BWBS3043: ISLAMIC BANKING

MANAGEMENT

Topic 7: Takaful
Contents
 Introduction
 Concepts of Insurance
 The development of takaful
 The defferences between takaful and insurance
 Operational framework of Takaful
 Models of Takaful
 Conclusion
INTRODUCTION

 Takaful is one of the important components of the

Islamic financial market.
 As one of the risk mitigation tools, takaful complements
its counterparts, namely the Islamic banking market.
 Indeed, mitigation and prudent management of risks are
integral parts of Islam in order to achieve justice in the
system.
 Takaful market is considered as one of the fastest
growing service industries, although it needs to work on
further improvement in areas such as accounting,
regulation, jurisprudence and operation.
CONCEPT OF INSURANCE

Insurance = a financial protection system which involves the

execution of contracts between the insurer and the
insured, in which the insurer agrees to underwrite
the subject risk of such contract.

“Insurance is a device for reducing risk by combining a sufficient

number of exposure units to make their individual losses
collectively predictable. Predictable loss is then be shared by or
distributed proportionately among all units in the combination”
(Mehr (1986)
CONCEPT OF INSURANCE
CONCEPT OF INSURANCE
 Pure Risk Speculative Risk
Nature of Outcome Loss/No loss Loss/gain/no change
in value
Origin of Risk unavoidable By deliberate choice
of action
Examples Death, fire, accident Fluctuations in market
value
Common Risk Insurance Use of derivatives
Management Method
WHY INSURANCE IS NOT ACCEPTED
BY SHARI’AH?

 In 1965, the Congress of Islamic Research in Cairo

discussed the legitimacy of insurance in the islamic
world.
 Muslim jurists have decided that insurance in Islam
should based on principles of mutuality and co-
operation.
 Based on this principles, the Islamic system of insurance
embodies the elements of shared responsibility, joint
indemnity, common interest, solidarity, etc.
 Thus, the concept of insurance is acceptable in Islam.
 WHY INSURANCE IS NOT ACCEPTED BY
SHARI’AH?

s
D i v i d e losse
*
e a d li ability
* Sp r

Therefore, the concept of insurance is not against the spirit of Shari’ah

WHY INSURANCE IS NOT ACCEPTED
BY SHARI’AH?
However, there are some means and methods used in conventional
insurance which are not acceptable to the Shari’ah.

Premium
WHY INSURANCE IS NOT ACCEPTED BY SHARI’AH?

Conventional insurance contains riba in two situation:

al -fadl
Riba
Riba al-nasi’ah

* Compensation > instalment

WHY INSURANCE IS NOT ACCEPTED BY SHARI’AH?

GHARAR
Gharar may originate from:

 Ignorance and lack of information over nature and attributes of

subject matters

 Doubt over its availability and existence

 Doubt over its quantity

 Lack of information concerning the price and terms of payment

(including currency to be paid)

 Prospect of delivery (including vendors ability to make delivery

according to contract)

 Uncertainty is present in conventional insurance because the value

and timing of compensation cannot be determined and known at
the time the contract is made.
 MAYSIR
 There is the element of al-Maisir (or gambling) which arises as a
consequence of the presence of al-Gharar, in particular in the case of
life insurance.

 When a policyholder dies before the end of the period of his insurance
policy after paying only part of the premium, for example, his
dependents will receive a certain sum of money which the
policyholder in the first place has not been informed and has no
knowledge of how and from where it is to be derived.

 Insurance contains an element of maysir because policyholders often

bet premiums on the condition that the insurer will make payment
(indemnity) higher than the premium paid during the occurance of the
insured event.
 BASIS FOR ISLAMIC INSURANCE
(TAKAFUL)

 Before the arrival of Islam, blood rite has been common practice to
revenge those who were killed. This is an early form of insurance by
way of mutual protection with a group of people taking steps to cover
the losses incurred due to the death of an individual in the tribe,
either revenge by bloodletting or payment of “blood money”. This
concept of compensation is known in its arabic term as “aqila” and
affirmed by the Prophet (PBUH).

 The basis of shared responsibility in the system of aqila becomes the

foundation of mutual insurance.

 Takaful is based on the spirit of brotherhood, mutual help and mutual

indemnity.
Takaful means that the majority guarantees the loss of the minority i.e. the
majority shares the burden of the unfortunate minority via the pooling of funds.
The principles of guarantee, derived from the word “kafala”, is the basis of
takaful.

This principle is further enhanced to incorporate the concept of “tabarru’”

meaning donation, which explicitly mentions that the money collected is to be
used for the purpose of assisting “fellow participants who require assistance
according to the terms agreed as long as these terms are not in conflict with the
Shari’ah.

The Takaful operator (takaful company) agrees to manage the tabarru’ fund
based on a set of guidelines and on the Al-Mudarabah (profit sharing) concept.

Participants are the rabbul-mal (capital providers) while the Takaful operators is
the mudharib (entrepreneur).
 Takaful
A combination of tabarru’ contract and agency
(wakalah) or profit –sharing (mudarabah) contract.
Participants are duty-bound to make contribution
to the scheme and are expected to mutually share
the surplus.
Takaful operator earns a return for rendering a
service of managing the takaful programme and
from mudarabah profit sharing scheme as
mudarib.
Counter-value (i’wad) is effort or undertaking of
risk.
Takaful operator acts as administrator of the
takaful fund and pays benefits from it. If there is
any sufficiency in the fund, the takaful operator
must provide interest-free loans to rectify the
deficiency.
Indemnification component is based om mutual
contribution, reciprocal donation (tabarru’).
Participants act as both the insured and insurer
simultaneously.
Takaful funds must be invested in Shari’ah-
compliant instruments.
Insurance
Contract of exchange (sale and purchase) between
insurer and insured.
Policyholders are duty-bound to pay premiums to
the insurer.
Insurance company makes a profit when there is
an underwriting surplus.
No clear valid counter-value. Source of profit is
anticipating that the uncertain future will be in
their favour (total premuim > total claims)
Insurer is liable to pay the benefits as promised
from insurance funds and/or shareholders’ fund.
Indemnification component is acommercial
relationship between the insurance company and
the insured.
There is a clear insurer-insured relationship.
There is no restriction in investment of funds.
Three levels of supervision and regulation of takaful

Takaful Act 1984

IFSB standards
Core principles of IAIS
 GENERAL TAKAFUL
(Mudarabah Model)

Participants Surplus
Takaful
Operator
deducted - Claims
Takaful Fund - Re-takaful
- Reserve
- Management
cost
Investment

Profit
 GENERAL TAKAFUL
(Wakalah Model)

Participants
Agency
Fee
Surplus

deducted
Takaful Fund
- Claims Takaful
- Re-takaful Operator
- Reserve
Investment

Performance
fee
Profit
 Hybrid of
Wakalah and Mudarabah Model?
 FAMILY TAKAFUL
(Mudarabah Model)
Participants Surplus

Takaful
Operator
Takaful Fund
- Claims
- Re-takaful
Participants’ Participants’ - Reserve
Account Special Account - Management
(saving) (Tabarru’) cost

Investment

Profit
 FAMILY TAKAFUL
(Wakalah Model)
Participants
Agency
Fee
Surplus

Takaful Fund

Participants’ - Claims
Participants’
- Re-takaful
Takaful
Account Special Account
(saving) (Tabarru’) - Reserve Operator

Performance
Investment

fee
Profit
 Conceptual Framework of
Takaful
The concept of insurance (Takaful), according to the
:jurists, is acceptable in Islam for the following reasons
the policyholders would co-operate (ta’awun) among
themselves for their common good;
every policyholder would pay his subscription in order to
assist those of them who need assistance;
it falls under the donation contract (al-tabarru’) which is
intended to divide losses and spread liability according to
the community pooling system;
the element of uncertainty is eliminated insofar as
subscription and compensation are concerned;
 it does not aim at deriving advantage at the cost of other
individuals.

 Clearly, the contract of insurance under Islamic law would not be

valid unless it were free from these elements.

 Thus in consonance with the above characteristics the jurists

resolved that the system of insurance which falls within the
confines of Islamic framework should be founded on the concept
of al-Takaful.

 An Islamic insurance transaction is a policy of mutual co-

operation, solidarity and brotherhood against unpredicted risk or
catastrophes, in which the parties involved are expected to
contribute genuinely.
 The difference between the principles of
Takaful and conventional insurance.

 the operations of Takaful must be in line with the Shari’ah principles. A

Takaful operation may be held void if any aspects of its operation is
proven to be contrary to the Shari’ah principles.
 The operation of Takaful is generally based on the governing principles
of al-Mudharaba, profits and loss sharing financing technique, which is
an alternative to the interest (riba), based financing technique as adopted
by the conventional insurance practices.
 The operation of Takaful practices is generally supervised by an
independent body called the Shari’ah Supervisory Council. It is the duty
of the council to advise the Takaful operator(s) in any given organization
on their operations for the purpose of ensuring that no aspect of the
company(s) operations involves any element which is not approved by
the Shari’ah principles.