FUNDAMENTALS OF TAKAFUL

The Meaning of Takaful

Joint Guarantee or Guaranteeing Each Other.
Stems from the word kafal or to take care of ones

needs. Takaful is a system of Islamic Insurance based on the principle of taawun (mutual cooperation) and tabarru (donation).

The Meaning of Takaful

The basic objective of takaful is to pay for a defined loss

from a defined fund. Each member of the group pools effort to support the needy. It means mutual help among the group. The operation of takaful are within the tijari (commercial) sector and is based on the Islamic commercial profitsharing principle of al-mudharabah.

Elements in Insurance not Conforming to Islamic Law

The purpose of insurance is to address some form of

financial loss and has positive contribution to the society. However, there are three elements in insurance that are not conforming to islamic law:
Gharar Maisir

Riba

PRINCIPLE OF TAKAFUL OPERATION

Conventional insurance operations did not comply

with the rule and requirements of the Syariah as it embodies the following three elements:
Al Gharar means uncertainty

Al Maisir means gambling

Al Riba means interest

Elements in Insurance not Conforming to Islamic Law

Gharar Uncertainty affecting the occurrence of a contract or the obligations under the contract. Naturally involved results that are unknown to all parties involved. In conventional insurance, gharar is argued to stem from the fact that what is being bought with the premiums is not well defined. Existence of ambiguities and uncertainty under the contract.

Payment of compensation Paying the premiums Nature of the contract insurance is an aleatory contract which based on the monetary values exchanged between the contracting parties may not be equal.

Elements in Insurance not Conforming to Islamic Law

Maysir or Gambling Refers to a situation in which unnecessary risk is created by entering into a transaction with a hope of gain and a fear of loss

Elements in Insurance not Conforming to Islamic Law

Usury or Riba Usury is defined as practice of lending money at exorbitant interest, especially at higher interest than is legal. Usury or riba also refers to lending at interest or addition to the principal of a loan. . Allah has permitted trade and prohibited in involving usury (surah Al-Baqarah, 2:275)

The Essence of Takaful

The heart of insurance system is pooling of resources

from many to help the unfortunate few. Insurance is allowable in Islam in risk sharing mechanism, as long as any elements that contravene Islamic principles are avoided. Sharing the risk with the purpose of helping each other is recommendable as Allah mentioned in the alQuran . Help you one another in virtue, righteousness and piety, but do not help one another in sin and transgression . (Al-Maidah:2)

The Essence of Takaful

In Malaysia, the development of the takaful industry

was largely triggered by the decree issued by the National Fatwa Committee. A special task force was set up by the government in 1982 to study the viability of establishing an Islamic insurance company, they conclude under the islamic insurance system, a portion of the contribution from every participant must be made with the intention of tabarru , and not for buying and selling, the existence of tabarru makes the transaction permissible and valid according to the Shariah.

The Essence of Takaful

Sheikh Dr Yusuf al-Qardawi, suggested a modification

to the insurance against hazards, to bring it closer to the Islamic principle by means of a contract of donation with a condition of compensation. For insurance to be accepted by Islamic tenets, it must be founded on the principles of tabarru (donation), taawun (mutual cooperation)

Al-Tabaru Concept
Tabaru menas to donate. The participants of takaful plan make an aqad

(agreement) to deposit as donation a certain portion of takaful contributions or installments into a risk fund. This fund will be used to assist participants who might suffer unexpected financial losses due to some contingencies.

Mutual Cooperation
Besides Tabarru, takaful is the principle of mutual

cooperation and risk sharing. Mutual cooperation or taawun is achieved through contributions from takaful participants to the tabarru fund which allows participants to provide financial assistance to fellow participant suffering a loss. Takaful system can be described as a co-operation among participants who mutually protect and guarantee the interest of one another, by jointly sharing responsibility to pay for potential losses that may occur, through donations into a common fund.

Mutual Cooperation
Takaful is built on the principle of mutual cooperation

where each participant participates in each others loss, while takaful operator facilitates this cooperation using its exercise, under the operation of the takaful business. Essentially, a cooperative risk-sharing plan, takaful system aims to provide insurance protection against risks such as premature death, illness, disability and property damages. It embraces the elements of mutual help, mutual protection and shared responsibility among participants, supported by tabarru principles.

Mutual Cooperation
Dr Yusuf Qardawi asserts that a cooperative system

established to assist its members who suffer from misfortune must meet the following conditions:
Every member makes his share of payments into a

common fund as a donation, in the spirit of brotherhood. Financial assistance is provided to members who suffer a loss from this common fund. Any investment of the money from the common fund must be done in halal business activity which is free from usury or interest. A member shall not seek a pre-determined amount of compensation in the event of a loss rather than indemnified for his total or partial loss.

Al-Mudharabah Concept
Mudharabah (Trustee Profit-Sharing) is a contractual

agreement between provider of a capital and entrepreneur for the purpose of business venture whereby both parties agree on a profit sharing arrangement. Takaful company acting as the entrepreneur and the participants entrust funds to the takaful company by means of takaful contributions. Takaful contact specifies the proportion of profit (surplus) to be shared between the participants and the takaful company.

OPERATION OF TAKAFUL
Licensed and regulated by the Takaful Act 1984
Supervisory authority vested under the Takaful Act is the

Bank Negara Malaysia. Underlying the importance of complying with the religion of Islam, all businesses of the company will be transacted in accordance with Islamic principles, rules and practices

Section 8, Takaful Act 1984

3(a) A Religious Supervisory Council, whose

members would be made up of Muslim religious scholars in the country, shall be established to advise the company on the operations of its takaful business in order to ensure that they do not involve any element which is not approved by the Religion of Islam

Section 8, Takaful Act 1984

(5) the Director General shall also refuse the register an

applicant unless he is satisfied (b)that there is in the Articles of Association of the takaful operator concerned provision for the establishment of a Syariah Supervisory Council to advise an operator on the operations of its takaful business in order to ensure it does not involve in any element which is not approved by the Syariah

Basic Takaful Model

Investment Returns on Capital Initial Equity Capital

Stakeholders Fund

Management Expenses & Commission

Interest-free loan (Qardul Hasan)

Share of investment returns a& surplus

Participants contributions

Takaful Fund

Claims (takaful benefits)

Takaful Operating Models

Takaful operating models: Primary Operating Models:

Taawuni Model Waqf Model

Takaful Models Used In Malaysia

Al-Mudharabah Al-Waqalah

Taawuni Model
Practices the concept of pure mudharabah in its

transaction. It is a profit-sharing model. Takaful Operator (TO) and participant share the direct investment income. In addition, the participant is entitled to 100% of surplus with no deduction made prior to the distribution. Pure mudharabah model encourages solidarity, unity, brotherhood and mutual cooperation. Taawuni Model is divided into 2 basic models
Al-Mudharabah Al-Wakalah

2 basic Taawuni Model

Al-Mudharabah model is a profit-and-loss sharing

model in which the participant and TO share the surplus. Al-Wakalah is a fee-based model in which the TO earns fee for the service of running the operation.

Waqf Model

Works on a nonprofit concept, emphasizing the idea of

donation among the participants. TO initiates the waqf fund by contributing the intial sum into the fund, and participants make donation to help the less fortunate members of the community. Generally undertaken by a social or governmental enterprises. A waqf deed is drawn to assist in the distribution of funds should a loss occur to any participants. Surplus and profits resulting form investment activities are not distributed to the participants. It will retain by the operator to support the community.

Takaful Models Used in Msia

Family Takaful Al-Mudharabah Model Al-Wakalah Model
General Takaful Plans Al-Mudharabah Model Al-Wakalah Model

Takaful Models Used in Msia Family Takaful Model

Al-Mudharabah Model TO acts as Mudharib (Entrepreneur) while Participants act as Rabbul Mal (Capital Provider) by paying contributions. Al-Mudharabah contract is partnership in nature.

Participants contribute capital, while

Legal Aspects of Takaful

Regulatory Framework of Takaful Business Remarkable growth rate of between 18-20 % per year Malaysian Takaful Regulation High Court
Malaysian Takaful Association

BNM

Takaful Tajafyk & Retakaful

Shariah Advisory Council

Legal Aspects of Takaful

TAKAFUL ACT 1984 REGISTRATION OF TAKAFUL OPERATORS SHARIAH FRAMEWORK MALAYSIAN TAKAFUL ASSOCIATION STATUTORY DEPOSITS TAKAFUL FUND STATUTORY ASSET REQUIREMENT INVESTMENT OF FUND SUPERVISION AND EXAMINATION ON TAKAFUL

OPERATORS TAKAFUL GUARANTEE SCHEME FUND

Legal Aspects of Takaful

BNM
Shariah Advisory
Formulate Policies & supervision
Determines ruling on issues of

Council High Court Takaful Operators Retakaful Operators Takaful Intermediaries Malaysian Takaful Association

syariah principles Decides on all muamalat cases Fund manager & u/writing U/writing manager on ceded TO Intermediaries
Agents Brokers Bancatakaful Adjusters

Self-regulatory body promoting

uniformity in market practices.

Legal Aspects of Takaful

Registration Section 4 (1) Section 4 (2) Section 11 (1)

Legal Aspects of Takaful