Takaful

Dr. Muhammad Imran Usmani

SECP Takaful ConferenceMarch 14, 2007

Conventional Insurance

How Qimar & Riba exist in Conventional Insurance

Definition of Takaful

Mudarabah Model

Wakalah Model

Wakalah based on Waqf Model

Application of Takaful

Presentation Outline

Definition

“A way to provide security / and compensation to what is valuable in the event of its loss, damage or

destruction based on the principle of risk taking and speculation”

Conventional Insurance

Two Aspects of InsuranceAccording to Shariah rules there are two aspects of Conventional Insurance, namely:

1. Conceptual Aspect2. Practical Aspect

So far as the Concept of Insurance is concerned, it is to cover the risk of loss, or “fortunate many helping the unfortunate few”.

This concept is not only recognized, but also appreciated and rewarded by Islam.

Conventional Insurance

"Help ye one another in righteousness and piety, but help ye not one another in sin and rancor".

Principles of Muwalat, Maaqil, and Kafalah and establishment of Islamic welfare state by the Holy Prophet (SAW), Waqf and Tabrru are examples for recognition of this concept.

Al-Maidah verse # 2:

Conceptual Aspect

Why this Concept is rewardable?

Second Aspect of Insurance is practical Aspect, it is forbidden due to two reasons:

1. Qimar or Maisir2. Riba

Since these two things have been clearly prohibited by Islam, they cannot be justified on the conceptual aspect of helping victims of various accidents or losses.

Practical Aspect

O believers! Intoxicants and gambling and Al Ansab (Animals sacrificed for idols) and Al Azlam (arrows for seeking luck or decision) are an abomination of Satan's handiwork. So avoid them in order that you may be successful. Satan wants only to excite enmity and hatred between you with intoxicants and gambling and hinder you from the remembrance of Allah and from prayer. So, will you not then abstain? (Al Maidah 90 – 91)

Quranic view on Gambling & Risk

Practical Aspect

Practical Aspect

How Qimar & Riba exists ?

QIMAR or MAISIR has been clearly prohibited by Quran and Hadith of the Holy Prophet (SAW).

Maisir has two basic elements which cause to prohibit. namely:

1. Gharar

2. Khatar

Khatar

“Taleequl milki al alkhatr, wal mal fil janibain”

To stipulate/conditionalize the ownership/profitability on uncertain event, whereas money is involved in the both sides.

However, if money is not involved from both sides i.e. one party voluntarily (without any compensation) declares “We shall compensate you on a particular event of loss”, it would not be Maisir.

Gharar

Gharar literally means “Uncertainty”

Forms of Gharar :

Any bilateral transaction in which the liability of the party in the transaction is either uncertain or contingent.

Consideration of either is not known.

Ultimate outcome of any one party is uncertain.

Delivery is not in the control of the obligor.

Payment form one side is certain, but from the other side is contingent.

Gharar & Khatar

Presence of Gharar and Khatar makes Qimar, Speculation, Gambling and Conventional Insurance prohibited.

Qimar

Indication of Presence of Qimar in a transaction

If in any transaction one party’s profit is dependent on the loss of the other then this is an indication that the transaction involves QimarQimar.

In the permissible modes of business any profit or loss is equally shared & is fair to every party. For example, in partnership (Musharakah) both the parties share profit & loss. Similarly in other trades like sale, purchase, hiring or leasing each party’s considerations are certain.

Conventional Insurance

Problems

The participant contributes a small amount of

premium in a hope to gain a large sum - Khatar.

The participant loses the money paid for the

premium when the insured event does not occur -

Gharar.

The company will be in deficit if the claims are higher

than the amount contributed by the participants -

Gharar.

Riba

The element of Riba (Interest) exists in lending or

borrowing funds/investments at fixed interest, and

other related practices in the investment activities

of the conventional insurance companies

The Solution

Islamic Cooperative Insurance( Takaful)

Takaful

Takaful is an Arabic word that means “Guaranteeing each other"

It is a system of Islamic Insurance based on the principle of TA’AWUN (mutual assistance) and TABARRU’ (Gift, Give away, donation) where the risk is shared collectively by the group VOLUNTARILY.

This is a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage to any of them as defined in the pact.

Models of Takaful

1. Mudarabah Model

2. Wakalah Model (hybrid of Wakalah &

Mudarabah)

3. Wakalah based on Waqf Model

Mudarabah Model

The participant and the operator enter into a Mudarabah contract from the beginning of the relation, for indemnification and share of the underwriting results.

The Surplus is shared between the participants and the takaful operator in an agreed ratio.

This model allows the takaful operator to share in the underwriting results from operations as well as the favorable performance returns on invested premiums.

Mudarabah Model

Shariah Concerns

The relation between the participants is that of tabarru’ and not Mudarabah, “Profit Sharing” can’t be applied here. Donation cannot be Mudarabah capital at the same time.

In a Mudarabah contract, a profit is to be generated to be distributed. Profit is not the same as ‘Surplus’(excess pf premiums over claims, reserves and expenses) and in the insurance context no definition can be generated by definition.

Mudarabah Model

Shariah Concerns

The sharing in underwriting surplus itself is something which is similar to making this into a commercial business venture and not a mutual contract for assistance and protection.

The requirement to provide Qard Hasanah (in case of a deficit) in a Mudarabah contract by definition is against the concept of Mudarabah which is a profit sharing contract and a Mudarib cannot be a guarantor.

Wakalah Model

Cooperative risk sharing occurs among the participants whereas the takaful operator earns a fee for services (as a Wakeel or Agent).

The operator earns an upfront deductible fee and shares the profit of investments, it does not share the results of underwriting.

Waqf Model

In order to eliminate the element of “Mayser”, the concept of ‘Waqf’ and ‘Tabarru’ is incorporated. In relation to this participants shall agree to relinquish as “donation” certain amount of money.

The Takaful Fund, consisting of the contributions paid as Tabarru, will be further invested by the Company based on the principle of Islamic modes of Trades, through which the element of interest (riba) will be replaced.

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

INVESTMENT BY FUND

PROFITS FROM INVESTMENT

DONATIONPAID BY

PARTICIPANT

WAQF FUND 75% TO

70%

WAQF FUND

OPERATIONAL COST OF TAKAFUL

/RETAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT 100%

SURPLUS

COMPANY

PARTICIPANT

60%

SHARE OF PROFIT FOR THE

COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

WAQF

INITIAL DONATION BY

SHAREHOLDERS TO CREATE WAQF

FUND

TAKAFUL OPERATOR FEES FOR

ADMINISTRATION EXPENSES

25% TO 30%

PROFIT SHARING ONMUDARABHA BASES

Waqf Model

Waqf Model

Basic Features

A Waqf Fund is established by the shareholders ofTakaful Company through the contribution of ‘Ceding amount’ (part of the Capital) to compensate the beneficiaries or participant of Takaful scheme. The Ceding amount of the Waqf will remain invested.

Any person by signing the proposal form, contributing to the Waqf and subscribing to the policy documents shall become the member of the Waqffund.

Waqf Model

Basic Features

The Waqf fund shall work to achieve the following objectives:

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

b. To extend benefits to its members strictly in accordance with the Waqf Deed.

c. To donate to Charities approved by the Shariah Supervisory Board

Basic Features

The Waqf Fund will lay down the rules for

distribution of its funds to the beneficiaries and will

decide how much compensation should be given to

a subscriber/member .

The Waqf will become owner of all contributions and

has the right to act as a legal entity as per its terms

for investment, compensations and dealing with the

surplus amounts.

Waqf Model

Waqf Model

Basic Features

The Takaful Company may distribute the surplus amounts on the following three basis:

a. A portion of surplus should be kept as reserve to mitigate the future losses.

b. A portion of surplus should be distributed among the participants to differentiate it from the conventional insurance procedures.

c. A portion of surplus should be utilized for the charitable purposes every year.

Basic Features

As per the rules of the Waqf, if the fund is

liquidated, the outstanding balance, after paying all

dues and payables, will be utilized to charitable

purposes.

The Takaful company, while managing the Waqf

Fund, will play two different roles simultaneously:

a. Operator/Manager

b. Mudarib

Waqf Model

Basic Features

As Operator/Manager, the Takaful Company will

perform all functions necessary for the operations

of the Waqf against a Wakala fee to be deducted

from the Contributions of the Participants.

As Mudarib of the fund, the Takaful Company will

manage the investment of the excess funds of the

Waqf into Shariah compliant investments and will

participate in the profit of the fund’s investments

at a fixed ratio of profit.

Waqf Model

Application

Takaful can be used to cover :

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

Vehicles (car, motorcycle etc..)

Goods ( For Import or Export )

Valuables

Health, accidents and Life