Takaful Dr. Muhammad Imran Usmani SECP Takaful Conference March 14, 2007
Presentation Outline Conventional Insurance How Qimar & Riba exist in Conventional Insurance Definition of Takaful Mudarabah Model Wakalah Model Wakalah based on Waqf Model Application of Takaful
Conventional Insurance Definition A way to provide security / and compensation to what is valuable in the event of its loss, damage or destruction based on the principle of risk taking and speculation
Conventional Insurance Two Aspects of Insurance According to Shariah rules there are two aspects of Conventional Insurance, namely: 1. Conceptual Aspect 2. Practical Aspect So far as the Concept of Insurance is concerned, it is to cover the risk of loss, or fortunate many helping the unfortunate few. This concept is not only recognized, but also appreciated and rewarded by Islam.
Conceptual Aspect Why this Concept is rewardable? Al-Maidah verse # 2: "Help ye one another in righteousness and piety, but help ye not one another in sin and rancor". Principles of Muwalat, Maaqil, and Kafalah and establishment of Islamic welfare state by the Holy Prophet (SAW), Waqf and Tabrru are examples for recognition of this concept.
Practical Aspect Second Aspect of Insurance is practical Aspect, it is forbidden due to two reasons: 1. Qimar or Maisir 2. Riba Since these two things have been clearly prohibited by Islam, they cannot be justified on the conceptual aspect of helping victims of various accidents or losses.
Practical Aspect Quranic view on Gambling & Risk O believers! Intoxicants and gambling and Al Ansab (Animals sacrificed for idols) and Al Azlam (arrows for seeking luck or decision) are an abomination of Satan's handiwork. So avoid them in order that you may be successful. Satan wants only to excite enmity and hatred between you with intoxicants and gambling and hinder you from the remembrance of Allah and from prayer. So, will you not then abstain? (Al Maidah 90 91)
Practical Aspect How Qimar & Riba exists? QIMAR or MAISIR has been clearly prohibited by Quran and Hadith of the Holy Prophet (SAW). Maisir has two basic elements which cause to prohibit. namely: 1. Gharar 2. Khatar
Khatar Taleequl milki al alkhatr, wal mal fil janibain To stipulate/conditionalize the ownership/profitability on uncertain event, whereas money is involved in the both sides. However, if money is not involved from both sides i.e. one party voluntarily (without any compensation) declares We shall compensate you on a particular event of loss, it would not be Maisir.
Gharar Gharar literally means Uncertainty Forms of Gharar : Any bilateral transaction in which the liability of the party in the transaction is either uncertain or contingent. Consideration of either is not known. Ultimate outcome of any one party is uncertain. Delivery is not in the control of the obligor. Payment form one side is certain, but from the other side is contingent.
Gharar & Khatar Presence of Gharar and Khatar makes Qimar, Speculation, Gambling and Conventional Insurance prohibited.
Qimar Indication of Presence of Qimar in a transaction If in any transaction one party s profit is dependent on the loss of the other then this is an indication that the transaction involves Qimar. In the permissible modes of business any profit or loss is equally shared & is fair to every party. For example, in partnership (Musharakah) both the parties share profit & loss. Similarly in other trades like sale, purchase, hiring or leasing each party s considerations are certain.
Conventional Insurance Problems The participant contributes a small amount of premium in a hope to gain a large sum - Khatar. The participant loses the money paid for the premium when the insured event does not occur - Gharar. The company will be in deficit if the claims are higher than the amount contributed by the participants - Gharar.
Riba The element of Riba (Interest) exists in lending or borrowing funds/investments at fixed interest, and other related practices in the investment activities of the conventional insurance companies
The Solution Islamic Cooperative Insurance ( Takaful)
Takaful Takaful is an Arabic word that means Guaranteeing each other" It is a system of Islamic Insurance based on the principle of TA AWUN (mutual assistance) and TABARRU (Gift, Give away, donation) where the risk is shared collectively by the group VOLUNTARILY. This is a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage to any of them as defined in the pact.
Models of Takaful 1. Mudarabah Model 2. Wakalah Model (hybrid of Wakalah & Mudarabah) 3. Wakalah based on Waqf Model
Mudarabah Model The participant and the operator enter into a Mudarabah contract from the beginning of the relation, for indemnification and share of the underwriting results. The Surplus is shared between the participants and the takaful operator in an agreed ratio. This model allows the takaful operator to share in the underwriting results from operations as well as the favorable performance returns on invested premiums.
Mudarabah Model Shariah Concerns The relation between the participants is that of tabarru and not Mudarabah, Profit Sharing can t be applied here. Donation cannot be Mudarabah capital at the same time. In a Mudarabah contract, a profit is to be generated to be distributed. Profit is not the same as Surplus (excess pf premiums over claims, reserves and expenses) and in the insurance context no definition can be generated by definition.
Mudarabah Model Shariah Concerns The sharing in underwriting surplus itself is something which is similar to making this into a commercial business venture and not a mutual contract for assistance and protection. The requirement to provide Qard Hasanah (in case of a deficit) in a Mudarabah contract by definition is against the concept of Mudarabah which is a profit sharing contract and a Mudarib cannot be a guarantor.
Wakalah Model Cooperative risk sharing occurs among the participants whereas the takaful operator earns a fee for services (as a Wakeel or Agent). The operator earns an upfront deductible fee and shares the profit of investments, it does not share the results of underwriting.
Waqf Model In order to eliminate the element of Mayser, the concept of Waqf and Tabarru is incorporated. In relation to this participants shall agree to relinquish as donation certain amount of money. The Takaful Fund, consisting of the contributions paid as Tabarru, will be further invested by the Company based on the principle of Islamic modes of Trades, through which the element of interest (riba) will be replaced.
Waqf Model COMPANY TAKAFUL OPERATOR FEES FOR ADMINISTRATION EXPENSES 25% TO 30% SHARE OF PROFIT FOR THE COMPANY MANAGEMENT EXPENSES OF COMPANY PROFIT / LOSS ATTRIBUTABLE TO SHAREHOLDERS 40% INITIAL DONATION BY SHAREHOLDERS TO CREATE WAQF FUND PROFIT SHARING ON MUDARABHA BASES WAQF INVESTMENT BY FUND PROFITS FROM INVESTMENT 60% PARTICIPANT DONATION PAID BY PARTICIPANT WAQF FUND 75% TO 70% WAQF FUND OPERATIONAL COST OF TAKAFUL /RETAKAFUL SURPLUS SHARE OF SURPLUS FOR THE PARTICIPANT 100%
Waqf Model Basic Features A Waqf Fund is established by the shareholders of Takaful Company through the contribution of Ceding amount (part of the Capital) to compensate the beneficiaries or participant of Takaful scheme. The Ceding amount of the Waqf will remain invested. Any person by signing the proposal form, contributing to the Waqf and subscribing to the policy documents shall become the member of the Waqf fund.
Waqf Model Basic Features The Waqf fund shall work to achieve the following objectives: a. To extend financial assistance to its members in the event of losses. b. To extend benefits to its members strictly in accordance with the Waqf Deed. c. To donate to Charities approved by the Shariah Supervisory Board
Waqf Model Basic Features The Waqf Fund will lay down the rules for distribution of its funds to the beneficiaries and will decide how much compensation should be given to a subscriber/member. The Waqf will become owner of all contributions and has the right to act as a legal entity as per its terms for investment, compensations and dealing with the surplus amounts.
Waqf Model Basic Features The Takaful Company may distribute the surplus amounts on the following three basis: a. A portion of surplus should be kept as reserve to mitigate the future losses. b. A portion of surplus should be distributed among the participants to differentiate it from the conventional insurance procedures. c. A portion of surplus should be utilized for the charitable purposes every year.
Waqf Model Basic Features As per the rules of the Waqf, if the fund is liquidated, the outstanding balance, after paying all dues and payables, will be utilized to charitable purposes. The Takaful company, while managing the Waqf Fund, will play two different roles simultaneously: a. Operator/Manager b. Mudarib
Waqf Model Basic Features As Operator/Manager, the Takaful Company will perform all functions necessary for the operations of the Waqf against a Wakala fee to be deducted from the Contributions of the Participants. As Mudarib of the fund, the Takaful Company will manage the investment of the excess funds of the Waqf into Shariah compliant investments and will participate in the profit of the fund s investments at a fixed ratio of profit.
Application Takaful can be used to cover : Property e.g. house, factory, mosque, offices Vehicles (car, motorcycle etc..) Goods ( For Import or Export ) Valuables Health, accidents and Life