Introduction to Takaful

- Introduction to Takaful -
Contents
Conventional Insurance
How Qimar & Riba exists in Conventional Insurance
Concept and Definition of Takaful
Application in Islamic Financial Institution
Key Feautres of Takaful
Conventional Insurance Vs Takaful
Modes of Takaful
Mudarabah Model
Wakalah Model
Wakalah based on Waqf Model

Re Takaful
 - Introduction to Takaful -
Conventional Insurance

DEFINITION

“A way to provide security / and compensation to what is valuable in

the event of its loss, damage or destruction based on the principle of
risk taking and speculation.”
 - Introduction to Takaful -
Conventional Insurance

• According to Shariah rules there are two aspects of Conventional

Insurance, namely:

1. Conceptual Aspect

2. Practical Aspect

• So far as the Concept of Insurance is concerned, it is to cover the

risk of loss, or “fortunate many helping the unfortunate few”.

• The concept is not only recognized, but also appreciated and

rewarded by Islam.
 - Introduction to Takaful -
Conventional Insurance
CONCEPTUAL ASPECT

"Help ye one another in righteousness and piety, but help ye not one another
in sin and rancor" (Al-Mai’dah, part of verse 2)

• Principles of Muwalat, Maaqil, and Kafalah and establishment of

Islamic welfare state by the Holy Prophet (SAW), Waqf and Tabrru
are examples for recognition of this concept.
 - Introduction to Takaful -
Conventional Insurance

PRACTICAL ASPECT

• Conventional Insurance is forbidden due to two reasons:

1. Qimar or Mayser
2. Riba

• Since the above two things have been clearly prohibited by Islam,
they cannot be justified on the conceptual aspect of helping
victims of various accidents or losses.
 - Introduction to Takaful -
Conventional Insurance

PRACTICAL ASPECT (cont’d)

O believers! Intoxicants and gambling and Al Ansab (Animals sacrificed for

idols) and Al Azlam (arrows for seeking luck or decision) are an abomination
of Satan's handiwork. So avoid them in order that you may be successful.
Satan wants only to excite enmity and hatred between you with intoxicants
and gambling and hinder you from the remembrance of Allah and from
prayer. So, will you not then abstain? (Al Maidah 90 – 91)
 - Introduction to Takaful -
How Qimar & Riba exist in Conventional Insurannce

MAYSER

 QIMAR or MAYSER has been clearly prohibited by Quran and

Hadith of the Holy Prophet (SAW). It has two basic elements
which are prohibited, namely:

1. Khatar

2. Gharar
 - Introduction to Takaful -
How Qimar & Riba exist in Conventional Insurannce

KHATAR

“Taleequl milki al alkhatr, wal mal fil janibain”

 To conditionalize the ownership/profitability on uncertain event,

where money is involved on both sides.

 However, if money is not involved on both sides i.e. one party

voluntarily (without any compensation) declares “We shall
compensate you on a particular event of loss”, it would not be
Mayser.
 - Introduction to Takaful -
How Qimar & Riba exist in Conventional Insurannce

GHARAR

 Lexically it means uncertainty and technically it means:

 Uncertainty of the counteract or

 Subject matter or
 Period in a commutative contract.
 - Introduction to Takaful -
How Qimar & Riba exist in Conventional Insurannce

GHARAR(cont’d)

 The element of Gharar in the commercial insurance contract:

 The insurer does not know how much he would owe to an

individual

 Some times an insured also does not know how much he

would pay ultimately to the insurer

 In case of no claim from the insured in general insurance,

Qimar emerges
 - Introduction to Takaful -
How Qimar & Riba exist in Conventional Insurannce

PROBLEMS

 The participant contributes a small amount of premium in a hope

to gain a large sum -Khatar

 The participant loses the money paid for the premium when the
insured event does not occur - Gharar

 The company will be in deficit if the claims are higher than the
amount contributed by the participants - Gharar
 - Introduction to Takaful -
How Qimar & Riba exist in Conventional Insurannce

RIBA

 The element of Riba in the commercial insurance contract exists

in two ways:

 Direct Riba - Excess on one side in case of exchange

between the amount of premium and the sum insured.

 Indirect Riba - The interest earned on interest based

investments
 - Introduction to Takaful -
Concept and Definition of Takaful

 ‘Takaful’ is derived from an Arabic word ‘Kafala’ meaning “ to

Guarantee“.

 A system of Islamic Insurance based on the principle of

TA’AWUN (mutual assistance) and TABARRU’ (Gift, Give away,
donation) where the risk is shared collectively by the group
VOLUNTARILY.

 This is a pact among a group of members or participants who

agree to jointly guarantee among themselves against loss or
damage to any of them as defined in the pact.
Definition of Takaful
Takaful Concept:
• It is based on the concept of brotherhood and mutual
solidarity.
• Takaful is a community-pooling system in which
participants contribute their savings into the common fund
to help those who need it most in times of financial
difficulty.
• Examples: The concept of Takaful is manifested in the
system of Bait-ul-Maal, cooperative societies and joint
family set-ups etc…
Definition of Takaful

Takaful Nature:
In practice, Takaful can serve as a risk-mitigation tool and
an alternative to conventional insurance.
 - Introduction to Takaful -
Application in Islamic Financial Institution

Takaful can be used to cover :

• Property e.g. house, factory, mosque, offices

• Vehicles (car, motorcycle etc..)
• Goods ( For Import or Export )
• Valuables
• Health, accidents and Life
 - Introduction to Takaful -
Key Features of Takaful
 Cooperative Risk-sharing for Protection.

 Clear segregation between Participant and Operator.

 Shariah Compliant Investment strategies.

 Avoidance of Riba (interest) and Maysir (Gambling).

 Gharar is forgiven, using Tabarru’

 Shariah Advisory Oversight

 - Introduction to Takaful -
Conventional Insurance vs Takaful

Insurance Takaful

• It is a business institutions’ operated • It is a co-operative institution based

venture based on the principles of on the principles of “Ta’awun’ (mutual
“Contract”. co-operation)

• Risk transfer mechanism where the • Risk sharing mechanism, as such no

insured substitutes certainty for transfer of risk is involved.
uncertainty.
 - Introduction to Takaful -
Modes of Takaful

 Currently, there are three kinds of Takaful model being operated

worldwide:

 Pure Mudarabah Model

 Wakalah Model (hybrid of Mudarabah & Wakalah)

 Wakalah based on Waqf Model

 - Introduction to Takaful -
Modes of Takaful

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 participants and the takaful

operator in an agreed ratio.

 This model allows the takaful operator to share in the

underwriting results from operations as well as the favorable
performance returns on invested premiums.
 - Introduction to Takaful -
Modes of Takaful
Mudarabah Model Illustration PROFIT
ATTRIBUTABLE TO
SHAREHOLDER

COMPANY COMPANY
ADMINISTRATION
& MANAGEMENT
EXPENSES

TAKAFUL CONTRACT
BASED ON PRINCIPLE INVESTMENT PROFITS FROM
BY COMPANY INVESTMENT
OF AL-MUDHARABAH

SHARE OF
SURPLUS FOR
THE COMPANY

TAKAFUL GENERAL
GENERAL OPERATIONAL
CONTRIBUTION TAKAFUL
TAKAFUL COST OF 40%
PAID BY FUND SURPLUS
FUND TAKAFUL
PARTICIPANT /RETAKAFUL 60%
SHARE OF
SURPLUS FOR
THE PARTICIPANT
 - Introduction to Takaful -
Modes of Takaful

MUDARABAH MODEL

Shari’a Concerns

 The relation between the participants is that of tabarru’ and not

Mudarabah, “Profit Sharing” can’t be applied here. Donation
cannot be Mudarabah capital at the same time.

 In a Mudarabah contract, a profit is to be generated to be

distributed. Profit is not the same as ‘Surplus’ (excess of
premiums over claims, reserves and expenses) and in the
insurance context no profit can be generated by definition.
 - Introduction to Takaful -
Modes of Takaful

MUDARABAH MODEL

Shari’a Concerns

 The sharing in underwriting surplus itself is something which is

similar to making this into a commercial business venture and not
a mutual contract for assistance and protection.

 The requirement to provide Qard Hasanah (in case of a deficit) in

a Mudarabah contract by definition is against the concept of
Mudarabah, which is a profit sharing contract and a Mudarib
cannot be a guarantor.
 - Introduction to Takaful -
Modes of Takaful

WAKALAH MODEL

 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.

 The operator may also charge a ‘fund management fee’ and

performance incentive fee’
 - Introduction to Takaful -
Modes of Takaful
Wakalah Model Illustration
TAKAFUL OPERATOR FEES MANAGEMENT PROFIT / LOSS
COMPANY FOR SHARE OF PROFIT
EXPENSES OF ATTRIBUTABLE TO
ADMINISTRATION EXPENSES FOR THE COMPANY
COMPANY SHAREHOLDERS
25% TO 30%

40% PROFIT SHARING ON

MUDARABHA BASIS

PROFITS
INVESTMENT
FROM
BY FUND
INVESTMENT

60%

PARTICIPANT TAKAFUL GENERAL

GENERAL OPERATIONAL SHARE OF
CONTRIBUTION TAKAFUL SURPLUS
TAKAFUL COST OF
PAID BY FUND 70% SURPLUS FOR THE
FUND TAKAFUL
PARTICIPANT TO 75% PARTICIPANT
/RETAKAFUL
100%
 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL

 The share-holders create a Waqf fund to extend the help to those

who want cover against financial losses.

 The participants donate to the fund and the operator manages the
fund.

 All underwriting results belong to the fund which itself has a legal
entity.
 - Introduction to Takaful -
Modes of Takaful
Waqf Model Illustration
TAKAFUL OPERATOR FEES MANAGEMENT PROFIT / LOSS
COMPANY FOR SHARE OF PROFIT
EXPENSES OF ATTRIBUTABLE TO
ADMINISTRATION EXPENSES FOR THE COMPANY
COMPANY SHAREHOLDERS
25% TO 30%

40%
INITIAL DONATION
PROFIT SHARING ON
BY SHAREHOLDERS
MUDARABHA BASES
TO CREATE WAQF
FUND

PROFITS
WAQF INVESTMENT FROM
BY FUND INVESTMENT

60%

DONATION WAQF OPERATIONAL SHARE OF

PARTICIPANT WAQF SURPLUS
PAID BY FUND COST OF
FUND SURPLUS FOR THE
PARTICIPANT 75% TO TAKAFUL
70% PARTICIPANT
/RETAKAFUL 100%
 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL(cont’d)

 A Waqf Fund is established by the shareholders of Takaful

Company through the contribution of ‘Ceding amount’ (part of the
Capital).

 The Ceding amount of the Waqf will remain invested.

 Any person by signing the proposal form, contributing to the

Waqf and subscribing to the policy documents shall become the
member of the Waqf fund.
 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL(cont’d)

 The Waqf fund shall work to achieve the following objectives:

a) To extend financial assistance to its members in the event of

losses.

b) To extend benefits to its members strictly in accordance

with the Waqf Deed.

c) To donate to Charities approved by the Shariah Supervisory

Board
 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL(cont’d)

 The Waqf Fund will lay down the rules for distribution of its funds
to the beneficiaries and will decide how much compensation
should be given to a subscriber/member.

 The Waqf will become owner of all contributions and has the right
to act as a legal entity as per its terms for investment,
compensations and dealing with the surplus amounts.
 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL(cont’d)

 The Takaful Company may distribute the surplus amounts on the

following three basis:

a) A portion kept as reserve to mitigate the future losses.

b) A portion distributed among the participants to differentiate

it from the conventional insurance procedures.

c) A portion utilized for the charitable purposes every year.

 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL(cont’d)

 If the fund is liquidated, the outstanding balance, after paying all

dues and payables, will be utilized to charitable purposes.

 The Takaful company, while managing the Waqf Fund, will play
two different roles simultaneously:

a) Operator/Manager

b) Mudarib
 - Introduction to Takaful -
Modes of Takaful

WAQF MODEL(cont’d)

 As Operator/Manager, the Takaful Company will perform all

functions necessary for the operations of the Waqf against a
Wakala fee to be deducted from the Contributions of the
Participants.

 As Mudarib of the fund, the Takaful Company will manage the

investment of the excess funds of the Waqf into Shariah
compliant investments and will participate in the profit of the
fund’s investments at a specified ratio of profit.
 - Introduction to Takaful -
Re-Takaful

 An Islamic alternative to conventional reinsurance based on a

Shariah compliant approved concept for reinsurance.

 Takaful Operator pays an agreed premium from its takaful fund to

the Re Takaful operator in return for the Re Takaful Operator
providing security for the assurance that the Takaful Operator is
protected.
Thank you !