PERVAIZ AHMED

INTERNATIONAL ISLAMIC

1st March, 2014, Qatar

T A K A F U L Shari’ah Compliant Alternative

to Conventional Insurance

Flow of Presentation

Risk Mitigation from Shari’ah Perspective

Global development of Takaful

How does Takaful Function?

Risk Mitigation from Shari’ah Perspective

Is the concept of risk mitigation permissible in Islam?

• This very concept is not only lawful/permissible in Islam but is in fact encouraged

What are the available risk mitigation tools?

• A concept misunderstood as against Tawakul.. Avoid using Risk Mitigation

Tools

• Funds may not be sufficient to compensate the loss

Self-Insurance or setting aside contingency money for the

rainy day

• A commercially viable system but contains the element of Riba, Gharar, and Qimar/Maysir

Conventional Insurance

• A commercially viable system which is also Shariah Compliant

Takaful

Risk Mitigation in Islam

Islamic history is replete with examples featuring risk mitigation activities:

Hadith:

“Tie the Camel and then Submit

to the Will of Allah”

Dhaman Khatr al-Tareeq:

A person would undertake another

person’s risks without any

consideration/fee in return

Dhaman Al-d’ark:

A person would influence a sale by

promising to compensate for

the loss if the subject-matter proved faulty

Aqila:

A risk sharing mechanism in

which community members pooled

their share of Diyat (blood money)

Shari’ah Ruling on Conventional Insurance

Concept of Insurance?

Content of Insurance? ?

Shari’ah has no objections as to the concept or objectives of insurance ; it only has reservations with the way it is

carried out i.e. the process of insurance

What is Allowed? Risk Transfer without Consideration (premium)

Risk Sharing between Participants

Basis of Contract: Taburru i.e. unilateral non-commutative

Takaful Operator has no ownership claim on the contributions

(premiums) paid by the participants

The Participants lose ownerships rights once the contribution is

paid on the basis of Taburru

The contribution becomes the property of the Pool (Waqf)

What is not Allowed? Risk Transfer Against Fixed Consideration (premiums)

Basis of Contract: Muawaza i.e. bi-lateral sales & purchase

Reason: Such a contract involves Riba, Gharar, & Qimar/Maysir

Origin of Modern Takaful

Western socio-economic, political, and legal orders overshadowed Islamic and traditional local norms

Muslim Revival and Renaissance began around the 1920s on multiple fronts

As a result, development of Islamic Banking started in 1970s

Dubai Islamic Bank, the first commercial Islamic bank, was established in 1975

There was a legal requirement that Islamic banks’ underlying assets be insured e.g. Car Ijarah

Islamic banks could not avail insurance from conventional companies as that would be antithetical to the cause

The need for a practical risk mitigation mechanism grew as the Islamic banking industry grew

First Takaful company was established in Sudan in 1979, four years after the establishment of the first Islamic bank

Need for Takaful was felt after the development of

Islamic Banking

1975

First Islamic Bank

1979

First Takaful Co.

Development of Takaful Industry

(USD) BILLON

187 # of Takaful

Operators in

2012

Approx.

48 Window

Operators

15 Irani

Operators

>18 Re-Takaful

Operators Global Market Size of Takaful Source E&Y Report 2013

Worldwide Takaful Developments & Growth

4.2

5.4

7.1

8.3

9.4

10.9

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012

Geographical Distribution of Takaful Volumes

51%

25%

16%

2% 5%

1%

Saudi Arabia

ASEAN

GCC

South Asia

Africa

Levant

Source E&Y Report 2013

Takaful Arrangements can be broadly

divided into the following two categories:

Family Takaful covers

All risks associated with human life, like

- death,

- disability and illness

- short-term and long-term investment needs

General Takaful covers

All risks associated with Physical Assets and Property, like

- house,

- marine,

- motor,

- engineering and misc.

Three Operational Models

Pure Mudarbah Practiced earlier, it is no longer in use.

Pure Wakalah This model in not widely practiced.

Hybrid – Wakalah + Mudarbah

This is the most prevalent model.

Hybrid- Wakalah+

Mudarbah+ Waqf

This model was suggested by Shari’ah Scholars in Pakistan.

How does it Function?

Wakalah Wakala

h

Wakalah Wakalah

Takaful Operator

Investment Participant

Participant

Participant

Participant

Participant Pool

Risk sharing Between Participants

Wakalah Wakalah

Surplus

Wakalah Fee, Claims, Re-Takaful

Participant’s

Investment

Account (PIA)

Waqf Fund Operator /

Wakeel

Participant Contributions

Profits from Investment Wakalee Fee(s)

for Investment

Management

Contributions for

Takaful Benefit

Payment of

Claims

Surplus

Distribution (if

any)

Wakala Fee for

Operating Waqf

Fund

1

2 3

4

5

6

7

How does it Function? Family Takaful

Takaful Funds

• Income and expenses of Shareholder’s are managed

Shareholder’s Fund

• Income and expenses of Tabarru/Waqf pool are managed

Participant Takaful Fund

• Investments of Participants are managed. This fund is Only required in Family Takaful companies

Participant Investment

Fund

Participant Takaful Fund (PTF) - Income

Income of PTF consists of following

Contributions received from the participants (other than the

portion transferred to PIA under Family Takaful Policies)

Claims amount and commission received from the Re-Takaful

operators

Investment profit attributable to participants in the PTF

Salvage/Recoveries

Qard-e-Hasna by the shareholder fund in case of a deficit

Any donation made by shareholders

Participant Takaful Fund (PTF)- Outgo

The outgo of PTF shall consists of the following

Settlement of losses and expenses occurred therein

Re-Takaful cost

Takaful Operator’s fee – Wakalah fee

Share of investment profits of PTF as Mudarib

Surplus distributed to participants

Return of Qard-e-Hasna to the shareholder’s fund

Shareholder’s Fund (SHF)

Both, Family and General Takaful Companies will be maintained in

a similar way under the guidelines of Shari’ah Board and Central

Shari’ah Board.

The SHF will consist of :

the paid-up capital and

undistributed profits to the shareholders.

The income of the shareholder’s fund will consist of:

Takaful Operator’s Fee (Wakalah Fee)

Profit on the investment of the SHF and proportion of the

investment profit generated by the investment of PTF as per PTF

rules and the PMD.

Shareholder’s Fund (SHF)

Expenses of shareholder’s fund shall consist of:

All expenses related to Takaful Operator, including all

marketing as well as administrative investment and operational

expenses including commission and over riders paid to business

intermediaries, benefit payments and related expenses as

surveyors’ fee

The Shareholder must undertake to declare unconditionally all

contracted liabilities of the PTF, but their liability in this regard shall

not exceed the SHF

Participant Investment Account (PIA)

This account is maintained in Family Takaful companies where unit

linking policies are offered to the customers.

Following are the investment avenues allowed by the Shari’ah

Shari’ah compliant Government Securities

Immoveable property

Joint Stock Companies

Redeemable Capital

Mutual Funds

Musharaka Certificates, Term Finance Certificates, Participation

Term Certificates

Placement of excess funds with Banks and Islamic financial

institutions

Surplus Distribution

After deducting the Wakalah Fees, Claims, Re-Takaful

Contributions, Contingency Reserves and Charities etc. the

remaining amount in the pool is to be distributed between the

participants; it does not go to the shareholders

Surplus distribution is one of the major USP of Takaful, It

differentiates between a very well managed company from a

poorly managed company.

For example QIIC which is a better managed company is

distributing surplus of 20% since last many year as opposed to

many other companies who are not distributing surplus at all.

Conventional Insurance Vs. Takaful

Conventional Insurance Takaful

Insurance is a compensatory

contract

Takaful is a non-compensatory

contract

Risk Transfer Risk Sharing

Insurer is the owner of all the funds

and have all the rights

Operator is just the manager of the

fund and has limited rights

Underwriting Surplus of the fund is

owned by the insurer

Surplus belong to the participants

and distributed amongst them

No restriction on the management

of investments

Investments are managed

according to the guidelines given

by Shariah

Jazaakum Allahu Khairan

Pervais.Ahmed@qiib.com.qa

www.qiib.com.qa