Certified Takaful Professional Module II (Takaful & Risk Mitigation tools in Islamic Finance) CTP: 405: Takaful Models, Type & Structures

Certified Takaful Professional Module II (Takaful & Risk Mitigation tools in Islamic Finance) CTP: 405: Takaful Models, Type & Structures

TAKAFUL (ISLAMIC INSURANCE) Takaful is an Islamic alternative to the conventional Insurance. The words Takaful has been derived from the Arabic verb Kafala which is also referred to as Kafalat 1 in Urdu language, its mean means to guarantee, to help, to take care of one another s needs. The Takaful system has been structured keeping in view the Islamic system of Dait (Blood Money) which is the philosophy behind mutual assistance/kafalat. Before going into further details about Takaful, we shall have a look at the conventional insurance system and the factors that led to it being considered Haram or illegal in the society. If the importance of insurance is observed in detailed, the following aspects emerge: To bear the risk/threat To protect others To share the loss Keeping in view the basic elements of insurance, it is evident that nowhere in Islam the above mentioned aspects are prohibited and that there is no reason to be considered haram or illegal since Islam itself encourages to help others. Narrated by Hazrat Abu Huraira (R.A.) that the Prophet Muhammad (PBUH) said: Whosoever removes a worldly hardship from a believer, Allah will remove from him one of the hardships on the Day of Judgment (Sahih Muslim, Hadith. 59) TIP Islam teaches us not only to have total dependence on Allah but also emphasizes on self protection against risks and threats. Islam teaches us not only to have total dependence on Allah but also emphasizes on self protection against risks and threats. Narrates by Hazrat Anas Bin Malik (R.A.), one day Prophet Muhammad (PBUH) noticed a Bedouin leaving his camel without tying it. He (PBUH) asked the Bedouin, Why don t you tie down your camel? The Bedouin answered, Glossary: 1 Kafala: to guarantee Article Reference: This article is written by Muhammad Zubair Mughal, CEO, AlHuda Centre of Islamic Banking and Economics. 2

I put my trust in Allah. The Prophet (PBUH) then said, Tie your camel first, and then put your trust in Allah. (Sunan At-Tirmidhi, 1981) Islam in fact, even goes to the length of ensuring that incase of one s death, there should be enough to support the widow for at least a year. Therefore, it is decided that the philosophy of Insurance does not contain any flaws from the Shariah perspective and it can not be considered Haram or illegal. Research has shown that the fault lies not in the philosophy itself, but in the methodology carried out by the insurance companies due to which it is looked upon narrow mindedly. Riba (Interest/Usury) Gharrar (uncertainty) Maysir Keep In Mind TIP Elements of Conventional Insurance are: Riba (Interest), Gharar (Uncertainty) and Maysir From the above discussion, it is decided that the philosophy of Insurance does not contain any flaws from the Shariah perspective and it can not be considered Haram or illegal. Conventional insurance contains both direct and indirect forms of Riba. The direct Riba is in the of Premium and indirect Riba in the shape of interest earned on interest based Investments e.g. by giving loans to financial institutes and banks on interest or by investing in interest based activity at stock exchange etc. thus promoting interest. Second factor is Gharar, where the person being insured does not know when he would bear the loss and to what amount, or the insurer can ascertain the amount and time with respect to profitability. Third element is Maysir, which involves a chance of total loss to one party in the contract, where profit to one person is directly related to another person s loss. While the relationship of claim between the insurance company and its client is related to each others profit and loss. Thus, by removing these three harmful elements of Riba, Gharrar and Maysir from the conventional insurance, we can call it Takaful. Now, we shall examine how these elements have been removed in the Takaful system. 3

The first ever Takaful Company in the world was established 27 years ago in Sudan in 1979 by the name of Sudan Islamic Insurance. It would be interesting to know that the founder of the company was a Pakistani. Following suite, in the same year another company by the name of Islamic Arab Insurance company (IAIC) was formed in United Arab Emirates but it took sometime for the company to establish. There are approximately more than 108 Takaful and 6 Re-Takaful companies operating globally with an approximate sum of $ 3 Billions Takaful contribution. Out of these companies 60% are General Insurance Companies while the remaining 40% are working as Life and Family Insurance Companies. Geographically, 56% of them are located in South East Asia, 36% in Middle East, 17% in Africa and!% in Europe and America. For the 23% of the Muslim population of the world, the existence of 260 Billion US dollars worth of Islamic Financial Market is a very encouraging factor for the Takaful Companies. TIP The first ever Takaful Company in the world was established 27 years ago in Sudan in 1979 by the name of Sudan Islamic Insurance. Keep In Mind There are approximately more than 108 Takaful and 6 Re-Takaful companies operating globally with an approximate sum of $ 3 Billions Takaful contribution. Out of these companies 60% are General Insurance Companies while the remaining 40% are working as Life and Family Insurance Companies. The systems used by Takaful companies in the world can be divided into three models. The models are: Mudarba Model (Sudan, African states) Wakalah Model (Malaysia and other countries) Wakalah Waqf Model (Pakistan) SECP is the regulatory authority for Takaful companies in Pakistan and has formulated rules and regulations for the companies by making amendments in the Insurance ordinance 2000 while keeping in view the Islamic perspective/principles of Wakalah and Waqf. TIP The first Takaful Company, introduced in Pakistan was Pak Kuwait Takaful Company Pak Kuwait Takaful was the first Takaful Company in Pakistan to be introduced. Another company by the name of Takaful Pakistan came into existence formed by Capt. Jamil Akhtar with the mutual collaboration of 4

House Building Finance Corporation (HBFC, Emirates Global Islamic Bank, Arif Habib, Sitara Chemical, Emirates Investments Group (U.A.E.) and Al- Buhaira National U.A.E. Pak Qatar Takaful has also recently started their operation in General & Life Takaful Business in Pakistan. All the Takaful companies operating in Pakistan are based on the Wakalah Waqf model. The operational methodology/system of the model can be explained through the following example; Some individuals form a Fund on the basis of Waqf and subsequently donate/contribute in the fund, hence giving it the name Participation Takaful Fund (P.T.F) with an understanding that if any calamity/risk befalls any of the participants of the fund, a decided amount would be donated (Tabbaru) to the effected. The fund would be monitored by an organization (Takaful Company) on the pattern of Waqf, to safeguard the deposits and to increase the profitability of the fund. Subsequently, the company would be paid its Wakalah agency fee. The example of a Waqf is similar to that of a Mosque Waqf Committee which receives its contributions from people for the maintenance of the Mosque. Likewise, Takaful Company also acts as a Waqf operator. It will receive donations from the people and strengthen the fund. Incase of a calamity to either of the members of the Fund, the company would pay the compensation. Furthermore, it would do its level best to make the Waqf Fund/Takaful contribution more profitable and for that, it would receive its Wakalah fees which would be its profit. Keep In Mind Takaful Company also acts as a Waqf operator. It will receive donations from the people and strengthen the fund. Incase of a calamity to either of the members of the Fund, the company would pay the compensation. The element of Riba (Interest) is removed from the whole system in such a manner that the Takaful company would invest in interest free institutions to make the fund more profitable while adhering to the rules and regulations of the Shariah and instead of premium, it would receive Tabbaru. As far as Gharrar is concerned, Takaful company is a Waqf and it does not have any direct relationship with the profit and loss of the 5

Person insured, instead the Takaful participants would share the risk from their given donations through mutual consent. Thus, the non compliant elements of the Shariah are removed along with the objections on Islamic banking that if Islamic banking defies interest then how come it practices conventional insurance which contains the elements of interest. Keep In Mind The element of Riba (Interest) is removed from the whole system in such a manner that the Takaful company would invest in interest free institutions to make the fund more profitable while adhering to the rules and regulations of the Shariah and instead of premium, it would receive Tabbaru. TIP The Takaful participants would share the risk from their given donations through mutual consent. Now a new market will emerge in Pakistan, which would support the Islamic Financial system. Those who abstained from Conventional Insurance by calling it un-islamic, also their savings will increase due to Takaful. With the increase in Takaful funds, the funding resources of Islamic Banks and Islamic Financial institutions will also increase alongside. Since Takaful companies have to invest without interest, their best choice would be the Islamic Banks or Financial institutions or they would opt for Sukuk (Islamic Bond), which would help in promoting the Sukuk market in Pakistan. Keep In Mind With the increase in Takaful funds, the funding resources of Islamic Banks and Islamic Financial institutions will also increase alongside. Since Takaful companies have to invest without interest, their best choice would be the Islamic Banks or Financial institutions or they would opt for Sukuk (Islamic Bond), which would help in promoting the Sukuk market in Pakistan. Actually, the promotion of Takaf is related to the expansion of Sukuk market because whenever the issues of underwriting hedge, Insurance of underlying assets etc. will arise, only Takaful will cover them due to 6

which both will be promoted dually. Thus the Sukuk would be more easily available as compared to the shares to the general public in the market and they would be assets backed. Consequently, the creative evolution of money in the country will come to a halt because of the asset base which would definitely be helpful in the stability and positive economic growth of the monetary system and short term Sukuk would be the cause of formation of Inter bank market between Islamic Banks and Financial Institutes. We can compare Takaful with a social organization where the Micro Takaful Ideology should be kept in view and used as a weapon to eliminate poverty in Pakistan. To eliminate the poverty from the country, while keeping in view the economic, social and geographical conditions of Pakistan, if Zakat, Waqf and the ideology of Micro Takaful are brought forward together, then it would be no less than a revolution. If Dr. Younas persists that the interest based micro finance system is the only solution for the elimination of poverty, then was the same existent at the time when there was no Zakat receiver. If we try and find solutions to our social and economic problems in the light of the Holy Quran and Sunnah, then there is success both in the world and hereafter. With the Shari ah compliant combination of Micro Takaful, Zakat and Waqf and with both positive and constructive thinking, beneficial results with regards to poverty elimination can be achieved. The question remains, who would think in a positive and broad minded manner when there is no Nobel Prize given on Islamic economics and finance, but only a question. 7

SHARI AH RULING FOR TAKAUFUL Takaful is derived from Arabic word which is defined as joint guarantee, a pact among a group of person who agree to jointly indemnify themselves against any specified calamity or loss. The amount comes out of a common pool created with individual contributions of participating members. This is in line with the command of Allah to assist other those in trouble. Allah says in Al Quran: Help one another in furthering virtue and God consciousness (Taqwa) and do not help one another in furthering evil and enmity (Surah Al Maidah: verse 2) In this verse, Allah says that we need to help each other in doing good deeds but not help each other to commit sin and rancor. In Takaful there are rule and requirements of the Shariah rulings that govern its operation. Allah also says in Al Qur an (Surah Al Maidah: 90): O ye who believe, Intoxicants and gambling, (dedication of) stone and (divination by) arrows, are an abomination of satan s handiwork: eschew such (abomination), that ye may prosper. (surah Al Maidah : verse 90) 8

As we have mentioned before in introduction that takaful is run in line with shari ah and doesn t implement any elements which is contradicting with the command of Allah such a al-gharar, al-maisir and al-riba. As long as Shari ah is concern, all products under Takaful as well as General Takaful Scheme product not implement these three elements in their operation. It also in line with another verse in Surah Al Baqarah: 275, Allah hath permitted trade and forbidden usury. In addition, according to the majority of Islamic scholars and ulama now their made consensus that, Takaful will be acceptable in Islamic Ruling as long as there are no element of unjust and cruelty practice among both party. This shariah ruling is also applicable for General Takaful Scheme. 9

TAKAFUL MODELS Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden." The role of this practice indicates that the policyholders are in fact the managers of the fund and the ones in ultimate control. However, the commercialization of Takaful has produced several types of Islamic insurance, each reflecting a different experience, environment and perhaps a different school of thought. Models of Takaful are: Mudarabah Model Wakala Model Waqf Model Mudarabah Model The surplus is shared between the participants with a Takaful operator. The sharing of such profit (surplus) may be in a ratio 5:5, 6:4 etc. as mutually agreed between the contracting parties. Generally, these risk sharing arrangements allow the Takaful operator to share in the underwriting results from operations as well as the favorable performance returns on invested premiums. Mudarabah is also defined as the contract between one party, known as the Rabul mal (capital provider), with another party known as the Mudarib (entrepreneur) where the Rabul mal provides the capital, and the Mudarib provides the skills in a business venture. When there is profit, it is shared between the Rabul mal and the Mudarib in a preagreed manner. In this case, the Takaful operator is the Mudarib and the participants are the capital providers. The pure Mudarabah model conforms to this definition and is practiced mainly in the Asia Pacific region. TIP Under Mudarabah Model, the Takaful operator is the Mudarib and the participants are the capital providers. TIP Musarabah Model is practiced mainly in Asia Pacific region. In this Mudarabah model, the Shariah committee generally approves the sharing ratio for each year in advance. The sharing of such profit (surplus) may be in a ratio of 5:5, 6:4, 7:3, etc. Generally, these risksharing arrangements allow the Takaful operator to share in the 10

underwriting results from operations, as well as the favorable performance returns on invested premiums. In a pure Mudarabah model, the Takaful operator and the participant share direct investment income only and the participant is entitled to a 100% share of the surplus. This model is applicable to family Takaful as the fund is entirely distributed to the participants. In a modified Mudarabah model, the investment income is ploughed back into the Takaful fund and the Takaful company shares with the participant the surplus from the Takaful fund. According to Mr. Azman Bin Ismail, under the modified Mudarabah model, no profit from the venture is shared between the operator and the participants. Instead, what is shared under the modified Mudarabah model is the actual balance of the fund at the end of the period (also called underwriting surplus), and not the surplus between the balance of the Takaful fund at the end of the period (meaning the Mudarabah contract) and the balance of the Takaful fund at the beginning of the period. In general Takaful business, the balance (or underwriting surplus) of the fund at the end of the period is always less than the balance of the fund at the beginning of the period. Under a pure Mudarabah model, if there is a loss, the Rabul mal loses (some of) his capital and the Mudarib loses in terms of effort. Therefore, the modified Mudarabah model is not really Mudarabah, and that is why some scholars, especially in the Middle East do not condone it. It is important to note that under Mudarabah, the Takaful fund belongs to the participants and not the Takaful operator. The Takaful operator therefore has no right to a share of the surplus. We can express the Mudarabah Model in below given diagram. 11

Mudaraba Model Profits attributable to Shareholders Company Company s Admin. & Mangt. Expenses Investment By Company Profit From Investments Participant Takaful Contribution paid by Participant General Takaful Fund General Takaful Fund Operational Cost of Takaful Surplus (Profit) Company s Share from Surplus Participant s Share from Surplus Wakalah Model The Wakala Model, commonly used in the Middle East, distinguishes between the operating company (wakeel) and the Takaful fund. The operating company does not share in the underwriting result, but rather it is compensated by a fee deducted from contributions made by participants and/or investment profits generated by the Takaful fund. The fee rate is fixed annually in advance in consultation with the Shariah committee of the company. TIP The Wakalah Model is commonly used in the Middle East. In order to give incentive for good governance, the management fee is related to the level of performance. The surplus of the Takaful fund belongs to the members; the operating company does not have a claim on it under any circumstances. If the Takaful operator is to generate a profit from its efforts, it must manage the operations (including salaries, overhead, selling commissions, sales and marketing expenses, etc) entirely within the disclosed wakala fees. 12

Since there is no other benefit to the takaful operator other than the declared wakala fees, the wakala model demands that all other charges/ costs to the program be provided to the participants at the lowest possible cost level that can be negotiated by the operator on their behalf. The Wakala model can be viewed as transparent as fees a re clearly related to the operator s operational costs. Mudharaba practices are usually preferred for investment aspects of takaful, while wakala practices are favored for risk sharing/under- writing aspects of the operation. Keep In Mind Mudharaba practices are usually preferred for investment aspects of takaful, while wakala practices are favored for risk sharing/under- writing aspects of the operation. The diagram of Wakala Model is given below: Investment Income Participants Payment of Contribution by Participant (based on Tabarru and Wakalah contract) Takaful Fund (TF) (100 - Y) % Underwriting cost & reserves retakaful claims reserves Provisions doubtful debt diminution in investment value Less: Surplus Equalization Reserve Qard Hassan to cover deficit Surplus (if any) 50 % of Surplus 50 % of Surplus Wakalah Fee (Y%) Shareholder Fund (SF) + Wakalah fee + Share of surplus (if any) + Investment income of SF - Commission - Actual mgmt. expenses W aq f M 13

odel This non profit model includes social governmental owned enterprises and programs operated on a non-profit basis which utilizes a contribution that is 100% tabarru (donation) from participants who willingly give to the less fortunate members of their community. Waqf, in contrast to wakala and mudharaba, operates as a public foundation. Whereas the takaful fund is owned models in waqf, it belongs to nobody in particular. While any surplus from the first two models can theoretically be distributed between members (although this rarely occurs in practice, other than in family takaful), such distribution is not possible in the waqf model, similar to the build-up of unallocated surplus commonly seen in some Western European life insurance models. Other things being equal, this may have a positive effect on the company s financial strength over time. Justice Muhammad Taqi Usmani, who has vast knowledge in the interpretation of Islamic jurisprudence, in particular relating to the Shariah laws governing finance and economics, believes strongly in the waqf model. He feels that waqf is more compatible with the cooperative concept of Takaful as it is created for the very purpose of co-operation. He said that if one establishes a fund for Takaful, then the fund should have a legal entity. So whenever one contributes to this fund, the contribution is regarded as a contribution for the common good. When the Waqf fund distributes the funds between the members according to its own rules, the fund needs to have its own legal entity, and according Islamic jurisprudence, waqf is an independent entity, hence he prefers this model and now in Pakistan the combined model name Wakala- TIP Waqf, in contrast to wakala and mudharaba, operates as a public foundation. Waqf model is under practice and it is illustrated in below figure. 14

Company (Capital) Wakala Fee 30%-35% Profit From Investment Mudarib's Share of PTF s Managem ent Expense Profit/Loss Attributable to Shareholders Takaful Contribution Paid by Participant Investment by The Company Investment Income Sharing on Mudarabah Basis Participants Takaful Fund Participa nts Takaful Fund General Takaful Fund Investment Income Operational Cost of Takaful/ ReTakaful Reserves Surplus (Profit) Surplus Distributio n to Participants 15

PRODUCTS OF TAKAFUL A number of Takaful insurance companies are operating in different countries. The basic trust of Takaful is to foster the spirit of cooperation among the members of the society. The principle of bearing the losses by the participants on a cooperative basis ensure enhancement of this spirit. There are generally two types of products of Takaful business, offered by the Takaful companies: General Takaful Family Takaful The prime idea of establishing Islamic insurance company is to provide the Islamic Banking system in Malaysia with a complete supporting institution that is in the line with Shari ah. Let us discuss the types in detail. General Takaful Basically, the general Takaful scheme is based on tabarru and mudarabah principle, where the participants enter into a contract with the company (operator). This short-term contract of joint guarantee is to provide protection against losses, which may be due to the personal accidents and loss or destruction of property. The amounts of participants contribution are determined by the terms agreed in the contract, by considering the value of the property and risk involved. In general Takaful, the company raises a fund, which called as tabarru fund or account, where the participants pay their contribution to the fund. The company will invest the remainder of the fund after deducting the operational cost of the scheme. Any profit or return from the investment will be returned back to the fund. If there is any participant who has occurred loss or damage to his property or belonging, then the particular participant will be compensated from this fund, by considering the level of damages and losses that the participant has suffered. As stated earlier, the profits from the investment out of tabarru fund will be returned back to the fund, so that the company will be able to apportion a greater amount of money into more profitable investment 16

areas. Moreover, when the company is always making the profits from its investment, which generate a stable financial position throughout the company, then it enable the company to return the profits back to the participants. The return of profits or profit sharing is the term or condition, which actually stated in the contract agreement between company and participants, which provides the portion of both parties to the profits arising from the investment. The profits will be divided just after deducting the operational costs, provided that it is still profit position after the deduction. However, the profits sharing will exclude those who get compensation from their claims. Generally, the sharing ratio will be determined by the both parties according to the principle of al- Mudarabah, such as 50:50 or 60:40. In Malaysia, there are two main companies which currently operate the Takaful scheme, which are: Syarikat Takaful Malaysia Takaful National As we mentioned before, General Takaful Scheme provides a form of cover against material loss and damage. The General Takaful products offered by Takaful Nasional are as follows: fire, accident, motor, engineering, miscellaneous, and marine takaful schemes. The Operation of the General Takaful General Takaful maybe participated in by an individual or a corporation in order to cover against any loss or damage of properties or goods due to fire, accident, flood, etc. Like Family takaful, participants of general takaful also enter into an agreement based on Al-Mudharabah, which stipulates the right and responsibilities of parties involved. The contract clearly defines the rights and obligations of both parties. The participants pay installments as tabarru' to the company which are credited to the general takaful fund of the company. This fund is invested by the company according to the provisions of Shari'a and the profit generated from such investment is pooled back to the fund. In line with the virtues of cooperation, mutual assistance, and share responsibility as embodied in the concept of takaful. The company will pay compensation 17

or indemnity to the fellow participants who suffered as loss consequent upon the occurrence of any disaster as outlined in the contract. If, after deducting all the operational costs, there is a surplus of the general takaful fund, it will be distributed between the participants and the company as per conditions of the agreement. Principles of General Takaful Operation The principles of General Takaful operations are as follows: Participant s Interest The competency of person to affect Takaful Contract is determined by his legal capacity to contract and his interest in the subject matter covered. The cover afforded under a Takaful contract is not the subject matter covered but the participant s pecuniary in the subject matter. Utmost Good Faith The Takaful contract cast a duty on the proposer discloses all material facts bearing on the contract. The duty of good faith applies to both the participant and the Takaful operator, like the proposer must not withhold information to the proposer, which led him into a less favorable contract. Proximate Cause The essence of the Takaful contract is the provision of indemnity for financial loss suffered by the participant as a result of the happening of an event covered against under the contract. It is necessary to state the perils against which cover is given, so that the intentions of the parties are clearly defined. Indemnity The Takaful contract is a contract of indemnity; it is a contract to pay the actual loss sustained by the participant. It is a mechanism by which the Takaful Company provides financial compensation in an attempt to place the participant in the same pecuniary position after the loss as he enjoyed immediately before the loss. 18

Subrogation (Hulul) And Contribution (Musahamah) The Takaful contract not only upholds the principle of indemnity but also Equity. Both the Subrogation and the Contribution principles are corollaries to the principles of indemnity and Equity. General Takaful Products The coverage of the General Takaful products is similar with the conventional products except for the existence of takaful elements of Tabarru' and Mudharabah. The element of Tabarru' differentiates the general takaful products from the conventional products. Tabarru' means that the participant (i.e. the policyholder) agrees to donate his contribution (premium) to the fund with a mission to help other participants of Takaful covered under the various Takaful schemes when in distress. Therefore, it is the members who are carrying the risk and the Takaful Operator is merely a custodian. If the contribution is made with the right intention of helping the fellow participants in need (i.e. the spirit of tabarru') hence the elements of gharar (uncertainty) and maisir (gambling) are eliminated. Keep In Mind The element of Tabarru' differentiates the general takaful products from the conventional products. Tabarru' means that the participant (i.e. the policyholder) agrees to donate his contribution (premium) to the fund with a mission to help other participants of Takaful covered under the various Takaful schemes when in distress. The other is the element of Mudharabah or the profit sharing. The Takaful Operator is merely a custodian of the Takaful fund. The contribution receives from the participant will be kept in a fund and invested in the Islamic investments and at the end of the period of takaful, the profits (if any) will be shared with the participants provided there is no claim made by the participant. The profit sharing ratio will be made known to the participant up front and agreed by both parties. For General Takaful, the ratio is 50: 50. 19

The General Takaful products offered are as follows: Fire Accident Engineering Fire Consequenti al Loss Group Personal Accident Umrah Personal Accident Contract Works Equipment All Risk House owners/ Householder Machinery Breakdown Storage Tanks Motor Marine Miscellaneous Motorcycle Cargo in Transit All Risk Private Car Marine Exports Employer's Liability Marine Imports Money Public Glass Workmen's Compensation 20

Family Takaful A family takaful plan is a long-term savings and investment programme with a fixed maturity period. Apart from enjoying investment profit, the plan provides mutual financial assistance among its participants. The family takaful plan is a financial programme that pools efforts to help the needy in times of need due to untimely death and other mishaps resulting in personal injury or disablement. The takaful plans designed by the takaful company would enable participants to participate in a takaful scheme with the following aims: To save regularly; To invest with a view of earning profits which are Shari ahcompliant; and To avail of cover in the form of payment of takaful benefits to heir(s) should a participant die before the maturity date of his takaful plan. It covers all the risks associated with human life like death, disability and illness including short tem and long term investment needs. Family takaful provides you with a protection and long-term savings. A person or his/her beneficiary will be provided with financial benefits if the person suffers a tragedy. At the same time, he will enjoy a long-term personal savings because part of your contribution will be deposited in an account for the purpose of savings. He will be able to enjoy investment returns from the savings portion based on a pre-agreed ratio. If the person participates in family takaful, he will be eligible for personal tax relief as in life insurance. Takaful Concept in Family Takaful When you participate in family takaful, you will contribute a certain amount of money to a takaful fund. You will undertake a contract (Aqad) for part of your contribution to be in the form of participative contribution (tabarru ) and the other part for savings and investment. Your contribution in the form of tabarru will be placed in a fund (Participants Special Account or PSA) that will be used to fulfill your obligation of mutual help, should any of the participants face a 21

misfortune arising from death or permanent disability. If you survive until the date of maturity of the plan, you will be entitled to share the net surplus from the fund, if any. The takaful operator will invest your savings and investment contribution (Participant s Account or PA) and the profit will be shared between you and the takaful operator according to a preagreed ratio. The Operations of Family Takaful A person who participates in any family Takaful plan is called a participant. A participant may choose any one of the plans offered by the company. The family Takaful plans have a defined period of participation. The Takaful company and the participant will enter into a long-term Takaful contract, which is based on the principle of Al-Mudarabah (profitsharing). The takaful contract spells out clearly the rights and obligations of the parties to the contract. The participant is required to pay regularly the takaful installments in consideration for his participation in the takaful plan. TIP The family Takaful plans have a defined period of participation. The participant will decide the amount of takaful installments that he wishes to pay, but such an amount shall be subject to the minimum sum as determined by the company. Each takaful installment paid by the participant shall be divided and credited by the takaful company into two separate accounts, namely the participant s account and the participant s special account. A substantial proportion, for example, such as 93% of this installment is credited into his participant s account solely for the purpose of his savings and investment. The balance is credited into participant s special account as tabarru for the purpose of mutual help. Mutual financial assistance such as takaful death benefits to fellow participants is paid from the participant s special account. What proportion of the takaful installment to be relinquished as tabarru and credited into the participant s special account is determined based on sound actuarial principles. 22

The takaful installment credited into these two accounts will be pooled as a single fund for the purpose of investment activities undertaken by the takaful company in a manner permitted by the Sharia. Any profits generated from the investment shall be shared between the participant and the company in a ratio to be mutually agreed between the participant and the company in accordance with the contract of Al- Mudharabah. For instance, if the ratio agreed is 7:3 then the participant shall be entitled to 70% of the profits whilst the company shall be entitled to 30%. The participant s share of the profits shall be credited into his participant s account. With the accumulation of such profits, the balance in the participant s account will increase over a period. Keep In Mind Any profits generated from the investment shall be shared between the participant and the company in a ratio to be mutually agreed between the participant and the company in accordance with the contract of Al-Mudharabah. For instance, if the ratio agreed is 7:3 then the participant shall be entitled to 70% of the profits whilst the company shall be entitled to 30%. Family Takaful Benefits In the event that a participant should die before the maturity of his family takaful plan, the following takaful benefits shall be paid to him: The total amount of the takaful installments paid by the participant from the date of inception of his takaful plan to the due date of the installment payment prior to his death and his share of profits from the investment of the installments which have been credited into his participant s account; The outstanding takaful installments which would have been paid by the deceased participant should he survive. This outstanding amount is calculated from the date of his death to the date of maturity of his takaful plan which shall be paid from the 23

participant s special account as agreed upon by all the participants in accordance with the takaful contract. If a participant survives until the date of maturity of his takaful plan, the following takaful benefits shall be paid to him: The total amount of takaful installments paid by the participant during the period of his participation plus his share of profits from the investment of the takaful installments credited into his participant s accounts. The net surplus allocated to his participant s special account as shown in the last valuation of the participant s special accounts. In the event that a participant is compelled to surrender or withdraw from the takaful plan before the maturity of his takaful plan, he shall be entitled to the surrender benefits. The participant is entitled to receive the proportion of his takaful installments that have been credited into the participant s account including his share of investment profits. However, the amount that has been relinquished as tabarru will not be refunded to him. Needs of Family Takaful Family takaful is needed because of two reasons: Protection It includes protection against financial loss from death, disability or medical illness. Example includes Participation Takaful fund (PTF). Investment Growth Family Takaful is needed In order to fulfill short term and long term needs such as: children s education and marriage, purchasing a new house, affording Hajj/Umrah Expenses, Retirement and Income etc. Example includes Participation Investment Account (PIA). 24

Family Takaful Products There are basically two types of Family Takaful Products; one for corporate customers and the other for Individual customers. Let us discuss the products under each head. Family Takaful products (corporate customers) Group Healthcare for employees The Group Health Takaful Plan is designed to cater to your employees well-being. It covers their hospitalization due to any reason, major medical expenses, maternity/childbirth as well as day-to-day medical expenses. Retirement Income This Plan enables the employer to provide its employees with retirement benefits, in either lump sum payment or as periodic income. Group Family Takaful The Group Family Takaful is a risk coverage Plan that provides protection to participant s employees in the event of Death due to any cause (Natural, sickness, accident) Family Takaful Products (Individual customers) Savings & Protection Why borrow loans and incur debts? One can maximize his/her savings through takaful and can meet his/her contingencies. Education Plan A Takaful plan which ensures the continuity of your child s education even when you are not around or cannot afford the tuition fees 25

Mortgage Takaful In an event of the participant s sudden death or disability, the Takaful Operator will settle the outstanding mortgage finances thus ensuring the security of home for loved ones. Retirement Income A Plan that provides regular income upon one s retirement How does Family Takaful function? The functionality of Family Takaful can be explained by the following diagram: 26

Summary CTP: 405: Takaful Models, Type & Structures Takaful is an Islamic alternative to the conventional Insurance. The words Takaful has been derived from the Arabic verb Kafala which is also referred to as Kafalat in Urdu language, its mean means to guarantee, to help, to take care of one another s needs. The Takaful system has been structured keeping in view the Islamic system of Dait (Blood Money) which is the philosophy behind mutual assistance/kafalat. Conventional insurance contains both direct and indirect forms of Riba. The direct Riba is in the of Premium and indirect Riba in the shape of interest earned on interest based Investments e.g. by giving loans to financial institutes and banks on interest or by investing in interest based activity at stock exchange etc. thus promoting interest. The element of Riba (Interest) is removed from the whole system in such a manner that the Takaful company would invest in interest free institutions to make the fund more profitable while adhering to the rules and regulations of the Shari ah and instead of premium, it would receive Tabbaru. As far as Gharar is concerned, Takaful company is a Waqf and it does not have any direct relationship with the profit and loss of the Person insured, instead the Takaful participants would share the risk from their given donations through mutual consent. In this Mudaraba model, the Shari ah committee generally approves the sharing ratio for each year in advance. The sharing of such profit (surplus) may be in a ratio of 5:5, 6:4, 7:3, etc. Generally, these risk-sharing arrangements allow the Takaful operator to share in the underwriting results from operations, as well as the favorable performance returns on invested premiums. Bancatakaful is defined as the delivery and distribution of a suitable range of tailored bankable protection and longterm savings, education and retirement plans designed to meet the lifecycle needs of the consumer base of a bank or other financial institution. In Bancatakaful, Takaful products are being distributed by a bank. Generally, Micro-insurance is viewed just like other normal insurance on small scale for low-income people it can be redefined as A mechanism to provide Shari ah-based protection to the blue collared, under-privileged individuals at an affordable cost. 27

What is Islamic Insurance? What is the Shari ah ruling for Takaful? What are the Models of Takaful? Explain them in detail What are the products of Takaful? Discussion Questions Supplement Material For further study, you can consult our CD or e-library by getting log-in to your account. You would get number of books, presentations, literature and reports on the following topics: Islamic Insurance Theory and Practice by Dr. Ahmed Salee Hedging in Islamic Finance by Bashir Ali Khallat Guiding principles of Risk Management for Institutions (other than insurance companies) offering only Islamic financial services IIFS E-Library: Books Articles Presentations Reports 28