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
onMain 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 undesiredDefinitnioioofoIni쌚uranice 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 InsuranceContract 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 AgainstAccording 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 othercountries 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 Islamicfinancial 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
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 theBUSINESS: 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 TakafulMalaysia 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 Islamicfinancing 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 entityWaqf 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