Takaful: Concepts and ModelsTakaful: Concepts and ModelsByBy

Atiquzzafar KhanAtiquzzafar Khan

IIIE, IIUIIIIE, IIUI

May 31, 2011May 31, 201113th13th Distance Learning CourseDistance Learning Course

on Islamic Financeon Islamic Finance

Main TopicsMain Topics

Introduction of Modern InsuranceIntroduction of Modern Insurance

Evaluation of Insurance Business Evaluation of Insurance Business

from Islamic Point of Viewfrom Islamic Point of View

Islamic Alternative: (Review of Islamic Alternative: (Review of

Existing Existing Experiences of Takaful)Experiences of Takaful)

Performance of Takaful IndustryPerformance of Takaful Industry

Risk and Insurance:Risk and Insurance:

Risk and uncertainty are fundamental Risk and uncertainty are fundamental

facts of life. All human activities are facts of life. All human activities are

subject to risk, which may lead to subject to risk, which may lead to

financial or physical losses to him. financial or physical losses to him.

Insurance is a device to cover the Insurance is a device to cover the

losses arise due to occurrence of losses arise due to occurrence of

some undesired event.some undesired event.

Definition of InsuranceDefinition of Insurance

Insurance is an economic device Insurance is an economic device

whereby the individual substitutes whereby the individual substitutes

a small certain cost (premium) for a small certain cost (premium) for

a large uncertain financial loss a large uncertain financial loss

(the contingency insured against) (the contingency insured against)

that would exist if it were not for that would exist if it were not for

the insurance.the insurance.

SocioSocio--Economic Benefits of InsuranceEconomic Benefits of Insurance

Risk CoverageRisk Coverage

Habit of ThriftHabit of Thrift

Safe and Profitable InvestmentSafe and Profitable Investment

Secure working environment for Secure working environment for BusinessesBusinesses

Planning for life stage needsPlanning for life stage needs

Capital formation in the EconomyCapital formation in the Economy

Nature of Insurance ContractNature of Insurance Contract

Premium Compensation

Premium Compensation

General Insurance

Life Insurance

Shariah Position of InsuranceShariah Position of InsuranceOpinion of Shariah scholars is divided Opinion of Shariah scholars is divided on insurance. We can classify them on insurance. We can classify them into three major groups.into three major groups.

Those who consider both the Those who consider both the concept and practice of commercial concept and practice of commercial insurance uninsurance un--Islamic.Islamic.

Those who are in agreement with Those who are in agreement with the present insurance and find the present insurance and find nothing wrong in it.nothing wrong in it.

Those who accept the concept of Those who accept the concept of insurance, but find prohibited insurance, but find prohibited elements in its present practice. elements in its present practice.

Rulings of Collective Fiqhi Rulings of Collective Fiqhi Bodies about Insurance Bodies about Insurance Islamic Research Institute of AlIslamic Research Institute of Al--Azhar Azhar

Uni.Uni.

Council of Grand Ulama of Saudi ArabiaCouncil of Grand Ulama of Saudi Arabia

Majlis TahqiqatMajlis Tahqiqat--ee--Shari'yah Lucknow, Shari'yah Lucknow, India India

Islamic Fiqh Academy of Rabita alIslamic Fiqh Academy of Rabita al--Aa'lamAa'lam--ee--IslamiIslami

Al MajmaAl Majma AlAl--Fiqhi AlFiqhi Al-- Islami of OICIslami of OIC

Council of Islamic Ideology, PakistanCouncil of Islamic Ideology, Pakistan

Major Arguments Against Major Arguments Against InsuranceInsurance

According to these Fiqhi bodies Conventional According to these Fiqhi bodies Conventional Insurance is unlawful because of involvement of Insurance is unlawful because of involvement of prohibited elements like,prohibited elements like,

Riba (Interest)Riba (Interest) Qimar (Gambling)Qimar (Gambling) Gharar (Uncertainty, Doubt, Risk)Gharar (Uncertainty, Doubt, Risk) Unlawful appropriation of othersUnlawful appropriation of others propertyproperty Violation of law of inheritance in case of life insurance.Violation of law of inheritance in case of life insurance.

Islamic SubstituteIslamic Substitute

These Fiqhi bodies suggested that that an These Fiqhi bodies suggested that that an scheme based on the concept of mutual scheme based on the concept of mutual cooperation and Joint responsibility may cooperation and Joint responsibility may be considered as Islamic Substitute for be considered as Islamic Substitute for conventional Insurance.conventional Insurance.

That alternate is introduced under the That alternate is introduced under the title of Takaful in the recent past.title of Takaful in the recent past.

Takaful PioneersTakaful Pioneers Takaful started some 30 years ago in Sudan Takaful started some 30 years ago in Sudan

and Middle East in 1979 with the and Middle East in 1979 with the establishement of:establishement of:

The Islamic Arab Insurance Co. (IAIC) in the The Islamic Arab Insurance Co. (IAIC) in the UAE andUAE and

The Islamic Insurance Co. of SudanThe Islamic Insurance Co. of Sudan But it took some time for the movement to But it took some time for the movement to

take shapetake shape..

Takaful PioneersTakaful Pioneers Later in 1984, Malaysia played a pioneering Later in 1984, Malaysia played a pioneering

role in setting the first Legal framework role in setting the first Legal framework specific to Takaful (Takaful Act Malaysia).specific to Takaful (Takaful Act Malaysia).

This was instrumental in the successful This was instrumental in the successful launching of the Takaful movement in launching of the Takaful movement in Malaysia and in other countries of South Malaysia and in other countries of South East Asia.East Asia.

Other Islamic/ Takaful Legislations Other Islamic/ Takaful Legislations

Other markets such as the Sudan Other markets such as the Sudan and Iran have Islamic regulatory and Iran have Islamic regulatory environments and became naturally environments and became naturally Takaful markets.Takaful markets.

In Pakistan Takaful Act is enforced in In Pakistan Takaful Act is enforced in 2005 and Pak2005 and Pak--Kauwait Takaful Co. Kauwait Takaful Co. started its operation.started its operation.

In the Gulf countries specific Takaful In the Gulf countries specific Takaful legislations are coming through in legislations are coming through in Bahrain and in Saudi ArabiaBahrain and in Saudi Arabia

Takaful TodayTakaful Today From a handful of operators two decades From a handful of operators two decades

ago the Takaful movement has blossomed ago the Takaful movement has blossomed into a fast growing phenomenon in many into a fast growing phenomenon in many Muslim countries with very promising Muslim countries with very promising prospects in other countries with a large prospects in other countries with a large Muslim community.Muslim community.

Takaful driversTakaful driversThis movement is driven by This movement is driven by

a strong demand from a public a strong demand from a public who would not insure who would not insure

otherwise (because of religious otherwise (because of religious

beliefs); andbeliefs); and

The successful development of The successful development of Islamic banking institutions Islamic banking institutions

providing capital and Islamic providing capital and Islamic

financial instruments for asset financial instruments for asset

management and investment.management and investment.

Takaful DriversTakaful Drivers Islamic banks and financial Islamic banks and financial

institutions play a strategic and institutions play a strategic and

important role in the distribution important role in the distribution

of Takaful products (especially of Takaful products (especially

Life Takaful Products).Life Takaful Products).

Just as Bancassurance played an Just as Bancassurance played an

important role in the distribution important role in the distribution

of personal lines insurance of personal lines insurance

products Bancatakaful is an products Bancatakaful is an

important driver for Takaful.important driver for Takaful.

Takaful OperatorsTakaful OperatorsThe number of Takaful operators The number of Takaful operators worldwide is now estimated at:worldwide is now estimated at:

150 Takaful companies operating in 150 Takaful companies operating in 40 countries40 countries

10 Retakaful companies10 Retakaful companies

6 Islamic windows by Conventional 6 Islamic windows by Conventional Reinsurance companiesReinsurance companies

Takaful PremiumTakaful Premium Takaful is one of the fastest growing Takaful is one of the fastest growing segments in insurance (at around segments in insurance (at around 20% pa. on average)20% pa. on average)

World Takaful contributions are World Takaful contributions are conservatively estimated at around conservatively estimated at around US$ 10 billion, of which:US$ 10 billion, of which: 60% General Takaful60% General Takaful

40% Family Takaful40% Family Takaful

Takaful Geographical SpreadTakaful Geographical Spread

South& East Asia :South& East Asia : 56%56%Middle East :Middle East : 36%36% Africa:Africa: 7%7% Europe, USA & Others:Europe, USA & Others: 1%1%

Definition of TakafulDefinition of Takaful

The word Takaful means joint guarantee. The objective of Takaful is cooperation and mutual help among the members of a defined group.In a practical sense Takaful can be visualized as a method of joint guarantee among a group of members or participants against loss or damage that may inflict upon any of them. The members of the group agree to guarantee jointly that should any of them suffer a catastrophe or disaster, he would receive certain sum of money to meet the loss or damage. All members of the group pool together their efforts to support the needy.

WORKING OF THE TAKAFUL WORKING OF THE TAKAFUL BUSINESS: The Malaysian CaseBUSINESS: The Malaysian Case

Takaful Business is based on the concepts of Takaful Business is based on the concepts of Mudarabah and Tabarru. Involvement of Mudarabah and Tabarru. Involvement of these two Islamic forms of business eliminates these two Islamic forms of business eliminates the elements of Riba from insurance contract the elements of Riba from insurance contract and convert Gharar into tolerable form. and convert Gharar into tolerable form.

In Family Takaful each Takaful installment is In Family Takaful each Takaful installment is divided and credited into two separate divided and credited into two separate Accounts namely, the Participants' Accounts namely, the Participants' Account(PA) and the ParticipantsAccount(PA) and the Participants Special Special Account(PSA). A substantial proportion of the Account(PSA). A substantial proportion of the installments is credited into the PA solely for installments is credited into the PA solely for the purpose of savings and investment.the purpose of savings and investment.

The balance of the installments is credited into The balance of the installments is credited into the PSA as `tabarru' for Sharikah Takaful the PSA as `tabarru' for Sharikah Takaful Malaysia to pay the Takaful benefits to the Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before heir(s) of any participant who may die before the maturity of the maturity of thethe contract.contract.

The amount accumulated in the PA is invested The amount accumulated in the PA is invested in various business according to Islamic in various business according to Islamic financing techniques, and the resultant profits financing techniques, and the resultant profits are divided between the company and the are divided between the company and the participants according to the agreed upon ratio, participants according to the agreed upon ratio, e.g., 30e.g., 30--70. 70.

The participant's share is calculated according The participant's share is calculated according to their individual share in the PA, and credited to their individual share in the PA, and credited into their respective accounts, the PA and the into their respective accounts, the PA and the PSA.PSA.

Companys Admin& Manag. Expenses

Profit Attributed To Shareholders

PA

PSA

FTF

Investment Profit

PA

PSA

Participant

Company

Takaful Contractbased on Mudarabah

Payment to The Family from

PA & PSA

Mudarabah ModelFamily Takaful

Share of Profit on S.H. capital

Share of Profit forMudarib

Cost of Re-takafulAnd Other DirectBusiness Expenses

Payment of claimsPayment of claimsShould the Participant die or suffer Should the Participant die or suffer Permanent and Total Disability in the fifth Permanent and Total Disability in the fifth year of participation, Takaful benefit will year of participation, Takaful benefit will be paid in the following manner:be paid in the following manner:--

i. From Participant's Account =RM 4,890i. From Participant's Account =RM 4,890

(RM978 x 5)(RM978 x 5)

profit if any, say profit if any, say RM 400RM 400

ii. From Participants Special ii. From Participants Special RM 5,000RM 5,000

Accounts (RM1000 x 5) Accounts (RM1000 x 5)

Total Takaful Benefit PayableTotal Takaful Benefit Payable RM 10,290RM 10,290

In case the Partcipant survivedIn case the Partcipant survived

Should the Participant survive until Should the Participant survive until the maturity of his FTP, payment of the maturity of his FTP, payment of Takaful benefit will be made to him Takaful benefit will be made to him as follows:as follows:--

i.i. From his Participant's Account = RM 9,780From his Participant's Account = RM 9,780

(RM978 x 10) (RM978 x 10)

profit from investmentprofit from investment RM 1,800RM 1,800

ii. From Participants Special ii. From Participants Special RM XXXXRM XXXX

AccountAccount

Total Takaful Benefit =Total Takaful Benefit = RM 11,580 + RM 11,580 + surplus determined surplus determined by Sharikah Takaful.by Sharikah Takaful.

Mudarabah ModelMudarabah ModelGeneral TakafulGeneral Takaful

TakafulOperator

Participant

Takaful ContractOn MudarabaBasis

4contribution

GTF

Investment

Profit

GTF

Operational

Cost Of

Takaful

Sur

plus

Share of Surplus for The Participants

40%

60%

Share of profit

On S.H. Capital

Share of Surplus

For the Operator

Administration& ManagementExpanses

Profit for

Shareholders

Shariah Concerns regarding Mudaraba ModelShariah Concerns regarding Mudaraba Model

Mudaraba is a commercial contract, hence not suitable for a Mudaraba is a commercial contract, hence not suitable for a donation (Tabarru) based scheme.donation (Tabarru) based scheme.

Donation given by the participants can not become capital Donation given by the participants can not become capital for Mudaraba at the same time.for Mudaraba at the same time.

Distribution of surplus among the participants in proportion Distribution of surplus among the participants in proportion of their contributions is like a conditional gift(Hiba bisof their contributions is like a conditional gift(Hiba bis--Sawab) which is not allowed. Sawab) which is not allowed.

Sharing of surplus in case of General Takaful(instead of Sharing of surplus in case of General Takaful(instead of profit) makes the contract essentially the same as profit) makes the contract essentially the same as conventional insurance contract.conventional insurance contract.

Provision of QardProvision of Qard--ee--Hasan from the Share holders fund in Hasan from the Share holders fund in case of deficit is not correct as Mudarib is not a guarantor. case of deficit is not correct as Mudarib is not a guarantor.

Companys Admin& Manag. Expenses

Profit Attributed To Shareholders

PSA

PAFTF

Investment Profit

PSA

PA

Participant

Company

Takaful Contractbased on Wakalah

Payment to The Family from

PA & PSA

Wakalah ModelFamily Takaful

Share of Profit on S.H. capital

Share of Profit forMudarib

Cost of Re-takafulAnd Other DirectBusiness Expenses

Wakalah Fee

25 to 35 %

65 to75%

Wakalah ModelWakalah ModelGeneral TakafulGeneral Takaful

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL ADMIN & MARKETINGEXPENSES 25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTION PAID BY

PARTICIPANT

GENERALTAKAFUL

FUND65% TO 75%

GENERALTAKAFUL

FUND

OPERATIONAL COSTOF TAKAFUL /RETAKAFUL

OPERATIONAL COSTOF TAKAFUL

OPERATIONAL COSTOF TAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANTSURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

Shariah Concerns regarding Wakalah ModelShariah Concerns regarding Wakalah Model

Wakalah model is free from many objections raised against Wakalah model is free from many objections raised against Mudaraba model but some shariah concerns are still there Mudaraba model but some shariah concerns are still there which are as follows:which are as follows:

Distribution of surplus among the participants in proportion Distribution of surplus among the participants in proportion of their contributions is like a conditional gift(Hiba bisof their contributions is like a conditional gift(Hiba bis--Sawab) which is not allowed. Sawab) which is not allowed.

Provision of QardProvision of Qard--ee--Hasan from the Share holders fund in Hasan from the Share holders fund in case of deficit is not correct as Wakeel is not a guarantor. case of deficit is not correct as Wakeel is not a guarantor.

Waqf ModelWaqf Model

Definition of WaqfDefinition of Waqf Waqf is an Arabic word and it means Waqf is an Arabic word and it means

to stop to withhold and not to let go.to stop to withhold and not to let go.

In technical meaning Waqf means to In technical meaning Waqf means to allocate or donate some property or allocate or donate some property or cash for a specific purpose to get cash for a specific purpose to get pleasure of Allah and not to let it go pleasure of Allah and not to let it go through consumption or sale.through consumption or sale.

The Waqf property comes into The Waqf property comes into ownership of Allah (SWT) and Waqif ownership of Allah (SWT) and Waqif will have no property rights on itwill have no property rights on it. .

ContCont

Waqif has right to set the rules for waqf Waqif has right to set the rules for waqf and manage the waqf.and manage the waqf.

Waqf may be general purpose or specific Waqf may be general purpose or specific purpose, like Waqf purpose, like Waqf Ala al Aulad or Ala al Aulad or Waqf Waqf Ala al Aqarib.Ala al Aqarib.

In Islamic Law Waqf is a legal entity In Islamic Law Waqf is a legal entity

Waqf ModelWaqf Model

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL OPERATOR FEES FORADMIN & MARKETING EXPENSES

25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTION

PAID BYPARTICIPANT

WAQF FUND65% TO 75% WAQF FUND

OPERATIONAL COST OFTAKAFUL /RETAKAFUL

OPERATIONAL COST OFTAKAFUL

OPERATIONAL COST OFTAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANTSURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

Waqf

INITIAL DONATION BYSHAREHOLDERS TOCREATE WAQF FUND

Waqf

PROFIT SHARING ONMUDARABHA BASES

A Waqf Fund would basically be a A Waqf Fund would basically be a separate legal entity to which the separate legal entity to which the Shareholders would initially make a Shareholders would initially make a donation to establish the Waqf Fund.donation to establish the Waqf Fund.

The donation can be of any reasonable The donation can be of any reasonable amount (Shariah Board may specify such amount (Shariah Board may specify such an amount).an amount).

The objectives of the Waqf fund would be The objectives of the Waqf fund would be to provide relief to participants against to provide relief to participants against defined losses as per the rules of the defined losses as per the rules of the Waqf fund.Waqf fund.

ContCont..

In this modified Wakala Model with Waqf, the In this modified Wakala Model with Waqf, the

relationship of the participants and of the relationship of the participants and of the

operator is directly with the Waqf fund. The operator is directly with the Waqf fund. The

Operator is the Wakeel of the Waqf Fund and Operator is the Wakeel of the Waqf Fund and

the participants pay one sided donation to the participants pay one sided donation to

the WAQF fund (not conditional) which also the WAQF fund (not conditional) which also

eliminates the issue of Gharar. The WAQF eliminates the issue of Gharar. The WAQF

fund rules may define the sharing of surplus fund rules may define the sharing of surplus

and other rules under which it would operate and other rules under which it would operate

but there is no obligation to distribute but there is no obligation to distribute

surplus. Further the Qard would be given by surplus. Further the Qard would be given by

the shareholders to the WAQF entity and not the shareholders to the WAQF entity and not

to individuals as in the typical Wakalah to individuals as in the typical Wakalah

model.model.

The Challenges aheadThe Challenges ahead Despite a remarkable breakthrough and a Despite a remarkable breakthrough and a

dynamic and sustained growth, there are dynamic and sustained growth, there are challenges facing the Takaful industry which challenges facing the Takaful industry which are:are:

1) Human Rsources1) Human Rsources 4) Asset Management4) Asset Management

2) Product Development2) Product Development 5) Re5) Re--TakafulTakaful

3) Distribution3) Distribution 6) Governance & Risk 6) Governance & Risk

The business model dilemmaThe business model dilemma The existence of three business models:The existence of three business models:

Mudharabah (Profit & Loss sharing)Mudharabah (Profit & Loss sharing)

Wakala (agency contract with a Wakala (agency contract with a performance fee element to replace performance fee element to replace surplus sharing)surplus sharing)

Wakala with Waqf modelWakala with Waqf model

Could create an uneven / unfair business Could create an uneven / unfair business environment to operateenvironment to operate

Need to reach a consensus internationally Need to reach a consensus internationally on a common and standard Takaful on a common and standard Takaful business modelbusiness model

Future OutlookFuture Outlook

Despite the remarkable growth rate Despite the remarkable growth rate recorded by the Takaful industry, recorded by the Takaful industry, penetration is still far below the penetration is still far below the enormous market potential offered enormous market potential offered by the Muslim community worldwide by the Muslim community worldwide (23% of the total world population).(23% of the total world population).

Growth OutlookGrowth OutlookWorld Muslim population is estimated World Muslim population is estimated at 1.5 billions, of which around 97% at 1.5 billions, of which around 97% are based in Asia and Africa.are based in Asia and Africa.

A twoA two--digit growth in the range of digit growth in the range of 15% to 20% can be reasonably 15% to 20% can be reasonably sustained for at least the next 10 sustained for at least the next 10 years in the existing markets (Far years in the existing markets (Far and Middle East).and Middle East).

New Takaful FrontiersNew Takaful FrontiersMarkets like Europe, North and Latin Markets like Europe, North and Latin America, Central Asia, Australia America, Central Asia, Australia where large Muslim communities live where large Muslim communities live are huge untapped reservoirs;are huge untapped reservoirs;

The recent opening towards The recent opening towards Islamic Islamic windowswindows in the banking sector in in the banking sector in Europe is likely to be followed by Europe is likely to be followed by Takaful windowsTakaful windows initiatives.initiatives.

Takaful Products to NonTakaful Products to Non--MuslimsMuslims

Takaful Products are not exclusive to Takaful Products are not exclusive to Muslims.Muslims.

Competitively priced and sold Competitively priced and sold through the right channel it could through the right channel it could attract any consumer irrespective of attract any consumer irrespective of their origin or faith (e.g. SriLanka).their origin or faith (e.g. SriLanka).

ConclusionsConclusionsDespite the challenges facing this Despite the challenges facing this newnew industry, exciting times are industry, exciting times are ahead once the latent potential is ahead once the latent potential is unleashed.unleashed.

The success of Takaful largely The success of Takaful largely depends on that of Islamic Financial depends on that of Islamic Financial institutions on a global basis.institutions on a global basis.

Questions & CommentsQuestions & Comments

atiquzzafar@iiu.edu.pkatiquzzafar@iiu.edu.pk