Certified Takaful Professional Module II
(Takaful & Risk Mitigation tools in Islamic Finance) CTP: 404: Shariah Elements/Principles in Takaful
CTP: 404: Shari’ah Elements/Principles in Takaful
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Wakalah-Concept and its Application in Takaful1
Islamic Transaction System is a dynamic system and in line with current
needs of the Ummah (people). Although the concept and basic principles
outlined by Islam in its Transaction (Muamalat) system seemed more
'traditional', it can be processed in a very practical and able means to
meet the financial needs of modern and complex community. In fact, the
mechanism of the Islamic financial system today is seen as one of the
best alternatives to the conventional financial system, which in current
condition is equivalent to the Malay proverb “like a crack waiting to
happen." This is the best part of Islam which holds no boundaries not
only in time but also geography.
The Wakalah contract is among the treasures of Islamic Transaction
system that has been popularized and its application tailored in various
facilities in the contemporary Islamic financial system.
The word Wakalah is taken from the Arabic word which means
representative. Literally it means to preserve, to protect, to guarantee, to
submit and to replace. Whereas in terms of syara‘ (law based on Islamic
teaching), understanding it refers to "a party may submit any matter that
may be represented in accordance to syara' to the other party when the
first is still alive".
The fuqaha (jurists' representatives Islamic scholars) have agreed that the
deed must be in accordance with syara' and must be based on is
permissible according to syara’ and has been proved by the Holy Quran,
Sunnah (deeds, sayings and approval of Prophet Muhammad PBUH) and
Ijma' (consensus of opinion). According to Ibn Qudamah, Ijma’ of the
'scholars' accepted the representations received as a declaration because
the declaration of Wakalah is needed by all walks of life in various forms
of activities. The Wakalah contract is made into Islamic laws shows
evidence that human behavior is weak, cannot live alone and require one
another to manage the affairs of life. Islam promotes the use of Wakalah
principles in various fields of activities as long as they do not conflict with
Reference: 1
This article “Wakalah-Concept and its Application in Takaful” is being written by Wan Jemizan Wan Deraman”
CTP: 404: Shari’ah Elements/Principles in Takaful
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Islamic laws. Among the resource proposition that is a principle of
representation which is required to conform that the principle of
representation is permissible:
Based on the event of Ashabul Kahfi as told in the al-Quran: "…So send
one of you with this silver coin of yours to the town, and let him find out
which is the good lawful food, and bring some of that to you (Al-Kahf: 19)
Let one of you go to the city with this silver coin and find food that is
purest and lawful (that is sold there). Let him bring you provision from it.
(JAKIM translation)
2. In the Sunnah it is narrated that Prophet Muhammad PBUH has
delegated ‘Urwah al-Bariqi to buy a goat for sacrifice. (Narrated by al-
Bukhari, Ahmad, Abu Dawood, at-Tarmizi, Ibn Majah and al-Daruqutni
which is from Urwah’s own)
To ensure that the contract is a binding one, it must meet certain terms
and conditions. They are the Represented/Principal (al-muwakkil), the
Representative (Al-wakil), the affairs which being represented (al-
Muwakkal fihi) and Sighah (Ijab and qabul). A representative The principal
must be a person who has the right to operate the properties
represented. The appointment of a representative would be invalid if it is
made by children who have not reached a certain age when they are
unable to differentiate between the good and the bad (mumayyiz) or by
people who are mentally disturbed. A representative must also have the
ability to make certain decisions in choosing between right and wrong, as
well choosing profits over losses. According to the Hanafi School of
Islamic law, a representative must also be wholehearted in the whole
affair and fully understands the contract represented. The appointed
Keep In Mind
The fuqaha (jurists' representatives Islamic scholars) have agreed that the deed must be in accordance with syara' and must be based on is permissible according to syara’ and has been proved by the Holy Quran, Sunnah (deeds, sayings and approval of Prophet Muhammad PBUH) and Ijma' (consensus of opinion). According to Ibn Qudamah, Ijma’ of the 'scholars' accepted the representations received as a declaration because the declaration of Wakalah is needed by all walks of life in various forms of activities.
A representative, the principal must
be a person who has the right to
operate the properties
represented.
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CTP: 404: Shari’ah Elements/Principles in Takaful
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representative must also be appointed determined. If A calls upon 2
persons without determining the actual representative, the appointment
is invalid. In addition, representatives must also know about the task or
the specified time period given.
The affairs that are delegated must meet certain conditions and if the
conditions are not met the representation becomes invalid. Among the
conditions of affairs that can be represented is that it must be required
permissible by Syara' (law based on the teaching of Islam) and owned by
the owner because the goods that does not belong to the owner cannot
be delegated to others to manage. The whole affair must be clear so that
ambiguity and deception can be avoided. Not every affair can be
delegated though; as this only involves the dealings and operational
matters in relation to properties or material goods. Whereas the physical
worships such as observing prayers, fasting and ablution cannot be
delegated except for representing someone for the hajj pilgrimage.
The declaration of contract or referred as Sighah is also a very important
aspect of a valid contract. The declaration of ijab (offer) from the owner
shall be made bright and clear. For example: "I entrust you to sell this
house" or "I submit this land sale transaction to you" or "You are my
representative in the business of selling this land". Whilst the declaration
of qabul (acceptance) from the representative should not be as
necessarily bright and clear. It is adequately accepted if the
representative does not show any rejection towards the affair submitted
to him.
Keep In Mind
The appointment of a representative would be invalid if it is made by children who have not reached a certain age when they are unable to differentiate between the good and the bad (mumayyiz) or by people who are mentally disturbed. A representative must also have the ability to make certain decisions in choosing between right and wrong, as well choosing profits over losses. According to the Hanafi School of Islamic law, a representative must also be wholehearted in the whole affair and fully understands the contract represented. The appointed representative must also be appointed determined.
Not every affair can be delegated
though; as this only involves the
dealings and operational
matters in relation to properties or material goods.
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Wakalah contract is divided into General Wakalah, Special Wakalah, Paid
Wakalah and Unpaid Wakalah. The General Wakalah is a Wakalah in
matters that are not specified such as a representative in all business
transactions, or being a representative without any prescribed goods to
be sold or purchased. Under the General Wakalah the wakil has a power
to do any business as long as no harm is done to the owner.
Whereas a Special Wakalah is a representative devoted to matters such
as sale and purchase of homes or cars, or rental properties such as land,
houses and buildings. Special Wakalah is bound by the matter or affair
devoted to him.
Paid Wakalah is required permissible by Syara'. The Prophet PBUH had
sent officers (employees) to accept collect charity tithe, and they were
paid for it. Representative of this type must perform those tasks well and
not to neglect them. In the context of takaful, the practice is based on
this type of wakalah.
Unpaid Wakalah is a representative who works voluntarily without any
form of payment. Representation of this type does not necessitate a
representative to continue the work and he can release himself from the
task at any time.
The Wakalah concept is practiced by most of the takaful operators in
Malaysia and this is a necessary tool to market the takaful products to
the society. This task is very much needed by the Takaful operators to
accelerate the distribution of products based on Islamic principles.
Keep In Mind
The declaration of contract or referred as Sighah is also a very important aspect of a valid contract. The declaration of ijab (offer) from the owner shall be made bright and clear. For example: "I entrust you to sell this house" or "I submit this land sale transaction to you" or "You are my representative in the business of selling this land". Whilst the declaration of qabul (acceptance) from the representative should not be as necessarily bright and clear. It is adequately accepted if the representative does not show any rejection towards the affair submitted to him.
Wakalah contract is divided into
General Wakalah, Special Wakalah,
Paid Wakalah and Unpaid Wakalah
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Unpaid Wakalah is a representative
who works voluntarily without
any form of payment.
Representation of this type does not
necessitate a representative to
continue the work and he can release
himself from the task at any time.
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Takaful Ikhlas Sdn. Bhd. (IKHLAS) for example, is using a model named
Wakalah as the basis of its operating business. Using the Wakalah
principles, IKHLAS operates by representing its participants in managing
all their established funds with trust, transparency and professionalism.
For this purpose, IKHLAS has charged management and performance
charges to participants based on the principle of Paid Wakalah (al-
Wakalah bi al-ujrah).
IKHLAS also employs representatives as intermediaries to market the
company products with paid wages. Aqad (declaration contract) between
the representatives and IKHLAS is based on Aqad Wakalah. This concept
is consistent with the principles of Islam as the practice of Prophet
Muhammad PBUH who had sent officers (employees) to accept collect
charity tithe, and the Prophet gave wages to them (al-Talkhis al-habir,
Vol. 1, pg. 176, 251, 271). In the Islamic principles, when a contract
Wakalah contract with wage payment is implemented, then the contract
is firm and binding, and this means that all parties are responsible for
implementing all the matters agreed in the Aqad.
Under the Wakalah system, the representative is necessarily associated
with four characteristics, Siddiq (Honesty), Amanah (Trust), Tabligh
(Passing Preaching) and Fatanah (Wise Wisdom). The four characteristics
must be implanted, comprehended and implemented by the
representatives in each business representation in order to achieve a
valuable life in this world and hereafter.
A Takaful representative is a DAKWAH who works to develop the
products of Islamic Transactions. Takaful is an alternative to the
Keep In Mind
Takaful Ikhlas Sdn. Bhd. (IKHLAS) for example, is using a model named Wakalah as the basis of its operating business. Using the Wakalah principles, IKHLAS operates by representing its participants in managing all their established funds with trust, transparency and professionalism. For this purpose, IKHLAS has charged management and performance charges to participants based on the principle of Paid Wakalah (al-Wakalah bi al-ujrah).
In the Islamic principles, when a contract Wakalah
contract with wage payment is
implemented, then the contract is firm
and binding
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conventional insurance system as concluded by the Task Force to Study
on the Establishment of Islamic Insurance Company in Malaysia 1983. A
Takaful representative also performs JIHAD against the Jahiliyyah system
(conventional insurance). This is because conventional insurance is
considered Haram (unlawful) according to the Fatwa issued by the
National Fatwa Council in 1972. Besides, a representative of Takaful also
IBADAH through his works because it is a manifestation of dedications,
faith and devotion to Allah who ordered to act upon the ma’ruf (good
deeds) and leave the munkar (evil deeds): Al Baqarah-25
A Takaful representative must have the moral restraint creditable
behavior to achieve the mission and vision as the standard bearer of
Islam.
In conclusion, the concept of representation as practiced by most of
Takaful operators creates employment opportunities and one of the
sources of income. The representatives also have the opportunity to
perform responsibilities as da'ie who encourage people to help each
other, do tabarru' and develop Islamic Muamalat system which is a
religious responsibility of every Muslim. As a result, in this world it may
serve as their source of income and in the Hereafter it may serve as a
reward to be presented before Allah.
Keep In Mind
A Takaful representative is a DAKWAH who works to develop the products of Islamic Transactions. Takaful is an alternative to the
conventional insurance system as concluded by the Task Force to Study on the Establishment of Islamic Insurance Company in Malaysia 1983, A Takaful representative also performs JIHAD against the Jahiliyyah system (conventional insurance). This is because conventional insurance is considered Haram (unlawful) according to the Fatwa issued by the National Fatwa Council in 1972.
In the Islamic principles, when a contract Wakalah
contract with wage payment is
implemented, then the contract is firm
and binding
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Revisit the Principle of Tabarru' in Takaful Structure2
It has been widely accepted today that Islamic Insurance, or Takaful,
unlike its conventional counterpart, is based on the fundamental
principles of mutual cooperation (ta’awun) and donation (tabarru`).
Under the Islamic laws of transactions (fiqh muamalah), the existence of
gharar (ambiguity) and maysir (gambling), which normally nullify an
exchange contract (muawadah), are tolerated in a contract of donation
(tabarru`). This corresponds to the Islamic legal maxim:
“uncertainties are tolerable in a gratuitous contract”
This is mainly due to the fact that parties who enter into a tabarru`
contract do not aim to make profit out of the contributed sum, and hence
the potential dispute which normally arises in a profit-making transaction
is deemed to be negligible in a gratuitous-based transaction.
Furthermore, the issue of uncertainty is irrelevant since the contributor
voluntarily gives away his property or right to the recipient without any
consideration.
In contrast, conventional insurance, which is based on the principle of
muawadah (exchange) and aims at making profit out of the insurance
operations, is prohibited from the Shariah's viewpoint since it contains
gharar (ambiguity). This is particularly true since a person who pays the
premium (insurance price) for the insurance policy has actually paid for
‘peace of mind’ which will indemnify him should any mishap occurring in
the future. Being free from uncertainties is never possible in the
insurance industry, because uncertainties are peculiar and integral to
both premium/contribution and claim/compensation.
Reference:2
The article “Revisit the Principle of Tabarru' in Takaful Structure” is written by Dr. Asyraf Wajdi Dusuki
CTP: 404: Shari’ah Elements/Principles in Takaful
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On the other hand, the Islamic alternative to conventional insurance, also
known as Takaful, reflects a reciprocal relationship and agreement of
mutual help between participating members who undertake to mutually
guarantee and indemnify each other in a particular defined event. The act
of guaranteeing each other implies mutual help and mutual indemnity on
the basis of brotherhood deeply rooted in the tabarru` principle which
tolerate the presence of gharar.
Notwithstanding the above, many contemporary scholars have started to
raise concerns on the current practice of takaful. This concern stems from
the fact that many takaful products and operations are started to
converge closely to the practice of conventional insurance. In particular,
the fundamental structure of takaful which premised on the basic
concept of tabarru' is started to be questioned when many benefits are
offered to the participants in the beginning of the takaful contract in
return for the contributions paid to the tabarru' pool managed by takaful
operators.
Keep In Mind
Conventional insurance, which is based on the principle of muawadah (exchange) and aims at making profit out of the insurance operations, is prohibited from the Shariah's viewpoint since it contains gharar (ambiguity). This is particularly true since a person who pays the premium (insurance price) for the insurance policy has actually paid for ‘peace of mind’ which will indemnify him should any mishap occurring in the future.
Takaful, reflects a reciprocal
relationship and agreement of
mutual help between
participating members
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Keep In Mind
In particular, the fundamental structure of takaful which premised on the basic concept of tabarru' is started to be questioned when many benefits are offered to the participants in the beginning of the takaful contract in return for the contributions paid to the tabarru' pool managed by takaful operators.
CTP: 404: Shari’ah Elements/Principles in Takaful
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Concept of Tabarru'
Tabarru’ is derived from the word tabarra’a which carries the meaning of
contribution, gift, donation or charity. Tabarru’ technically is a unilateral
declaration of intent, which is a contract with a particular nature in
Islamic commercial law. The purpose of this type of contract is to give a
favour to the recipient without any specific consideration in return.
Unlike the exchange contract, this type of contract is valid and
enforceable in Islamic commercial law even for no consideration.
The basis for tabarru’ is stated in the Qur’an:
“It is not righteousness that ye turn your faces to the East and the West;
but righteous is he who believeth in Allah and the Last Day and the angels
and the Scripture and the prophets; and giveth wealth, for love of Him, to
kinsfolk and to orphans and the needy and the wayfarer and to those
who ask, and to set slaves free; and observe proper worship and pays the
poor-due; and those who keep their treaty when they make one, and the
patient in tribulation and adversity and time of stress. Such are they who
are sincere. Such are the God-fearing.” (2: 177)
It is also supported by many hadiths; for instance, in a hadith Asma’
narrated that the Prophet (P.B.U.H) said:
“Give (in charity) and do not give reluctantly lest Allah should give you in
a limited amount; and do not withhold your money lest Allah should
withhold it from you." (Sahih Bukhari)
Tabarru’ is derived from the
word tabarra’a which carries the
meaning of contribution, gift,
donation or charity.
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Essentially, tabarru’ is a contribution or donation which entails no return
but rather a reward from Allah alone. There are two important pillars of
tabarru’, namely the absence of counter-value and the intention to
perform tabarru’. In the absence of any of the two, it is no longer
considered tabarru’. For instance, if a donor contributes with an
expectation of a counter-value from the donation given, then the whole
transaction will be perceived as an exchange (muawadah) rather than a
tabarru` contract.
Issue of Ownership and Possession in Takaful
This basic structure of takaful premised on the tabarru` principle gives
rise to one of the fundamental Shariah concerns, which is regarding the
absolute ownership transfer. When a participant pays a premium to the
takaful operator, he has effectively donated his contribution as tabarru`,
hence, relinquishing his ownership over the object donated as prescribed
by the rules of tabarru`. Ibn Qudamah in his famous book Al-Mughni
asserts that hibah (which is a form of tabarru` contract) requires the gift
giver to enable the beneficiary to own the object of hibah. It is further
reiterated by Ibn Nujaym in Al-Bahr al-Ra`iq Sharh Kanz al-Daqa`iq that
the most important implication of hibah will be the transfer of the
subject matter to the beneficiary/donee, which entitles him to hold the
title of ownership over the object of hibah (thubut al-milk li`l mawhib
lahu).
Unlike the majority of scholars who deem possession as one of the pillar
of hibah, Hanafi schools on the other hand regard it to be an important
condition for the validity of hibah. According to Al-Utsaimin in Al-Sharh
Keep In Mind
Essentially, tabarru’ is a contribution or donation which entails no return but rather a reward from Allah alone. There are two important pillars of tabarru’, namely the absence of counter-value and the intention to perform tabarru’. In the absence of any of the two, it is no longer considered tabarru’. For instance, if a donor contributes with an expectation of a counter-value from the donation given, then the whole transaction will be perceived as an exchange (muawadah) rather than a tabarru` contract.
This basic structure of
takaful premised on the tabarru`
principle gives rise to one of the fundamental
Shariah concerns, which is regarding
the absolute ownership
transfer.
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al-Mumti’ Kitab al-Waqf wa al-Hibah wa al-Wasiyyah, hibah will only take
effect upon the recipient of the donation taking possession of it. This
corresponds to the Islamic legal maxim "La yatimmu al-tabarru' illa bil
qabdi", which means "Tabarru' will not take effect unless there is a
possession".
This hadith is based on a the saying of the Prophet Muhammad (peace be
upon him):
"Hibah is not permissible unless it (the subject matter of hibah) is
posessed" (Al-Zailaie al-Hanafi, Fakhruddin Uthman Ibn Ali.Tibyan al-
Haqaiq Syarh Kanz al-Daqaiq. Kitab: al-Hibah. Dar al-Kitab al-Islami).
Therefore, hibah is voidable without complete possession. This is further
reiterated by a Maliki's scholar Al-Qarafi in his book Anwar al-Baru’ fi
Anua’ al-Furuq, who mentioned the following:
"If possession does not take effect in hibah, it is void".
Keep In Mind
When a participant pays a premium to the takaful operator, he has effectively donated his contribution as tabarru`, hence, relinquishing his ownership over the object donated as prescribed by the rules of tabarru`. Ibn Qudamah in his famous book Al-Mughni asserts that hibah (which is a form of tabarru` contract) requires the gift giver to enable the beneficiary to own the object of hibah. It is further reiterated by Ibn Nujaym in Al-Bahr al-Ra`iq Sharh Kanz al-Daqa`iq that the most important implication of hibah will be the transfer of the subject matter to the beneficiary/donee, which entitles him to hold the title of ownership over the object of hibah (thubut al-milk li`l mawhib lahu).
Hanafi schools regard possession to be an important
condition for the validity of hibah.
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"Hibah is not permissible unless
it (the subject matter of hibah) is
posessed"
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Shafie scholars also shared the same view with regards to taking
possession as an important pillar for hibah to be valid. They based their
opinion on the famous saying of Imam al-Shafie in his book al-Umm:
"Hibah and sadaqah are all permissible contracts which exclude
compensation and should be completed by possession".
Nevertheless, it is observed that a takaful contract cannot be considered
a pure tabarru’ contract but rather a qualified or conditional tabarru’
contract due to the following reasons: Firstly, the contribution made by a
participant in takaful is with consideration to a right to claim for
compensation in the event of loss or damage of subject matter. Thus, the
tabarru’ is not merely for charity but conditional upon certain
consideration, namely the right to claim takaful benefits in the event of
loss. Without such a right, he will neither participate nor perform the
tabarru’. This is deemed to be a violation of the fundamental objective of
tabarru’.
Secondly, takaful participants are normally obliged to pay different
amounts of contributions depending on the different degree of risk
exposure. This inevitably implies that their participation in the fund is
conditional upon a certain amount of contribution to deserve a certain
amount of compensation. Should the participant disagree with the
amount, he will not be allowed to participate or benefit from the takaful
protection scheme. Again this would be perceived as contradictory to the
nature of tabarru` since the real intention of the contracting parties is not
for donation, but rather to make them eligible for certain benefits under
takaful.
Thirdly, there are some controversial practices in takaful operation which
contravene the pure tabarru’ concept. For example, surrendering of
benefit, survival benefit or even sharing of underwriting surplus among
participants of takaful although they have surrendered all their rights
It is observed that a takaful contract
cannot be considered a pure tabarru’ contract
but rather a qualified or conditional
tabarru’ contract
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over their moneys to the fund. Therefore, it should not return to the
participants upon maturity of the policy or liquidation of the fund.
Alternative Structure
As an alternative to the pure tabarru` concept, Accounting and Auditing
Organization For Islamic Financial Institutions (AAOIFI) suggested the
principle of Iltizam bil tabarru’ or a commitment to donate to underscore
the relationship between the participant and the fund. According to this
concept, a contributor may donate a sum of money for mutual assistance
purposes on condition that the balance, if any, should be returned to
him. This will allow him to retain his ownership right over the initial
contribution he made, with a provision allowing him to waive his right of
ownership over the portion used to indemnify other participants.
This principle was expounded by Maliki jurists, whereby if a person
commits himself to do a good deed without subjecting it to other
conditions, he is obliged to fulfill it as long as he did not die or become
bankrupt (See Al Hattab, Tahrir Al Kalam fi Masa’il Al Iltizam, Beirut: Dar
Al Gharb Al Islami, 1984 at p 71). In takaful, the participants commit
themselves to perform tabarru’ to other participants who sustained
losses. This principle is important as the majority of scholars are of the
opinion that tabarru’ is not complete unless the subject matter is
transferred to the donee, although a commitment to donate has been
given. This is observed in the question of hibah, whereby possession
Keep In Mind
it is observed that a takaful contract cannot be considered a pure tabarru’ contract but rather a qualified or conditional tabarru’ contract due to the following reasons: Firstly, the contribution made by a participant in takaful is with consideration to a right to claim for compensation in the event of loss or damage of subject matter. Thus, the tabarru’ is not merely for charity but conditional upon certain consideration, namely the right to claim takaful benefits in the event of loss. Secondly, takaful participants are normally obliged to pay different amounts of contributions depending on the different degree of risk exposure. Thirdly, there are some controversial practices in takaful operation which contravene the pure tabarru’ concept.
CTP: 404: Shari’ah Elements/Principles in Takaful
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(qabd) of the subject matter is a condition for a binding hibah; this is the
opinion of many jurists but not Maliki jurists.
However, the Maliki jurists are of the opinion that a commitment to
donate or give is sufficient to create a binding donation, based on the
saying of Saidina Ali and Ibn Mas’ud that:
“A gift, if specifically defined, is binding, whether received or not” and to
prevent the materialization of the saying of the Prophet:
“a person who withdraws his gift or donation is like a dog that withholds
its vomit." (Sahih Bukhari).
This principle is important in the case of takaful whereby upon
participating in a takaful contract, the participants are said to have given
full commitment to pay contributions to the takaful fund; the fund is also
committed to compensate them against any losses experienced by them,
within the period of the policy. Thus, in case a participant delays payment
of his contributions, the company can claim from him the contributions,
Keep In Mind
Accounting and Auditing Organization For Islamic Financial Institutions (AAOIFI) suggested the principle of Iltizam bil tabarru’ or a commitment to donate to underscore the relationship between the participant and the fund. According to this concept, a contributor may donate a sum of money for mutual assistance purposes on condition that the balance, if any, should be returned to him. This will allow him to retain his ownership right over the initial contribution he made, with a provision allowing him to waive his right of ownership over the portion used to indemnify other participants.
In takaful, the participants
commit themselves to
perform tabarru’ to other
participants who sustained losses.
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and it may be considered as his debt to the fund until he officially
withdraws from the policy. Here, the fact that he has not delivered his
donation does not make him not liable to pay them as he has committed
himself to pay it, and it is already a binding contract. So, iltizam bil
tabarru’ here is deemed to be binding and enforceable as iltizam or
pledge alone can create a binding tabarru’ contract. Asserting that takaful
is a binding contract is important as it is the basis for the computation of
the periodical contributions and the amount of compensation payable to
the participant.
On the other hand, the relationship between the fund and the recipient
of the compensation is said to be iltizam bil ta’wid or a commitment to
compensate, which is a form of iltizam bil tabarru’. It is said to be a form
of conditional commitment whereby the performance of the
commitment is subject to the certain need, namely a claim by a takaful
participant due to some loss sustained. Thus, in takaful, the contributions
of the participant may be utilized fully or partially, thus allowing him to
claim any underwriting surplus. This is based on the opinion of Sheikh
Abdul Sattar Abu Ghuddah in Buhuth fil Mu’amalat wal Asalib Al
Masrifiyyah Al Islamiyyah, vol. 6, Jeddah, Majmu’ah Dallah Al Baraka,
2005 at p. 300.
Hibah Bil Thawab
Notwithstanding the above, the question remains whether the counter-
value in such takaful practice tantamounts to an exchange contract? This
is so according to Al Hattab in his book Tahrir Al Kalam fi Masa’il Al
Iltizam; if a commitment is given subject to a condition that when a donor
Keep In Mind
The relationship between the fund and the recipient of the compensation is said to be iltizam bil ta’wid or a commitment to compensate, which is a form of iltizam bil tabarru’. It is said to be a form of conditional commitment whereby the performance of the commitment is subject to the certain need, namely a claim by a takaful participant due to some loss sustained. Thus, in takaful, the contributions of the participant may be utilized fully or partially, thus allowing him to claim any underwriting surplus.
CTP: 404: Shari’ah Elements/Principles in Takaful
17
contributes something, he is expecting a counter-value then it falls under
the category of hibah al thawab, a gift given to the beneficiary on
condition that a reward is given to the donor in exchange. For example, I
give this pen as a gift on condition that you give your book in return.
As indicated earlier, hibah is a form of tabarru' or charitable gift in which
the donor has unilaterally relinquished his right of ownership over the
object of gift to the recipient or donee. The matter is known in classical
jurisprudence as hibah bi al-thawab (gift with expected compensation) or
hibah bi shart al-'iwad (gift with stipulated counter-value). Shafie and
Hambali's scholars disallow such a transaction based on the following
hadith:
“A person who withdraws his gift or donation is like a vomiting person
who withholds his vomits”. This is also supported by another hadith
narrated by Al-Tarmizi:
“A person who withdraws his gift or donation is like a dog that withholds
its vomit.”
On the other hand Maliki schools allow the transaction. However, they perceive hibah bi shart al-iwad is no longer deemed as charitable
(tabarru') contract but rather a muawadah or enchange contract. In the takaful context, the gift is the contribution and the thawab is the
indemnification by the risk fund. It is opined that the ruling of hibah bi al-thawab will take the ruling of an exchange contract. The main issue now,
should takaful is considered as exchange contract, the whole issue of riba, gharar and jahalah will emerge and resemblance the conventional insurance. Therefore the practice of surplus sharing and other benefits derived in takaful is in violation of Shariah principles which prohibit riba
and gharar.
hibah is a form of tabarru' or
charitable gift in which the donor has unilaterally relinquished his
right of ownership over the object of
gift to the recipient or donee.
TIP
CTP: 404: Shari’ah Elements/Principles in Takaful
18
BRIEF COMPARISON OF CONVENTIONAL INSURANCE AND TAKAFUL
The key structural issues to be examined and understood-
especially to fully appreciate differences between
conventional insurance and Takaful - are the following items:
Regulations, Taxation and Auditing Sources of Capital and Returns to Capital Organizing principle; i.e. Relationship among
participants themselves and between Participants and the Takaful Operator.
Treatment of Expenses and Liability for Claims Zakat and Charitable features - how to cleanse profits Funds management - pooled or unitized Investment of Premiums in accordance to Shari’ah Dissolution - who ends up with any surplus capital
A comparison is made below to highlight the salient differences between conventional insurance (excluding mutual companies3 that share many aspects in common with Takaful companies) and Takaful companies:
Glossary:3
Mutual Company: It is a private company whose ownership base is made
of customers. It is very common in the insurance industry; mutual
companies have account holders who receive distributions based upon
the extent of their exposure and business with the company.
Fund Management: it is the management of the cash flow of a financial
institution. The funds manager ensures that the maturity schedules of the
deposits coincide with the demand for loans.
Investment: In finance, an investment is a monetary asset purchased
with the idea that the asset will provide income in the future or
appreciate and be sold at a higher price.
Auditing: Auditing is a systematic examination of the books and records
of a business or the organization in order to ascertain or verify and to
report upon the facts regarding the financial operation and the result
thereof
CTP: 404: Shari’ah Elements/Principles in Takaful
19
Conventional Insurance Takaful Insurance
Sources of laws & regulations are set by state and man-made.
Sources of laws are based upon Divine revelations (Holy Quran and Hadith)
Profit-motive, maximizing returns to shareholders.
Community well-being optimizing operations for affordable risk protection as well as fair profits for the operator.
Profits and/or Bonus units to be returned ton policyholders as determined by managers and Board of insurer.
Takaful contract specifies in advance how and when profit/surplus and/or Bonus units will be distributed.
Initial capital supplied by shareholders.
Initial capital supplied by Rabb al Mal (Agent) or paid in via premiums from participants.
Separation of policyholder and insurer with differing interests.
Coincidence of interests between policyholder and operator as appointed by participants.
Transfer of losses among insurance pools and from policyholders to shareholders.
Losses retained within classes of business written and sole obligation of Participants.
Right of insurable interest is vested in the Nominee absolutely in Life insurance.
Right of insurable interest is determined by Islamic principles of Faraid (inheritance).
Insured may elect cost or replacement cost valuation and claim accordingly whether or not they chose to rebuild property.
Insured may not "profit" from insurance and entitled to compensation only for repair or rebuild or replacement.
CTP: 404: Shari’ah Elements/Principles in Takaful
20
Conventional Insurance Takaful Insurance
Agents and Brokers are typically independent from insurer and paid a fee from the premium charged to policyholders that is not disclosed that is not disclosed.
Agents are employees of the Takaful and any sales commission should be disclosed.
Investment of premium conducted by insurer with no involvement by policyholders.
Takaful contract specified under principles of Mudarabah, how premiums will be invested and how results are shared. Under al Wakalah, similar practice plus Participant can direct his investments into a range of unitized funds.
Insurer invests premiums consistent with profit-motive with no moral guidelines; hence co-existence of Al Riba and Al Maisir.
Takaful invests premiums in accordance with Islamic values and Shariah guidelines.
Dissolution – reserves and excess/surplus belong to the shareholders.
Dissolution - reserves and excess/surplus could be returned to Participants, although consensus opinion prefers donation to charity.
Taxes - subject to local, state and federal taxes.
Taxes - subject to local, state and federal taxes (if any) plus obligated to arrange annual tithe (Zakat) donations to charity.
Benefits paid from general insurance account owned by insurer.
Benefits paid from contributions (Al tabarru) made by participants as mutual indemnification.
Accounting consistent with GAAP and prevailing statutory rules of Auditing for uniform application of accounting standards.
Accounting standards consistent with national rules (with may be GAAP) plus prevailing statutory rules. Auditing same standards plus conformance with Islamic rules; typically with Shari’ah Advisory oversight.
CTP: 404: Shari’ah Elements/Principles in Takaful
21
Islamic Transaction System is a dynamic
system and in line with current needs of
the Ummah (people). Although the
concept and basic principles outlined by
Islam in its Transaction (Muamalat)
system seemed more 'traditional', it can
be processed in a very practical and able
means to meet the financial needs of
modern and complex community.
The word Wakalah is taken from the
Arabic word which means
representative. Literally it means to
preserve, to protect, to guarantee, to
submit and to replace. Whereas in terms
of syara‘ (law based on Islamic teaching),
understanding it refers to "a party may
submit any matter that may be
represented in accordance to syara' to
the other party when the first is still
alive".
Wakalah contract is divided into General
Wakalah, Special Wakalah, Paid Wakalah
and Unpaid Wakalah. The General
Wakalah is a Wakalah in matters that
are not specified such as a
representative in all business
transactions, or being a representative
without any prescribed goods to be sold
or purchased. Under the General
Wakalah the wakil has a power to do any
business as long as no harm is done to
the owner.
Whereas a Special Wakalah is a
representative devoted to matters such
as sale and purchase of homes or cars,
or rental properties such as land, houses
and buildings. Special Wakalah is bound
by the matter or affair devoted to him.
Paid Wakalah is required permissible by
Syara'. The Prophet PBUH had sent
officers (employees) to accept collect
charity tithe, and they were paid for it.
Representative of this type must
perform those tasks well and not to
neglect them. In the context of takaful,
the practice is based on this type of
wakalah.
Unpaid Wakalah is a representative who
works voluntarily without any form of
payment. Representation of this type
does not necessitate a representative to
continue the work and he can release
himself from the task at any time.
Tabarru’ is derived from the word
tabarra’a which carries the meaning of
contribution, gift, donation or charity.
Tabarru’ technically is a unilateral
declaration of intent, which is a contract
with a particular nature in Islamic
commercial law. The purpose of this
type of contract is to give a favour to the
recipient without any specific
consideration in return. Unlike the
exchange contract, this type of contract
is valid and enforceable in Islamic
commercial law even for no
consideration.
Summary
CTP: 404: Shari’ah Elements/Principles in Takaful
22
Explain the concept of Wakalah?
What is the application of Wakalah in Takaful?
What is the principle of Tabarru' in Takaful Structure?
What are the Issues of Ownership and Possession in Takaful?
How does takaful differ from conventional insurance?
For further study, you can consult our CD or e-library by getting log-in to your account. You would get number of books, presentations, literature and reports on the following topics:
Overview of the Sukuk Market by Professor Rodney Wilson
How does Takaful differ from Insurance by Liaquat Ali Khan
The Islamic Insurance - Theory and Practice By Ahmed Mohammed Sabbagh and Dr. Ahmed
Salem Mulhim
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