Introduction to Takaful PDF

Takaful  The Nature of Takaful Takaful is the Islamic alternative to conventional Insurance. While both carry the same objectives of providing protection, the actual concept and policy wordings of takaful differ from the conventional insurance. Takaful is a noun stemming f...

Takaful  The Nature of Takaful Takaful is the Islamic alternative to conventional Insurance. While both carry the same objectives of providing protection, the actual concept and policy wordings of takaful differ from the conventional insurance. Takaful is a noun stemming from Arabic verb “kafala”, meaning to protect or to guarantee. The takaful system promotes cooperation among members, contributions to certain fund for sharing responsibilities, assurance, protection and assistance between participants.  Definition of Takaful Takaful Act of Malaysia defines Takaful as “ a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose” So, Takaful is a mutual or cooperative insurance whereby participants contribute regularly to a common fund and intend to jointly guarantee each other, i.e. To compensate any of the participants who are inflicted with a specific risk.  Definition of Takaful Islamic Financial Services Act 2013 define takaful as an arrangement based on mutual assistance under which Takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to Takaful participants or their beneficiaries on the occurrence of pre agreed events  Shari’ah Basis of takaful ⚫ The Qur’an enjoins human beings to help one another in good things and virtue and avoid cooperating with people to cause injury or damage or corruption of virtues (Quran 5:2). ⚫ Therefore, Islamic scholars have taken this verse as a solid foundation for establishing the Takaful industry. ⚫ Takaful is a form of mutual help to those in need when peril strikes. It is a cooperative fund to help members of the fund. ⚫ In addition the Hadith of the Prophet (saw) also advices Muslims to take precautions before relying on Allah. ⚫ Other Islamic legal principles encourage steps to be taken to remove or mitigate injury and risk. 5 6 7  Principles of Takaful Takaful is acceptable because it is based on the principles of mutuality and co-operation and also based on following: The participants will co-operate among themselves for their common good Every participant will pay his contribution in order to assist any fellow members who need assistance His contribution is considered as a donation (tabarru’) to the members in the group The donation contribution is intended to divide losses and spread liability according to the community pooling system The element of uncertainty will be eliminated insofar the terms in the contribution and compensation are made clear to the participants It does not aim at deriving advantage at the cost of other individuals  The Principles of Takaful Ta’awun Tabarru’ Piety Brotherhood or mutual Donation. Every participants Devoutness or individual assistance. Cooperation for donates his or her contribution purification. All persons are common good. to help those in need. accountable to Allah and their success in the hereafter depends on their performance in this life on earth.  The Principles of Takaful Obligation of mutual help and joint guarantee, emphasizing unity and co-operation among the participants. Takaful is based on the concept of solidarity, shared responsibility and brotherhood among the participants. The participants agree to co-operate and mutually take responsibility for helping one another in the event of defined loss. Insurance Elements That Do Not Conform To Islamic Law Al-Maisir Al-Gharar Riba Gambling as the Uncertainty in the Interest in its consequence of the contract of Insurance. Investment. presence of uncertainty. Conventional Insurance is not complied with Syariah? Riba The compensation amount received by the insured is mostly in excess of total premium paid The investment made by the company in non permissible activities Gharar Whereby the subject matter of the contract is not certain until the insured event has taken place The total amount payable by both parties also is not certain Maysir Policyholders often bet premiums on the condition that the insurer will pay compensation in an amount higher than the premium paid during the occurrence of the insured event Insured will also get nothing from his premiums if the insured event does not happen at all  Operation of Takaful Fund The transactional aspect of the commercial activity of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with the Shariah. The Company involved in takaful business, as the operator, will accept payment of the takaful installments or takaful contributions (premium) from the participants (clients) for the takaful plan or takaful scheme they wish to participate.  Operation of Takaful Fund ⚫ In order to eliminate the element of “uncertainty” in the Takaful contract, the concept of tabarru (to donate, to contribute, to give away) is incorporated in it. ⚫ In relation to this a participant shall agree to relinquish as “gift” certain portion of his Takaful installments. ⚫ For the service rendered as manager of the Takaful Operations the company will charge a management fee.  Underlying Contracts in Takaful Among participants Tabarru’ Between participants and Takaful operator Mudharabah Wakalah Ju’alah Waqf  Operation of Takaful Fund The Takaful Fund, consisting of the contributions paid as Tabarru, will be further invested by the Company based on the principle of Al –Mudarabah, through which the element of interest (riba) will be replaced. All “premium holders” will participate in profit and loss. Profit will be shared on agreed ratio.  Principle of Al-Mudharabah Al-Mudharabah or trustee profit sharing is defined as a contract agreement between a rabbul-mal (capital provider) with the takaful operator, known as mudarib (fund manager). In the case of profit, the takaful operator and the capital provider will share the profit according to a pre-agreed ratio. In the case of loss or meeting with the liabilities of fund, the capital provider will bear the loss solely and it is limited to the amount invested. Mudharabah Model  Wakalah Model The takaful operator is acting as the agent on behalf of the participants to manage the risk fund contributed by the participants. In any event of loss or damage to the risks underwritten, the contributions to the risk fund will be used to compensate the relevant participants. The takaful operator charges a fee for administrating and managing the funds for the participants (wakalah fee). Wakalah Model  Waqf Model The waqf model mechanism is based on a non-profit concept. It emphasizes the idea of donation among the participants. The takaful operator initiated the waqf fund by contributing the initial sum into the fund, and participants make donations to help the less fortunate members of the community. Waqf Model  Takaful Coverage (Services) Family Takaful Health/Medical takaful Takaful plans for education Individual family takaful plans General Takaful Fire Takaful Scheme Motor Takaful Scheme Accident Takaful Scheme Marine Takaful Scheme  The Islamic Financial Services Act 2013 (IFSA 2013) The Islamic Financial Services Act 2013 contains a provision that requires all takaful operators to establish a Shariah Supervisory Council or Shariah Supervisory Board. The duties of this board include: To ensure all company articles of associations, policies, reinsurance, agreements and documentation are in accordance with the Shariah. To ensure all investment channels, procedures and operations are in line with the Shariah. To conduct random inspections on all records and operations. To respond to queries from companies or the public regarding takaful issues related to Islamic Law.  Comparison between Insurance and Takaful Insurance Takaful Purpose Security and Profit Security and Cooperation Activity Buying and Selling Product Mutual Cooperation (Ta’awun) and (Commercial Factors) Donation (Tabarru’) Ownership of Fund Insurance Company Participants Risks Transfer Sharing Business No Restriction Free from elements of Riba, Gharar and Maisir Role Sell Insurance product Manage participant’s fund Payment Premium Contribution (Donation) Surplus Shareholders Shared between participants and SHF (Shareholders’ fund) Advisory Board No requirement Shariah Advisory Council Thank You