TOPIC 6

LEGAL FRAMEWORK OF TAKAFUL

1
CONTENT:

6.0 Introduction

6.1 Development of Takaful system

6.2 Differences between Insurance and

Takaful

6.3. Regulatory Framework for Takaful in IFSA

2013
(Part VI s. 90-96 and Part IX s.139-142)

6.4 Guidelines/Policy Documents on Islamic

Banking and Takaful
6.0 Introduction

• The new legal framework would not only streamline

the legal requirements across sectors but would also
ensure that the law was reflective of the nature and
features of Shariah contracts.

• It would also ensure that the degree of regulation

would commensurate with level of risks that Islamic
financial institutions, markets and products pose to the
overall financial system

• Greater clarity on the legal and prudential

requirements underpinned by Shariah principles will
enable participants of the Islamic financial system to
align to their practices and expectations accordingly
when undertaking Islamic financial business and
transactions
6.1: HISTORICAL DEVELOPMENT OF TAKAFUL
(TAKAFUL INDUSTRY EVOLUTION)

• Insurance practices were known before the time of the Prophet

Muhammad SAW and had gradually developed.
• Ibn Abidin (1784-1836), became the first Islamic scholar to
come up with the meaning, concept and legal basis of an
insurance contract.
• It was a common practise of the ancient Arab tribes that if any
member of a tribe was killed, the concept of Aqilah (Joint
Responsibility) was practised.
• The practice of paying blood money, ransom and society’s
responsibility to establish a joint venture to provide help and
aid to the poor were practiced at that time.
• The development of the Takaful industry in Malaysia
started when Takaful Act was enacted by Parliament
in 1984. This Act (Takaful Act 1984) provides for the
regulation of Takaful business
in Malaysia

• The development of the Malaysian Takaful Industry

1984 - 2013 is summarized in the following tables and
diagrams:
ITEMS 1984 2013
Sole composite operator with 11 Takaful Operators with
Takaful
RM10m capital that sets the minimum capital of RM100m
Operator(s)
foundation for the industry each, which enhances competition
Investors/ An Islamic bank and state Broad range comprising of private
Shareholde religious councils and religious investors, banking groups, insurers
rs foundations and reinsurers

Limited products mainly confined Broad range of product mix with

to motor, fire and mortgage sophisticated features. Family
Products Takaful. General products products dominated the market
dominated the market with 63% with 71% share (in terms of
share (in terms of contributions) contributions)

Muslims and non-Muslims with

Customers Mainly Muslims different expectations, preference
and demands

Branches, marketing officers,

Distribution Branches and marketing officers
agency force, bancatakaful,brokers,
Channels and Takaful Desks
internet and strategic alliances

Wider range of shariah-compliant

Investment Confined to Islamic deposits and investment instruments issued by
Avenues Government Islamic securities the Government and the private
sector
Phase I (1984-1992) Phase II (1993-2000) Phase III (2001-2010)

• Phase I started with the • In Phase II more licenses
enactment of a dedicated
regulatory law, i.e. the
Takaful Act 1984 and the
commencement of the
first Takaful Operator in
1985.
• The Act governs the
conduct of Takaful
business and requires the
registration of Takaful
Operators. • This has facilitated retakaful
• It also provides for the
establishment of Shariah
Committees to ensure
that the business
operations of a Takaful
Operator are in
compliance with shariah
principles at all times.
were granted to operators
and there was greater
regionalcooperation among
Takaful Operators, including
the formation of the ASEAN
Takaful Group in 1995 and
the establishment of ASEAN
Retakaful International
(L) Ltd in 1997.
arrangements among Takaful
Operators in Malaysia and in
the region, namely Brunei,
Indonesia and Singapore
• The Financial Sector Master Plan
(FSMP) was introduced
• The objective among others, is to
increase the capacity of Takaful
Operators and strengthen the
legal, shariah and regulatory
framework of the Takaful industry.
• Under the FSMP, Malaysia aspires
to become an international centre
for Islamic finance, and during this
period there was an increased
pace of development of the Takaful
industry.
• The Malaysian Takaful Association
(MTA) an association for Takaful
Operators was establish in 2002.
• The MTA aspires to improve
industry self-regulation
through uniformity in market
practices and in promoting higher
level of cooperation
among the players in developing
the industry.

A gradual approaches….
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6.2: WHY TAKAFUL NOT INSURANCE CONVENTIONAL?

(DIFFERENCES BETWEEN INSURANCE AND TAKAFUL)

• Conventional insurance suffer from fundamental

problems in its modus operandi, i.e.,:
– Maysir
– Gharar
– Riba

• 1972 fatwa by National Council for Religious

Affairs of Malaysia : life insurance is unlawful
 RIBA IN CONVENTIONAL INSURANCE
•Issue : contract of sale

The Seller : Insurance Company

The buyer : Contributor/The Insured
Subject matter : financial guarantee IF calamity
occurs-

Price : RM 1200/year

RIBA exists when the contributor receives compensation

(RM80,000) from the insurance company.

The amount received (RM80,000) is far more than the amount

contributed (RM12,000 or less). =riba al-fadhl
:
 RIBA IN CONVENTIONAL INSURANCE (2)

Money is an usurious item. Deals involving usurious

items must satisfy:
• Matahalan bi mathalin ( same value)
• Yadan bi yadin (delivery at the time of aqad)

Therefore:
•Different values in returns = riba al-fadhl
•Deferred payment involving usurious items = riba al-
nasi’ah

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12
GHARAR IN CONVENTIONAL INSURANCE

•Gharar in conventional insurance :

1. From the doubt about the contract without
knowing exactly what the outcome will be.
2. Policy holders are unsure about the contract :
ignorant/don’t understand .

• From Doubt :
1. In the contract and compensation’s existence
2. Contract’s outcome
3. In the length of the contract period
4. In the amount of compensation and premium
GHARAR IN CONVENTIONAL INSURANCE

SCENARIO 1 : General Insurance (Motor vehicle insurance)

Premium paid by Imtiaz : RM2,000
Cover up by the insurer : RM 60,000

Possibility 1 : No peril occurs

Imtiaz loses and get nothing for the premium paid
The Insurer : enriched by RM2,000.

Possibility 2 : A peril occurs

Imtiaz will get full/lesser protection amount or none if the peril
is not included in the policy- GHARAR for uncertainty as to the
actual amount.
GHARAR IN CONVENTIONAL INSURANCE

SCENARIO 2 : Life Insurance

RM 200 monthly / 30 yrs
Cover up : RM 150,000

Possibility 1 :
Imtiaz lives through the 30 yrs and paid RM72,000 if he dies
his family will get RM 150,000 ( 150000-72000 =78000)

Possibility 2 :
Imtiaz die in the middle of 3rd yr (paid RM 6000)
His family gets coverage of RM 150,000 ( 150,000-6000 =
144,000
MAISIR IN CONVENTIONAL INSURANCE

Purchasing the policy with hope of getting more in

terms of compensation/indemnity if any of the perils
were to occur.
DIFFERENCES BETWEEN TAKAFUL AND INSURANCE
HOW INSURANCE IS MODIFIED TO BE SHARIAH COMPLIANT

According to Dr. Yusof Qaradawi:

“In my view insurance against hazards can be

modified in a manner which would bring it closer to
the Islamic principle by means of a contract of
donation with a condition of compensation”;

“A further requirement is that the company must be

free from usurious business”.

• The Lawful and The Prohibited in Islam pg.276 (English translation)

According to “Badan Petugas Khas”:

“Under the Islamic insurance system, part of the

contribution from every participant must be made
with the intention of tabarru’ not for buying and
selling, the existence of tabarru’, makes the
transaction permissible and valid according to the
Shariah.”
–Translated from the “Badan Petugas Khas” Report pg. 19

Badan Petugas Khas’ was the special taskforce

commissioned by the Government in 1982 to study
the feasibility of setting up Islamic insurance in the
Malaysia.
WHY TAKAFUL?

"And help one another in righteousness and

piety and do not help one another in evil
deeds and enmity"
(Al Maidah, 2)

"Be sure we shall test you with something

of fear and hunger,some loss on goods, lives
and the fruits (of yours toil), but give
Glad tidings to those who patiently
persevere, - Who say, when afflicted with
calamity "To Allah we belong and to him is
our return ".
(Al-Baqara,155-156)
HADITH

Legal Maxim :
•“al- Darar Yuzal” : damage or harm is removed
WHAT IS TAKAFUL?
 TAKAFUL AS A CONCEPT
(AS ENVISAGED BY SOME SCHOLARS)

Concept is based on solidarity, shared responsibility &

brotherhood among participants;

Participants all agree to cooperate and be mutually

responsible to help one another financially should a
member suffer a loss defined in the policy;

This is achieved through making contribution

(tabarru’) to a common fund from which financial
compensation can be paid to eligible participants;
Participants mutually bear the risks themselves in
the spirit of tabarru’;

Participants are both the insurer as well as the

insured at the same time.

Takaful operator does not bear the risk;

The problem with such mutual aid concept is that

Participants can be called upon to make additional
contributions, if the common fund is not sufficient to
pay the compensation / benefits guaranteed by the
scheme.
TAKAFUL IN PRACTICE (MODIFIED MUTUALITY CONCEPT)

Participants are not asked to pay additional contributions even

if the takaful fund is in a deficit.

Instead, Takaful Operator will provide interest free loan (Qard

Hassan) to make up the deficit.

Participants are not involved in the day to day operation or in

the management of the takaful funds;

The management of the takaful fund is delegated the Takaful

Operator.
TRANSPARENCY OF CONTRACTS
Contract between the Contract between
Participants Participants & TO.
themselves
Participant
Takaful Operator
Participant

Participant •Wakalah or (agency)

Takaful Fund Contract for managing
Participant the fund
•General
Participant
•Other contracts may
Participant •Family also be used such as
Mudharabah, Wadi’ah
Participant or Waqaf for example
Participant
•or other contracts not
forbidden by the
Tabarru’ Contract
Shariah
TAKAFUL BUSINESS

Takaful Products :
1. General takaful as the alternative to
general insurance.

2. Family takaful is the alternative to life

insurance

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Common Takaful Models
Underlying contract…..
Mudharabah

• The giving of capital to another person who will

trade with it for the purpose of sharing the profits
according to a pre-agreed ratio.
• The participants is the capital provider (rabbul mal)
and the manager (mudharib) is the takaful
operator.
• Profit, if any, will be shared based on a pre-agreed
ratio.
• Any losses are solely borne by the participants,
except in cases of negligence/fraud of the takaful
operator.
 Mudharabah

Donation Takaful
Fund

Manage

Participants Takaful Malaysia

Wakalah:
• Agency contract.
• The participants, as the principal, appoints the
takaful operator as their agent (wakil) to
manage the takaful fund.
• The takaful operator is entitled to an agency
fee.
 Wakalah

Donation Takaful
Fund

Manage

Participants

Takaful Malaysia
6.3 REGULATORY FRAMEWORK FOR TAKAFUL

Legal Definition of takaful

AAOIFFI’s Shariah Standards 26 (2) of 2007 provides : an

agreement between person who are exposed to risks by
paying contributions on the basis of “commitment to
donate”........

IFSB : Islamic counterpart of conventional insurance, and

exists in both life )or family) or general forms. IT is based
on concepts of mutual solidarity and typical Takaful
undertaking will consist of two-tier structure that is hybrid
of a mutual and commercial form of company.
6.3 LEGAL FRAMEWORK OF TAKAFUL INDUSTRY
Regulatory Requirements for Takaful: IFSA 2013

• The enacted Islamic Financial Services Act 2013 (IFSA) has

replaced Takaful Act 1984 as the source of Takaful legislation
and provides for the regulation of Takaful business in
Malaysia.
• The Act is supplemented by the Takaful Regulations
(Regulations) through which Bank Negara Malaysia prescribes
the details of mandatory requirements contained in certain
provisions of the Act.
• The Act is considered comprehensive and provides BNM with
the necessary tools for intervention and remedial action.
• The act requires among others, that Takaful Operators with
composite licenses (i.e.having both Family and General
Takaful business) to separate the licenses into different entity
and each entity must have a minimum paid capital of RM100
million.
•
Bank Negara Malaysia (BNM)

• When preparing the regulatory framework for the Takaful

industry, BNM has to give due consideration between the
different objectives of the following
stakeholders:
1. Regulator
2. Operators
3. Consumers
4. Domestic and international stakeholders
• the primary purpose of regulation is to ensure that a
Takaful intermediary/agent obtains sufficient information
about a prospective participant before rendering
appropriate advice on the suitability of a particular Takaful
product to the potential client.
BNM role as supervisor is to achieve the following
objectives:

Preserve the stability of Takaful Industry;

Instill public confidence in the Takaful

Industry;

Promote strong governance standards in the

management of Takaful Operators;

Ensure that consumers are well informed for

decision making;

Integrate supervision across borders and

sectors.
44
TAKAFUL ACT OF 1984

Takaful Act, 1984 is the Act for the regulation of Takaful business.
It was enacted following the establishment of Bank Islam in 1984;
• Due to the fact that Islamic bank needs insurance cover for its own
assets and interests arising from the financing and credit facilities

Section 2 : defines Takaful as a scheme based on brotherhood,

solidarity and mutual assistance which provides for mutual
financial aid to the participants in case of need, whereby the
participants mutually undertake to contribute solely for that
purpose.
It gives clear description that the participants of Takaful scheme are
joint contributors to receive mutual protection.
Duties in respect of Takaful Fund: Division 6 (ss. 90 - 96)

Section 90:Establishment and maintenance of takaful funds

A licensed takaful operator shall establish and maintain one or

more takaful funds for any class or description of its takaful business
as may be specified by the Bank

Section 91 : Takaful funds to be separate from shareholders’ fund

A licensed takaful operator shall keep any takaful fund

established and maintained under section 90 separate from its
shareholders’ fund
 Section 92 : Requirements relating to takaful funds

(1) A takaful fund established under section 90 shall be maintained and

managed by a licensed takaful operator on behalf of and in the best
interests of the takaful participants and the licensed takaful operator
shall—
(a) pay into a takaful fund all receipts in respect of takaful certificates to
which the takaful fund relates and which are issued by it or under which
the takaful fund has undertaken liability, including all income of that takaful
fund;
(b) maintain at all times assets in a takaful fund of a value
equivalent to or higher than the liabilities of that takaful fund;
(c) apply the assets of a takaful fund only to meet the liabilities
and expenses properly incurred by that takaful fund; and
(d) comply with such other requirements as may be specified by
the Bank under paragraph 57(2)(g) including requirements on the types of
assets to be, or not to be included, as assets of a takaful fund.

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 Section 92 : Requirements relating to takaful funds …cont’

(2) For the purposes of subsection (1), the Bank may

specify what constitutes “receipts”, “income”, “liabilities” or
“expenses” of the takaful fund which are attributable to the
business to which a takaful fund or takaful certificate
relates, and the manner to determine or value the receipts,
income, assets, liabilities or expenses.

(3) Unless the Bank otherwise approves, a licensed takaful

operator shall maintain a takaful fund established under
section 90 so long as it is under liability in respect of any
takaful certificate or takaful claim relating to that takaful
fund.

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Section 93 : Requirements relating to shareholders’
fund in respect of takaful funds

(1) A licensed takaful operator shall comply with any

requirements relating to its shareholders’ fund which
are attributable to the business to which a takaful
fund or takaful certificate relates as may be specified
by the Bank.

(2) For the purposes of subsection (1), the Bank may

specify what constitutes “receipts”, “income”, “assets”,
“liabilities” or “expenses” of the licensed takaful
operator which are attributable to the business to which
a takaful fund or takaful certificate relates, and the
manner to determine or value the receipts, income,
assets, liabilities or
expenses.

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Section 94 : Withdrawal from takaful funds

A licensed takaful operator shall not make any

withdrawal from a takaful fund, whether from the
surplus or otherwise of that takaful fund, unless—

(a) it has complied with such requirements on

withdrawals as may be specified by the Bank;

(b) the withdrawal does not impair the sustainability of

the takaful fund to meet its liabilities; and

(c) the interests and fair treatment of takaful

participants, including their reasonable expectations,
have been given due regard.

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Section 95 : Deficiency of takaful funds

Where the value of the assets of the takaful fund is

less than the value specified under paragraph
92(1)(b), the licensed takaful operator shall provide
qard or other forms of financial support to the
takaful fund from the shareholders’ fund for an
amount and on such
terms and conditions as may be specified by the
Bank.

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 Section 96 : Assumption of risk

(1) No licensed takaful operator shall cause any takaful

fund which it operates to assume any risk in respect of
such description of takaful certificate as may be
prescribed by the Bank unless and until the takaful
contribution payable is received by the licensed takaful
operator in such manner and within such time as may
be prescribed by the Bank.

(2) Where the takaful contribution payable under

subsection (1) is received by a person on behalf of a
licensed takaful operator, the receipt shall be deemed to
be receipt by the licensed takaful operator for the purpose
of that subsection and the onus of proving that the takaful
contribution was received by a person who was not
authorized to receive the takaful contribution shall lie on
the licensed takaful operator.

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 Best Interest of
Takaful Participant

53
 LIST OF PROHIBITED BUSINESS CONDUCT (SCHEDULE 7)

Para 1.Engaging in conduct that is misleading or deceptive in relation to the nature,

features, terms or price of financial service or product
Para 2:Inducing financial consumer to an act or omit to do an act in relation to
financial service or product by
 Making misleading, false or deceptive statements;
 Dishonestly concealing or omitting material facts;
 Recklessly making any statement, illustration, promise, forecast or comparison which
is misleading, false or deceptive.
Para 3 :Exerting undue pressure, influence or using or threatening to use
harassment, coercion, or physical force in relation to the provision of or payment for
financial service or product.
Para 4:Demanding payments for unsolicited financial services or products unless the
financial consumer has communicated his acceptance of the offer either orally or in
writing.
Para 5 :Exerting undue pressure on, or coercing, financial consumer to acquire
financial service or product as a condition for acquiring another financial service or
product.
Para 6:Colluding to fix or control the features or terms of financial service or product
to the detriment of financial consumer, except for tariff or contribution rates or
certificate terms approved by BNM.
Provisions relating to Takaful Certificate - Schedule 8

Permissible Takaful Interest (PTI)

• The term “Permissible Takaful Interest” refers to the benefit
(or interest) a person has on a covered object or person. This
benefit can refer to a financial benefit, among others. A
person has permissible Takaful interest in a thing when he or
she would experience some kind of loss (financial or
otherwise) if the thing were to be damaged or lost
• The financial relationship between the participant and the
subject matter covered should be such that the participant
will financially or economically benefit by the survival or
safety or existence of the subject matter or alternatively will
suffer financial or economic loss due to the destruction or
loss to the subject matter. Permissible Takaful Interest must
therefore be capable to be measured or valued financially in
order to be covered by Takaful.
• Permissible Takaful Interest must exist at the beginning and
at time of loss – otherwise, the Takaful affected is void.

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 PROVISIONS RELATING TO TAKAFUL CERTIFICATE - SCHEDULE 8

Permissible Takaful Interest (PTI) … (1)

•A takaful participant entering into a contract of family takaful under shall
have a PTI in the person covered at the time such contract of takaful is
entered into and at the time the takaful benefits are payable.
•If no PTI in the person covered at the time such contract is entered into, the
contract shall be void.
•If not PTI in the person covered at the time the benefits are payable, such
contract shall not be void outright but shall be subject to subparagraph (5).
•Subpara (5): Upon the TO becoming aware that a takaful participant no
longer has a PTI in the person covered, where there is no claim made or
there is a claim made or on the maturity of such takaful certificate, as the
case maybe, the TO shall pay to the takaful participant such moneys
payable under the contract of family takaful as may be specified by BNM;
and upon such payment, the contract of family takaful shall be deemed to
be terminated.
PROVISIONS RELATING TO TAKAFUL CERTIFICATE - SCHEDULE 8
Permissible Takaful Interest (PTI) …(2)
•What is PTI? If the person covered is—
(a) his spouse or child;
(b) his ward under the age of majority at the time the person entered into the contract
of takaful;
(c) his employee; or
(d) a person on whom he is wholly or partly, dependent for maintenance
or education at thetime he entered into the contract of takaful.
Note :All the above with question of fact: proof with documents e.g IC
•The participant shall, unless the person covered is a minor (sub-para8), obtain the
prior written consent of that person.
•The person covered may revoke his consent by informing the TO in writing. Upon
such revocation of consent, the takaful participant no longer has a PTI on that
person covered.

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•A family takaful certificate issued in respect of a contract of takaful entered into by

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a person where the person covered is his spouse shall not be void only on the
ground of dissolution of marriage between the person and his spouse.
Note: no exemption w other clause: e.g charity houses
SCHEDULE 9: SECTION 141
PRE-CONTRACTUAL DISCLOSURE AND REPRESENTATIONS, AND
REMEDIES FOR MISREPRESENTATIONS – NEW!

• Pre-contractual duty of • Insurer’s/Takaful operator’s, etc., pre-

disclosure for insurance/takaful
contracts other than consumer
insurance/takaful contracts
• Pre-contractual duty of
disclosure for consumer
insurance/takaful contracts
• Duty to take reasonable care
• Misrepresentation in respect of
insurance/takaful contracts
• Group policies/certificates
• Insurance /takaful on life of
another
• Warranties and
representations
contractual duty of disclosure
• Knowledge of, and statement by
insurance/takaful agent
• Non-contestability for life insurance
/family takaful contracts
• Remedies for misrepresentation
• Deliberate or reckless
misrepresentation
• Careless or innocent
misrepresentation
• Future treatment of contract
• Variations
• Modifications for group
policies/certificates

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 WARRANTIES AND REPRESENTATIONS (PARA.10, SCH.9)

“Any representation made before a consumer insurance/takaful

contract was entered into, varied or renewed shall not be converted
into a warranty by means of any provision of the consumer
insurance/takaful contract or of any terms of the variation or of any
other contract, whether by declaring the representation to form the
basis of the contract or otherwise.”

 Abolishes the ‘basis of contract’ clause in consumer insurance/takaful

contracts (although such clauses can still be used in non-consumer
insurance/takaful contracts).
 Insurers/takaful operators can no longer argue that an inaccurate answer
constitutes a breach of warranty to render a consumer insurance/takaful
contract void from its inception.
 Therefore, insurers can only void a consumer insurance/takaful contract
on grounds of misrepresentation.
WARRANTIES AND REPRESENTATIONS (PARA.10,
SCH.9)
Non-consumer Consumer insurance/takaful
insurance/takaful contracts contracts

Basis of
Misrepresentation
contract clause

Contract Reckless or Innocent or

immediately void deliberate careless

Contract void –
Contract void –
no refund of
refund premium
premium

Not :Remedy in dispute- IFSA

 MISREPRESENTATION (PARA.7, 14, 15, 16, 17, SCH.9)
Type of Elements Remedies
misrepresentation
 Knowledge that the statement was
untrue or misleading, or did not
care whether or not it was untrue or
misleading; and
Deliberate  the matter misrepresented was Avoid the consumer insurance/takaful contract
or reckless relevant to the licensed and refuse all claims.
insurer/takaful operator, or did not
care whether or not it was relevant
to the insurer; or
 Dishonesty

Based on what the insurer/takaful operator

would have done if not for the
misrepresentation:

 avoid the contract and refuse all claims,

but shall return to the consumer any
 Not deliberate or reckless, as the premium/ contribution paid;
Careless
case may be
or innocent
 treat the contract as if it had been entered
into or renewed on different terms; and/or

61
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 if the licensed insurer/takaful operator
would have charged a higher premium/
contribution, reduce proportionately the
© ZICOlaw. amount to be paid on a claim.
 Pre-contractual duty of disclosure (para.4, 5, 11, Sch.9)
Non-consumer insurance/takaful Consumer insurance/takaful
Party
contracts contracts

 Duty to not:
• Make misleading or false statements,
fraudulently or otherwise;
 Same
• fraudulently conceal a material fact; or
• In the case of insurance/takaful agents,
use unauthorised sales brochures

Insurer/Takafu  Duty to clearly inform a proposer in writing of  Onus is on insurer/takaful operator

l Operator the proposer’s pre-contractual duty of to ask a consumer to answer
disclosure, and that this duty of disclosure shall specific questions
continue until the time the contract is entered
into, varied or renewed
 Where the proposer fails to answer or gives an
incomplete/irrelevant answer, the onus is on the
 Same
insurer/takaful operator to pursue the matter
further

 Duty to volunteer all relevant information to the  Duty to take reasonable care not to
insurer/takaful operator make a misrepresentation

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Consumer/
proposer

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 Duty of utmost good faith  Same

© ZICOlaw.
 DUTY TO TAKE REASONABLE CARE (PARA.6, SCH.9)

(1)In determining whether a consumer has taken reasonable care not to

make a misrepresentation, the relevant circumstances may be taken into
account including —

The consumer How clear and

insurance/takaful Any relevant specific the
contract and the explanatory material insurer’s/takaful
manner in which it or marketing material operator’s questions
was sold were

If the licensed insurer/takaful operator was, or ought to have been, aware of

any particular characteristics or circumstances of the consumer, the
insurer/takaful operator shall take into account such characteristics or
circumstances.
*Note: Even if the consumer did not take reasonable care, the insurer/takaful
operator would still be assumed to have taken into account particular factors
relating to the consumer, where the insurer/takaful operator knew or ought to
have known of such factors.
 PAYMENT OF TAKAFUL BENEFITS - SCHEDULE 10, IFSA

Power to make nomination

•To prominently display in the nomination form that the takaful participant may—
(i) assign the takaful benefits to a person or designate the nominee
to receive the takaful benefits as a beneficiary under conditional hibah; or
(ii) designate the nominee to receive the takaful benefits as an executor
*under FSA policy owner has to assign the policy benefits to the nominee
(if nominee is not his spouse, child or parent) if he wants the nominee to
receive as beneficiary and not as executor

Effect of nomination
•Update SOP to explain to participants the different effects of nomination
Revocation of nomination
•Update SOP to reflect new requirements i.e. Where there is more than one nominee
and any particular nominee who is nominated as a beneficiary under conditional
hibah predeceases the takaful participant, the TO shall pay the share of the deceased
nominee, upon the death of the takaful participant to the estate of the deceased
takaful participant unless the takaful participant has made a subsequent nomination
in place of the deceased nominee *under FSA it is payable to remaining nominees

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PAYMENT OF TAKAFUL BENEFITS - SCHEDULE 10, IFSA

Payment where there is nomination

•If there is nomination, TO shall pay the takaful benefits according to the direction of the
nomination upon receipt of a claim by the nominee together with proof of death of the
takaful participant
•If a nominee fails to claim the takaful benefits within 60 days of the TO becoming aware of
the death of the takaful participant, the TO shall immediately notify the nominee in writing.
•Where a nominee fails to claim the takaful benefits within 12 months of the TO becoming
aware of the death of the takaful participant despite notification —
(a) in the case of a nominee who is nominated as an executor, paragraph 8 shall
apply as though no nomination was made; or
(b) in the case of a nominee who is nominated as a beneficiary under conditional
hibah, the takaful benefits payable to such nominee shall be lodged with the
Registrar of Unclaimed Moneys in accordance with the provisions of the
Unclaimed Moneys Act 1965 [Act 370].
•Where a nominee dies after the death of the takaful participant but before any takaful
benefits has been paid to him as nominee, the TO shall pay the takaful benefits to—
(a) the estate of the deceased takaful participant if the nominee is an executor;

65
or

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(b) the estate of the deceased nominee if the nominee is a beneficiary under
conditional hibah.
 PAYMENT OF TAKAFUL BENEFITS - SCHEDULE 10, IFSA

Payment where there is no nomination

•If takaful participant dies without having made a nomination relating to
takaful benefits under a takaful certificate, the TO shall subject to
paragraph 7, pay the takaful benefits of the deceased takaful participant to
the lawful executor or administrator of his estate.
•If the TO is satisfied that there is no lawful executor or administrator of the
estate of the deceased takaful participant at the time of payment of takaful
benefits, the licensed takaful operator may pay to a proper claimant without
requiring the grant of probate or letters of administration or a distribution
order —
(a) where the takaful benefits do not exceed RM100,000 or such greater
amount as may be prescribed by BNM, all such takaful benefits; or
(b) where the takaful benefits exceed one hundred thousand ringgit, or
such greater amount as may be prescribed by BNM, an amount not greater
than RM100,000 or such greater amount as may be prescribed by BNM.

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•The TO shall pay the balance of the takaful benefits under subsubparagraph (2)(b) to

© ZICOlaw. All Rights Reserved.

the lawful executor or administrator of the estate of the deceased takaful participant.
 PAYMENT OF TAKAFUL BENEFITS - SCHEDULE 10, IFSA

Compensation on Claim Amount

•If a claim or a part of a claim made under a family takaful certificate, or
under a personal accident takaful certificate upon the death of a takaful
participant is not paid by a TO within 60 days of notification of the claim,
the TO shall pay a minimum compensation at the rate of investment yield of
the participant’s risk fund plus 1% or such other rate as may be specified
by BNM, on the amount of takaful benefits upon expiry of the 60 days until
the date of payment, whereby the 1% is to be paid from shareholders’
funds.
*under FSA: minimum compound interest at the average fixed deposit rate
applicable for the period of 12 months for licensed banks
•Where the balance of takaful benefits are to be paid by a TO to the lawful
executor or administrator of the estate of the deceased takaful participant
under subparagraph 8(3), compensation payable under subparagraph (1)
shall only apply to such balance of takaful benefits upon expiry of 60 days

67
from the time that the lawful executor or administrator produces the grant

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of probate or letters of administration or distribution order until the date of
payment.
 KEY OPERATIONAL DIFFERENCES BETWEEN TA 1984 AND IFSA 2013

Operational
TA 1984 IFSA 2013
aspect
Permissible Not explicitly required Explicitly required for family takaful at
takaful interest the time of payment of contribution and
when certificate is effected (Sch8 para 3: 273)

Surplus of assets Have consistently be a requirement Issue of surplus assets seems to be

over liabilities for licensing and can be a cause for
revocation of licence; as set out in ss.
2 (definition of ‘statutory balance
sheet’), 4(2)(b), 11(1)(d) and 16(3)
dealt with only in these ss. 12 and 218
in the event of winding up. (Div.3 )
By virtue of Takaful (Surplus of Assets
over Liabilities) (Revocation)
Regulations 2013, gazetted as P.U.(A)
197, the Minister has revoked the
Takaful (Surplus of Assets over
Liabilities) Regulations 1985.

Levy S. 21(3) imposes that levy not NO longer provided for under the IFSA.
exceeding 1% of the annual actual
contribution of an operator in any one
year assessable on the general
business, and in the case of family
solidarity business on any new
business, carried out by the operator
© ZICOlaw.
in the previous year
KEY OPERATIONAL DIFFERENCES BETWEEN TA 1984 AND IFSA 2013
Operational
TA 1984 IFSA 2013
aspect
Consumer takaful None Introduces provisions governing consumer
contract takaful contracts

Pre-contractual More onerous duty on consumer to Less onerous pre-contractual duty of

duty of disclosure disclose all relevant information disclosure for consumers with greater
responsibility on insurers to guide relevant
disclosures.

For consumer insurance contracts, eradicates

the insurer’s ability to rely on the basis clause
(in proposal, reinstatement forms, health
warranties) to repudiate claims on the basis of
material non-disclosure.

Prohibited S. 28: any statement, promises or
conducts forecasts which is misleading,
false, or deceptive, or by any
fraudulent concealment of a
material fact, or by the reckless
Extensively listed out in Schedule 7. Include,
among others, demanding payments for
unsolicited products and services, exerting
undue pressure, influence or using or
threatening to use harassment, coercion or

69
making (fraudulently or otherwise) physical force in relation to the provision on
payment for products and services. – offences

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of such statement are offences
qs by componies-if participants have illness-
MUST cover-waive the rights
© ZICOlaw.
 KEY OPERATIONAL DIFFERENCES BETWEEN TA 1984 AND IFSA 2013
Operational
TA 1984
aspect
Investible assets S. 17(2)(a) and (b): imposes
requirement as to asset of Takaful
Fund
Assumption of S. 25: Is at the point when -
risk- protection start (a) the contribution payable is
received by the operator or is
guaranteed to be paid by such
person; or
(b) deposit of such amount as may be
prescribed is made in advance.
Cessation Notice s. 32: TO shall notify BNM in writing
within 14 days that a person has
ceased to be its chairman, director,
CEO or senior officer and the
reasons.
Capacity Age S. 64: TA a person under the age of
18 shall not have the capacity to
enter into a contract of takaful.
© ZICOlaw.
IFSA 2013
All investment limits must be in
accordance with the Risk-Based
Capital Framework for Takaful
Operators (BNM/RH/GL004-23).
S. 96: Is at the point when –
the takaful contribution payable is
received by the licensed takaful
operator in such manner and within
such time as may be prescribed by
the Bank. i.e. any third party
collection channel
Now it is reduced to 7 days.
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Now this has been reduced to 16.
© ZICOlaw. All Rights Reserved.
+
6.4 GUIDELINES/POLICY DOCUMENTS ON
ISLAMIC BANKING AND TAKAFUL

BNM has issued a number of policy

document/guidelines for Islamic banking and Takaful

• Examples of the policy document/guidelines are:

Shariah Governance Framework

Guidelines on Takaful Operational Framework
Policy Documents on Shariah Contracts

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SHARIAH GOVERNANCE FRAMEWORK
The Shariah Governance Framework for the Islamic
Financial Institutions (SGF) is a guideline/policy
document issued by BNM in 2010.
• The effective date of implementation of SGF is January
2011.
• The objectives of SGF:
i. sets out the expectations of the Bank on an IFI’s
Shariah governance structures, processes and
arrangements to ensure that all its operations and
business activities are in accordance with Shariah;
ii. provides a comprehensive guidance to the board,
Shariah Committee and management of the IFI in
discharging its duties in matters relating to Shariah; and
iii. outlines the functions relating to Shariah review,
Shariah audit, Shariah risk management and Shariah
research.

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GUIDELINES ON TAKAFUL OPERATIONAL
FRAMEWORK

Takaful operators are also expected to conduct

operations in a prudent and ethical manner, guided by
prevailing legislations, requirements and guidelines
issued by BNM.
• Guidelines on TOF covers operational processes
relating to takaful and shareholders’ funds:
• requirements relating to the setting up of funds
• management of contributions received from
participants
• management of fees and operating costs of the
takaful operators
• management of assets, liabilities and surplus of
the takaful funds
• rectification of deficiency of the takaful funds
• requirements on disclosure and transparency

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 Objectives of TOF Principles of TOF

• Principle 1:
Ensure uniformity with Shariah
i. To enhance
principles and consistency with the
operational efficiency essential features of takaful
of takaful business; • Principle 2:
ii. To build healthy Promote prudent management of
takaful funds which are takaful funds to enhance the funds’
sustainable; financial resilience
iii.To safeguard the • Principle 3:
interests of Promote fairness and transparency to
protect the interests of participants
participants; and
• Principle 4:
iv. To promote
Ensure appropriateness of fees and
uniformity in charges imposed on participants and
takaful business takaful funds
practices. • Principle 5:
Instill good governance and risk

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management practices.
POLICY DOCUMENTS ON SHARIAH CONTRACTS

• As part of the objective to strengthen the

Shariah-compliance culture among Islamic
financial institutions (IFIs), Bank Negara
Malaysia issued a series of policy
documents on Shariah contracts to enhance
the end-to- end compliance with Shariah.

• It outlines the Shariah requirements and

optional practices relating to 14 Shariah
contracts including wadi`ah, hibah, kafalah,
wakalah, wa`d, tawarruq etc. to facilitate
IFIs in developing Islamic financial services
and products.

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IFSA 2013…. Regulatory Requirements for Takaful …d most important parts
• DUTIES & RESPONSIBILITIES of board of
directors, senior management, appointed
Governance actuary & external auditor
• Minimum expectation for TO on outsourcing
Shariah compliance in all aspects
of takaful activities, functions or processes
• Diversification rules, basis for valuation &
Assets, safekeeping of assets
Investments • Investment limit permissible
& Liabilities
• Determination & provisioning of liability
Prudential
• Capital adequacy based on risk profiles
Solvency • Stress test process that commensurate to
nature, complexity & sophistication of the
business
Product • Sound risk management practices in
Requirements developing, managing & controlling
product risk
Reporting, market • Disclosure & presentation of reports &
statements
conduct &
• Minimum standard on product
market protection transparency & disclosures
Effective supervisory assessment on safety & soundness of TOs under Risk-Based
Supervisory Framework
Source:BNM website
• DUTIES & RESPONSIBILITIES of the
Shariah Advisory Council & Shariah
Committee
• Fiduciary duties of takaful operator (TO)
• Stature of participants in takaful
• Invest in Shariah-compliant
instruments
• Management of takaful fund
• Accounting treatments
• Qard to rectify deficit in takaful
fund
• Shariah endorsement on product
• Fees, charges & surplus
distribution
• Separation of funds
• Disclosure on aqad, fees, profit
sharing ratio
 77
©
ZICOlaw.

NEXT LECTURE :
CHAPTER 7 : LEGAL FRAMEWORK OF ISLAMIC
CAPITAL MARKET