PRINCIPLES OF TAKAFUL PRESENTED BY: IIU
PRINCIPLES OF TAKAFUL Introduction to Takaful Comparison between conventional and Islamic Insurance Main elements of Takaful Insurance Types of Takaful contracts The Conduct of Takaful business Conventional Insurance products Takaful Products 2 Takaful Market, Challenges and Opportunities
Introduction To Takaful What is Takaful? The word Takaful is an Arabic word from the verb Kafala which means to take care of each others needs. In other words, mutual guarantee Members form a group in which they agree to guarantee themselves against loss or damage. An entire group would assist the individual who has suffered loss by indemnifying that person for the loss suffered. 3
In simple terms, Takaful can be described as the Islamic equivalent of conventional insurance that is based on the principles of shariah (Islamic Law). First practiced by the Muhajarin of Mecca and the Ansar of Medina 4
The concept of Mutual guarantee/mutual assistance which are core principles of Takaful was first practiced through Diya (Blood Money) and Fidya (Ransom). Diya (Blood Money): A person guilty of manslaughter or causing bodily harm was required to pay Diya. 5
Methods of Diya Include; a. Aqila- where the offender is known b. Qasama (oath)- where the offender is not known. Heirs to the victims swear a religious oath a total of 50 times. Fidya (Ransom): Ransom money for the release of a captured prisoner 6
Takaful is based on the principles of Shariah Shariah is the religious law of Islam. Sometimes described as the path to the watering place. Shariah is not just about faith, it covers conducts, behavior, and practices and it is designed to regulate all aspects of human life. 7
Sources of Shariah These are categorized into two: 1. Primary Sources: a. Quran- The foremost Source of Islamic Knowledge a. Sunnah and Hadith- The Traditions of the Prophet Muhammad (PBUH). Includes his authentic sayings, reported actions, tacit approvals and physical attributes. 8
2. Secondary Sources Ljima (Consensus) Qiyas (Analogical Deduction) Ljtihad (Legal Reasoning) Lsthsan (Juristic Preference) Maslahah (Public Interest) Consolidated opinions of all the Shariah Jurists after demise of the Prophet Muhammad (PBUH). Application of an original rule established through the sources of shariah on an earlier case to a current issue. Exertion of Maximum Intellectual effort in order to find a conclusion to an issue related to Shariah Exercising Personal Opinion to give preference to one rule over an existing rule. Done for the purpose of public fairness Involves prohibition or permitance of something either because it does or does not benefit the public Urf (Custom) Recurring practices which are recurrent to people of sound nature. 9
Forbidden practices under Shariah Law 1. Gharar Uncertainty 1. Maysir- Speculation 1. Riba Usury/Interest.
Gharar (Uncertainty) Literal Meaning: uncertainty, Hazard or risk. Both parties in a contract of exchange must be aware of the item or service being sold and the consideration moving in the opposite direction. If one party is unaware, the contract becomes voidable because the outcome will be unfair for the party. Example: Mary enters into a contract to purchase 2 bags of oranges that will grow in Joseph s garden in the next year. The Delivery of the oranges cannot be guaranteed hence uncertainty.
Maysir (Speculation) A form of gambling transaction that involves an effortless gain of one party at the detriment of the other. Proceeds from such a transaction are regarded as impure and of no benefit. Example; Joseph places a bet of Ugx 1,000 that Manchester united will beat Mancity 2-0. Manchester wins and Joseph receives 30,000
Riba (Usury/Interest) An Increase in one good for another in an exchange without any form of consideration for the increase. All Forms of Riba are impermissible In a contract where goods are passed from one individual to another something equivalent in value or service must be exchanged as consideration. Nothing more or less
Riba (Usury/Interest) Cont.. Example: Joseph wants to buy a car priced at Ugx 20,000,000 but he only has 15,000,000. He accepts a loan from ABC bank for 5,000,000 so that he can buy the car. The Bank Stipulates that Joseph will have to repay 6,000,000 in instalments. The 1,000,000 is interest.
Comparison Between Islamic Insurance and Conventional Insurance The fundamental difference between the two types of insurance is highlighted by the nature of contract. A Conventional Insurance contract is arranged between two parties i.e the insured and the insurer. The Insurer in exchange for premium guarantees to compensate the insured for loss after the occurrence of a event. In Takaful, the persons participating in the scheme mutually insure one another based on the spirit of mutual indemnity.
Islamic Insurance Conventional Insurance Is about Risk Sharing Participants Share in the profit and Loss of the Takaful business Free of Gharar, Maysir and Riba and other prohibited elements. Premiums from participants are based on the contract of donation Is about risk transfer Profits and Loss are for the shareholders Existence of Gharar, Maysir and Riba Premiums from participants are based on a contract of exchange
Islamic Insurance Contributions to a Takaful fund should be invested in Shariah compliant assets (Halal) Takaful Involves the use of operational models like Mudharaba Segregation of accounts Conventional Insurance Premiums can be invested in any kind of assets depending on interest of management No operational models are used. A single Set of Accounts
Main Elements of Takaful Insurance It Consists of a risk Sharing Pool made of Contributions in the form of donations (Tabarru). The Risk Pool is managed by the Takaful operator using various Takaful Models. The Pool can have various names e.g. Participants Risk Fund (PRF), Participants Investment Fund (PIF), Policy Holders Fund etc.
The parties to a Takaful contract; a. Participants/Contributors (The Insured) b. Takaful Operator (The Insurance Company)
Basic Features of a generic Takaful contract: A Takaful Pool or Participants Risk Fund created by Tabaru Donations. A Takaful Operator manages the insurance operations of the pool. The Operator is remunerated by means of a Takaful operator contract Participants are entitled to a share of the surplus and are also liable for any deficit in the fund. In case of a deficit in the fund, the Takaful operator provides supplementary capital in the form of a Qardh-al- Hassan.
Management of Deficit: A Deficit in the fund arises when the contribution pool pays out more claims than the contributions received. Claims can arise as a result; a. Non-payment of outstanding contributions b. Poor Management of Takaful operations c. Deliberate Pricing below prudent levels d. Poor Re-takaful Arrangements.
Treatment of Deficit: In an ideal sense, In the event that a fund makes a deficit, Participants are called upon to increase their contributions to the fund. As a result of regulatory measures, obligation to fund a deficit is for the Takaful operator. The Takaful Operator provides a benevolent, interest free loan known as Qardh-al-Hassan The mechanism of Qardh-al-Hasan enables the operator to inject capital provided by the operator who under shariah does not assume risk
Treatment of Surplus A surplus arises when the contributions to the pool are greater than the claims paid from the pool. Surpluses are distributed to the participants in three ways; a. To all Participants b. To Only participants with no claims c. To all Participants based on the net result of each participant.
Types of Takaful Contracts There are basically four types of Takaful contracts also known as Takaful Models Mudharaba Contract Waqf Contract Takaful Contracts Wakalah Contract Mudharaba- Wakala Contract
Wakalah (Agency) Contract This is essentially a principal agent relationship. The participants act as the principal while the Takaful operator acts as the agent. The agent is referred to as the wakil The participants appoint the Takaful operator to manage the risk fund and in return is entitled to an agency fee called a wakalah fee
Mudharabah Contract (Risk- Sharing arrangement) This is a risk sharing partnership in which party enters into a profit sharing agreement with another party to invest the proceeds of the Takaful fund. There are two parties involved in a Mudharabah Contract a. The Rab-al Maal (The Capital Provider)- The Participants b. The Mudharib (Expertise Provider) The Takaful Operator The Investment Profit is shared between the Rab-al Maal and Mudharib at an agreed ratio. Losses however to the fund are born exclusively by the Rab-al- Maal
Hybrid Wakalah-Mudharaba Takaful Contract Under this model The Takaful operator acts as both an agent and a Mudharib. The Takaful operator is entitled to both agency fees and a share of investment profit from the investments proceeds of the Takaful fund. The Obligation to fund any deficit still remains that of the Takaful Operator
Waqf Contract The aim of this arrangement is creating a trust fund. The Owner of the trust fund is God. The Waqf is a religious charity fund owned by God. Donations to the fund are received from both the Takaful Operator and the Participants. Participants are entitled to the any surplus from the fund and are also required to make good any deficit.
Conduct of Takaful Business Shariah Supervisory Board (SSB) Plays an oversight role of governance of the Takaful operator Ensures that all transactions are in compliance with Shariah The SSB is appointed by the management of the Takaful Company and has minimum of three members. All Members should be experts in Fiqh al Muamalaat (Islamic Jurisprudence).
Roles of the SSB Reviewing all Takaful contracts to ensure compliance with shariah Reviewing all investment transactions for shariah conformity Carrying out regular Shariah Audits of the Takaful companies operations Issuing a Shariah compliance report to the company upon completion of audit Responding to queries or requests for clarification by the Board of Directors or the company authorized employees.
Conventional Insurance Products Conventional Insurance can be broken down into two; Life Insurance Pure Life Endowment Policies Term Policies General Insurance Motor Policies Fire and Allied Perils Accident Policies Health Insurance
Takaful Products Takaful is divided into two main categories; a. Family Takaful (life) Investment Linked Takaful Child Education Takaful Medical and Health Takaful b. General Takaful (General) Motor Takaful Non-Motor Takaful i.e ( Personal Accident Takaful, Home Takaful etc)
Takaful Market The biggest Markets for Takaful are Iran, Malaysia and the Gulf Cooperation Council Countries (UAE, Oman and Saudi Arabia) Saudi Arabia and Malaysia account for close to 70% of the global Takaful Market. Takaful services account for approximately 8% of the Market in the Middle East and 15% of the Market in Malaysia
Opportunities Take Business from established insurance operators Emerging Market economies. Projected rise in Insurance Penetration Development of Technology encouraging inclusion of poorest communities giving greater hope to micro-takaful Provision
Challenges Branding (Unique Selling Points) Takaful Windows by conventional companies Distribution Channels (Brokers, Retail agencies, Banca- Takful) Availability of Re-Takaful
Q&A 36 Professional indemnity insurance