Takafu( and~etakafuf. 'Ach"anced Princyles andpractices. Munich Re IBFIM TOBIAS FRENZ YOUNES SOUALHI. Second:Edition. Published by.

Transcription

1 BFI Munich RE.

2 Takafu( and~etakafuf 'Ach"anced Princyles andpractices TOBIAS FRENZ YOUNES SOUALHI Second:Edition IBFIM Published by Kuala Lumpur 2010 Munich Re

3 Published by IBFIM W) 3rd Floor, Dataran Kewangan Darul Takaful, Jalan Sultan Sulaiman, Kuala Lumpur, Malaysia. Tel.: Fax: 603~ Second Edition 2010 Munich Re 2010 All rights reserved. No part of this publication may be reproduced. duplicated or copied by any means without the prior consent of the holder of the copyright. While every care is taken in the preparation ot this publication, no responsibility can be accepted for any errors, however caused. Publication Manager: Mohd. Zain Abd. Rahman Perpustakaan Negara Malaysia Cataloguing-in-Publication Data Frenz, Tobias. Takaful and retakaful: advanced principles and practices I Tobias Frenz and Younes Soaulhl. Kuala Lumpur: IBFIM, p. ISBN {pbkj ISBN {hbd) Printed in Malaysia by Percetakan Mesbah Sdn Bhd ( K) No. 11, Jalan Tun Perak 6. Taman Tun Perak, Cheras, Selangor Darul Ehsan. Tel: Fax:

4 TABLE OF CONTENTS FOREWORD._.. i PREFACE iii 1 ISLAM 1.1 Origin Keymovements.. _ WorldwideMuslimcommunity OriginandcollectionoftheQur'an Translations AnoteonArabic.. _ Sunnahandhadith _ Foundationsoflslam.. _ Sixarticlesoffaith Fivepillarsofislam Ahkampentad Darurahornecessitydoctrine TheShari'ah ObjectivesofShari'ah {maqasidai-shari'ahl Islamicjurisprudence Islamic schools of juris prudence _10 BridgingdifferencesincontemporaryIslamicfinance Thedoctrineofal-khurujminal-khilaf(resolvingdisputesl Guidelines and parameters of dispute resolution in Islamic finance _._. _._. _._ DiversificationofShari'ahcontractsand instruments Considering the opposite view Ignoring weak views Reviewing classical views that may be irrelevant to Islamic banking and finance v

5 Proper understanding of complex financial products Minimising debt based products and promoting equity based products Finding a balance between the maqasid and textual modes of ijtihad in islamic finance 43 2 Islamic Finance 2.1 Objectives of Shari'ah in Islamic finance Islamic banking Islamic capital market Takaful business performance History of Islamic finance.55 3 Islamic Commercial Contracts 3.1 Contract requirements _ Valid and invalid contracts Amalgamation of contracts Substance over form Contract classification Unilateral contracts _._ _1.1 Gift (Hibah) _._._. _ _1.2 Waiver (TanazulJ _._._. _ _1.3 Donation (Tabarru'J.._ Promise rwa'dj _ Rebate (Ibra') Will (Was;yvah) Bilateral contracts _ 68 3_2.21 Partnership or equity based contracts 68 vi

6 Musharakah Dirninishingmusharakah Mudarabah Salescontracts Trustsales Salesfor futuredelivery Salam fstina' Bay'aVurbun Sarl Bay'al-'inah SSA SBA with variable profit rate Bay'a/-dayn Tawarruq LeasingContracts Leasing{fjarah} B Financial lease Forward lease Financing by concept in Malaysia Supporting contracts DebttransferfHiwalah} Guarantee(Kafalah} Pledge(Rahn} B Loan (Oardhasan} Agency contract (Wakafah) Commission contract rju'afah) IslamiC accounts and deposits Wadi'ah yad damanah accounts I11I vii

7 Qard accounts Mudarabah deposits Islamic creditcards Islamiccapitalmarkets Equities _ Stockscreening Example Preferential shares Purification process Sukuk Tradabilitv Typical sukuk structure Sukuk issuance -taxation issues Types ofsukuk l ljarah sukuk Mudarabah sl1kuk Musharakah sl1kuk Murabahah sukuk Hvbrid sukuk Controversial features of sukuk The repurchase undertaking Guaranteed regular distributions True ownership of assets Islamicderivatlves Futures and forwards Options TAKAFUL 4.1 Risk management under Islam Why is conventional insurance unlawful? 118 viii

8 4.2.1 Riba Gharar Maisir.. _ Haram Conclusion A Shari'ah compliant alternative to insurance TAKAFUL OPERATION 5.1 Legal structure NOll-profit company Commercial company Models of Islamic insurance in selected countries Source of Capital Takaful operational models Segregated Funds Tabar(U TakafuIBenefits SurplusSharing M utual!cooperative. for-profitinsurancecompany Pure wakalah model Wakalah model with performance incentive Riskmanagementcharge Mudarabah model Hybrid wakafah mudarabah model Waqf model Wadl'ah model The modelofchoice ix

9 5.3 Technical foundations of general takaful and retakaful An analysis of participants' behaviour Irrecoverable qard hasan, reserving and risk modelling Modelling expected qard hasan repayments Pooling A tentative takaful typology and its results Markets and niches for the different takaful types Risk transfer and modeling Where risk sharing flourishes Shari ahcomplianceofthetakafultypes Maintaining the separation of funds in high volatility business Technical aspects Dripping under family takaful Family takaful operating fund Ownership of the takaful fund ,4 Surplus distribution Distribution of underwriting surplus Sharing of underwriting surplus Ways of allocating surplus Claims contingency reserve How is the CCR built up? Is there a cap on the CCR? Surplus sharing examples Model examples Oard hasan Legal nature of the qard Cash or asset assignment? Issues with the qard hasan 187 x 1111I11.

10 5.6.9 Shari'ah supervisory board _ Treatment of takaful in annual reports Reporting in Malaysia Takaful under IFRS Solvency and risk: based capital Evolution of solvency models Rating agencies' view of capital adequacy Shari'ah quality rating RBC for takaful - Is it any different? Valuation of liabilities Funding of risk capital charges IFSB exposure draft on solvency requirements undertakings for takaful Risks specific to takaful Market and credit risk Liability risk Operational Risk Shari'ahcompliancerisk Fiduciary risk Reputational risk Displaced commercial risk Solvency models in selected takaful markets Takaful standardisation Takaful at a glance TAKAFUL MARKETS 6.1 Selected takaful markets Malaysia Brunei mum xi

11 6.13 Indonesia Labuan Pakistan Bangladesh Bahrain Singapore Oatar Sudan United Arab Emirates United Kingdorn Kingdom of Saudi Arabia Regulatoryoverview Shari'ah parameters for takaful lwakafahl RISKS AND CHALLENGES 7.1 Regulatory considerations Limited data Competition with conventional insurers Cannibalisation Market approach Marketing Distribution Products Pricing Pricing methodology PriCing basis Underwriting Contract wording/marketing material 252 xii 11I11I11

12 Compensation for late payment Exclusions Guarantees Ex-gratia payments Nomination under family takaful Islamic investments Shari'ah oompliance Staffing Evolving regulations and accounting standards.259 B RETAKAFUl 8.1 The current retakaful market Types of retakaful arrangements Legal structure Operational model Pricing considerations Wakafahpricingworkflow Proportional pricing (original contribution basisf Non-proportionalpricing(Riskcontributionbasisl Commission and brokerage Wakalah fee Pooling Current limitations and solutions Claims contingency reserve and surplus sharing ecr examples Surplus distribution formula for pooled business Retrotakaful Screeningprocess Need for standardisation and harmonisation I1I11I.kafu! and Retakafu! - Advanced Principles and Practices XIII

13 812 Financial retakaful and securitisation Recapture of family takaful business Recapture under the Shari ah Getting takaful operators to chose retakaful first APPENDIX 9.1 Shari'ah parameter for takaful (wakalahj Islamic finance interest groups Glossary Abbreviations Bibliography 333 xiv Takaful and Retakaful - Advanced Principles and Practic..l1ll1l1: