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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

Takaful by Capt. M. Jamil Akhtar - Revision history

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