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IFE 760










Takaful or also knows as Islamic Insurance is another Islamic product that help to mitigate
the risk and in the meantime avoiding the muslim from making transaction that involve usury
(riba‟), uncertainty (gharar) and maisyir (gambling) that was prohibited in Islam.

Basically, there are two form of Islamic Insurance (Takmin/Takaful) which are Business
Insurance (Takmin Tijari) and Cooperative Insurance (Takmin Taawuni). Majority of ulama‟
said the business insurance is prohibited because it involves the element of usury, uncertainty
and maisyir. The cooperative insurance however is considered as permissible in Islam. The
basis of the permissibility is the contract used in the insurance is a contribution contract
(Uqud Tabarru‟at) is bound to achieve the goal of helping individuals in the community who
deal with disasters and to minimize the burden certified.

Islamic Insurance or Takaful is a system through which the participants donate part or all of
their donations (tabarru‟) which are used to pay claims for damages suffered by some of the
participants. The company‟s role is constrained to manage the insurance operations and
investing the insurance donations.

In another word, Takaful is 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.

Takaful comes with several numbers of models and only three was the most prominent
models that vastly used in the business transaction (muamalah) nowadays. This paper
somehow will discuss regarding the takaful models used around the world in brief. In
addition, this paper will consist of brief critique on the advantage and disadvantages of the
model from economic, social as well as political point of view. The paper will further extent
to the syariah scholar opinion over the syariah compliance and develop a few
recommendations on each of the model discussed.
Pure Wakalah (Agency) Model

Takaful under wakalah model is a cooperative risk sharing occurs among the participants
whereas the takaful operator earns a fee for services (as a Wakeel or Agent). The operator
earns an upfront deductible fee and shares the profit of investments; it does not share the
results of underwriting (M.Imran, 2007)

There are no much issues pertaining to this model as it is newly implemented in year 2002
since the establishment of third and forth takaful operators in Malaysia (M.Abdul Hamid,
2004). The model was introduced due to the fact that al mudharabah model is not a purely
mudharabah and yet it was named as modified al-mudharabah. However, there are still some
questions raised like what are really differences between this model and conventional
insurance model. There are similar in term of using agency and the agents were paid
commission (ju‟alah) for the insurance services. In order to answer this issue, we have to go
back to the basic form of takaful. The most important thing here is that takaful is totally
different with conventional in the sense that its contract is based on tabarru‟ as discussed
before. The takaful operator should clarify to their participants this important feature
(tabarru‟) i.e., that their contributions are for the purpose of mutual indemnity and assistance
amongst the members.

However, takaful operator of wakalah system should make it difference not only in term of
tabarru‟ but also in distributing a higher dividend, hibah or any surplus share to their
participants to show significant difference and also better insurance services to their
customers. From the observation on the performance of takaful operators using the al-
wakalah principle it was found that their returns to the participants have been comparatively
low compared with takaful operators using the al-mudharabah. Under the al-wakalah, the
operator being the agent of the participants can use part of the fund to cover its management
costs. Under the al-wakalah too, underwriting surplus of the takaful fund, if any, shall be
distributed back to the participants only, based on the premise that the funds, actually belong
to the participants. This is not same under the principle of Al-Mudharabah and based on past
experience, the takaful operators under this principle can contribute a higher profit sharing.
Mudharabah (Profit –Sharing ) Model

For this model, the entrepreneur or al-mudharib (takaful operator) will accept payment of
takaful contributions (premium) called as ra's-ul-mal from investors or capital providers
(takaful participants) acting as sahib-ul-mal (Billah,M.M, 2007). The contract specifies how
the profit from the operations of takaful is managed by the takaful operator is to be shared, in
accordance with the principle of al-mudharabah, between the participants as the providers of
capital and the Takaful operator as the entrepreneur. The sharing of such profit may be in a
ratio 50:50, 60:40, 70:30, etc. as mutually agreed between the contracting parties. For the
mudarabah contract to be permissible, a number of elements need to be present: the capital
provider (participant); the entrepreneur (takaful operator); capital; an appropriate activity;
profit-and-loss sharing; and offer and acceptance. In the event of a loss, it is the duty of the
capital provider to top up. The mudharabah contract is cancellable, and upon cancellation all
cumulative capital plus profit must be returned to the capital provider less administrative
expenses. Also, the capital provider will have to give consent to appoint the entrepreneur to
work on his behalf.

Takaful model under al mudharabah principle seem to be highlight the principle of

brotherhood in Islam. In addition, sharing profit between takaful operator and participant can
embrace the economy as well as social interaction between man as summon by Allah in the
holy quran to take care of the relationship between man (hablun min anas). The contributions
(tabarru) made by the participant makes the money circulate in the economy and not to forget
it‟s circulated over investment pool also. The disadvantage of the model was the model itself
is not a pure mudharabah model and it‟s somehow questioned by the scholar of its

For this model there are two main issues that arise regarding its syariah compliance. Some of
the issues were regarding the management fee; can it be deducted from takaful fund or
shareholder‟s fund after sharing the profit? There are currently two different practices
between two takaful operators in Malaysia. The pioneer one, the management expenses is
deducted after sharing the surplus profit and the latter, the expenses is deducted from takaful
fund (contribution). Secondly, the practice of this model is contradicted with the original al
mudharabah. The Hanafites view that the expenses that can be covered by the funds from
Mudharabah capital include clothing, food, drink, payment for workers, food for the animal
which he rides in his travel, washing his clothes, oil for his lamp, fire woods and such like.
The Malikites allow the expenses to be covered from the Mudharabah capital on condition
that the entrepreneur really makes a journey or really requires the expenses for the journey to
generate an income from the Mudharabah capital, even if the journey is less than “Masafah
al-Qasr” i.e. more than 95 kilometers. The expenses include food, drink, expenses for riding
animal, lodging, baths, washing clothes, medicines and the like according to custom during
his outward and return journey. The Hanbalites view that the entrepreneur has the right to
claim expenses from the Mudharabah capital if he includes them in the terms and condition
of the Mudharabah contract. It is stated in “Al-Mughni”, it is valid if the entrepreneur
includes his expenses in the terms and conditions of the Mudharabah whether he stays in
town or goes outstation. It is clear from the views of the Hanafites, Malikites and Hanbalites
that the covering of expenses from the Mudharabah capital is permissible, whilst it is
obligatory in Hanafites. However, the Shafaites prohibit the covering of expenses from the
Mudharabah capital whether the entrepreneur stays in town or goes outstation. The reason is
that, the expenses might use up all the profit in which case only the entrepreneur benefited
from the profit, or the expenses might be more than the profit in which case the expenses will
have to be covered from the Mudharabah capital itself, which therefore contradicts the
purpose of Mudharabah. In the same way, if the entrepreneur accepts Mudharabah capital
with the condition that his expenses are paid from the Mudharabah capital, the Mudharabah
becomes invalid.

It is understood that this model is one of the most prominent model widely used by the
takaful operator in Malaysia namely and some other countries. In a mudarabah contract, a
profit is generated to be distributed (although there are the usual concerns as to cash or
accrual basis for accounting). Essentially, an investment on a mudarabah basis of 100 should
at the end of the period give more than 100 to be termed as profit and for the operator to share
in that. However, profit is not the same as surplus (excess of premiums over claims, reserves,
and expenses), and in the insurance context, no profit can be generated by definition so the
question of distribution of profit is of concern.

It is recommended to the takaful operator to provide a top-up interest-free qard hasan (in case
of a deficit) in a mudarabah contract by definition is against the concept of mudarabah (even
if this really is a mudarabah), which is a profit-sharing contract, and the mudarib cannot be a
Waqf Model

In order to eliminate the element of “Mayser”, the concept of „Waqf‟ and „Tabarru‟ is
incorporated. In relation to this participants shall agree to relinquish as “donation” certain
amount of money. The Takaful Fund, consisting of the contributions paid as Tabarru, will be
further invested by the Company based on the principle of Islamic modes of Trades, through
which the element of interest (riba) will be replaced (M.Imran, 2007)

This non-profit model includes social-governmental owned enterprises and programmes

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.

A Waqf Fund is established by the shareholders of Takaful Company through the

contribution of „Ceding amount‟ (part of the Capital) to compensate the beneficiaries 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.

The Waqf Fund will lay down the rules for distribution of its funds to the beneficiaries and
will decide how much compensation should be given to a subscriber/member. The Waqf will
become owner of all contributions and has the right to act as a legal entity as per its terms for
investment, compensations and dealing with the surplus amounts. As Operator/Manager, the
Takaful Company will perform all functions necessary for the operations of the Waqf against
a Wakala fee to be deducted from the Contributions of the Participants. As Mudarib of the
fund, the Takaful Company will manage the investment of the excess funds of the Waqf into
Shariah compliant investments and will participate in the profit of the fund‟s investments at a
fixed ratio of profit.

Through this model, it solves the problem of the legality and the technicality of the model.
The formal difficulties have been resolved, as a waqf fund is a separate legal shari‟ah entity
with a right of ownership (comparable to a corporate legal entity) (T.Frenz, Y.Soulhi, 2010).
From the technical side, the fund itself would also contain the seed capital, thereby reducing
the need for interest – free loans. However, as the seed capital for waqf fund usually only a
nominal amount, the cushion might be insignificant in practice.
Wadiah Model

This Model is the alternative model for retakaful operations under the contract of Al Wadiah
(Safekeeping). Under this model, all participants would cooperate under the ta‟awuni model
and contributions (tabarru) would be allocated to the wadiah yad dhamanah fund (M.Ali,

In the context of re-takaful operation, the takaful operators (cedants) as a group appoint the
re-takaful operator to manage and safe-keep the money deposited in the wadiah fund in return
for a wakalah fee. The distinction of this model is that the money pooled by the takaful
operators is considered a deposit, not a donation. Takaful operators will be the owner of the
entire takaful fund, including any net underwriting surplus. Deductions will be made from
this wadiah fund and channeled as tabarru (donation) if any claims are made or expenses
incurred by the takaful operators. This is based on the principle of taawun (mutual assistance)
between the participants. Takaful operators also authorize the re-takaful operator to use and
invest the fund; however, it will bear the risk of any losses to the fund. In return, the
investment profit will exclusively belong to the re-takaful operator. Thus, the source of
income for the re-takaful operator is the management fee and investment profit.

It is found that the wadiah model has many advantages over the existing models; it creates
fairness, transparency and a trust relationship between the re-takaful operator and the
participants. It is more equitable, as the participants enjoy a fully guaranteed right to the
entire wadiah fund, including any net underwriting surplus, while the re-takaful operator
enjoys management fees and the profits of investments from the fund. The wadiah model is
also more transparent than the existing model, for it clearly determines the ownership of the
fund and the ownership of the underwriting surplus. It mitigates several issues by treating the
contribution from the participant as a deposit and not as tabarru; hence, the participants will
not lose ownership of the fund, as is required by the rules of tabarru in the Shariah. It is also
more clearly Shariah compliant in that the modified wakalah and mudhrabah models have
departed from the pure models of wakalah and mudharabah. This model also concurs with the
practice of surplus distribution in the Middle East.
Modified Mudharabah Model

The hybrid model by the combination of both wakalah and mudharabah contract are the most
commonly used by the takaful operator. In this model, wakalah is used for the underwriting
function and a mudharabah on the investment.

This model has its appeal as investment profits can be source of income and the wakalah fee
earned on the underwriting activities creates a stable and predictable source of up-front
income, which can be used to fund the initial acquisition. Although the operator is exposed to
the risk of adverse claims experience, this can easily be minimized by using quota share
retakaful arrangements.

As far as concern, there are no such issues regarding the model because it‟s already explained
earlier regarding both contracts about its permissibility issue and some technical issue.

From the economic point of view, modified mudharabah model can promote the economic
stability by enhancing the principle of sharing in the wealth for society‟s well being. In
society and political perspective, the model guaranteed justice in wealth distribution among
the participant and the operator. Hence, it helps preserve the society into a holistic way.
Wakalah Model with Performance Incentive

The model was the same as per wakalah model with a little extend to the receiving the
performance fee. Some operators apply a wakalah model with incentive compensation (also
referred as modified wakalah) where the wakalah fee comprises an up-front fee as well as a
proportional share in the underwriting surplus (T.Frenz, Y.Soualhi, 2010).

Most of the takaful operator would consider it rationale to reward an operator with a share in
the surplus generated as an incentive for good performance. It is evident that the policy
wordings must crystal clear stating this practice to avoid ambiguity. Hence, the incentive can
be in form of gift, performance fee (using the contract of ju‟alah) or waiver (tanazul), where
the participants waive parts of their surplus share. An issue arises have through as two
Islamic contracts relating to the same thing are merged and this is not accepted by all scholars
if it violets substance over form principles.
Hybrid Model: Wakalah + Waqf Model

Wakala Waqf Model is extension of Wakala Model. This model is advocated by the leading
Islamic Scholar of Muslim Umah, H‟ Justice (R) Mohammad Taqi Usmani. This model after
its first implementation at PKTCL (Pakistan Takaful Company Limited) is getting popularity
not only in the Middle East but also in the Fareast.

A Waqf Fund is established by the shareholders of a Takaful Company through the

contribution of „Ceding amount‟ (part of the Capital). 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. Waqf Fund will extend benefits to its members strictly in
accordance with the Waqf Rules lay down in the Waqf Deed. The Waqf Fund will becomes
owner of all contributions and has the right to act as a legal entity as per its terms for
investment, compensations and dealing with the surplus amounts.

For this model, the Islamic jurists have different opinion regarding the legal staus of waqf
fund/ deed and application to waqf act on waqf deed. Therefore, takaful operator should seek
advice from the shariah advisory board or fatwa council to remove the ambiguity.

Accounting, Auditing and Governance Standards for Islamic Financial Institutions.

(2008). Shari‟a Standard. Bahrain.

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Cooperative Insurance, The Bank of AlJazira Develoment Perspectives, International

Cooperative and Mutual Insurance Federation, 2004

Islamic Insurance, Challenges and Opportunuties, Financial Services Research, ICIMF, 2005

Mahomed Akoob, The Development of Takaful and Retakaful, African Islamic Finance

Conference, 2007

Muhammad Ali Jinnah Ahmad, A New Re-Takaful Model Based On Wadiah, ISRA

International Journal of Islamic Finance, Vol.2, Issue 1, 2010

Takaful and Actuarial Practices (2009), compiled by Ismail, E & Abdul Razak, S.H,


Muhammad Imran Usmani, Takaful, SECP Takaful Conference, 2007

M.Shoaib Khandaza, Pak-Kuwait Takaful Co.Ltd, SECP Takaful Conference, 2007

Mohammad Khan, Islamic Insurance (Takaful and Re-Takaful), Proce Waterhouse Coopers,


www.meinsurancereview.com, 2007