Operational and Actuarial Aspectst of Takaful

Topic 2 Shariah and Regulatory Environment

Sub Topics

Shariah Principles Takaful Basis and Principles Regulation on Takaful Shariah Advisory Commitee

Objectives of Shariah

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2. 3.

Shariah looks towards the improvement and perfection of the conditions of human life. The benefits of Shariah can be classified as follows:[1] The Daruriyyah (essentials) The Hajiah (complementary) The Tahsiniyyah (desirable) [1] Hashim Kamali, Principle of Islamic Juris prudence

Objectives of Shariah

Shariah provides for mankind in many ways so that he can attain a prosperous life. However a prosperous life should not be an ultimate goal of mankind and must be within permissible economic and social activities so that unity and harmony amongst man prevail. Islam views the economic activities of man quite lawful, meritorious and sometimes obligatory. It even approves that mankind progress economically but such progress should not be the be-all and the end-all of human life.

Sources of Shariah
Primary Sources:
Quran Hadith/Sunnah (Traditions of the Prophet)

Secondary Sources:
Ijma (Consensus of Jurists) Qiyas (Analogy)

Shahriah Doctrines

Wajib (Obligatory) Mandub (commendable) Halal (permissible) Makruh (reprehensible) Haram (prohibited)

Legal Maxim of Shariah

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2.

3.

4.

5.

There are five fundamental legal maxims (qaidah kulliyah). The five are: Acts are judged by the intention behind them (Al-umuru bi-maqasidiha); Certainty is not overruled by doubt (Al-yaqinu la yuzallu bish-shakk); Custom is the basis of judgement (Al-aadatu muhakkamatun); Hardship begets facility (Al-mashaqqatu tujlab at-taysir); and Harm must be eliminated (Ad-dararu yuzal).

Application to Takaful

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2. 3.

4. 5.

Some of the more common corollary legal maxims that has been used in the discussion on takaful are : The original legal position of any matter is permissibility until there is evidence prohibiting it. Whatever leads to haram, is in itself haram. In contracts effect is given to intention and meaning and not to words and phrases. Difficulty brings ease. The ends do not justify the means.

Shariah Basis for Takaful

The Takaful policy embodies the concept of Tawakkul whereby one should strive hard in overcoming ones unexpected future risk or perils before leaving ones destiny in the hand of Allah(s.w.t.) Anas bin Malik r.a. narrated that the Holy Prophet (s.a.w) told a Bedwin Arab who left his camel untied trusting to the will of Alah (s.w.t.) to tie the camel first then leave it to Allah (s.w.t.)

Shariah Basis for Takaful

Takaful is aim at providing protection from future unforeseen constraints upon the occurrence of an unexpected particular future risk. The following sayings by the Holy Prophet justified the concept of protection for those who are in need. Narrated by Abu Huraira (r.a.. the Holy Prophet(s.a.w.) said: whosoever removes a wordly hardship from a believer, Allah (s.w.t.) will remove from him one of the hardships of the day of judgement. Whosoever alleviates form one, Allah(s.w.t.) will alleviate his lot in this world and the next.

Concepts of Takaful

1. 2. 3.

The contract of Takaful is founded on the following three principles: Mutual responsibility, Mutual assistance and cooperation, Mutual protection or guarantee.

Mutual Responsibility

In al-Bukhari and Muslim it was reported that the Prophet had said: Each and every one of you shall bear responsibility and every one shall be responsible for those who he is to be responsible for. The relationship and kinsman ship amongst those who believe is like one body part, when one part suffers from pain the other part shall feel the same.

Mutual Assistance and Cooperation

Help you one another in virtue, righteousness and piety; but do not help one another in sin and transgression. AlMaidah (5:2) Do not misappropriate your property among yourselves in vanities, but let there be amongst you traffic and trade by mutual goodwill An- Nisa (4:29)

Mutual Protection and Guarantee

(Allah) He, has fed them against hunger and has made them safe from fear. Al-Qurashi (106:4) Verily, that who believes is one who provides safety and protection to another mans property and life. Narrated by Ibn Majah

Existing Regulations

Malaysia Takaful Act 1984 Bahrain Insurance Law 1987 KSA Control Law for Cooperative Insurance Companies 2003 Indonesia Law with respect to Insurance Business 1992 Singapore Insurance Act 2002 (Revised)

International Governing Bodies

OIC Fiqh Academy Islamic Financial Services Board (IFSB) Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) International Association of Insurance Supervisors (IAIS) Basel Accord

IAIS Core Principles

ICP 1 Conditions for effective insurance supervision ICP 3- Supervisory authority ICP 6 Licensing ICP 7 - Suitability of persons ICP 9 - Corporate governance ICP 10 - Internal control

IAIS Core Principles

ICP 16 - Winding-up and exit from the market ICP 19 - Insurance activity ICP21 Investments ICP 22 - Derivatives and similar commitments ICP 23 - Capital adequacy and solvency

IAIS Core Principles

ICP24 Intermediaries ICP 25 - Consumer protection ICP 26 - Information, disclosure & transparency towards the market

Objectives of AAOIFI

To develop accounting and auditing thoughts relevant to Islamic financial institutions; To disseminate accounting and auditing thoughts relevant to Islamic financial institutions and its applications through training, seminars, publication of periodical newsletters, carrying out and commissioning of research and other means; To prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions; and

To review and amend, accounting and auditing standards for Islamic financial institutions.

BNM Guidelines

Guidelines on Directorship for Takaful Operators Guidelines on Prohibitions Against Unfair Practices in Takaful Business Guidelines on Claims Settlement Practices Guidelines on Proper Advice Practice for Family Takaful Business Guidelines on Operating Costs of Family Takaful Business Guidelines on Financial Statements for Takaful Operators Guidelines on Related Party Transactions for Takaful Operators Guidelines on Outsourcing For Takaful Operators Guidelines on the Governance of Shariah Committee

Shariah Advisory Council

Roles and Functions To advise the Board on Shariah matters in its business operation; To endorse Shariah Compliance Manuals; To endorse and validate relevant documentations; To assist related parties on Shariah matters for advice upon request; To advise on matters to be referred to the SAC; To provide written Shariah opinion; To assist the SAC on reference for advice;

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