CHAPTER 3

Concept, Principles
and Models of
Takaful
 Concept of Takaful
The takaful concept is in conformity with Syariah
and is based on the Islamic principle of al-Takaful
and al-Mudharabah.
In order to eliminate the element of uncertainty in
takaful contract, the concept of tabarru is
incorporated in it.
Involvement of these two Islamic forms of business
eliminates the elements of Riba from insurance
contract and convert Gharar into tolerable form.
In Family Takaful each Takaful installment is
divided and credited into two separate Accounts
namely,, the Participants' Account (PA) and the
Participant's Special Account (PSA). A substantial
proportion of the installments is credited into the
PA solely for the purpose of savings and
investment..
 The balance of the installments is credited into
the PSA as `tabarru' for TO to pay the Takaful
benefits to the heir(s) of any participant who
may die before the maturity of the contract.
The amount accumulated in the PA is invested
in various business according to Islamic
financing techniques, and the resultant profits
are divided between the company and the
participants according to the agreed upon
ratio, e.g., 30-70.
The participant's share is calculated according
to their individual share in the PA, and
credited into their respective accounts, the PA
and the PSA.
 Al-Mudharabah
The commercial profit sharing contract
between the provider or providers of
fund for a business venture and the
entrepreneur.
The enterpreneur or al-Mudharib
(takaful operator) will accept payment
of the takaful installments or takaful
contributions (premium) termed as
Ras-ul-mal from investors or providers
of capital or fund (takaful participants)
acting as Sahib-ul-mal.
Al-Mudharabah (cont.)
The contract specifies how the profit or
surplus from the operations of takaful
managed by the takaful operator is to
be shared, in accordance with the
principle of al-Mudharabah.
The sharing of profit (surplus) may be
in ratio 5:5, 6:4, 7:3, etc. as mutually
agreed between the contracting
parties.
Proximate Cause
 Al-Tabarru
Means to donate, to contribute, to give
charity.
Participant agree to relinquish as tabarru,
certain portion of his takaful installments
or takaful contributions that he agrees or
undertakes to pay thus enabling him to
fulfill his obligation of mutual help and
joint guarantee should any of his fellow
participants suffer a defined loss.
Basic Principles of Takaful
Mutualassistance
Making sacrifices to one another
Guaranteeing one another
 Mutual Assistance
The principle of mutual assistance,
cooperation or helping one another is
always encouraged by Islam.
Islam expects its followers to helping each
other in matters of good deeds and
charity.
This principle is executed by the
agreement of the participants to give
away a portion of their takaful
contribution as tabarru.
Making Sacrifices to One
Another
The principle of sacrifices is
practiced by Islam through the
concept of Jihad.
Jihad here means the sacrifices of
time, energy, wealth and blood in
order to make sure that others
would benefit from the sacrifices
that they make.
Guaranteeing Each Other
Syeikh Muhammad Al-Ghazali and Syeikh
Yusuf Al-Qaradhawi states that the
guarantees must fulfill the following
conditions:
Every members contribution must be
done with the intention to help the
needy.
The contributions must be used
according to shariah.
Guaranteeing Each Other
(cont.)
Contributions given is not for the
purpose of profiting from the
occurrence of loss but compensated
based on mutual agreement.
It is unlawful to claim back the
takaful contributions. Everything will
be settled according to shariah.
Takaful Model
The existence of three business models:
Mudharabah (Profit & Loss sharing) - was
developed in Malaysia
Wakala (agency contract with a
performance fee element to replace
surplus sharing) - was developed in the
Gulf
Wakala with Waqf model -was developed
in South Africa
Hybrid
 The takaful operator is the administrator of the
fund and manages the fund in trust on behalf
of the participants, and the contract between
participants and the operator is governed
under the contract of Mudharabah or Wakalah.
Mudaraba Model
Under the mudharabah contract, the takaful
operator acts as a mudharib (entrepreneur) and
the participants as rabbul mal (capital providers).
The contract specifies how the surplus from the
takaful operations is to be shared between the
takaful operator and the participants. Losses are
borne by the participants as the capital providers
The sharing of such profit (surplus) may be in a
ratio 5:5, 6:4 etc. as mutually agreed between the
contracting parties. Generally, these risk sharing
arrangements allow the takaful operator to share
in the underwriting results from operations as well
as the favorable performance returns on invested
premiums.
 Mudaraba Model
However, to protect the interest of the
participants, the takaful operator is required to
observe prudential rules including provision of
financing rate-free loans by the operator to the
takaful risk funds in the event that there is a
deficiency in the takaful risk funds.
MUDARABA MODEL

Qard al
hassan

Deficit
 Shariah Concerns regarding
Mudaraba Model
Mudaraba is a commercial contract, hence not suitable for
a donation (Tabarru) based scheme.
Donation given by the participants can not become
capital for Mudaraba at the same time.
Distribution of surplus among the participants in
proportion of their contributions is like a conditional gift
(Hiba bis-Sawab) which is not allowed.
Sharing of surplus in case of General Takaful(instead of
profit) makes the contract essentially the same as
conventional insurance contract.
Provision of Qard-e-Hasan from the Share holders fund in
case of deficit is not correct as Mudarib is not a guarantor.
Wakala Model
Cooperative risk sharing occurs among
participants where a takaful operator earns
a fee for services (as a Wakeel or Agent)
and does not participate or share in any
underwriting results as these belong to
participants as surplus or deficit.
Under the Al- Wakala model, the operator
may also charge a fund management fee
and performance incentive fee.
Wakala Model
Wakala -Waqf ModeL
It is a WAKALAH model with a separate legal
entity of WAQF in-between.
The relationship of the participants and the operator
is directly with the WAQF fund. The operator is the
Wakeel of the fund and the participants pay
contribution to the WAQF fund by way of Tabarru.
The contributions received would also be a part of
this fund and he combined amount will be used for
investment and the profits earned would again be
deposited into the same fund which also eliminates
the issue of Gharar.
Losses to the participant are paid by the company
from the same fund.
Operational expenses that are incurred for providing
Takaful services are also met from the same fund.
Definition of Waqf
Waqf is an Arabic word and it means to stop to
withhold and not to let go.
In technical meaning Waqf means to allocate or
donate some property or cash for a specific
purpose to get pleasure of Allah and not to let it
go through consumption or sale.
The Waqf property comes into ownership of Allah
(SWT) and Waqif will have no property rights on it.
Waqif has right to set the rules for waqf and
manage the waqf.
Waqf may be generall purpose or speciifiic
purpose,, like Waqf Alla all Aullad or Waqf Alla all
Aqariib..
In Islamic Law Waqf is a legal entiity
A Waqf Fund would basically be a
separate legal entity to which the
Shareholders would initially make a
donation to establish the Waqf Fund.
The donation can be of any reasonable
amount (Shariah Board may specify
such an amount).
The objectives of the Waqf fund would
be to provide relief to participants
against defined losses as per the rules
of the Waqf fund.
Wakala -Waqf ModeL
Shariah Concerns regarding
Wakala Model
Wakalah model is free from many objections
raised against Mudaraba model but some
shariah concerns are still there which are as
follows:
Distribution of surplus among the participants
in proportion of their contributions is like a
conditional gift(Hiba bis- Sawab) which is not
allowed.
Provision of Qard-e-Hasan from the Share
holders fund in case of deficit is not correct as
Wakel is not a guarantor.
 Hybrid of wakalah and
mudharabah
Takaful hybrid model is a combination of the two
principles above.
Under the model, a relationship between the
operator which combines the role of
entrepreneur or Mudarib as well as the agent or
wakil of the participant, whilst the latter in the
capacity as both provider of capital or sahibul-
mal and principal to the agent.
Underwriting activities: The TO is entitled to an
agency fee for managing the fund as a wakil.
Investment activities: The TO is entitled to
share of profit for managing the investment of
the fund as mudarib.
Hybrid Model
 Hybrid Wakalah Model
Unlike the al-Mudarabah model, this model enables
the operator based on the agency arrangement to
charge the takaful fund to cover both the
management expenses as well as the agency cost. In
addition, there is profit sharing on al-Mudarabah on
the investment of the takaful fund. On the other
hand, any underwriting surplus of the takaful fund
will be shared among participants only.
Nevertheless, the main concern of the wakalah
hybrid model is the unfulfilled undertaking by the
operator to distribute and pay out the surplus to
participants despite the provision to such sharing in
the contract. From the operational point of view, the
reason given by most operators is that, the takaful
fund is in deficit after taking into account provisions
for certain types of reserve.
 Hybrid Wakalah Model
Majority
of the TOs (Takaful Operators) in
Malaysia adopt Hybrid Wakalah Model.

The Central Bank of Malaysia clearly sets

the rule that in the Wakalah contract,
Takaful operators can charge Wakalah
fess (agent fees and administrative
expenses) upfront to the participants
(certificate holders).