FUNDAMENTALS OF TAKAFUL

The Meaning of TakafulJoint Guarantee or Guaranteeing Each Other.Stems from the word kafal or to take care of

one’s needs.Takaful is a system of Islamic Insurance

based on the principle of ta’awun (mutual cooperation) and tabarru’ (donation).

The Meaning of TakafulThe basic objective of takaful is to pay for a

defined loss from a defined fund. Each member of the group pools effort to support the needy.

It means mutual help among the group.The operation of takaful are within the tijari

(commercial) sector and is based on the Islamic commercial profit-sharing principle of al-mudharabah.

Elements in Insurance not Conforming to Islamic LawThe purpose of insurance is to address some

form of financial loss and has positive contribution to the society.

However, there are three elements in insurance that are not conforming to islamic law:GhararMaisirRiba

PRINCIPLE OF TAKAFUL OPERATIONConventional insurance operations did not

comply with the rule and requirements of the Syariah as it embodies the following three elements:Al Gharar means uncertainty Al Maisir means gamblingAl Riba means interest

Elements in Insurance not Conforming to Islamic LawGharar

Uncertainty affecting the occurrence of a contract or the obligations under the contract.

Naturally involved results that are unknown to all parties involved.

In conventional insurance, gharar is argued to stem from the fact that what is being bought with the premiums is not well defined.

Existence of ambiguities and uncertainty under the contract. Payment of compensation Paying the premiums Nature of the contract – insurance is an aleatory contract

which based on the monetary values exchanged between the contracting parties may not be equal.

Elements in Insurance not Conforming to Islamic LawMaysir or Gambling

Refers to a situation in which unnecessary risk is created by entering into a transaction with a hope of gain and a fear of loss

Elements in Insurance not Conforming to Islamic LawUsury or Riba

Usury is defined as practice of lending money at exorbitant interest, especially at higher interest than is legal.

Usury or riba also refers to lending at interest or addition to the principal of a loan.

“…. Allah has permitted trade and prohibited in involving usury”(surah Al-Baqarah, 2:275)

The Essence of TakafulThe heart of insurance system is pooling of

resources from many to help the unfortunate few.Insurance is allowable in Islam in risk sharing

mechanism, as long as any elements that contravene Islamic principles are avoided.

Sharing the risk with the purpose of helping each other is recommendable as Allah mentioned in the al-Quran…. Help you one another in virtue, righteousness and piety, but do not help one another in sin and transgression …. (Al-Maidah:2)

The Essence of TakafulIn Malaysia, the development of the takaful

industry was largely triggered by the decree issued by the National Fatwa Committee.

A special task force was set up by the government in 1982 to study the viability of establishing an Islamic insurance company, they conclude “under the islamic insurance system, a portion of the contribution from every participant must be made with the intention of tabarru’ , and not for buying and selling, the existence of tabarru’ makes the transaction permissible and valid according to the Shariah.

The Essence of TakafulSheikh Dr Yusuf al-Qardawi, suggested a

modification to the insurance against hazards, to bring it closer to the Islamic principle by means of a contract of donation with a condition of compensation.

For insurance to be accepted by Islamic tenets, it must be founded on the principles of tabarru’ (donation), ta’awun (mutual cooperation)

Al-Tabaru’ ConceptTabaru’ menas to donate.The participants of takaful plan make an aqad

(agreement) to deposit as donation a certain portion of takaful contributions or installments into a risk fund.

This fund will be used to assist participants who might suffer unexpected financial losses due to some contingencies.

Mutual CooperationBesides Tabarru’, takaful is the principle of mutual

cooperation and risk – sharing.Mutual cooperation or ta’awun is achieved through

contributions from takaful participants to the tabarru’ fund which allows participants to provide financial assistance to fellow participant suffering a loss.

Takaful system can be described as a co-operation among participants who mutually protect and guarantee the interest of one another, by jointly sharing responsibility to pay for potential losses that may occur, through donations into a common fund.

Mutual CooperationTakaful is built on the principle of mutual

cooperation where each participant participates in each other’s loss, while takaful operator facilitates this cooperation using its exercise, under the operation of the takaful business.

Essentially, a cooperative risk-sharing plan, takaful system aims to provide insurance protection against risks such as premature death, illness, disability and property damages.

It embraces the elements of mutual help, mutual protection and shared responsibility among participants, supported by tabarru’ principles.

Mutual CooperationDr Yusuf Qardawi asserts that a cooperative

system established to assist its members who suffer from misfortune must meet the following conditions:Every member makes his share of payments into a

common fund as a donation, in the spirit of brotherhood. Financial assistance is provided to members who suffer a loss from this common fund.

Any investment of the money from the common fund must be done in halal business activity which is free from usury or interest.

A member shall not seek a pre-determined amount of compensation in the event of a loss rather than indemnified for his total or partial loss.

Al-Mudharabah ConceptMudharabah (Trustee Profit-Sharing) is a

contractual agreement between provider of a capital and entrepreneur for the purpose of business venture whereby both parties agree on a profit sharing arrangement.

Takaful company acting as the entrepreneur and the participants entrust funds to the takaful company by means of takaful contributions.

Takaful contact specifies the proportion of profit (surplus) to be shared between the participants and the takaful company.

OPERATION OF TAKAFULLicensed and regulated by the Takaful Act 1984Supervisory authority vested under the Takaful

Act is the Bank Negara Malaysia.Underlying the importance of complying with the

religion of Islam, all businesses of the company will be transacted in accordance with Islamic principles, rules and practices

Section 8, Takaful Act 1984…3(a) A Religious Supervisory Council,

whose members would be made up of Muslim religious scholars in the country, shall be established to advise the company on the operations of its takaful business in order to ensure that they do not involve any element which is not approved by the Religion of Islam…

Section 8, Takaful Act 1984…(5) the Director General shall also refuse the

register an applicant unless he is satisfied…(b)that there is in the Articles of Association of

the takaful operator concerned provision for the establishment of a Syariah Supervisory Council to advise an operator on the operations of its takaful business in order to ensure it does not involve in any element which is not approved by the Syariah…

Basic Takaful ModelInvestment Returns on Capital

Stakeholders’Fund

Management Expenses & Commission

Participants contributio

ns

Claims (takaful benefits)

Initial Equity Capital

Takaful Fund

Share of investment returns a& surplus

Interest-free loan (Qardul Hasan)

Takaful Operating ModelsTakaful operating models:

Primary Operating Models: Ta’awuni Model Waqf Model

Takaful Models Used In Malaysia Al-Mudharabah Al-Waqalah

Ta’awuni ModelPractices the concept of pure mudharabah in its

transaction. It is a profit-sharing model.Takaful Operator (TO) and participant share the

direct investment income.In addition, the participant is entitled to 100% of

surplus with no deduction made prior to the distribution. Pure mudharabah model encourages solidarity, unity, brotherhood and mutual cooperation.

Ta’awuni Model is divided into 2 basic modelsAl-MudharabahAl-Wakalah

2 basic Ta’awuni ModelAl-Mudharabah model is a profit-and-loss

sharing model in which the participant and TO share the surplus.

Al-Wakalah – is a fee-based model in which the TO earns fee for the service of running the operation.

Waqf ModelWorks on a nonprofit concept, emphasizing the idea

of donation among the participants.TO initiates the waqf fund by contributing the intial

sum into the fund, and participants make donation to help the less fortunate members of the community.

Generally undertaken by a social or governmental enterprises.

A waqf deed is drawn to assist in the distribution of funds should a loss occur to any participants.

Surplus and profits resulting form investment activities are not distributed to the participants.

It will retain by the operator to support the community.

Takaful Models Used in M’siaFamily Takaful

Al-Mudharabah ModelAl-Wakalah Model

General Takaful PlansAl-Mudharabah ModelAl-Wakalah Model

Takaful Models Used in M’sia – Family Takaful ModelAl-Mudharabah Model

TO acts as Mudharib (Entrepreneur) while Participants act as Rabbul Mal (Capital Provider) by paying contributions.

Al-Mudharabah contract is partnership in nature. Participants contribute capital, while

Legal Aspects of TakafulRegulatory Framework of Takaful Business

Remarkable growth rate of between 18-20 % per yearMalaysian Takaful Regulation High Court

Malaysian Takaful

Association

BNM

Shariah Advisory Council

Tajafyk

Takaful &

Retakaful

Legal Aspects of TakafulTAKAFUL ACT 1984REGISTRATION OF TAKAFUL OPERATORSSHARIAH FRAMEWORKMALAYSIAN TAKAFUL ASSOCIATIONSTATUTORY DEPOSITSTAKAFUL FUNDSTATUTORY ASSET REQUIREMENTINVESTMENT OF FUNDSUPERVISION AND EXAMINATION ON

TAKAFUL OPERATORSTAKAFUL GUARANTEE SCHEME FUND

Legal Aspects of TakafulBNMShariah Advisory

CouncilHigh CourtTakaful OperatorsRetakaful OperatorsTakaful

IntermediariesMalaysian Takaful

Association

Formulate Policies & supervision

Determines ruling on issues of syariah principles

Decides on all muamalat casesFund manager & u/writingU/writing manager on ceded

TO Intermediaries

Agents Brokers Bancatakaful Adjusters

Self-regulatory body promoting uniformity in market practices.

Legal Aspects of TakafulRegistration

Section 4 (1)Section 4 (2)Section 11 (1)

Legal Aspects of Takaful