Takaful

Dr. Muhammad Imran Usmani

SECP Takaful Conference

March 14, 2007
 Presentation Outline

9 Conventional Insurance

9 How Qimar & Riba exist in Conventional Insurance

9 Definition of Takaful

9 Mudarabah Model

9 Wakalah Model

9 Wakalah based on Waqf Model

9 Application of Takaful
 Conventional Insurance

Definition

“A way to provide security / and compensation to what

is valuable in the event of its loss, damage or
destruction based on the principle of risk taking and
speculation”
 Conventional Insurance

Two Aspects of Insurance

According to Shariah rules there are two aspects of
Conventional Insurance, namely:

1. Conceptual Aspect
2. Practical Aspect

So far as the Concept of Insurance is concerned, it is to

cover the risk of loss, or “fortunate many helping the
unfortunate few”.

This concept is not only recognized, but also

appreciated and rewarded by Islam.
 Conceptual Aspect
Why this Concept is rewardable?

Al-Maidah verse # 2:

"Help ye one another in righteousness and piety, but

help ye not one another in sin and rancor".

Principles of Muwalat, Maaqil, and Kafalah and

establishment of Islamic welfare state by the Holy
Prophet (SAW), Waqf and Tabrru are examples for
recognition of this concept.
 Practical Aspect

Second Aspect of Insurance is practical Aspect, it is

forbidden due to two reasons:

1. Qimar or Maisir
2. Riba

Since these two things have been clearly prohibited by

Islam, they cannot be justified on the conceptual
aspect of helping victims of various accidents or
losses.
 Practical Aspect
Quranic view on Gambling & Risk

O believers! Intoxicants and gambling and Al Ansab (Animals

sacrificed for idols) and Al Azlam (arrows for seeking luck or
decision) are an abomination of Satan's handiwork. So avoid
them in order that you may be successful. Satan wants only to
excite enmity and hatred between you with intoxicants and
gambling and hinder you from the remembrance of Allah and
from prayer. So, will you not then abstain? (Al Maidah 90 – 91)
 Practical Aspect

How Qimar & Riba exists ?

QIMAR or MAISIR has been clearly prohibited by

Quran and Hadith of the Holy Prophet (SAW).
Maisir has two basic elements which cause to prohibit.
namely:
1. Gharar
2. Khatar
 Khatar

“Taleequl milki al alkhatr, wal mal fil janibain”

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

ƒ However, if money is not involved from both sides

i.e. one party voluntarily (without any
compensation) declares “We shall compensate you
on a particular event of loss”, it would not be
Maisir.
 Gharar

Gharar literally means “Uncertainty”

Forms of Gharar :
ƒ Any bilateral transaction in which the liability of the
party in the transaction is either uncertain or
contingent.
ƒ Consideration of either is not known.
ƒ Ultimate outcome of any one party is uncertain.
ƒ Delivery is not in the control of the obligor.
ƒ Payment form one side is certain, but from the other
side is contingent.
 Gharar & Khatar

Presence of Gharar and Khatar makes Qimar,

Speculation, Gambling and Conventional Insurance
prohibited.
 Qimar

Indication of Presence of Qimar in a transaction

ƒ If in any transaction one party’s profit is
dependent on the loss of the other then this is an
indication that the transaction involves Qimar.
Qimar

ƒ In the permissible modes of business any profit or

loss is equally shared & is fair to every party. For
example, in partnership (Musharakah) both the
parties share profit & loss. Similarly in other trades
like sale, purchase, hiring or leasing each party’s
considerations are certain.
 Conventional Insurance

Problems

ƒ The participant contributes a small amount of

premium in a hope to gain a large sum - Khatar.

ƒ The participant loses the money paid for the

premium when the insured event does not occur -
Gharar.

ƒ The company will be in deficit if the claims are higher

than the amount contributed by the participants -
Gharar.
 Riba

ƒ The element of Riba (Interest) exists in lending or

borrowing funds/investments at fixed interest, and
other related practices in the investment activities
of the conventional insurance companies
 The Solution

Islamic Cooperative Insurance

( Takaful)
 Takaful

ƒ Takaful is an Arabic word that means

“Guaranteeing each other"

ƒ It is a system of Islamic Insurance based on the

principle of TA’AWUN (mutual assistance) and
TABARRU’ (Gift, Give away, donation) where the
risk is shared collectively by the group
VOLUNTARILY.

ƒ This is a pact among a group of members or

participants who agree to jointly guarantee among
themselves against loss or damage to any of them
as defined in the pact.
 Models of Takaful

1. Mudarabah Model

2. Wakalah Model (hybrid of Wakalah &

Mudarabah)

3. Wakalah based on Waqf Model

 Mudarabah Model

ƒ The participant and the operator enter into a

Mudarabah contract from the beginning of the
relation, for indemnification and share of the
underwriting results.

ƒ The Surplus is shared between the participants and

the takaful operator in an agreed ratio.

ƒ This model allows the takaful operator to share in the

underwriting results from operations as well as the
favorable performance returns on invested
premiums.
 Mudarabah Model

Shariah Concerns

ƒ The relation between the participants is that of

tabarru’ and not Mudarabah, “Profit Sharing” can’t be
applied here. Donation cannot be Mudarabah capital
at the same time.

ƒ In a Mudarabah contract, a profit is to be generated

to be distributed. Profit is not the same as ‘Surplus’
(excess pf premiums over claims, reserves and
expenses) and in the insurance context no definition
can be generated by definition.
 Mudarabah Model

Shariah Concerns

ƒ The sharing in underwriting surplus itself is

something which is similar to making this into a
commercial business venture and not a mutual
contract for assistance and protection.

ƒ The requirement to provide Qard Hasanah (in case of

a deficit) in a Mudarabah contract by definition is
against the concept of Mudarabah which is a profit
sharing contract and a Mudarib cannot be a
guarantor.
 Wakalah Model

ƒ Cooperative risk sharing occurs among the

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

ƒ The operator earns an upfront deductible fee and

shares the profit of investments, it does not share
the results of underwriting.
 Waqf Model

ƒ 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.

ƒ 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.
 Waqf Model
TAKAFUL OPERATOR SHARE OF
COMPANY FEES FOR MANAGEMENT PROFIT / LOSS
PROFIT FOR THE
ADMINISTRATION EXPENSES OF ATTRIBUTABLE TO
COMPANY
EXPENSES COMPANY SHAREHOLDERS
25% TO 30%

40%

INITIAL
PROFIT SHARING ON
DONATION BY
MUDARABHA BASES
SHAREHOLDERS
TO CREATE WAQF
FUND

WAQF PROFITS FROM

INVESTMENT
INVESTMENT
BY FUND

60%

DONATION WAQF SHARE OF

PARTICIPANT WAQF OPERATIONAL
PAID BY FUND SURPLUS FOR
FUND COST OF SURPLUS
PARTICIPANT 75% THE PARTICIPANT
TAKAFUL
TO 100%
/RETAKAFUL
70%
 Waqf Model

Basic Features

ƒ 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.

ƒ 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 Model

Basic Features
ƒ The Waqf fund shall work to achieve the following
objectives:
a. To extend financial assistance to its
members in the event of losses.
b. To extend benefits to its members strictly in
accordance with the Waqf Deed.
c. To donate to Charities approved by the
Shariah Supervisory Board
 Waqf Model

Basic Features
ƒ 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 .
ƒ 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.
 Waqf Model

Basic Features
ƒ The Takaful Company may distribute the surplus
amounts on the following three basis:
a. A portion of surplus should be kept as
reserve to mitigate the future losses.
b. A portion of surplus should be distributed
among the participants to differentiate it
from the conventional insurance procedures.
c. A portion of surplus should be utilized for
the charitable purposes every year.
 Waqf Model

Basic Features
ƒ As per the rules of the Waqf, if the fund is
liquidated, the outstanding balance, after paying all
dues and payables, will be utilized to charitable
purposes.
ƒ The Takaful company, while managing the Waqf
Fund, will play two different roles simultaneously:
a. Operator/Manager
b. Mudarib
 Waqf Model

Basic Features
ƒ 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.
ƒ 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.
 Application

Takaful can be used to cover :

ƒProperty e.g. house, factory, mosque, offices

ƒVehicles (car, motorcycle etc..)
ƒGoods ( For Import or Export )
ƒValuables
ƒHealth, accidents and Life