Takaful: Central Idea & General Principles PDF

Topic 4 Takaful: Central idea & general principles Outline 6.1Theory of contract in Islamic law Classification of contracts Essentials contracts in Takaful operation Contractual relationship among the participants Contractual relationship between the participants a...

Topic 4 Takaful: Central idea & general principles Outline 6.1Theory of contract in Islamic law Classification of contracts Essentials contracts in Takaful operation Contractual relationship among the participants Contractual relationship between the participants and Takaful operator 6.2Scope of Takaful contract 6.3Rational outlook of Takaful 6.4Features of Takaful 6.5 Sources of laws 6.6Justifications for the validity of Takaful Introduction ⚫ The central idea of insurance under Islamic law is that it is a mutual financial transaction between two parties – one provides material security to the other against a defined risk ⚫ The operator provides compensation against an unexpected loss or damage – if any ⚫ In a case the risk does not happen to, upon the maturity period the insured is entitle to the whole amount (in a life policy) and a bonus (after deductions or charges in general policies), together with profit based on the principles of al-mudharabah ⚫ In a such transaction both the operator and the participant are mutually helping each other to obtain a financial security Theory of contracts in Islamic law ⚫ Contracts in Islamic law include both bilateral as well as unilateral contracts ⚫ A contract (‘aqd)can be defined as the connection of offer and acceptance that results in legal effects on the subject matter of the contract ⚫ Any dealing in property needs a relevant underlying contract that is compatible with the purpose of dealing ⚫ Contract is the best available means to reflect the intention and accordingly the consent of the parties Theory of contracts in Islamic law (ctd) ⚫ To this effect, the Qur’an in surah an-Nisa verse 49, prescribed to the believers:- “…not to devour your assets among yourselves in vanity, except in trading by your consent…” ⚫ The Prophet PBUH is reported to have said that:- “The property of a Muslim is no licit for other to enjoy unless by his consent” Classification of contract ⚫ The nature and classification of a contract in Islamic law depends greatly on the purpose of concluding the contract, as follows:- Contract Purpose Contract of exchange (mu’awadat) Transfer of ownership/usufruct for a consideration Contract of investment (shirkah) Profit and loss sharing Contract of security (tawthiqat) Securing the interest of the party for whom the contract is made Contract of agency (wakalah) Authorization of the agent to act on behalf of the principal, with or without fee Contract of commission (ju’alah) Rewarding someone based on his performance/output Contract of safe-custody (wadi’ah) Deposit of an item for safe custody by a custodian Contract of gratuity/charity (tabarru’) Giving away something to the recipient without any consideration or price Essential contracts in Takaful operation ⚫ A Takaful scheme essentially involves two main parties:- i. The Takaful operator ii. Group of participants ⚫ There are two aspects of contractual relationship between these two parties, i.e.:- i. The contractual relationship among the group of participants ii. The contractual relationship between the group of participants and the Takaful operator Essential contracts in Takaful operation The contractual relationship among the group of participants ⚫ The underlying contract among the participants/ policyholders is the donation or tabarru’ contract ⚫ Tabarru’ in general is the agreement by a participant to relinquish, as donation, a sum of contribution that he/she agrees to pay into a Takaful fund ⚫ The purpose of this donation is to provide mutual indemnity to the Takaful participants – the donation acts as a mutual help and joint guarantee should any fellow participants suffers a defined loss ⚫ The tabarru’ contract is the pillar in the Takaful scheme that allows the gharar element to be tolerated under the arrangement, without affecting the validity of the contract Essential contracts in Takaful operation The contractual relationship among the group of participants (ctd) ⚫ Most of the Takaful scheme describe the donation arrangement as tabarru’ ⚫ However, of late, some Takaful scheme specify this tabarru’ contract as a form of endowment or waqf arrangement ⚫ Waqf generally means: “to relinquish a right over property and allocate it for the general enjoyment of the usufruct by the specified beneficiaries” Essential contracts in Takaful operation Takaful participants Mutual Mutual Indemnity Donation Indemnity Takaful Fund Contract among Takaful participants Essential contracts in Takaful operation The contractual relationship between the group of participants and the Takaful operator ⚫ There is no insurer-insured relationship between the participants and the Takaful operator – the participants are insuring themselves ⚫ The Takaful operator is engaged by the participants (as a group) to manage the Takaful scheme for them ⚫ In general, the Takaful operator is expected to:- i. manage the underwriting of Takaful contributions and payment of protection amount or claims ii. manage any investment portfolio of the fund Essential contracts in Takaful operation The contractual relationship between the group of participants and the Takaful operator (ctd) ⚫ The actual contract underlying the relationship between the Takaful operator and the participants can be any of the following, depending on the needs or preference of the parties:- Mudharabah Wakalah Ju’alah Wadiah yad dhamanah Hybrid or combination of any two or more of the above-mentioned contracts Essential contracts in Takaful operation Mudaharabah ⚫ Meaning:- “the giving of a specified amount of capital to another person to another person who will trade with the capital for the purpose of sharing the profits generated according to a pre-agreed ratio” Wakalah ⚫ Meaning:- “Agency contract” Ju’alah ⚫ Meaning:- “the commitment to pay a specified amount of reward for the performance of a prescribed task” Essential contracts in Takaful operation Wadiah yad dhamanah ⚫ Meaning:- Guaranteed safe custody Hybrid ⚫ The underlying contracts between the participants and Takaful operator may also be a combination ot two or more of the above contracts ⚫ For instance, the contract of mudarabah can be used for investment purposes of the fund, whilst agency contract with fee can be used for insurance activities of the fund Essential contracts in Takaful operation Takaful participants Donation Takaful funds Manage Takaful Operator Investment Contract between takful participants and Pay Claims Takaful operator Scope of Takaful contract ⚫ The scope of an Islamic insurance policy is very wide and flexible ⚫ The purpose of insurance is to sustain a smooth life in this world, which is in line with Surah al-Baqarah:201:- “…Our Lord, give us happiness in this world and happiness in the hereafter” ⚫ Though, there are certain limitations set by Shari’ah in order to purify the transaction ⚫ Allah s.w.t prohibited any kind of accumulation of profit and wealth by way of unjust enrichment as illustrated in Surah an-Nisa:29:- “…do not eat up your property among yourselves in vanities, but let there be amongst you traffic and business by mutual goodwill…” Scope of Takaful contract (ctd) ⚫ A Takaful contract should not involve any element of riba in its investment or any other activities as emphasis in Surah al-Baqarah:275:- “…Allah swt has permitted trade and forbidden riba…” ⚫ In Takaful the nominee is only a trustee, whose obligation is to receive the benefits of the policy and distribute them among the legal heirs of the deceased in accordance with the principles of al-wasiyah Scope of Takaful contract (ctd) ⚫ Every individual in society has the freedom to enter into a Takaful contract, but in the following situations a person may not enter into insurance contract:- i. Age ii. insanity or medical unfitness ⚫ In addition, M Nejatullah Siddiqi suggest that all insurance concerning perils to lives, limbs, and health should be dealt with exclusivley under the supervision of the state Rational outlook of Takaful ⚫ Insurance does not signify a chance for material gain nor supersede the power of Almighty Allah s.w.t ⚫ It aims at achieving the pleasure of Allah s.w.t through the concept of mutual help and co-operation with the goal of providing material assistance against unexpected future damage or loss ⚫ Thus, we shall discuss the rational of Takaful from the following aspects:- i. Individual and dependants ii. Societies Rational outlook of Takaful (ctd) 1. Individual and the dependants ⚫ Insurance also enables certain people to be rescued from unexpected future material risk, which may lead them to hardship or misfortune ⚫ As illustrated in hadith of Holy Prophet s.a.w:- “…whoever removes a worldly hardship from a believer Allah s.w.t will remove from him one of the hardships of the hereafter. Whosoever alleviates the needy person, Allah s.w.t will alleviate from him in this world and the next…” (Narrated by: AbuHuraira r.a.) Rational outlook of Takaful (ctd) 1. Individual and the dependants (ctd) ⚫ Anyone might face financial constraints as a result of an unexpected occurrence which causes material loss or damage ⚫ Indeed, Allah s.w.t encourages people to seek a better life in both this world and hereafter as illustrated in Al-Baqarah:201 “…Our lord, give us good in this world and good in the hereafter…” Rational outlook of Takaful (ctd) 1. Individual and the dependants (ctd) ⚫ Takaful is a welfare transaction aimed at compensating and providing material protection for the unfortunate offspring who have been left helpless upon the death of the deceased ⚫ Holy Prophet s.a.w also advised us to provide for their children and to ensure their future material ⚫ As illustrated in his hadith:- “Verily it is better for you to leave your offspring wealthy than to leave them poor asking others for help” (Narrated by Amir bin Saad bin Abi Waqqas r.a.) Rational outlook of Takaful (ctd) ii. Societies ⚫ Takaful may ensure a development of mutual co-operation and the spirit of brotherhood in society, and also cultivate solidarity through seeking a prosperous life. ⚫ Takaful also contributes towards producing self reliance society. ⚫ In a way insurance reduces poverty in society, while ensuring a comfortable life for the insured and also for his beneficiaries. Rational outlook of Takaful (ctd) ii. Societies (ctd) ⚫ It also guarantees future material security for the widow and other dependents of the deceased. ⚫ Takaful also ensures security for one from unexpected risk and encourages societies to involve in lawful transaction as illustrated in Al-Baqarah:275:- “…Allah s.w.t permitted trade and prohibited involvement in usury…” Features of Takaful ⚫ Takaful must possess certain fundamental characteristics before it can be held valid ⚫ It can be further classified into three main categories:- i. Sincerity ii. Absolute shari’ah principles iii. Moral attributes Sincerity ⚫ Every transaction or dealing should be entered into with sincerity and pure intentions as illustrated in Al-Quran (Al-Bayyinah:5) “…And they have been commanded no more than this, to worship Allah s.w.t offering him sincere devotion…” Features of Takaful (ctd) Sincerity (ctd) ⚫ A tradition of the Prophet PBUH adds:- “…The rewards of deeds depends upon the intentions and every person will get the reward according to what he has intended…” (Narrated by Omar bin al-Khattab r.a) ⚫ The parties in Takaful contract must have the sincerity not to make personal gain – transaction should based on mutual co-operation, solidarity and brotherhood towards rescuing one from unexpected losses and damages Features of Takaful (ctd) Absolute shari’ah principles ⚫ Takaful contracts is invalid should any of its aspects contravene any shari’ah principle. ⚫ Hence, aims and operations should not involve any element which is not approved by the shari’ah. ⚫ Allah s.w.t says (Surah al-Imran:85):- “If anyone desires any religion other than Islam never will it be recognised by Allah s.w.t” Features of Takaful (ctd) Moral attributes. ⚫ Takaful contract and practices must also conform with moral sanctions. ⚫ For example, the parties involved should observe the principles of utmost good faith, honesty, disclosure and truthfulness ⚫ These principles is in line with Allah s.w.t commands in Al-Nisa: 49):- “…Do not misappropriate your property among yourselves in vanities …”  Sources of laws Sources of law affecting Takaful Analogical Specific sources Generalsources sources Quran Masaleh Principle of:- Sunnah Mursalah Contract Practices of the Urf Liability companions Fiqh Utmost good faith Ijtihad Relevant Mirath and wasiyah literature Wakalah Acts of Daman Parliament Mudharabah SAC Musyarakah Precedents Right and Unanimous obligations decisions Humanitarian law Sources of laws (ctd) Quran ⚫ Quran is the primary sources for Islamic law ⚫ The contract of insurance contains the elements of mutual co-operation (Al-Maidah:2) ⚫ It is a binding promise, which binds both the insurer and the insured based on the general principles of contract (Al-Maidah:1) ⚫ It also contains the elements of alleviation of hardship and provision of material security and assistance for those who face unexpected risk and peril, by ensuring for them a comfortable life (Al-Baqarah:201) Sources of laws (ctd) Sunnah ⚫ Sunnah is the second primary source of Islamic law. ⚫ Takaful embodies the concept of tawakal, whereby one should strive hard to overcome unexpected future risks. ⚫ Such concept has been justified in the following hadith:- “…Tie the camel first and then leave it to Allah s.w.t…” (Narrated by Anas bin Malik r.a.) Sources of laws (ctd) ⚫ Takaful also aims to protect the participants from future material constraints upon the occurrence of a particular unexpected future risk. ⚫ This concept is justified in the following hadith:- “Whosoever removes a worldly hardship from a believer, Allah s.w.t will remove from him one of the hardships of the day of judgment (Narrated by Abu Huraira r.a) Sources of laws (ctd) ⚫ The aims of Takaful contract to provide material security for the offspring of the deceased also justified as illustrated in the following hadith:- “…Verily it is better for you to leave your offspring wealthy than to leave them poor asking others for help…” (Narrated by Amir bin Saad bin Abi Waqqas ra) ⚫ Prophet PBUH also recognised the practice of al-aqilah in ancient Arab. Sources of laws (ctd) Practices of the companions. ⚫ A further development in the practice of Takaful can also be seen during the period of the second Caliph, Sayyidina Umar r.a. ⚫ The government encouraged people to practice al-aqilah nationwide. ⚫ Sayyidina Umar r.a. commanded that a Diwan of Mujahidin be established in various districts. ⚫ Those whose names were recorded and contained in the Diwan had to contribute blood money for any act of manslaughter committed by someone from their own tribe. Sources of laws (ctd) Ijtihad ⚫ The legality of Takaful contract is first put forward by Ibn Abidin – a famous Hanafi’s lawyer (1784-1836) ⚫ The practices of Takaful contract resemble the merchants in his ruling and contributions paid by the participants resemble sokra, while the indemnity provided against the risk is similar to the indemnification in Takaful practices ⚫ The mutual understanding between merchants and ship owner resemble the agreement between the participants and the Takaful operator Sources of laws (ctd) Ijtihad ⚫ The following scholar also agreed with the legality on insurance contract:- i. Mufti Mohammad Abduh ii. Sheikh Muhammad Baqit iii. Muhammad Musa iv. Ahmad Ibrahim v. Khan Muhammad Yusuf Musa vi. Ahmed Taha Sanusi vii. Andur Rahman Isa viii. Dr Nejatullah Siddiqi Sources of laws (ctd) Mursaleh Mursalah ⚫ With the multiple risks that exist in our modern life there is urgent need to find a way of providing material security to those who have been devastated by unexpected loss, damage or peril ⚫ Hence, insurance is necessary for the public interest as it is the means of rescuing a victim from an unexpected risk ⚫ Nonetheless, the validity of Takaful based on the doctrine of Mursaleh Mursalah is still subject to cmpliance with the divine principle laid down in the Holy Qu’ran and the Sunnah of the Holy Prophet s.a.w Sources of laws (ctd) Al-urf ⚫ Al-urf means custom, practice or usage of the community ⚫ The original concept of Takaful was originated Arab tribal custom of al-aqilah, which was approved by the Holy Prophet s.a.w Sources of laws (ctd) Al-fiqh ⚫ There are provisions in the fiqh which deal with insurance practices. ⚫ For instance, Sayyed Sabek, in his book Fiqh al-sunnah discusses the validity of insurance contracts. ⚫ A Takaful contract is based on the general principles of al-aqd, mudharabah, wakalah, shirkah and etc. Sources of laws (ctd) Acts of parliament ⚫ Takaful companies have been established and operate based on the shari’ah based enactments and regulations, approved by the parliaments of the respective countries. ⚫ For example, Takaful Act 1984 which is aimed at controlling shari’ah based insurance practices in Malaysia Sources of laws (ctd) Unanimous decisions of the Islamic scholar ⚫ There have been numerous conferences on Takaful held worldwide and Muslim scholars have unanimously agreed on the validity of its practices i. The Islamic Fiqh Week held in Damascus from Apr 1-6, 1961 ii. The Seminar held in Morocco on May 6,1972, which upheld the validity on insurance business with the exception of life insurance business iii. The Second Conference of muslim Scholars held in Cairo in 1965 iv. The Symposium on Islamic Jurisprudence held in Libya from May 6-11, 1972 Sources of laws (ctd) Unanimous decisions of the Islamic scholar ⚫ There have been numerous conferences on Takaful held worldwide and Muslim scholars have unanimously agreed on the validity of its practices v. The First International Conference on Islamic Economics held in Makkah from February 21-26, 1976 vi. The Islamic Conference held in Mecca in October 1976 vii. The First International Summit of iSlamic Insurance held in Dubai on November 11,1996 viii. The labuan International Summit on Takaful held in Labuan, Malaysia on June 19-20, 1997 ix. The Second Asian Conference on Takaful held from march 26-27, 2007, Singapore THANKS FOR LISTENING