takaful ( the economic point of view)

- a mutual guarantee or assurance, based on the principles of al-’Aqd provided by a group of

people living in the same society, against a well-defined risk or catastrophe affecting one’s life,
property or any possession of value.
- known as cooperative insurance with mutual whereby the participants commit to regularly
contribute certain amounts in a specified fund to mutually guarantee each other and appoint
a body to act as the fund manager. In this contract, the participants have the opportunity to
mitigate the possible financial risk that their family might encounter in case of any misfortune
- takaful is based on the idea of social solidarity, cooperation and joint indemnification of losses
of the members
- system whereby participants contribute regularly to a common fund and intend to jointly
guarantee each other, that is, to compensate any of the participants who are inflicted with a
specific risk. It is similar to a mutual insurance in spirit but inclined more towards commercial
insurance in its business endeavour. When a person participates in a takaful scheme, he does
not only seek protection for himself but also jointly cooperates with other participants to
mutually contribute to one another in case of need

The various types of family takÉful schemes provided by Syarikat Takaful Malaysia Berhad are Takaful
mySiswa, Takaful mySinar, Takaful myImpian, Takaful myMedicare, Takaful myRawat, Mortagage
Takaful Plan, Takaful myInvest, Takaful myGraduan and Investment Funds.

Example of family takaful product

Among the family takÉful products offered by Hong Leong Tokio Marine are Mortgage
Reducing Term Takaful, Comprehensive Mortgage Takaful, Single Contribution Investment-
Linked Family Takaful, (HLTMT i-Invest), HLTMT i-Save and HLTMT i-Grad. A participant who
participates in any of HLTMT’s family takÉful schemes shall be provided with a nominee form.
Hong Leong Tokio Marine Takaful provides a clear status of the nominee’s responsibilities for
a Muslim and Non-Muslim participant in its nominee form. The first nominee for a Muslim
participant is responsible to distribute the takÉful benefits to the legal heirs according to the
Islamic law of inheritance (farÉ’iÌ). This is subject to Section 65 of Takaful Act 1984 and any
order from the courts. In case the first nominee dies first, then the second nominee shall take
upon the same responsibility. For a non-Muslim participant, the distribution of the takÉful
benefits shall be distributed equally according to the percentage stated in the nominee form
if any of the nominees die before the participant.

Three aspects of mutuality under takaful,

1. mutual help
2. mutual responsibility
3. protection from losses.

Islamic Financial Services Act (IFSA) 2013

- takaful = An arrangement based on mutual assistance under which takaful participants agree
to contribute to a common fund providing for mutual financial benefits payable to the takaful
participants or their beneficiaries on the occurrence of pre-agreed events.
- The IFSA also establishes the distinct relationship between takaful fund, takaful operator and
takaful participants whereby:
o section 90 requires that a licensed takaful operator establish and maintain separate
takaful fund(s).
 o section 91 requires a fund established under section 90 to be managed separately
from the shareholders’ fund.
o section 92 prescribes that the takaful fund established must be maintained and
managed by a licensed takaful operator on behalf of and in the best interests of the
takaful participants.
- “takaful certificate” includes a takaful cover note or any contract of takaful for family takaful
business or general takaful business whether or not embodied in or evidenced by an
instrument in the form of a takaful certificate, and references to— (a) issuing a takaful
certificate shall be construed as entering into a contract of takaful, whether or not a formal
contract has been issued; and (b) a takaful certificate of a takaful operator includes a takaful
certificate in respect of which the takaful operator is under any liability, whether the takaful
certificate was issued by the takaful operator or the liability was transferred to the takaful
operator from another takaful operator.
- licensed takaful operator = “a person licensed under section 10 to carry on takaful business
and includes a licensed international takaful operator.”

IFSB-8
- takaful: Takaful is derived from an Arabic word that means joint guarantee, whereby a group
of participants agree among themselves to support one another jointly for the losses arising
from specified risks. In a Takaful arrangement the participants contribute a sum of money as a
Tabarru’ commitment into a common fund that will be used mutually to assist the members
against a specified type of loss or damage. The underwriting in a Takaful is thus undertaken on
a mutual basis, similar in some respects to conventional mutual insurance. A typical Takaful
undertaking consists of a two-tier structure that is a hybrid of a mutual and a commercial form
of company – which is the Takaful operator (TO) – although in principle it could be a pure
mutual structure.

AAOIFI Shari’ah Standard No. 26 (2015)

- Islamic insurance is a process of agreement among of persons to handle the injuries resulting
from specific risks to which all of them are vulnerable. A process, thus initiated, involves
payment of contributions as donations, leads to the establishment of an insurance fund that
enjoys the status of a legal entity and has Jurnal ‘Ulwan Special Issue I: Keunggulan Warisan
Islam Jilid 8 (Bil.1) 2023: 178-188 181 independent financial liability. The resources of this fund
are used to indemnify any participant who encounters injury, subject to a specific set of rules
and a given process of documentation. The fund is managed by either a selected group of
policyholders, or joint stock company that manages the insurance operations and invests the
assets of the fund, against a specific fee.

Parties to takaful transaction

Takaful transaction, there are four parties involved namely the participant, the operator, the
insured, and the beneficiary.
1. The participants are those who contribute the mutual fund
2. insured are those who are among the participants that face the risk and being assisted by
the fund. The monetary contribution made by the participants to the fund is known as
mutual contribution and those who gained benefit from the co-operative fund is known
as beneficiaries.
3. The fund is managed by the Takaful operator, which is formed through registered, licenced
body or cooperation who binds himself unilaterally to manage the fund according to
Shariah principles. In general, each member of the group pools effort to support the needy
and it means mutual help among the group. Should any member or participant suffer a
disaster or catastrophe he will receive a certain sum of money or financial benefit from a
fund as defined in the pact to help him meet the loss or damage. The basic objective of
 Takaful is to pay for a defined loss from a defined fund. Therefore, the Takaful operator
need to maintain adequate assets of the defined funds under its care

Implementation of Takaful
Takaful can be implemented through al-Mudharabah and al-Wakalah model through the
Takaful operator. Under the mudharabah contract, the Takaful operator acts as a mudharib
(entrepreneur) and the participants as rabbul mal (capital providers). The Takaful operator
runs the business with the accumulated money that contributed by the participant. Both the
operator and the participant will share the profits earned from such transaction accordingly.
Thus, Takaful is based on the concept of shared responsibility and co-operation. Mudharabah
is a profit and loss sharing scheme where it gives the right to the contracting parties to share
profit, while liability for loses is borne by the participant. Losses are borne by the participants
as the capital providers. However, to protect the interest of the participants, the Takaful
operator is required to observe prudential rules including provision of financing rate-free loans
by the operator to the Takaful risk funds in the event that there is a deficiency in the Takaful
risk funds. The wakalah concept is essentially an agentprincipal relationship, where the
Takaful operator acts as an agent on behalf of the participants and earns a fee for services
rendered. The fee can be a fixed amount or based on an agreed ratio of investment profit or
surplus of the Takaful funds

challenges
1. lack of awareness
2. the limited range of product varieties
3. low penetration rate,
4. inadequate technology capabilities
5. limited knowledge of staff and takaful agents
6. shortage of talent
7. the need to improve the takaful services and marketing strategies

Therefore, relevant parties such as Bank Negara Malaysia (BNM), Malaysian Takaful Association (MTA),
Takaful Operators and Advisors should provide the best strategies in order to increase market
penetration in Malaysia.

5. Reasons Why Takaful is Better Than Conventional Insurance The following are reasons why Takaful
is better than conventional insurance:
i. Takaful is more just than conventional. This can be seen from the definition and objectives
of takaful for joint action to protect and help each other out in the community by investing in
the tabarru’ fund which depends on certain risks and shariah-compliant. Takaful and
conventional insurance have the same goal which is to manage and mitigate the risk. However,
fundamental difference in the initial contract set the takaful apart from insurance. Takaful
based on risk-sharing among the participants which is fairer than conventional that applies a
risk transfer from the participants to the company. Transfering the risk could only jeopardise
the participants if the company goes into a limbo and not able to make up with the promises
to pay.
ii. Takaful fund management is using a concept called mudharabah or literally translated into
cooperation between parties. This concept rightly applies with takaful in which participants
provide the capital and takaful companies will manage and profit distribution will based on
consensus and pre-agreed upon. No elements of riba (interest), gharar (uncertainty of funds
availibility) and maysir (gambling) that cause oppression, injustice and loss to participants that
sometimes do happen with insurance.
 iii. Unutilized takaful fund usually will be distributed back to the participants. This happen
when the actual operational cost etc is lower than the budgeted one thus the need to return
it. However, operational cost totally borne by the policyholders thus unlikely any excess of fund
exist and considered as forfeited funds.
iv. Basic concept of takaful that applies profit-sharing ensure any additional gain from
investment from the fund is equally shared as per agreement. This is not the case with
insurance as the concept of selling/ buying of policy and whatever accumulated f rom the
investment are company’s 100%.
v. Takaful activities readily more helpful in boosting the economy for all parties not limited to
the company only. Participants enjoy benefits that not listed under insurance that also assist
their economic needs. This is more helpful while trying to achieve purpose of life which is to
find, manage and use the property for God. (Mohd. Izhar Ahmad, Tariq Masood & Mohd Saeed
Khan, 2010)

Issues and Challenges Faced By Takaful Industries

1. Human Resource Development

As the Takaful business has the potential in market growth, there is a need in developing the
human resource with skills and knowledge of Takaful. In todays business, there is still lack of
experts in supporting the Takaful business. Continuos training plan need to be developed to
produce human resource knowledgable in Takaful and insurance as well as in Shariah. Business
in Takaful is now expanding, thus the supply of human resource with expertise in Takaful need
to cater for the market demand.
2. Awareness
Lack of awareness is another issue in conducting Takaful business. Takaful is not only meant
for the Muslims, thus, the effort should be broad and borderless. To create awareness, the
Islamic financial institutions play a significant role in developing and implementing Takaful
concept through the entire world. Forums and other platforms should be used to address
educational issues surrounding Takaful besides effective marketing strategies in order to
create awareness.
3. Product Development
Product development is fundamental in ensuring the business growth. Thus, the study of
consumer needs and how to meet the needs is essential in developing new products.
Development of innovative takaful products will attract more consumers and thus will benefits
the society. The research and development of Takaful product must be conducted by an advice
of scholars in order to ensure the product is Shariah compliant.
4. Investment Option
In Takaful, all the activities should avoid the elements of riba’ (usury), maysir (gambling) and
gharar (uncertainty). It is a big challege for the operator to ensure all the activities is Shariah
compliant. On management perspective, it is the interest to maximize the shareholders’ values
which could create potential conflict from shariah-compliance aspects. There could also be
conflict of interest that regarding management of assets invested in related companies.

Recommendation

1. Education is one method of uplifting society and disseminating knowledge to determine what
is right or wrong and what is appropriate or not. It is not in the best interests of the country if
the public is uneducated. Education should be the first step in helping people understand the
purpose and benefits of takaful. Hence, the government must seriously consider the education
of the young generation. Education teaches people to think rationally and make logical
decisions. If we were to compare two products, they would choose the ethical product if all of
 the benefits and costs were comparable. People's mindsets are changed by education, which
encourages them to think outside the box. Most educated people understand the importance
of ethics, justice, corporate and social responsibility, which is why they demand takaful. This
suggests that the potential demand for takaful will be high, at least on an ethical basis.
2. risk mitigation tools and investment planning into the education system could be a good
suggestion to make the public aware. Further efforts should be taken in educating potential
consumers and promoting the takaful market. One of the ways is incorporating takaful
education syllabus with the aim to educate the youngsters on the important of having financial
protection. This initiative not only able to enhance takaful awareness but also increase future
takaful penetration rate
3. all takaful stakeholders to collaborate in overcoming the skill mismatch issue that exists within
the industry. Close and intensive collaboration between regulators, takaful companies and
universities and training institutes that are currently offering or intending to offer takaful
courses is highly recommended to overcome the skill mismatch issue. This is also to ensure
that the Islamic finance qualification providers are able to produce graduates with skills and
specialization that the industry needs
4. (level of financial knowledge will have a direct effect on family takaful awareness. The
community groups found to be at the forefront of poor financial knowledge are women, rural
people, low-income earners, and less educated group) increase awareness of financial
products and family takaful protection, especially among the B40 and younger people, need
to be implemented more efficiently. This is especially critical as family members of the B40
family are more negatively affected when the breadwinner experiences premature death.
Family takaful awareness is also important for young people because family takaful taken at a
younger age is more cost effective. Additionally, attaining family takaful at a younger age is less
likely to result in rejection by insurance companies. From the perspective of takaful companies,
younger prospective customers generally have better health, thus categorized as good
prospects. Implementation of education programmes for young people will encourage better
financial management habits and ownership of family takaful by these groups may indirectly
assist in controlling the wasteful spending often associated with these groups. Government
agencies such as BNM have been working hard to ensure that the involvement and ownership
of family takaful by Malaysians can be enhanced to a more satisfactory level. However, efforts
to educate critical target groups such as the rural and B40 communities, young people, and
women need to be given more attention so that family takaful ownership of these groups can
be alleviated. This goal may not be immediately possible, but if continuous efforts are made,
family takaful penetration and ownership will certainly increase
5. In terms of product varieties, it is important to extend the range of takaful products. more
disclosure should be made available to takaful participants for them to understand product
features and takaful operations. There is a need to develop tailor-made products to meet the
needs of various segments of society. Furthermore, innovative products can help to attract
more people to participate in takaful. An example of an interesting and innovative product
feature provided by one of the takaful operators, which promotes extra services such as Badal,
haji, and waqf as attached services to the basic products to attract more participants. The
majority of takaful practitioners point to the variety of takaful products as the primary factor
influencing takaful market penetration In realizing this mission, takaful operators need to work
hand in hand with takaful advisors in order to extend the range of takaful products that are
competitive, attractive and affordable that cover all segments of consumers and could
compete with conventional insurance market.
6. promoting takaful market and creating takaful awareness via smartphone advertising, or also
known as mobile advertising, may help to address the inadequate technology capabilities
issue. An effort done by MTA is a good example. Due to movement control orders during the
height of the 2021 COVID-19 pandemic in Malaysia, the MTA had little choice but to intensify
 its use of, and amplify its presence on, digital platforms. Embracing this new way of working
was critical for the MTA in continuing its agenda to advocate and campaign for greater takaful
awareness among the public. These new norms saw the MTA ramping up its social media
promotion and meeting head-on the challenges of organizing virtual industry engagements
with multiple stakeholders to support the MTA’s work agenda. Public webinars were
conducted via social media platforms in collaboration with various organizations such as the
Financial Education Network (FEN) and the Association of Islamic Banking Institutions Malaysia
(AIBIM). Even the landmark annual industry awards event was conducted virtually to recognise
achievements of the various parties in the takaful industry (Malaysian Takaful Association,
2021).
7. advertisements and innovations on marketing strategies are needed in order to attract more
takaful participants to the industry. Some basic marketing strategies as well as the use of
electronic network to enhance the marketing strategies of the takaful industry in terms of
using internet facilities as it is faster, easier and cheaper, taking into consideration the
advantages of the wide usage of internet among Malaysians will be able to attract Muslim and
nonMuslim consumers as well. A proposal of promoting takaful products by branding good
products and better promotions among Muslim community by offering Islamic values and
fundamentals bundled with a good range of products. Extensive advertisement, promotion
and education of the public of the advantages of takaful as an investment instrument would
be advantageous, especially for middle and low income families who wish to invest in
educational plans and to be stress-free over the foreboding issue of educating their children
8. highlighting surplus and profit sharing will make takaful products more attractive to
participants with importance of transparency in relation to conditions of profit distributions.
9. takaful operators need to have knowledgeable staff and takaful agents who can elaborate,
articulate and respond to customers’ queries in order to persuade more people to participate
in takaful. The takaful practitioners mentioned that staff and takaful agents must be able to
explain the terms and conditions related to each takaful product in order to reduce the
misconception related to takaful products especially if customers have claims to be made.
Furthermore, competent staff and takaful agents must have adequate actuarial knowledge as
well as a thorough understanding of Shari'ah rules. The absence of one will indicate an
imbalance in their knowledge. Continuous training programmes are desperately needed to
allow staff and agents to be more creative when promoting takaful products. Knowledgeable
staff and takaful agents will enable them to explain and justify information to takaful
customers more effectively, as well as approach new customers to participate in the takaful
industry
10. reduce the gap in talent shortage ; the industry players must play greater role in designing
and strategizing human capital. This is crucial to retain the knowledgeable and skilful takaful
staff. One way to increase the number of talents is by offering competitive remuneration. As
spoken by Tan Sri Muhammad bin Ibrahim, the 8th and who was the Governor of the BNM in
his remarks at the takaful Annual Dinner and Awards 2018, the remuneration of employees of
takaful operators is not competitive. He further mentioned that among the highly skilled
employees, those working in takaful earn 15% less than those in conventional. Therefore, if
this gap exist, shortage of takaful talent will remain. Another possible effort that should be
taken to minimize the shortage of Takaful Market Penetration In Malaysia: Strategies To Move
Forward Wan Noor Hazlina Wan Jusoh 186 talent is to ensure graduates from the certified
programs such as the Chartered Professional in Islamic Finance, Certified Shari’ah Advisor and
Certified Shari’ah Practitioner is ready and able to join the takaful workforce. Moving forward,
the sustainability for Malaysia’s takaful industry will demand the adoption of best practices
and rapid adaptation to change in meeting customers’ needs (Husin, 2019).
11. takaful operators need to demonstrate their ability to offer a comparable, if not better quality
of service than conventional insurance when dealing with takaful participants. Hence, there is
 a need to invest in technology to deliver high quality service to help customer retention which
will directly benefit the consumer as well as takaful operators in the long-term and improve
competitive standing and prospects in takaful market. This is to ensure customer retention and
to get more takaful participants involved in order to expand the industry, which will improve
the rate of takaful market penetration. Takaful operators must be able to effectively respond
to customers’ needs and demands as consumers have increasingly becoming more discerning
and demanding better product choices, more efficient delivery channels and more customer
friendly practices from takaful operators.

Concept of insurance

Insurance in general sense is transferring the risk from a party be it an individual, an organisation or
company to insurance company for a certain payment of premium. It is the most practical method of
handling a major pure risk. Through insurance system, the insurance company is also known as the
insurer, while the insurance buyer is called the insured or the policyholder. An insured is required to
pay premium at the inception of the contract. Premium is the price of insurance protection and service
rendered from the insurer. In the event of a loss occurring, insurance company is obligated to pay
compensation as specified under the insurance policy. The compensation paid out to the insured or
his beneficiaries is called insurance benefit.(Zuriah Abdul Rahman & Hendon Redzuan, 2009) Insurance
is an economic institution founding on the pillar principle of reciprocity, formed for the purpose of
establishing a general fund. The need arises when unexpected risk occurred, which the probability of
such risk to happen can be reasonably calculated. In financial term, insurance defined as redistributing
the cost of unexpected losses. Insurance can be understood as a group of people vowed to collect and
galvanizing effort and resources to establish alliances for mutual cooperation and responsibility, to
bear one another, if destined to any of them misfortune befalls. Through this alliance, the unfortunate
people affected will get coverage benefits that are usually a certain amount of money. With such
benefits, it expected to alleviate the suffering of those involved, usually those dependents who have
to borne the consequences of such misfortune. In other words, insurance can be defined as “a financial
arrangement whereby an individual substitute a small certain cost (the premium) for a large uncertain
financial loss (the contingency insured against)” (Vaughan, J.E and Vaughan, T., 2001). Meaning that,
insurance is an arrangement whereby an insured purchase a plan that covers specified risks and losses.
When an insured purchases insurance, he is required to make premium payments. In returns, he
receives an insurance protection. Insurance protection is essentially a promise made by the insurer
that in the event of a loss, the insurer shall compensate the insured or his beneficiary. The insurer is
required by the law to fulfil the obligation to pay insurance benefit should the insured loss occu rs. An
insurance arrangement typically includes three distinct characteristics; risk transfer, risk reduction and
loss sharing. i. Risk transfer is an insurance allows the risk faced by the insured to be transferred to the
insurer who is financially stronger to pay for a loss than the insured. ii. Risk deduction is an insurance
system permits insurer to predict future losses with reasonable accuracy. The future losses can be
predicted, then risk can be reduced. iii. Loss sharing means spreading the losses incurred by the
unfortunate few over the entire insurance pool. (Zuriah Abdul Rahman & Hendon Redzuan, 2009)
International Journal of Management Sciences 547 This characteristics is essential in order to
understand how insurance works. There are two main types of insurance; life and general whereby
these two are different in their natures and characteristics. i. Life insurance is a coverage that pays a
sum of money to the policyholder or the nominee in the event of anything untoward happened to
policyholders, such as death. Typically, the life insurance coverage is more than a year. This means
periodic premium payments, monthly, quarterly, or annual basis, to be settled. Risks covered in this
type are death during the policy term, income during retirement, illness, and disability. The main
products include whole life policies, endowment policies, endowment policies, investmentlinked
policies, annuity policies, and medical and health policy. ii. General insurance is an insurance policy
that protects the insured against any loss or damage suffered that not covered in life insurance. For
complete coverage, the insured must understand the risks covered to ensure the insured and
beneficiary protected from any unexpected events. The coverage period for most general insurance
policies and plans is a year that requires a lump sum premium payment. The risks covered by general
insurance of property due to fire or theft, liability arising out of damage to third parties caused by the
insured, accidental death or injury. The main products of general insurance policies including vehicle,
fire policy/ owners/ household, personal accident policy and medical and health policy. There are three
principles applied in the conventional insurance; insurable interest, full and absolute trust and
indemnity. Insurable interest Insurance buyer should have a stake in goods or lives insured where a
loss or damage to property or life insured will result in a financial loss to the buyer. For example, if the
insured selling his car, the insured also should stop insuring it because the insured no longer has an
insurable interest. If the insured continue to insure, the insurance company will not pay compensation
to the insured in case of loss or damage to the car. Full and absolute trust An insurance contract is a
contract on the basis of good faith. Insured as a policyholder, must disclose all material facts when
buying a policy. If failed, the insurance policies purchased may be invalid. Indemnity Indemnity means
the payback of loss in the form of cash, goods, or the cost of the damaged building. The principle of
indemnity is based on three notions; i. Contribution - each insured and insurer share such agreed
payment, ii. Subrogation - the insured cannot claim damages from the other party once insurer has
paid the agreed amount and iii. Doctrine of proximate cause - the damages paid to the insured risks
only. (http://www.insuranceinfo.com.my) Insurance is an economic device, which a group of
individuals transfer risk in order to combine experience, which permits mathematical prediction of
losses, and provides for payment of losses from fund contributed by all members of the group. It is an
arrangement that redistribute the cost of losses through payment of premium in return for a promise
to receive compensation in the event of a loss.

Common law and takaful

the application of the Common Law by Malaysia is Shariah compliance, particularly with doctrine al-
’Urf, it has to adhere to the following conditions (‘Adil, 1997; Abu Sunah, 2004; Saleh, 2000):-
1) ‘Urf must not be inconsistent with the existing Islamic texts. This is the weightiest condition
to the effect that any custom shall be left out of shelves if it is against with Islamic texts. In
connection with the Common Law and its application in Takaful Act 1984, there are so many
case laws to be evaluated its adherence with the Islamic texts. The earlier three subject
matters i.e. insurable interest, assignment and valued policy could be a ‘tip of iceberg’ where
the actual number may enumerate largely unexpected. The framework of having Shariah
Advisory Council though is so far the best solution, but there is unfortunately no strict
enforcement, direct supervision or involvement of neither Shariah judges nor scholars in the
trial itself hence the court may not comply with Shariah rules. The closest example is the case
law of Teng Gia Hwa & 1 or v Syarikat Takaful Malaysia Bhd (2010) which came after effect of
the Central Bank of Malaysia Act 2009 (in respect of Shariah Advisory Council authority). The
verdict by Judge Datuk David Wong did not make any reference to Shariah resolution in respect
of valued policy and also had included the interest 4% of the judgement sum which is usury
(riba) and prohibited in Islam. In the event of no clear quotes in the existing Islamic texts, the
principle of maslahah (public interest) is applicable. For example, making motor insurance or
Takaful a compulsory is based on the Common Law and it is for public interest whereby the
vehicle owner is able to pay compensation for bodily injury or death to third parties caused by
road accidents. This is consistent with the teaching of Islam for the followers to help each other
in any matters that will benefit the public, as the word of God, which means:- “And cooperate
in righteousness and piety, but do not cooperate in sin and aggression.” Translated of verse al-
Maidah (5): 2 And since the Takaful contract is based on mutual cooperation whereby the each
participant agrees to help others for their loss, the main objective i.e. compensation is also
applied by the Common Law. The concept of compensation that exists in the Common Law
 has been earlier practised at the time of the Prophet through the doctrine of al-‘Aqilah or
‘blood money’ (Syabir, 2001) based on the hadith of the following: - “Two women from ethnic
Huzayl came into conflict, and at least one was throwing stones and causing the death of
another with its contents. They then have to refer to the Prophet, and he has ruled that blood-
money or compensation shall be paid on the unborn baby..….” (Muslim, 1988)

2) ‘Urf must have been adopted by society as a whole and broadly, or even most of them
(Saleh, 2000). This condition can be observed in the acceptance of this common law as it is
practiced by society in England and later in Malaysia after being adapted into Takaful Act 1984
and other of acts relating to insurance and Takaful in Malaysia.

3) ‘Urf or custom must already exist upon being referred to any new emerging case (Saleh,
2000). In this case, the Common Law is now more than 800 years of practice before being
adapted into Malaysia Takaful and insurance law i.e. Takaful Act 1984, Civil Law Act 1956 and
few other Acts.

4) There is no single word or act openly against the custom practised (Saleh, 2000). For
example, if the parties to the contract agreed to waive the ‘urf or customs, then they should
no longer consider that practice as a custom or ‘urf. In this case, the concept of compensation
in the Common Law is commonly accepted worldwide and most importantly endorsed by the
Muslim scholars via doctrine of al-‘Aqilah or blood money.

HIBAH IN FAMILY TAKÓFUL

Hibah = “a voluntary contract that results in uncompensated ownership transfer between
living individuals”). In other words, it can be referred to as giving ownership of one’s property
to another without any rewards.9 The permissibility of giving hibah can be found in the
Quranic verses and ÍadÊths. Allah said in the Qur’Én: “But if they, of their own good pleasure,
remit any part of it to you, take it and enjoy it with good cheer” (SËrah al-NisÉ’, 4:4). Zuhaily
(2003) quoted a ÍadÊth narrated by AbË Hurayrah in which Prophet Muhammad (peace be
upon him) said, “Exchange gifts so that you may love one another”(Zuhayli, 2006, p.3989). The
above Quranic verse and ÍadÊth clearly show that Allah enjoins Muslim to give charitable gifts.
Islamic law stipulates that each contract should fulfil certain conditions in order to be valid and
this includes the hibah contract. The contract of hibah becomes valid if four constituents or
pillars (arkaan) have been fulfilled. The four constituents in the hibah contract are the donor,
donee, subject matter and ÎÊghah (offer and acceptance). The donor here is the owner of the
subject matter of the gift. The donee can be anybody who is capable of managing the property.
The subject matter refers to any property which is owned by the donor, it needs to be in
existence at the time the hibah is made and must be a valuable object. The ÎÊghah here
indicates the offer made by the donor and the acceptance made by the donee.

There are three types of hibah:

1. unrestricted hibah = the transfer of property without any specific conditions and
consideration in return
2. temporal hibah (ÑumrÉ) = is given for the duration of the donor’s or donee’s lifetime.
3. provisional hibah (ruqbÉ). = a gift contingent upon the donor’s or donee’s life whereby, if
the donor dies before the donee, the ownership of the gift will be transferred to the donee
upon fulfilment of certain conditions.

Looking into the concept of hibah as a mechanism of estate management can be an alternative
to the policyholder in family takÉful to give the right of ownership to whomever he trusts.
Buang (2008) explained that hibah is seen as the best solution due to the nature of a bequest
in Islam, which only permits a maximum of onethird of the property to be distributed in the
event of death. A. Hibah as a Mechanism of Estate Management in Family TakÉful Currently,
the concept of hibah is widely practised in the family takÉful products offered by some of the
takÉful operators. For instance, Takaful Ikhlas is the first takÉful operator which provided in its
family takÉful plan a form for hibah. The policyholder can give away the takÉful benefits as a
form of hibah in the event of the death of the policyholder. According to Mohd Noor and
Abdullah (2008), when the takÉful benefits are given away as hibah, the takÉful benefits are
not part of the estate and the Islamic law of inheritance (farÉ’iÌ) shall not be applicable to that
effect. Furthermore, the other legal heirs cannot claim the takÉful benefits once the hibah is
put into effect. The fraction of the takÉful benefits which is given away as hibah depends on
the participant’s consideration because Islamic law does not provide the specific proportion
of property to be given as hibah. Ismail (2009) agreed that the Islamic law of inheritance
(farÉ’iÌ) shall not be applied once the hibah is put into effect, on the ground that the takÉful
benefits are the right of the participant and the takÉful operator gives the freedom to the
participant to make hibah. The participant may want to give a certain portion as a hibah to
those he thinks are qualified. In practice, the application of hibah in takÉful products leads to
an issue whereby there is no ruling provided to that effect. Hence, arguments between the
legal heirs and the donee arise due to the lack of knowledge on the concept of hibah and its
implications. Nurdianawati Irwani Abdullah and Nazliatul Aniza Abdul Aziz ISRA International
Journal of Islamic Finance • Vol. 2 • Issue 2 • 2010 79 B. Issues of Hibah to the Nomination in
Family TakÉful There are differences of opinion regarding the application of hibah in
nomination being adopted in the family takÉful. Some of the opinions hold that hibah in family
takÉful should not take effect after the participant dies. This is because the takÉful benefits
have not yet existed at the time the hibah contract is made. They argue based on the fact that
hibah should take effect during the lifetime of a person. The concept of hibah is now being
customised to fit the needs of current development in Islamic banking and takÉful.
Nevertheless, there are inherent issues regarding the practice of hibah in family takÉful. The
main issues are: 1. Contradiction with Islamic Law on the Nature of Gifts (Hibah) Generally,
takÉful benefits are owned by the policyholder if the policyholder is still alive at the maturity
of the policy. However, if the policyholder dies before the maturity of the policy, then hibah
will take effect at this point. With regard to the practice of hibah in family takÉful, it indicates
here that hibah takes place after the death of the policyholder. Thus, it goes against the nature
of hibah itself which is to take effect during the lifetime of the policyholder. In addition to the
above, Kahf (2006) stresses that the owner of a policy cannot defer any distribution of takÉful
benefit till after death. Due to this, he believes that any distribution which takes effect after
death is subject to certain conditions which are:  The distribution of the estate must not
surpass one-third of the estate net of expenses and debts. It is reported by SaÑd ibn AbÊ
WaqqÉÎ in the ÍadÊth: The Prophet came to visit me in my sickness. I was then at Makkah and
did not like to die at a place from which I had migrated. The Prophet of Allah said: “May Allah
have mercy on Ibn Nafra´.” I Case Studies of the Practice of Nomination and Hibah by
Malaysian TakÉful Operators 80 ISRA International Journal of Islamic Finance • Vol. 2 • Issue 2
• 2010 said, “O Prophet! I am wealthy and my only heir is my daughter. Permit me to make a
will of my entire property.” He said, “No.” I said, “Can I make a will of two-thirds of my
property?” He said, “No.” I said, “Permit me for a third.” The Prophet replied, “You may make
a will of a third, although this is also too much. For you to leave your heirs well to do is better
than leaving them poor and in want whilst others meet their needs.” 10  The estate must not
be distributed to any of the heirs whose entitlements to farÉ’iÌ are clearly provided in the
Qur’Én.11 This rule is mentioned in the ÍadÊth reported by AbË UmÉmah in which Prophet
Muhammad said: “Allah has already given to each entitled relative his proper entitlement.
Therefore, [there can be] no bequest in favour of a legal heir.”12 Based on the above, it is
assumed that the distribution of the estate after the death is considered as waÎiyyah and not
as hibah. However, the practice nowadays seems to contradict the nature of hibah itself since
 hibah should only take effect during the lifetime of the policyholder. 2. Evasion of the Islamic
Law of Inheritance (FarÉ’iÌ) The takÉful benefit which is owned by the deceased during his
lifetime must be distributed in accordance to the Islamic law of inheritance (farÉ’iÌ) (Kahf,
2006). In other words, hibah cannot be implemented after death. Halim (2009) mentioned
that any form of gift (hibah) after the death is considered as a tactic to avoid the Islamic law
of inheritance (farÉ’iÌ). She observed that the use of a living trust (hibah) among Muslims
should be given attention to in order to harmonise with Islamic law. 10 Sahih Al-Bukhari, p.3.
11 There is already a specific set of laws regarding inheritance (mÊrÉth) and bequest (waÎiyyah)
in Islamic law; particularly relating to the categories of heirs and their entitlement to the estate
of a deceased person. 12 Sahih Al-Bukhari, p. 6. Nurdianawati Irwani Abdullah and Nazliatul
Aniza Abdul Aziz ISRA International Journal of Islamic Finance • Vol. 2 • Issue 2 • 2010 81 3.
Ownership of TakÉful Benefit At the time the hibah is made, the takÉful benefit is not yet
owned by the deceased during his lifetime. AbË ×anÊfah and al-ShÉfiÑÊ mentioned that taking
possession (qabÌ) is a condition for the validity of hibah (Nasir, 2002). Without delivery of
possession, the property will then pass to the donor’s heirs, even if the offer was accepted by
the donee (Pearl, 1979). Likewise, Kahf (2006) mentioned that, based on the opinions of the
jurists, any property which was not owned by the deceased during his lifetime (in the case of
hibah in takÉful), must be according to the Islamic law of inheritance (farÉ’iÌ). Referring to the
above literature, the takÉful benefit is not owned by the policyholder during his lifetime. Hibah
in family takÉful is deemed to be completed when the policyholder or the donor dies. The
ownership of the takÉful benefit is transferred to the donee or recipient of hibah after the
death of the policyholder. 4. Absence of Ruling on Hibah in the Takaful Act 1984 Currently,
there is no ruling mentioned in the Takaful Act 1984 regarding the application of ibah in takÉful
(Muhamad, 2008). This leads to many problems regarding hibah. C. Issues of WaÎiyyah
WaÎiyyah is one of the tools that can be used for disbursing the property of the deceased.
Typically, a waÎiyyah is referred to as a gratuitous gift of property by its owner to another,
contingent on the giver’s death, and the gift takes effect on the giver’s death (Yahya, 2004). In
implementing waÎiyyah, there are two rules which need to be taken into consideration by the
testator. According to Marican (2008), the waÎiyyah should not be made in favour of any of his
legal heirs and the transfer of property should not exceed one-third. He further mentioned
that most of the jurists have opined that the onethird rule in waÎiyyah aims to help those
people who are not listed as Quranic heirs. For instance, parents can use a form of waÎiyyah
to be given to their adopted child. Case Studies of the Practice of Nomination and Hibah by
Malaysian TakÉful Operat

The Most Preferred Takaful Structures

In Malaysia, a licensed TO is required to manage Takaful operations according to Islamic

Shari'ah. The TO must ensure a sound and prudent management of the Takaful operations.
BNM had issued some Guidelines on TOF on 26 June 2013 for the management of Takaful and
shareholders’ funds. The purpose of these Guidelines were to achieve operational efficiency
of Takaful business and the sustainability of Takaful funds. Improving the Takaful Sector In
Islamic Countries 81 Improving the Takaful Sector In the Islamic Countries 71 Furthermore,
BNM issued a Policy Document on Takaful Operational Framework (TOF) to be enforced on 1st
July 2020. This Document summarizes the rules for the management of Takaful funds and
shareholders fund. The Policy document aims at ensuring the operational efficiency of the
Takaful business and the sustainability of its funds to safeguard the best interests of the Takaful
participants. The policy document is developed based on the IFSA 2013, which requires
licensed TO to act as the manager and administrator of the Takaful funds on behalf of the
Takaful participants. The policy document summarizes the operational requirements for
implementing wakalah and mudarabah contracts that are currently being used by the industry.
 Notwithstanding this, the licensed TO may explore new Shari'ah contracts for its Takaful
business model beyond wakalah and mudarabah. It is, however, subject to prior approval of
the Shari'ah Advisory Council and BNM

Saudi Arabia

The banking and insurance sectors are regulated mainly by the Saudi Arabian Monetary Authority
(SAMA), which also serves as the central bank of the Kingdom of Saudi Arabia. The SAMA was
established, under two Royal decrees issued on 25/7/1371H (20/4/1952). The first was No.
30/4/1/1046 provided for setting up the SAMA, its venue in Jeddah, and opening branches across the
country as believed to be necessary. The second Decree No. 30/4/1/1047 provided for the approval of
the Charter of the SAMA, attached to the decree, and ordering its implementation.

The SAMA has been entrusted with performing many functions pursuant to several laws and
regulations. The salient functions are “to deal with the banking affairs of the Government; Minting and
printing the national currency (the Saudi Riyal), strengthening the Saudi currency and stabilizing its
external and internal value, in addition to strengthening the currency’s cover; Managing the Kingdom’s
foreign exchange reserves and the monetary policy for maintaining the stability of prices and exchange
rate; Supervising commercial banks, exchange dealers, cooperative insurance companies, the self-
employment professions relating to the insurance activity; finance companies and credit information
companies” (SAMA, 2019d). One of the core departments of SAMA is the General Department of
Insurance Control, which is responsible for Takaful.

Soon after the enactment of the Law and Implementing the Regulation, SAMA established a group of
insurance supervisors to operate in its Banking Inspection Department. Since then, the team members
are operating as an independent department within SAMA. They are dedicated to the regulation and
supervision of insurance activities. SAMA's Insurance Supervision Department aims towards protecting
policyholders and shareholders' rights, providing better insurance services that are fair, effective and
competitive in prices and covers, fostering the stability of the insurance market, developing insurance
market in the region including training and providing employment opportunities for Saudi nationals
(SAMA, 2019e).

The Saudi Arabia government also took several initiatives towards improving market regulations and
encouraging product innovation by issuing Insurance Corporate Governance Regulation on 21st
October 2015. This regulation has 6 sections with 132 articles and its main objective is to set high
standards of corporate governance within the market while recognising the best international practice.

SAMA has adopted the cooperative insurance model instead of the Takaful model due to the following:

a) The Takaful model that is being practiced by some insurance companies does not protect
policyholders from the greed of those companies. It is noted that the financial results for
insurance companies are often positive (profitable) for the shareholders’ fund contrary to the
Takaful fund whose results are often negative (the fund suffers from an accumulated deficit).

b) The Takaful model that was represented in the first insurance experience in the Saudi Arabia
was implemented by the National Cooperative Insurance Company; a government insurance
company established by a Royal Decree in 1985. This Company was later renamed the
Company for Cooperative Insurance). The Takaful model adopted by the Company was based
on Mudarabah. It was managing the insurance and investment funds of 25% of the proceeds
from policyholders’ premiums. The Takaful was charging the actual administrative and
 management expenses of the Takaful fund. The Takaful Company, however, was not able to
meet the profitability benchmark of feasibility study unlike the insurance companies operating
in the market in the kingdom.

c) The cooperative model proposed by the Council of Senior Scholars in the Kingdom in
resolution No. 51 for the year 1395 AH was not practical because it required the contribution
by the insured (policyholder) to be a mere donation. This means that the beneficiaries of the
Takaful fund could include policyholders and others who do not hold insurance policy or do
not contribute to the fund. Furthermore, the surplus from the insurance must be channelled
to charity and the policyholders are not entitled to benefit from such surplus because their
donation is separate from their liability.

d) The cooperative model has been criticized by scholars from Saudi Arabia due to its inherent
Shari’ah issues. Fatwas critical of the cooperative model include those issued by the Shari’ah
advisory board of Al-Ahli Bank no. 89.

Turkey

Turkey does not have a separate law for Islamic banking sector. The Banking Law No. 5411 regulates
the distinction between conventional and Islamic banks only in terms of licensing and fund collection.
However, with the recent sub-regulations, the regulations required by the participation banking sector
have been made to a large extent. With these sub-regulations, the financing methods of participation
banks have been defined in a broad and detailed manner. Fund collection were added to the fund
collection by proxy; profit distribution calculations and profit balancing reserve were reorganized; the
regulation on the Shari'ah governance framework was issued; development and investment banks
were allowed to operate in Islamic ways;

In order to further support the development of Islamic finance and Takaful in Turkey, several strategies
and initiatives are defined in the 11th Development Plan (SBB, 2019) as well. For instance:
• “The position of interest-free finance will be strengthened in the country’s financial system;
• Diversified products and services, as well as human resources, will be developed in the
interest-free finance arena;
• Various financial instruments and mechanisms will be established to support policy
development processes;
• Rules and regulations will be developed for the implementation of new business models and
windows in order to expand participation banking;
• Awareness of the interest-free finance system will be enhanced by providing more
information to the public about the functioning of the interest-free finance system and
financial products;
• An integrated data reporting infrastructure will be established;
• A set of regulations will be developed to increase the variety of products and services related
to the interest-free finance system;
• Platforms based on lease certificate, electronic product certificate or stock portfolio will be
developed to carry out commodity Murabahah transactions in Turkey;
• The use of lease certificate (Sukuk) issues in the financing of public investments will be
augmented;
• Regulations will be revised to provide ease of application in the use of asset leasing
companies (special purpose vehicles) in issuing lease certificates;
• Audit standards for interest-free finance will be developed;
• Standardisation of the terminology of instruments and institutions related to interestfree
finance will be ensured;
 • Interest-free finance corporate governance system will be established and aligned with
international best practices;
• Legislation and institutional structure will be developed to encourage participation insurance
(Takaful), and operations will be expanded to address all types of risk groups;
• Participation reinsurance (Re-Takaful) fund will be introduced and developed to prevent the
flow of national resources abroad.”

Moreover, the 11th Development Plan has set a market share target for Islamic banking as 7%
for the end of the Plan period, 2023. This will have a positive effect on Takaful industry (SBB,
2019), as Takaful is an important component of the Istanbul Finance Centre Plan. In 2009, the
Turkish government revealed its “Strategy and Action Plan for Istanbul as an International
Financial Centre”. This is to prepare the ground for making of Istanbul a global financial centre
by 2023. In order to promote this project, some requirements are needed. They Improving the
Takaful Sector In Islamic Countries 104 Improving the Takaful Sector In the Islamic Countries
94 include the improvement of all logistical areas, such as the legal framework and the
arrangements for arbitration, and the building of new infrastructures, such as over-the-
counter (OTC) derivatives market, specialised commodity exchanges and energy and carbon
emission exchanges. Takaful is one of the main components of the IIFC project (SBB, 2019).
The Public Oversight Authority in Turkey has recently taken steps to contribute to the
development of the Islamic finance industry in 2019. In this context, AAOIFI's management,
accounting and auditing standards and ethical principles have been introduced into Turkish
legislation. In addition, AAOIFI Shari'ah standards have been translated into Turkish language
by Istanbul Sabahattin Zaim University in cooperation with PBAT.15

Case

In Malaysia, cases on Islamic banking and Takaful are under the civil courts jurisdiction. This
development is due to the fact that Islamic banking and Takaful are considered as under the item
„finance" provided in the First List, 9th. Schedule of the Federal Constitution. In this respect, the
Syariah courts only have jurisdiction to hear any cases that fall within the State List in the Federal
Constitution and this excludes any Islamic financial disputes/cases.
Banking as well as the incorporation and regulation of corporation falls within the Federal List.? As in
the case of Bank Islam Malaysia Berhad v. Adan Bin Omar [1994] 3 CLJ 735 (HC); [1994]3 AMR 44 (HC),
it was argued by the Defendant that the civil courts had no jurisdiction to hear Islamic banking cases.
The Financial Mediation Bureau (FMB) was established under the general purview of BNM, and it is
considered an integrated dispute resolution centre specifically meant for small claims, disputes, and
complaints involving financial services providers and their customers.

The jurisdiction of FMB with particular reference to Takaful disputes relates to all family Takaful claims
and general Takaful claims. There is a mandatory ceiling on claims, complaints, or disputes relating to
financial loss. For motor and fire Takaful, the amount must not exceed RM200,000 (circa USD66,666),
while for third party property damage, the ceiling is put at RM5,000 (circa USD1,666). For any other
disputed claim, the amount should not exceed RM100,000 (circa USD33,333). Time barred claims,
complaints or disputes as a result of the operation of an extant law are excluded from the jurisdiction
of FMB. These are expected to be referred to the court or arbitration for hearing and determination
(Segara, 2009).

2) Assignment of the contract

Since the Takaful Act 1984 does not allocate any specific provision on this, the existing Common Law
is applicable. For example, motor Takaful certificate does allow the participant to validly reassign or
transfer the ownership of the certificate to new participant, provided the Takaful operator has
consented. This is basically replicating the same rules in insurance, on which is based on the English
Common Law. A sample English case law on the assignment is
Peters v General Accident Fire & Life Assurance Corporation Ltd (1938).

3) Valued Policy
A valued policy is the policy which specifies the agreed value of the subject matter insured.
In the case law of Teng Gia Hwa & 1 or v Syarikat Takaful Malaysia Bhd (2010), the judge issued the
verdict based on the English law of Marine Insurance Act 1906 since there is no provision in the Takaful
Act 1984. Syarikat Takaful Malaysia at the point of Takaful application had accepted the valued policy
of the participant's vessel at RM 500,000, however disputed to pay the sum after the vessel was
missing. The judge opined that it is allowed by the Common Law to presume the actual loss of the
vessel. The above lists are not exhaustive and it might require an in-depth study to ascertain the whole
gap of Takaful Act 1984 in relation to Common Law. The main point to be highlighted here is that the
Common Law is still applicable in Takaful cases despite of the existence of Takaful Act 1984 and the
Shariah Advisory Council.12

Accounting and reporting are the auxiliary functions of TOs’ operations

• accounting and reporting for Takaful should guarantee the separation of funds
established between TOs and participants. Different funds available in business should
be properly separated, and the management and usage of such funds should also be
properly observed, as certain usage or direct expenses on one fund could not be
simply absorbed by the other. This is primarily because the assumption of risks in the
Takaful system is undertaken by participants collectively and not by the TOs. This
affects the ownership concept over the contributions pooled in the scheme, whereby
the right over such contributions remains in the hands of participants collectively.
Accounting and reporting for Takaful should, therefore, properly address these
requirements.
• In addition, reporting in Takaful demands for a more comprehensive disclosure
compared to insurance reporting. The focus of reporting should be on both Shari’ah
adherence and the financial strength (of both TO and Takaful funds established). In
essence, participants in the Takaful scheme should rightfully be entitled to several
rights, including receiving regular flow of information on underwriting strategies,
investment objectives and policies relating to Takaful funds, operational guidelines that
govern the relationship between TOs and participants and the basis of allocation of
profits (if Mudharabah model) between the two parties and the basis of fees payment
(if Wakalah model). More importantly, adequate disclosure of information in which
participants will be better able to assess the potential risks and rewards attached to
their contributions paid, as well as on the extent on adherence to Shari’ah over the
management of such contributions, and, subsequently, make appropriate decisions to
protect their own interest, if the situation warrants, is needed

1. Accounting for contribution and unearned contribution reserve.

• Contribution in Takaful is defined as the monetary payment provided
once or periodically by a participant to TO for the purpose of investment
and tabarru’ which represents participant’s contribution to the Takaful
scheme.
o In the general Takaful scheme, participants contractually agree
to relinquish their rights wholly over contributions paid which will
 be used for the benefits of participants in the scheme
collectively.
o Family (life) Takaful scheme, on the other hand, contractually
agree to relinquish their rights over part of the contributions paid.
The balance will become their personal Takaful fund. Equivalent
to the term “premium” in the case of insurance, either received
or receivable, contributions in Takaful represent a primary
source of revenue or income to the Takaful fund (scheme) and
not to the TO. This is due to the fact that Takaful works on the
basis of pooled funds which is made up of contributions paid by
participants to the Takaful scheme, leaving TO as merely an
intermediary whose functions include managing those funds
according to terms and conditions of the Takaful contract. The
contribution ownership remains attached to participants
collectively. Unearned contribution reserve (UCR) in Takaful
refers to contributions already received in respect of risks which
are still unexpired at the end of the accounting period. It is the
amount set aside at the end of the financial period, out of net
contributions in respect of risks to be borne by the Takaful fund
subsequent to the period end date under the Takaful contracts
entered into on or before the reporting date. Reserve for
Unearned Contribution (RUC) is conceptually an expense to the
Takaful fund, as it relates directly to contributions collectively
owned by Participants.
2. Accounting for claims.
• the risk on any calamities could occur and claims notification will then
be subsequently lodged. Accordingly, sufficient provision for claim must
be made prior to the distribution of profit to participants in the financial
period. It is in this sense that prudent care must be exercised by TOs
so as to ensure that the rights and interests of both the participants and
the TOs are equally protected (Kasmah, 1996).
3. Accounting for Re-Takaful.
• Equivalent to Re-insurance (RI), Re-Takaful is a means for TOs to
spread the Takaful fund’s exposure to losses by ceding and accepting
premiums amongst Takaful funds managed by other TOs. The concept
of Re-Takaful is similar to RI, except that the former is the practice of
transferring a part or whole of the liability from one Takaful scheme to
the other and not among TOs. This is based on the fact that risks are
assumed collectively by participants and not the TOs. Equivalent to
UCR and claims, outward Re-Takaful is also an expense to the Takaful
fund and not to the TOs.
4. Accounting for investment surplus/deficit.
• Equivalent to the case of insurance, besides underwriting surplus,
investment income also forms part of income to both TOs and
theTakaful fund, i.e. income to participants collectively, as TOs are also
allowed by BNM to set aside an allowable amount of contributions
collected for investment purposes. However, investment in the Takaful
system differs significantly from insurance in terms of the types of
investments allowed, whereby only Shari’ahcompliant investments are
allowed. It covers non-interest-bearing instruments, and investees’
operations must also operate in permissible (Halal) businesses devoid
of elements of gambling, alcoholic and any other religiously and socially
unacceptable types of businesses. Further, the mudharabah model
requires for investment surplus (if any) to be shared between
participants and TOs, thereby the mudharabah portion of the
 investment surplus is considered as income in TOs’ income statement.
Participants’ mudharabah portion of the investment surplus will instead
be transferred to individual participants’ accounts (Takaful fund). In
cases of deficit (losses), it will entirely be borne by participants, in
accordance with the mudharabah principle, whereby the capital
provider (participants) should bear all losses, as the mudharib has
already lost in terms of their efforts. In the case of the wakalah model,
the whole portion of investment surplus will go to participants (Takaful
fund), as TOs are only entitled to wakalah fees as the reward for their
efforts in managing the investment. In somewakalah models, TOs could
also share the surplus, depending on the terms in the wakalah contract.

5. Accounting for management expenses.

• Expenses directly affects the level of underwriting surplus and
subsequently the insurer’s or the TO’s bottom line. Expenses in Takaful
could generally be divided into
o operational (or underwriting) expenses = expenses incurred
in Takaful operations only, covering claims, reserving and
outward Re-Takaful. These costs, which are directly associated
with Takaful funds, are to be absorbed by the participants
collectively, primarily due to the fact that the Takaful system is
a scheme, whereby risks are jointly assumed (or underwritten)
by all participants instead of the TOs.
o management expenses = expenses incurred in the running of
TOs such as staff salaries and management-related expenses
which carry specific Shari’ah rulings. Essentially, these costs
are to be borne by shareholders (i.e. the TO) and not
participants. Such separation is primarily based on the rules of
mudharabah and wakalah. In mudharabah, its operational
principles govern the permissibility of charging MEs to Takaful
funds which are effectively the capital in the mudharabah
contract. Any deduction from the capital would subsequently
affect the underwriting surplus and, hence, its distribution to
participants and TO. In the wakalah model, the wakalah fees
payable are basically the TOs’ reward, meant to cover their
MEs. As such, TOs adopting the wakalah model should not
charge any of their MEs to Takaful funds, as it has been
provided for in the wakalah fees. It is in this regard that
expenses in Takaful have to be properly handled, as both rights
and obligations of TO and participants should be equally
protected and fulfilled, thereby ensuring justice and fairness in
the mudharabah and wakalah contracts.

Takaful accounting and reporting regulations in Malaysia

• the enactment of Financial Reporting Act (1997) has given birth to both the Financial
Reporting Foundation and the Malaysian Accounting Standards Board (MASB)
o MASB = responsible for coordinating the adoption of IFRS effective from
January 2012.
o IFRS, = however, does not specifically cover the accounting and reporting for
Islamic Financial Institutions (IFIs) such as the IBs and Takaful, as they are of
the opinion that IFRSs are technically compatible with transactions undertaken
by IFIs.
• In ensuring proper accounting and reporting by TOs, the Malaysian Government,
through its specific Takaful Act (1984), delegated the function of formulating the
accounting techniques and reporting format and contents of TOs to BNM[2], causing
TOs to compulsorily abide by the issued circulars and guidelines.
• Nonetheless, TOs are also presented with Shari’ah-based accounting and reporting
standards on Islamic insurance produced by AAOIFI. These standards, however, have
never been enforced by BNM on TOs
• BNM Guidelines :
o specific context of TO’s financial reporting, the latest and relevant BNM’s
guideline was issued on 28 June 2013 (Guidelines on Financial Reporting for
TOs–“GFR-TO”) which aims at addressing issues arising from MASB’s
convergence exercise towards IFRSs. The introduction of GFR-TO effectively
superseding the earlier Takaful guideline coded GPT-6 which was introduced
in July 2004
o GFR-TO = enhanced version of GPT-6. It provides minimum expectations in
applying Malaysian Financial Reporting Standards (MFRSs) by TOs. It aims at
ensuring adequate disclosures in TOs’ financial statements, thereby enhancing
comparability and facilitating informed assessment of TOs’ financial position
and performance. Whilst it requires TOs’s financial statements to be prepared
in accordance with the relevant MFRSs to the extent that the standards are
consistent with Shari’ah principles, the preparation is, however, subject to
modifications required by BNM to reflect specific exceptions to MFRS, following
which the relevant and adequate disclosure must be made. In terms of specific
accounting treatment, among others, GFR-TO expects TOs to report on the
assets and liabilities of the Takaful fund separately from their assets and
liabilities. It also requires TOs to present family Takaful contract liabilities
(including actuarial liabilities, unallocated surplus and fair value/revaluation
reserves, if any) as a liability in their SOFP. TOs are also required to disclose
provision for expense liabilities as a liability in its SOFP. These collectively
reflect the nature of a pre-specified relationship between TOs and participants,
albeit, not specifically mentioned in the guideline