Takaful, Concept and Models by Atiquzzafar Khan

  Concepts and Concepts and

  Takaful: Takaful:

  Models Models

  

By

By

  

Atiquzzafar Khan

Atiquzzafar Khan

  

May 5, 2009

May 5, 2009

th th

  

9 Distance Learning Course

  

9 Distance Learning Course

on

on

Main Topics Main Topics

  • Introduction of Modern

  Introduction of Modern Insurance Insurance

  • Evaluation of Insurance

  Evaluation of Insurance Business from Islamic Point of Business from Islamic Point of View View

  • Islamic Alternative: (Review

  Islamic Alternative: (Review of Existing Experiences of of Existing Experiences of

Risk and Insurance: Risk and Insurance: Risk and uncertainty are Risk and uncertainty are fundamental facts of life. All fundamental facts of life. All human activities are subject to human activities are subject to

  

risk, which may lead to fnancial

risk, which may lead to fnancial

or physical losses to him. or physical losses to him. Insurance is a device to cover Insurance is a device to cover the losses arise due to the losses arise due to occurrence of some undesired occurrence of some undesired

  DefinitnioioofoIni쌚uranice DefinitnioioofoIni쌚uranice

  

Ini쌚uraniceo ni쌚o anio ecoiomnico

Ini쌚uraniceo ni쌚o anio ecoiomnico

devniceo wherebyo theo niidnivniduanlo

devniceo wherebyo theo niidnivniduanlo

  

쌚ub쌚tnitute쌚oano쌚manllocertanniioco쌚to

쌚ub쌚tnitute쌚oano쌚manllocertanniioco쌚to

  

(premnium)oforoanolanrgeouicertanniio

(premnium)oforoanolanrgeouicertanniio

fianicnianlo lo쌚쌚o (theo coitniigeicyo

fianicnianlo lo쌚쌚o (theo coitniigeicyo

nii쌚uredo angannii쌚t)o thanto wouldo

nii쌚uredo angannii쌚t)o thanto wouldo

exni쌚to nifo nito wereo ioto foro theo

exni쌚to nifo nito wereo ioto foro theo

nii쌚uranice. nii쌚uranice.

INSURANCE BUSINESS

  By Type of Products By Type of Products i) i)

  Lnifeonii쌚uranice Lnifeonii쌚uranice nini) nini) oGeieranlonii쌚uranice oGeieranlonii쌚uranice ninini) ninini)

  Lnianbnilnityonii쌚uranice Lnianbnilnityonii쌚uranice Nature of Insurance Contract

Nature of Insurance Contract

  

Aleatory Contract Aleatory Contract

  

Unilateral Contract Unilateral Contract

  

Conditional Contract Conditional Contract

   Contract of Adhesion Contract of Adhesion

  

Principals Governing Insurance

Principals Governing Insurance

  Contract Contract

   Principal of Indemnity

  Principal of Indemnity 

  Principal of Insurable Interest Principal of Insurable Interest

   Principal of Subrogation

  Principal of Subrogation 

  Principal of Utmost Good Faith Principal of Utmost Good Faith

  

Nature of Insurance Contract

Nature of Insurance Contract

  Premium Compensation

  Premium Compensation

  General Insurance Life Insurance Shariah Position of Insurance Shariah Position of Insurance

  

Opinion of Shariah scholars is divided on

Opinion of Shariah scholars is divided on insurance. We can classify them into insurance. We can classify them into three major groups. three major groups.

  • Those who consider both the concept

  

Those who consider both the concept

and practice of commercial insurance

and practice of commercial insurance

un-Islamic. un-Islamic.

  • Those who are in agreement with the

  

Those who are in agreement with the

present insurance and find nothing present insurance and find nothing wrong in it. wrong in it.

  • Those who accept the concept of

  Those who accept the concept of insurance, but find prohibited elements insurance, but find prohibited elements in its present practice. in its present practice.

  

Rulings of Collective Fiqhi

Rulings of Collective Fiqhi

Bodies about Insurance Bodies about Insurance

  • Islamic Research Institute of Al-Azhar

  

Islamic Research Institute of Al-Azhar

Uni. Uni.

  • Council of Grand Ulama of Saudi Arabia

  Council of Grand Ulama of Saudi Arabia

  • Majlis Tahqiqat-e-Shari'yah Lucknow,

  Majlis Tahqiqat-e-Shari'yah Lucknow, India India

  • Islamic Fiqh Academy of Rabita al-

  Islamic Fiqh Academy of Rabita al- Aa'lam-e-Islami Aa'lam-e-Islami

  • Al Majma’ Al-Fiqhi Al- Islami of OIC

  Al Majma’ Al-Fiqhi Al- Islami of OIC

  Insurance Insurance

  

Major Arguments Against

Major Arguments Against

  According to these Fiqhi bodies According to these Fiqhi bodies

  Conventional Insurance is unlawful Conventional Insurance is unlawful because of involvement of prohibited because of involvement of prohibited elements like, elements like,

  • Riba (Interest)

  Riba (Interest)

  • Qimar (Gambling)

  Qimar (Gambling)

  • Gharar (Uncertainty, Doubt, Risk)

  Gharar (Uncertainty, Doubt, Risk)

  • Unlawful appropriation of others’ property

  Unlawful appropriation of others’ property

  • Violation of law of inheritance in case of

  

Violation of law of inheritance in case of

life insurance. life insurance.

  Islamic Substitute Islamic Substitute

   The Islamic Substitute of The Islamic Substitute of Conventional Insurance, Conventional Insurance, according to these Fiqhi according to these Fiqhi bodies, may be some scheme bodies, may be some scheme based on mutual cooperation based on mutual cooperation and Joint Responsibility. and Joint Responsibility.

   That alternative is introduced That alternative is introduced under the title of Takaful in under the title of Takaful in recent past. recent past.

  Takaful Pioneers Takaful Pioneers

  

Takaful started some 30 years

  

Takaful started some 30 years

ago in the Middle East with the

ago in the Middle East with the

launching of two companies in

launching of two companies in

  1979: 1979:

  • The Islamic Arab Insurance Co.

  

The Islamic Arab Insurance Co.

  (IAIC) in the UAE and (IAIC) in the UAE and

  The Islamic Insurance Co. of Sudan

  • The Islamic Insurance Co. of Sudan

  But it took some time for the But it took some time for the movement to take shape. movement to take shape.

  Takaful Pioneers Takaful Pioneers

   Later in 1984, Malaysia played a Later in 1984, Malaysia played a pioneering role in setting the pioneering role in setting the first Legal framework specific to first Legal framework specific to

Takaful (Takaful Act Malaysia).

  

Takaful (Takaful Act Malaysia).

   This was instrumental in the This was instrumental in the successful launching of the successful launching of the

Takaful movement in Malaysia

  Takaful movement in Malaysia

and in other countries of South

and in other countries of South

East Asia. East Asia.

  

Other Islamic/ Takaful Legislations

Other Islamic/ Takaful Legislations

  

  Other markets such as the Sudan Other markets such as the Sudan and Iran have Islamic regulatory and Iran have Islamic regulatory environments and became naturally environments and became naturally Takaful markets.

  Takaful markets.

  

  In Pakistan Takaful Act is enacted in In Pakistan Takaful Act is enacted in 2005.

  2005.

  

  In the Gulf countries specific Takaful In the Gulf countries specific Takaful legislations are coming through in legislations are coming through in

  Bahrain and in Saudi Arabia Bahrain and in Saudi Arabia

  Takaful Today Takaful Today

  From a handful of operators From a handful of operators two decades ago the Takaful two decades ago the Takaful movement has blossomed movement has blossomed into a fast growing into a fast growing

phenomenon in many Muslim

phenomenon in many Muslim

countries with very countries with very promising prospects in other promising prospects in other

countries with a large Muslim

countries with a large Muslim

community. community.

  

Takaful drivers

Takaful drivers

  This movement is driven by This movement is driven by

  • a strong demand from a public

  

a strong demand from a public

who would not insure otherwise who would not insure otherwise (because of religious beliefs); and (because of religious beliefs); and

  • The successful development of

  

The successful development of

Islamic banking institutions Islamic banking institutions providing capital and Islamic providing capital and Islamic

financial instruments for asset

financial instruments for asset

management and investment. management and investment.

  Takaful Drivers Takaful Drivers

   Islamic banks and financial Islamic banks and financial institutions play a strategic and institutions play a strategic and important role in the distribution of important role in the distribution of Takaful products (especially Life Takaful products (especially Life Takaful Products). Takaful Products).

  Just as Bancassurance played an Just as Bancassurance played an important role in the distribution of important role in the distribution of personal lines insurance products personal lines insurance products Bancatakaful is an important driver Bancatakaful is an important driver for Takaful. for Takaful.

  

Takaful Operators

Takaful Operators

  The number of Takaful operators The number of Takaful operators worldwide is now estimated at: worldwide is now estimated at:

  

  150 Takaful companies operating in 150 Takaful companies operating in

  40 countries 40 countries

  

  10 Retakaful companies and 6

  10 Retakaful companies and 6 Conventional Reinsurance companies

  Conventional Reinsurance companies have established Islamic windows. have established Islamic windows.

  Takaful Premium

Takaful Premium

  

  Takaful is one of the fastest growing Takaful is one of the fastest growing segments in insurance (at around segments in insurance (at around

  20% pa. on average) 20% pa. on average)

  

  World Takaful contributions are World Takaful contributions are conservatively estimated at around conservatively estimated at around

  US$ 3billions, of which: US$ 3billions, of which:

  60% General Takaful

  • – 60% General Takaful

  40% Family Takaful

  • – 40% Family Takaful
Takaful Geographical Spread Takaful Geographical Spread

   South& East Asia :

  South& East Asia : 56%

  56% 

  Middle East : Middle East :

  36% 36%

   Africa:

  Africa: 7%

  7% 

  Europe, USA & Others: Europe, USA & Others:

  1% 1% Definition of Takaful

Definition of Takaful

  The word Takaful means joint guarantee. The objective of Takaful is cooperation and mutual help among the members of a defined group. In a practical sense Takaful can be visualized as a

method of joint guarantee among a group of members or

participants against loss or damage that may inflict upon

any of them. The members of the group agree to guarantee jointly that should any of them suffer a catastrophe or disaster, he would receive certain sum of money to meet the loss or damage. All members of the

  BUSINESS: The Malaysian Case BUSINESS: The Malaysian Case

  

Takaful Business is based on the concepts

Takaful Business is based on the concepts

of Mudarabah and Tabarru. Involvement of of Mudarabah and Tabarru. Involvement of these two Islamic forms of business these two Islamic forms of business eliminates the elements of Riba from eliminates the elements of Riba from insurance contract and convert Gharar into insurance contract and convert Gharar into tolerable form. tolerable form.

  In Family Takaful each Takaful installment In Family Takaful each Takaful installment

is divided and credited into two separate

is divided and credited into two separate

  Accounts namely, the Participants' Accounts namely, the Participants'

Account(PA) and the Participants’ Special

  

Account(PA) and the Participants’ Special

Account(PSA). A substantial proportion of Account(PSA). A substantial proportion of the installments is credited into the PA the installments is credited into the PA solely for the purpose of savings and solely for the purpose of savings and investment. investment.

  

The balance of the installments is credited into

  

The balance of the installments is credited into

the PSA as `tabarru' for Sharikah Takaful the PSA as `tabarru' for Sharikah Takaful

  Malaysia to pay the Takaful benefits to the Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before heir(s) of any participant who may die before the maturity of the contract. the maturity of the contract.

  

The amount accumulated in the PA is invested

The amount accumulated in the PA is invested

in various business according to Islamic in various business according to Islamic

financing techniques, and the resultant profits

financing techniques, and the resultant profits

are divided between the company and the are divided between the company and the participants according to the agreed upon ratio, participants according to the agreed upon ratio, e.g., 30-70. e.g., 30-70.

  The participant's share is calculated according The participant's share is calculated according to their individual share in the PA, and credited to their individual share in the PA, and credited into their respective accounts, the PA and the into their respective accounts, the PA and the PSA.

  PSA.

  Company’s Admin & Manag. Expenses Profit Attributed To Shareholders PA PSA FTF Investment Profit PA

  PSA Participant Company Takaful Contract based on Mudarabah 30% 70% Payment from PA Payment from PSA Mudarabah Model

  Family Takaful

  Payment of claims Payment of claims

  Should the Participant die or suffer Should the Participant die or suffer Permanent and Total Disability in the fifth Permanent and Total Disability in the fifth year of participation, Takaful benefit will

year of participation, Takaful benefit will

be paid in the following manner:- be paid in the following manner:-

  

i. From Participant's Account =RM 4,890

i. From Participant's Account =RM 4,890

  (RM978 x 5) (RM978 x 5) profit if any, say profit if any, say RM 400 RM 400

   Total Takaful Benefit Payable Total Takaful Benefit Payable RM 10,290 RM 10,290 In case the Partcipant survived In case the Partcipant survived

  Should the Participant survive until Should the Participant survive until the maturity of his FTP, payment of the maturity of his FTP, payment of Takaful benefit will be made to him Takaful benefit will be made to him as follows:- as follows:- i. i. From his Participant's Account = RM 9,780 From his Participant's Account = RM 9,780 (RM978 x 10) (RM978 x 10) profit from investment profit from investment RM 1,800 RM 1,800 ii. From Participants Special ii. From Participants Special RM XXXX RM XXXX Account Account Total Takaful Benefit = Total Takaful Benefit = RM 11,580 + RM 11,580 + surplus determined surplus determined by Sharikah Takaful. by Sharikah Takaful.

  Mudarabah Model Mudarabah Model PROFITS

  General Takaful ATTRIBUTABLE TO SHAREHOLDERS

  COMPANY ADMINISTRATION & MANAGEMENT COMPANY'S TAKAFUL CONTRACT PROFITS INVESTMENT BY EXPENSES BASED ON PRINCIPLE OF FROM AL-MUDHARABAH COMPANY INVESTMENT TAKAFUL OPERATIONAL TAKAFUL COST OF THE COMPANY SURPLUS FOR SHARE OF PARTICIPANT PARTICIPANT CONTRIBUTI ON PAID BY GENERAL GENERAL TAKAFUL TAKAFUL FUND FUND COST OF TAKAFUL OPERATIONAL OPERATIONAL SURPLUS (PROFIT) 40% (Example Only) 60% (Example Only) TAKAFUL COST OF SURPLUS FOR THE PARTICIPANT SHARE OF

  Wakalah Model

Wakalah Model

  COMPANY TAKAFUL ADMIN & MARKETING EXPENSES 25% TO 35% FOR THE COMPANY SHARE OF PROFIT EXPENSES OF ATTRIBUTABLE TO MANAGEMENT PROFIT / LOSS COMPANY SHAREHOLDERS CONTRACT BASED ON PRINCIPLE OF BY FUND TAKAFUL INVESTMENT PROFITS FROM INVESTMENT 40% AL-WAKALAH 60% OPERATIONAL COST PARTICIPANT CONTRIBUTIO TAKAFUL TAKAFUL GENERAL GENERAL TAKAFUL OPERATIONAL COST OF TAKAFUL / RETAKAFUL SURPLUS SURPLUS FOR SHARE OF PARTICIPANT 65% TO 75% N PAID BY FUND FUND OPERATIONAL COST OF TAKAFUL OF TAKAFUL (PROFIT) THE PARTICIPANT 100%

  

Waqf Model

Waqf Model Definition of Waqf Definition of Waqf

   Waqf is an Arabic word and it means Waqf is an Arabic word and it means to stop to withhold and not to let go. to stop to withhold and not to let go.

  In technical meaning Waqf means to In technical meaning Waqf means to allocate or donate some property or allocate or donate some property or cash for a specific purpose to get cash for a specific purpose to get pleasure of Allah and not to let it go pleasure of Allah and not to let it go through consumption or sale. through consumption or sale. The Waqf property comes into The Waqf property comes into ownership of Allah (SWT) and Waqif ownership of Allah (SWT) and Waqif will have no property rights on it will have no property rights on it .

  .

   Waqif has right to set the rules Waqif has right to set the rules for Waqf and manage the for Waqf and manage the Waqf. Waqf.

  

Waqf may be general purpose

  

Waqf may be general purpose

or specific purpose, like or specific purpose, like Waqf ‘Ala al Aulad or Waqf ‘Ala al Aulad or Waqf ‘Ala al Aqarib. Waqf ‘Ala al Aqarib.

   In Islamic Law Waqf is a legal

  

In Islamic Law Waqf is a legal

entity entity

  Waqf Model

Waqf Model COMPANY SHARE OF PROFIT ADMIN & MARKETING EXPENSES EXPENSES OF ATTRIBUTABLE TO TAKAFUL OPERATOR FEES FOR MANAGEMENT PROFIT / LOSS 25% TO 35% FOR THE COMPANY 40% COMPANY SHAREHOLDERS

  INITIAL DONATION BY CREATE WAQF FUND SHAREHOLDERS TO

  MUDARABHA BASES TAKAFUL Waqf Waqf

  INVESTMENT PROFITS FROM BY FUND

INVESTMENT

60% CONTRACT BASED ON PRINCIPLE OF AL-WAKALAH TAKAFUL OPERATIONAL COST OF TAKAFUL /RETAKAFUL PARTICIPANT CONTRIBUTION WAQF FUND PARTICIPANT PAID BY 65% TO 75%

WAQF FUND

OPERATIONAL COST OF OPERATIONAL COST OF TAKAFUL SURPLUS (PROFIT) THE PARTICIPANT SURPLUS FOR SHARE OF 100%

   A Waqf Fund would basically be a A Waqf Fund would basically be a separate legal entity to which the separate legal entity to which the Shareholders would initially make a Shareholders would initially make a donation to establish the Waqf Fund. donation to establish the Waqf Fund.

   The donation can be of any reasonable The donation can be of any reasonable amount (Shariah Board may specify such amount (Shariah Board may specify such an amount). an amount).

   The objectives of the Waqf fund would be The objectives of the Waqf fund would be

to provide relief to participants against

to provide relief to participants against

defined losses as per the rules of the defined losses as per the rules of the Waqf fund. Waqf fund.

  

In this modified Wakala Model with Waqf, the

In this modified Wakala Model with Waqf, the

relationship of the participants and of the

relationship of the participants and of the

operator is directly with the Waqf fund. The

operator is directly with the Waqf fund. The

  

Operator is the Wakeel of the Waqf Fund and

Operator is the Wakeel of the Waqf Fund and

the participants pay one sided donation to the

the participants pay one sided donation to the

  

WAQF fund (not conditional) which also

WAQF fund (not conditional) which also

eliminates the issue of Gharar. The WAQF fund

eliminates the issue of Gharar. The WAQF fund

rules may define the sharing of surplus and

rules may define the sharing of surplus and

other rules under which it would operate but

other rules under which it would operate but

there is no obligation to distribute surplus.

there is no obligation to distribute surplus.

  

Further the Qard would be given by the

Further the Qard would be given by the

shareholders to the WAQF entity and not to

shareholders to the WAQF entity and not to

individuals as in the typical Wakalah model. individuals as in the typical Wakalah model.

  

The Challenges ahead

The Challenges ahead

  

  Despite a remarkable breakthrough Despite a remarkable breakthrough and a dynamic and sustained growth, and a dynamic and sustained growth, there are challenges facing the there are challenges facing the Takaful industry.

  Takaful industry.

  The business model dilemma

The business model dilemma

  The existence of three business models: The existence of three business models:

  

Mudharabah (Profit & Loss sharing)

Mudharabah (Profit & Loss sharing)

  Wakala (agency contract with a Wakala (agency contract with a performance fee element to replace performance fee element to replace surplus sharing)

   surplus sharing) Wakala with Waqf model

  Wakala with Waqf model 

  Could create an uneven / unfair business Could create an uneven / unfair business environment to operate

   environment to operate Need to reach a consensus internationally on

  Need to reach a consensus internationally on a common and standard Takaful business a common and standard Takaful business model model

  

Future Outlook

Future Outlook

  

  Despite the remarkable growth rate Despite the remarkable growth rate recorded by the Takaful industry, recorded by the Takaful industry, penetration is still far below the penetration is still far below the enormous market potential offered enormous market potential offered by the Muslim community worldwide by the Muslim community worldwide (23% of the total world population).

  (23% of the total world population).

  

Growth Outlook

Growth Outlook

  

  World Muslim population is estimated World Muslim population is estimated at 1.5 billions, of which around 97% at 1.5 billions, of which around 97% are based in Asia and Africa. are based in Asia and Africa.

  

  A two-digit growth in the range of A two-digit growth in the range of

  15% to 20% can be reasonably 15% to 20% can be reasonably sustained for at least the next 10 sustained for at least the next 10 years in the existing markets (Far years in the existing markets (Far and Middle East). and Middle East).

  

New Takaful Frontiers

New Takaful Frontiers

  

  Markets like Europe, North and Latin Markets like Europe, North and Latin

  America, Central Asia, Australia America, Central Asia, Australia where large Muslim communities live where large Muslim communities live are huge untapped reservoirs; are huge untapped reservoirs;

  

  The recent opening towards “Islamic The recent opening towards “Islamic windows” in the banking sector in windows” in the banking sector in

  Europe is likely to be followed by Europe is likely to be followed by “Takaful windows” initiatives.

  “Takaful windows” initiatives.

  

Takaful Products to Non-Muslims

Takaful Products to Non-Muslims

  

  Takaful Products are not exclusive to Takaful Products are not exclusive to Muslims.

  Muslims.

  

  Competitively priced and sold Competitively priced and sold through the right channel it could through the right channel it could attract any consumer irrespective of attract any consumer irrespective of their origin or faith. their origin or faith.

  Conclusions Conclusions

  

  Despite the challenges facing this Despite the challenges facing this

  “new” industry, exciting times are “new” industry, exciting times are ahead once the latent potential is ahead once the latent potential is unleashed. unleashed.

  

  The success of Takaful largely The success of Takaful largely depends on that of Islamic Financial depends on that of Islamic Financial institutions on a global basis. institutions on a global basis.

  

THANK YOU

THANK YOU