Issues in Taka Ful by Imran Us Man i

8/6/2019 Issues in Taka Ful by Imran Us Man i

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Takaful

Dr. Muhammad Imran Usmani

SECP Takaful Conference March 14, 2007


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Conventional Insurance

How Qimar & Riba exist in Conventional Insurance

Definition of Takaful

Mudarabah Model

Wakalah Model

Wakalah based on Waqf Model

Application of Takaful

Presentation Outline


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Definition

A way to provide security / and compensation to whatis valuable in the event of its loss, damage or

destruction based on the principle of risk taking andspeculation



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Tw o Aspects of I nsuranceAccording to Shariah rules there are two aspects of

Conventional Insurance, namely:

1. Conceptual Aspect2. Practical Aspect

So far as the Concept of Insurance is concerned, it is tocover the risk of loss, or fortunate many helping theunfortunate few.

This concept is not only recognized, but alsoappreciated and rewarded by Islam.



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"Help ye one another in righteousness and piety, buthelp ye not one another in sin and rancor".

Principles of Muwalat, Maaqil, and Kafalah and

establishment of Islamic welfare state by the HolyProphet (SAW), Waqf and Tabrru are examples forrecognition of this concept.

Al-Maidah verse # 2:

Conceptual Aspect

W hy this Concept is rew ardable?


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Second Aspect of Insurance is practical Aspect, it isforbidden due to two reasons:

1. Qimar or Maisir2. Riba

Since these two things have been clearly prohibited byIslam, they cannot be justified on the conceptualaspect of helping victims of various accidents or

losses.

Practical Aspect


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O believers! Intoxicants and gambling and Al Ansab (Animalssacrificed for idols) and Al Azlam (arrows for seeking luck ordecision) are an abomination of Satan's handiwork. So avoidthem in order that you may be successful. Satan wants only toexcite enmity and hatred between you with intoxicants andgambling and hinder you from the remembrance of Allah and

from prayer. So, will you not then abstain? (Al Maidah 90 91)

Quranic view on Gambling & Risk

Practical Aspect


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Practical Aspect

How Qimar & Riba exists ?

QIMAR or MAISI R has been clearly prohibited byQuran and Hadith of the Holy Prophet (SAW).

Maisir has two basic elements which cause to prohibit.namely:

1. Gharar

2. Khatar


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Khatar

Taleequ l milki al alkhatr, w al mal fil jan ibain

To stipulate/conditionalize theownership/profitability on uncertain event,whereas money is involved in the both sides.

However, if money is not involved from both sidesi.e. one party voluntarily (without anycompensation) declares We shall compensate you

on a particular event of loss, it would not beMaisir.


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Gharar

Gharar literally means Uncertainty

Forms of Gharar :Any bilateral transaction in which the liability of theparty in the transaction is either uncertain or

contingent.Consideration of either is not known.

Ultimate outcome of any one party is uncertain.

Delivery is not in the control of the obligor.Payment form one side is certain, but from the otherside is contingent.


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Gharar & Khatar

Presence of Gharar and Khatar makes Qimar,

Speculation, Gambling and Conventional Insuranceprohibited.


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Qimar

I ndication of P resence of Qimar in a transaction

If in any transaction one partys profit isdependent on the loss of the other then this is anindication that the transaction involves QimarQimar .

In the permissible modes of business any profit orloss is equally shared & is fair to every party. Forexample, in partnership (Musharakah) both the

parties share profit & loss. Similarly in other tradeslike sale, purchase, hiring or leasing each partysconsiderations are certain.


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Problems

The participant contributes a small amount of premium in a hope to gain a large sum - Khatar.

The participant loses the money paid for the

premium when the insured event does not occur -Gharar.

The company will be in deficit if the claims are higher

than the amount contributed by the participants -Gharar.


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Riba

The element of Riba (Interest) exists in lending or

borrowing funds/investments at fixed interest, andother related practices in the investment activitiesof the conventional insurance companies


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The Solution

Islamic Cooperative Insurance

( Takaful)


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Takaful

Takaful is an Arabic word that means Guaranteeing each other"

It is a system of Islamic Insurance based on theprinciple of TAAWUN (mutual assistance) andTABARRU (Gift, Give away, donation) where the

risk is shared collectively by the groupVOLUNTARILY.

This is a pact among a group of members or

participants who agree to jointly guarantee amongthemselves against loss or damage to any of themas defined in the pact.


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Models of Takaful

1. Mudarabah Model

2. Wakalah Model (hybrid of Wakalah &

Mudarabah)

3. Wakalah based on Waqf Model


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Mudarabah Model

The participant and the operator enter into aMudarabah contract from the beginning of therelation, for indemnification and share of theunderwriting results.

The Surplus is shared between the participants andthe takaful operator in an agreed ratio.

This model allows the takaful operator to share in theunderwriting results from operations as well as thefavorable performance returns on investedpremiums.


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Mudarabah Model

Shariah Concerns

The relation between the participants is that of tabarru and not Mudarabah, Profit Sharing cant beapplied here. Donation cannot be Mudarabah capitalat the same time.

In a Mudarabah contract, a profit is to be generatedto be distributed. Profit is not the same as Surplus (excess pf premiums over claims, reserves and

expenses) and in the insurance context no definitioncan be generated by definition.


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Mudarabah Model

Shariah Concerns

The sharing in underwriting surplus itself issomething which is similar to making this into acommercial business venture and not a mutualcontract for assistance and protection.

The requirement to provide Qard Hasanah (in case of a deficit) in a Mudarabah contract by definition isagainst the concept of Mudarabah which is a profit

sharing contract and a Mudarib cannot be aguarantor.


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Wakalah Model

Cooperative risk sharing occurs among the

participants whereas the takaful operator earns a feefor services (as a Wakeel or Agent).

The operator earns an upfront deductible fee and

shares the profit of investments, it does not sharethe results of underwriting.


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Waqf Model

In order to eliminate the element of Mayser, the

concept of Waqf and Tabarru is incorporated. Inrelation to this participants shall agree to relinquishas donation certain amount of money.

The Takaful Fund, consisting of the contributions paidas Tabarru, will be further invested by the Companybased on the principle of Islamic modes of Trades,through which the element of interest (riba) will bereplaced.


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PROFIT / LOSSATTRIBUTABLE TO

SHAREHOLDERS

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

DONATIONPAID BY

PARTICIPANT

WAQFFUND75 %

TO70 %

WAQFFUND

OPERATIONALCOST OFTAKAFUL

/ RETAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT100%

SURPLUS

COMPANY

PARTICIPANT

60 %

SHARE OFPROFI T FOR THE

COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

WAQF

INITIALDONATION BY

SHAREHOLDERSTO CREATE WA QF

FUND

TAKAFUL OPERATORFEES FOR

ADMINISTRATIONEXPENSES

25% TO 30%

PROFIT SHARING ONMUDARABHA BASES

Waqf Model


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Waqf Model

Basic Features

A Waqf Fund is established by the shareholders of Takaful Company through the contribution of Cedingamount (part of the Capital) to compensate thebeneficiaries or participant of Takaful scheme. The

Ceding amount of the Waqf will remain invested.

Any person by signing the proposal form,contributing to the Waqf and subscribing to the policy

documents shall become the member of the Waqf fund.


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Waqf Model

Basic Features

The Waqf fund shall work to achieve the followingobjectives:

a. To extend financial assistance to itsmembers in the event of losses.

b. To extend benefits to its members strictly inaccordance with the Waqf Deed.

c. To donate to Charities approved by the

Shariah Supervisory Board


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Basic Features

The Waqf Fund will lay down the rules fordistribution of its funds to the beneficiaries and willdecide how much compensation should be given toa subscriber/member .

The Waqf will become owner of all contributions andhas the right to act as a legal entity as per its termsfor investment, compensations and dealing with thesurplus amounts.

Waqf Model


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Waqf Model

Basic Features

The Takaful Company may distribute the surplusamounts on the following three basis:

a. A portion of surplus should be kept asreserve to mitigate the future losses.

b. A portion of surplus should be distributedamong the participants to differentiate itfrom the conventional insurance procedures.

c. A portion of surplus should be utilized forthe charitable purposes every year.


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Basic Features

As per the rules of the Waqf, if the fund isliquidated, the outstanding balance, after paying alldues and payables, will be utilized to charitablepurposes.

The Takaful company, while managing the Waqf Fund, will play two different roles simultaneously:

a. Operator/Manager

b. Mudarib

Waqf Model


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Basic Features

As Operator/Manager, the Takaful Company willperform all functions necessary for the operationsof the Waqf against a Wakala fee to be deductedfrom the Contributions of the Participants.

As Mudarib of the fund, the Takaful Company willmanage the investment of the excess funds of theWaqf into Shariah compliant investments and willparticipate in the profit of the funds investmentsat a fixed ratio of profit.

Waqf Model


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Application

Takaful can be used to cover :

Property e.g. house, factory, mosque, officesVehicles (car, motorcycle etc..)

Goods ( For Import or Export )

Valuables

Health, accidents and Life

Issues in Taka Ful by Imran Us Man i

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