

their origin or faith.

Conclusions

 Despite the challenges facing this

“new” industry, exciting times are

ahead once the latent potential is

unleashed.

 The success of Takaful largely

depends on that of Islamic Financial

institutions on a global basis.

THANK YOU

Takaful Concepts and Models by Atiquzzafar Khan - Revision history

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