Help ye one another in righteousness and piety, but help ye not one another in sin and rancour. (The Holy Quran 5.3)

CONCEPT OF ISLAMIC INSURANCE (TAKAFUL) AND REFORMS REQUIRED IN INSURANCE LAW. INTRODUCTION : Islamic Insurance (Takaful) is an alternative form of conventional insurance based on the concept of trusteeship and cooperation inspired by the beliefs of the followers of Islamic teaching. Muslim societies in different parts of the world are now practising Takaful scheme as their own way of sharing financial responsibilities to assists each other. They have invented an Islamic way of mutual assistance to deal with uncertainties of life. Takaful is a social scheme based on the principles of brotherhood, solidarity and mutual assistance. It provides mutual financial aids and assistance to those who are members of the takaful scheme and voluntarily agree to contribute a certain amount of money for that purpose. It is a mutual agreement among the participants of the scheme. This has its origin from the concept of collective sharing of individual s` loss. Takaful insurance system is bounded by Islamic principles, rules and the laws of Islam (Shariah). Islamic Insurance (Takaful) has originated from the ancient Arab tribal customs of Al-Aqilah. If any members of a tribe would have been killed by a member of a different tribe the heirs of the deceased would be paid compensation by the paternal relative of the accused. The paternal relatives known as Al Aqilah used to mutually agree to contribute for protecting the accused from financial liability. Islamic Insurance or Takaful has developed as a new concept of financial assistance whereby a group of people provide mutual guarantee or assurance and create a common fund out of their savings in order to provide compensation/ financial assistance against defined risks of life, property and or liability. The monetary contributions made by the participants, (policyholders) are managed by the operators (Insurers). The Takaful operators (Islamic Insurance Companies) are obliged to manage the fund according to the Shariah Principles. WHAT IS TAKAFUL?: Takaful is an Arabic word stemming from the verb kafal which means to take care of ones needs. Under Takaful scheme, the members or the participants in a group agree to jointly guarantee themselves against loss or damage caused by specified perils. The entire group would assist the incumbent person from the fund they have created to alleviate (indemnify) his loss and or to provide him with financial help. Takaful is a legally binding agreement between all the participants of the scheme to pay any of the members who suffers a loss as specified in the takaful certificate. Takaful scheme has been evolved from the teachings of Islam i.e. on the basis of the Quran and the Sunnah(Traditions of Prophet Muhammad). The Quran says: Help ye one another in righteousness and piety, but help ye not one another in sin and rancour. (The Holy Quran 5.3) The Prophet Muhammad said: The believers, in their affection, mercy and sympathy to each other, are like the body, if one of its organs suffers and complains, the entire body responds with insomia and fever (Muslim). The prophet Muhammad also said, The one who looks after and works for a widow and for a poor person, is like a warrior fighting for the cause of Allah, or like a person who fasts during the day and prays over the night. (Bhkhari) Takaful generally means joint guarantee. It is an understanding among a group of people (called the participants) who agree to reciprocally guarantee each other financially should any event (as defined in the contract) occur. The basic objective of a Takaful contract is to pay from a common fund, which is set up by the participants of the scheme. The fund thus created is managed by a registered Takaful Operator. The fund is created by the equitable contributions of the participants. The Takaful operators can be registered under the relevant Companies Act or Cooperative Societies Act or Societies Registration Act and Insurance Act/ Takaful Act. In order to ensure that a Takaful scheme operates within the principles of Islamic teachings, the transactional aspects of the system is subjected to Islamic contractual

laws. Hence, Takaful contracts are based on the principles of Mudarabah,(limited partnerships) which means profit and loss sharing. The fundamental basis of Takaful scheme is that its operations do not involve any element which is not approved by the Shariah (Laws of Islam). Therefore, it is necessary that the Takaful oprators should establish and maintain Takaful fund for the class or each of the Takaful schemes carried on by the operators. The assets comprised in the fund shall be applicable only to meet such part of the operators liabilities and expenses as is properly so attributable. The assets of the Takaful fund shall be kept separate from all other assets of the operator. This means that the fund of the entrepreneurs of a Takaful company should not be amalgamated with Takaful fund created by the participants of a Takaful scheme. When a Takaful scheme is operated on the basis of mutual or on the basis of cooperative principles, any surplus or deficit of the Takaful operation has to be shared by the participants, or the members themselves. But when a Takaful scheme is being operated on commercial basis, the surplus of Takaful operation has to be shared between the operator and the participants in accordance with the principle of Mudarabah. The sharing of such surplus may be in a ratio as agreed between the contracting parties. The participants are entitled to a share of surplus as they providers of the fund and the operators are supposed to have a share of the surplus as the entrepreneur and managers of the fund. When a contract is made between the operator of a Talkaful scheme and the participants of that scheme, the concept of Tabarru (donation) is incorporated in it. This means a participant will agree to relinquish a certain amount of Takaful contributions to fulfill his obligation of mutual help and joint guarantee should any of the fellow participants under the scheme suffer a loss caused by specified perils and or hazards of life. The operation of Takaful practices is supervised by an independent body called the Shariah Supervisory Board or Council. The Board advises the Takaful operators on the day to day operational matters in order to ensure that the Operator does not involve in its operation any element, which is not approved by the Shariah principles. The establishment of a Shariah Supervisory Board is a prerequisite before the commencement of the Takaful operation. The Shariah Board prescribes the necessary requirements for acceptability of different modes of transactions of the Takaful operators from the Shariah point of view and provide the operators a clear perception of the relevant rules and principles of Shariah. HOW TAKAFUL OPERATES? : Operational and working system of Takaful business is almost similar to commercial insurance of the contemporary world. The types of business are either Family Takaful (Life Insurance) or General Takaful (non life Insurance). A Family Takaful scheme is basically a long-term saving and investment programme which also provides mutual financial assistance among its participant. An individual having a capacity to make a contract if desires to take part in a particular Family Takaful scheme would pay regularly the takaful installments for crediting into a fund. The amount of installment and the period of regular payment has to be decided primary by the participant according to his present and future financial ability. In a Family Takaful, the contributions paid by the participants (policy holders) are credited into two separate heads of Account one being the capital of the participants and the other is the donation (Tabarru) for the purpose of joint guarantee and shared responsibility among all the participants as embodied in the concept of Takaful system. Major portions of the installment (say 90%) are credited into the P.A(Participants Account) and the balance amount is credited into S.A (Special Account) or the Tabarru (Donation) Account. The purpose of having a Tabarru Account is to create a provision to pay the takaful benefits (policy amount) to the heirs of any participant who may die before the determined date(maturity). In the event when a Participant in a Family Takaful Scheme expires before the determined period, he will receive the credit balance in his P.A.(along with the share of profit earned from the investment) also the outstanding takaful installment which would have been paid by the deceased participant should he survived up to the final payment of the installment. When a participant lives until the date of final payment, the takaful benefit comprises the final balance in the P.A. plus the net surplus allocated to the participant from

special account. The net surplus payable to the participant is arrived at from the actuarial valuation of S.A(Special Account).The Actuarial valuations be made to asses the future obligations under the takaful schemes. Valuation is done to test the adequacy of the Tabarru and to examine of the operator the solvency and of course to determine the distributable surplus of the special account. The distinctive feature of the Family Takaful scheme in comparison to conventional life insurance policies is the separation of the investment portion from the portion which is set aside to cover the risk. The profit from the investment of Fund in S.A is also shared between the Participants and the Takaful Operator. The most significant distinction of the takaful business is the sharing of profit. Therefore, accuracy and transparency of the Takaful accounting system is of prime importance. The share of profit of the participant is credited into the individual participants account on yearly basis and an yearly statement is to be sent to individual participant. A Participant is required to nominate someone as an executor over the benefits of the Takaful scheme and distribute such benefits as per Islamic law of inheritance after his demise. The nominee receives the benefits only as a trustee. If the nominee is a non-muslim he is regarded as an absolute beneficiary. However, a Muslim can assign the benefits to some one as a donee in which the benefits under the scheme are given in advance as Hiba(gift) in favour of the donee. In this case, the donee becomes the absolute beneficiary of the Takaful benefits. The conventional life insurers offer bonus or profits to a special type of policy holders subscribing the with profit policies. The declaration of profit is dependent upon the asset valuation of the life fund depending on the results of the investments returns. The rate of bonus varies from year to year. On the other hand, Takaful contract specifies from the very day of the contract how the surplus from Takaful investments are to be shared between the Takaful Operator and the Participants. This is done in accordance with the principle of Mudarabah (profit sharing). The profits are shared in the fixed ratio as agreed between the Operator and the Participant. In the conventional life insurance policy, the agency commission is paid out of the premium collected from the plocyholders. But a Takaful Operator (under Tejari Model) considers agent as part and parcel of the operator, and, therefore, agency commission is to be paid by the operator out of the shareholders fund/share of profit. However, when at the time of contract, it is mutually agreed between the operator and the participants that the agency commission will be paid out of participants contribution the Takaful operators (under Wakala Model) are allowed to pay agency commission as per agreement. In the conventional life insurance contract the surrender value under the policy will be much lower than the actual premium paid by the policyholder. But under a Takaful contract, in case of a surrender of the scheme, all contributions of the participants deposited to Participants Account (investment portion) will be refunded along with the profits made from investment. The proportion of his installment will be donated as Tabarru and shall not be refunded. Since Tabarru is only a negligible portion of the total amount of the installment, amount of surrender value of the participants will be near to all the installments he has paid. Moreover, in case of any urgency the participants are allowed to withdraw partially from the money deposited in the participants account. Under the conventional life insurance, the beneficiaries of the policyholders are not entitled to any claim, if the policyholder commits suicide within 1 (one) year of the contract. Under Takaful scheme, the beneficiaries of the participant will have the right to claim benefits from the operator even if the participant has committed suicide or has been killed while committing a crime. Under the Takaful scheme the contributions made by the participants should not be forfeited, even for a breach of utmost good faith. In case, a participant discontinues payment of installment and ask for surrender value, all contributions deposited in the Participants Account should be refunded to the participant along with proportion of up to date profits made from investment. The operators, however, may charge service fees for withdrawal from the scheme. Under Takaful operation, the accounts of Shareholders Fund is maintained separately from the respective Takaful funds. Income of Takaful operator are derived from investment return of shareholders fund and

the share of profit from Family Takaful fund. Operating expenses such as staff cost, establishment cost and administrative costs are to be met from Shareholders Fund. Operation of general takaful is also simila with the operation of conventional non-life insurance. The participants under a general Takaful scheme pay the contributions as donation (Tabarru) and the takaful operator will invest these contributions as per Islamic principles having no element of interest. All returns on the investment will be pooled back to the fund and loss or damage of any participants property or liability as the case may be would be compensated from this fund. Investment returns from the General Takafu Fund can not be credited to the Shareholders Fund which is maintained separately. The shareholders fund is credited with the share of profit (say 50%) from the General Takaful Fund. Financial statements of the Shareholders Fund are to be prepared separately. Unlike the Family Takaful Scheme, General Takaful schemes are not functioning as means of savings. However, the participants are entitled to a share of profit at the expiry of the Takaful period. If there is surplus after deducting all the operational costs, the surplus shall be shared between the Participants and the General Takaful Operator. The sharing of the surplus will be made in a ratio agreed to at the time of the contract. The underwriting surplus from General Takaful Fund (Tabarru Fund) is determined after deducting retakaful (reinsurance) cost, reserve for unearned takaful contributions (technical reserve) and estimated outstanding claims. WHAT ARE THE DISTINCTIVE FEATURES? : One of the prime distinctive features of takaful in comparison to conventional insurance lies in the legal relationship between the contracting parties. The relationship between the insurer and the insured in the conventional system is that of buyer and seller. Insurance policies are sold to the policyholder and insurers want to maximize their own gain by selling the service of insurance. But in case of Takaful, the operators act as trustee and or manager of the participant s fund. As manager or trustee, the operators are entitled to have remuneration which is given by the participants as share of profit arising from operational surplus of the Takaful Fund/Mudarabah Fund. Another fundamental distinction between Takaful and Insurance is the laws and principles governing the systems of takaful and insurance. Islamic insurance is operated on the basis of Divine laws of Islam and the sources of these laws are the Holy Book as revealed to the Prophet, interpretations of the Quranic law, traditions of the Prophet, practices of the companions of the Prophet, consensus among the Islamic Scholars, juristic opinion of Islamic Scholars by analogy, customs, precedence of the Muslim society etc. Conventional insurance is operated basically by the law of contract, law of liability, Act of the parliament, common law and the customs or usages which have been developed since the early primitive era until today. Rules and regulations of conventional insurance system are derived from Statutes, case laws, judicial precedent, customs and practices. On the other hand, rules and regulations of Takaful are primarily based on the Quran and the Sunnah and secondary sources of Islamic law i.e. relevant Shariah case laws, juristic opinions and of course, Shariah based Statutory provisions if any. Insurance practice under common law and western laws evolve round the elements of interest, profit maximization and often exploitation; whereas under Islamic law, modus operandi of Takaful is based on an interest free system. Modus operandi of Takaful is based on the principles of Shariah. It is operated on the principles of mutual cooperation, solidarity and brotherhood. It is practised basically on the principles of Mudarabah (profit & loss sharing ) based financing which is an alternative to the interest based financing. Thus the funds generated from the conventional insurance business belong to the insurance company, but the funds generated from the contribution of participants of Islamic Insurance Company belong to the participants (policyholders). The funds of conventional insurance company can be invested in any scheme or project as per relevant insurance laws and regulations, but the funds of a Takaful business should not be invested in projects until and unless it is supported by the Shariah discipline. The entire procedure shall comply with the guidelines of the Shariah and certainly not by any unethical/unislamic practices. The main difference between a Takaful scheme and conventional insurance lies in mode of investment and sharing of surplus. A Takful operation is based on the principles of Mudarabah financing technique,

whereby the parties involved share the profits with an agreed portion. This makes the Takaful operation a Riba-free transaction. Muslims believe that Allah has prohibited interest (Riba) for the obvious reason of its unfairness. The Mudarabah financing technique is considered by Islamic Jurists as a fair and just transaction and presents a fair commercial dealing. It is considered as the best alternative to the unfair interest based transaction. The ultimate object of an insurance company is to make maximum profit. Sincerity of purpose is not an essential requirement for a valid insurance. But the ultimate object of Takaful is to achieve the pleasure and blessings of the Almighty Allah. According to Islamic teachings, deeds of human being is evaluated by Allah by its real intention and therefore, it is the prime duty of the believers to perform all their activities only to seek the pleasure and blessing of God by performing good deeds with utmost sincerity and only according to the path prescribed by the Quran and the Sunnah. In order to protect the Takaful operations from being involved in their practice with some elements of the conventional system, a council of Shariah experts need to supervise all the aspects of a Takaful operator. This is necessary to make sure that, the Takaful scheme are being operated on the basis of Shariah principles. The Shariah Supervisory Council provide necessary consultation for the Takaful operations for development of Takaful laws, regulations and practices justified by the Shariah sanctions. REFORMS REQUIRED IN INSURANCE LAW: It is heartening to note that Department of Insurance, Govt. of Bangladesh, has taken a move to amend the old age Insurance Act 1938, wherein it has been proposed that Takaful be defined in order that the operators as well as the policyholders (participants) know what is meant by Islamic Insurance and what is its main purpose. By defining Takaful in the Insurance Act, a long felt desire of the operators. This will help to clarify ambiguity now primarily in the market. Unfortunately most of the conventional insurers argue that Islamic Insurance is in no very different from the conventional insurance. If and when Takaful will be defined in the Insurance Act, the Takaful insurers will have a stronger legal basis to to seen this operations in compliance with the provisions of Islamic Shariah. However, it is earnestly felt that a separate law or a separate chapter in the present Insurance Act 1938 be incorporated. The Insurance Act 1938 and Insurance Rules 1958 were adopted when Islamic Insurance was not in vogue in this country. Therefore, it is felt that a separate law be formulated for Islamic Insurance Alternatively Govt. may also consider to incorporate a separate chapter on Takaful (Islamic Insurance). We have identified few issues which need to be dealt with in the proposed legal framework for successful operation of Islamic Insurance in Bangladesh. 1. Definitions : Some of the other definitions need to be incorporated in the legal framework are as follows : a. Contribution Means takaful installment payable by participants of Islamic Insurance (Takaful schemes). b. Family Takaful Means takaful for the benefit of the individual and his family. c. General non life Takaful Means all takaful business which is not a family takaful (Islamic Life Insursance) business. d. Islamic Insurance Company Means an insurer incorporated under company s Act 1994 and who operates its business as per and on the basis of mutual assistance of the participants in compliance with the provision of the Islami Shariah. e. Participant : Includes, policyholders (participants in the Takaful scheme) or an assignee where they are entitled as against the takaful operator to the benefit of the policy and the personal representatives of a deceased participant.

f. Re-takaful Means an arrangement consistent with sound takaful principles for re-takaful (sharing of liabilities) in respect of risks incurred or to be incurred by the takaful operator in the course of his carrying on takaful business. g. Re-Takaful s Deposit Means an amount deposited with or retained by a takaful operator by way of security for the performance by the re-takaful operator of contracts undertaking liabilities incurred by the takaful operator. h. Takaful Benefits Includes any benefit, pecuniary or not which is secured by a takaful policy, and pay and other expressions, where used in relation to takaful benefits, shall be construed accordingly. i. Takaful Business Means business of Islamic Insurance (takaful) whose aims and operations do not involve any element which is not approved by the Shariah. j. Takaful Operator Means a Company or a Society which carries on takaful business. 2. Registration : The Chief Controller of Insurance shall be responsible for the registration of Islamic Insurance Companies on the application of any Company or Society on payment of the prescribed fees, deposits and or Security money. The Regulatory Authority shall refuse to register an applicant of Islamic Insurance business unless he is satisfied that there is in the Articles of Association of the Takaful operator concerns the provision for the establishment of a Shariah Supervisory Board to advise an operator of the Takaful business in order to ensure that it does not involve any element contrary to Law of Shariah. 3. Requirement of Takaful Operators : No Company or Society shall carry on Islamic Insurance business (Life or non Life) unless it is registered under Insurance Act or is permitted by Regulatory Authority to offer products in the name of Islamic Insurance (Takaful) in respect of particular class of business and it has deposited the required amount in respect of it. Subject to the provision of Insurance Act, Islamic Insurance shall be carried out only by a Company as defined in the Company Act or a Society Registered under Societies Registration Act or Co-operative Societies Act. 4. Deposits : An Islamic Insurance operator when registered in respect of any class of Islamic Insurance business shall at all times have in respect of that business a deposit with the Central Bank (Bangladesh Bank) of a value of not less than the amount as may be prescribed by the Insurance Rules. The deposit of Islamic Insurance operator shall be invested not contrary to the Shariah and as may be approved by Insurance Rules. All incomes accruing in respect of a deposit shall be payable to the Islamic Insurance Company making the deposit. In lieu of cash deposit, Mudaraba Bond as may be issued by Islamic Banks licensed under the Banking Companies Act may be deposited with the Central Bank by an operator. Any income derived from Mudarabah Bond shall be payable to the Islamic Insurance operator depositing such Bond. 5. Separation of Takaful Funds : The assets of any Takaful Fund under this Act shall be kept separate from all other assets of the operator. Takaful Funds belongs to the participant on collection basis and shall be managed by the operator for a legitimate consideration of the services rendered. Any return from the assets of the Takaful Fund shall be shared between the policyholders and the operator as per terms of agreement in the policy document. Incomes derived from the assets representating the share holders fund shall be distributed among the shareholders along with the share of profit derived from Takaful Funds & Tabarru Funds which shall be managed and operated on Mudaraba basis as per Shariah Law. 6. Annual Accounts and Audit : An Islamic Insurance company registered under a Takaful Act shall prepare the Statement of Accounts and other Statements as required by the Chief Controller of Insurance.

An operator registered under Takaful Act shall have each Accounts audited for each accounting period in accordance with the Insurance Rules and or schedules prescribed by the Regulatory Authority (Chief Controller of Insurance). All statement of Accounts & Balance sheet shall be prepared showing Tabarru Fund and Mudaraba Fund separately from that of Shareholders Fund. 7. Policy Document : Policy Document issued by the Takaful operators shall clearly specify how the profit from investment of the Takaful assets are to be shared between the operator & the participants in accordance with the principles of Al-Mudaraba as agreed between the participants and the operator regardless of the amount of investment profit made during the accounting year. 8. Nomination : Participants of a Family Takaful Scheme (Islamic Life Insurance) may nominate a person or persons from amongst the heirs to whom the money shall be paid in the event of his death. However, the nominee should not be treated as an absolute beneficiary, but a mere trustee or an executor who is under a responsibility shall receive the benefit of the policy and distribute that among the right beneficiaries according to the principles of Faraied (Islamic Law of Inheritance). If the nominee is a non muslim he shall be regarded as an absolute beneficiary. A muslim can assign benefit of a Takaful Scheme to a person or a persons or a donee if and when a valid Hiba (Gift) is made in favour of the donee. The receivers of the Hiba (Gift) shall become the absolute beneficiary of Takaful benefits. 9. Commission to Agents : An agent of an Islamic Life Insurance Company shall be normally paid for his services by the operators out of the Shareholders Fund and or their share of profit derived from the Mudaraba Fund unless it is clearly specified in the policy document that agents commission shall be paid from the contribution made by the participants. 1o. Distribution of Profit The policy document must specify how the surplus from Takaful investment in Mudaraba account & Tabarru account shall be distributed between the Takaful operators and the participants. The proportion of the share of the profits to be credited annually and shall be determined at the out set of the contract and shall be binding on both the parties. The net surplus, if any as derived from the Tabarru account shall be distributed in accordance with the principles of Al-Mudaraba as agreed between the participant and the operator. The net surplus shall be determined by an Actuary after proper valuation of assets to meet future obligation under the Takaful Schemes. 11. General Takaful Fund : The participant of any General Takaful scheme shall pay the takaful contribution as Tabarru to the General Takaful Fund. The fund shall be invested by the company and all profit from such investment shall be pooled back to the fund. If after deducting all the operational costs of General Takaful there is a surplus, that surplus will be shared between the participants and the Company as per agreement between the parties. 12. Share of net surplus for non Life Takaful Operators : If at the end of the period of Takaful contract there is a net surplus in the operators General Takaful Fund, the same shall be shared between the participant and the company in accordance with the principles of Al Mudarabah in the agreed proportion provided that the participant has not incurred any claim and or not received any benefits under the policy inforce. Sufficient provision for claim must be made before the surplus is to be distributed. The provision for claim reserve shall be calculated based on formula provided by the Regulatory Authority. 13. Forfeiture of Policy : The contribution credited in the participants accounts shall not be forfeited for non payment, or any other wrong or offence committed by the participants. 14. Surrender Benefit : In case a participant is unable to continue his contribution for the balance period of the contract he shall be entitled to receive surrender benefits, which shall be total

amounts of installments credited into his participants account up to the date of surrender together with the share of profits from investment accumulated in participants account during the same period. 15. Assumption of Risk : No operator shall assume the risk in respect of any general business unless and until the contribution payable is received by the operator or is guaranteed to be paid by such person in such manner and within such time as may be prescribed by the Regulatory Authority. 16. Product Certification : A Takaful operator is required to submit to the Regulatory Authority certification by an Actuary who shall certify that the Tabarru rate of Takaful product is based on sound principles. 17. Actuarial Verification : A Takaful operator is required to submit to the Regulatory Authority an Actuarial report on the financial condition of the operator as well as the Tabarru Fund (Participant s Special Account) related of the payment of the Takaful benefits. 18. Rate of Tabarru : Under the Family Takaful contract, the participant pays Takaful contribution as Mudarabah capital, the participant shall agree to pay or part of the whole of the Takaful installment as Tabarru which shall be credited into the relevant accounts for the purpose of paying Takaful benefits to eligible claimants. An appointed Actuary of the Family Takaful operator shall certify the rate of Tabarru of any Family Takaful scheme. 19. Right to claim benefits : The nominee or the beneficiary of the participants under a Family Takaful scheme shall have the right to claim benefits from the operator of an Islamic Insurance Company even if the participant (policyholder) has committed suicide or has been killed while committing a crime. 20. Investment of Assets : Every Takaful operator shall invest and at all time shall keep in the Insurance Act, save that none of assets be invested in debentures, deposits, securities, bonds having interest based transactions and in such modes which are prohibited in Islamic Shariah. We have, so far tried to identify the issues that must be clearly spelled out in the proposed amendments in the Insurance Law & Insurance Rules as may be appropriate. Now considering that majority of the conventional life insurance companies are offering insurance services in the name and style of Islamic Insurance without amending Memorandum / Articles of Association and without proper authority/guide line, the D.O.I. may take an urgent move to wipe out the ambiguities in the market by way of adopting appropriate Law & Rules for the Islamic Insurance operators. K. M. Mortuza Ali Managing Director Prime Islami Life Insurance Ltd.