231

Revisiting Takaful Insurance: A Survey on

Functions and Dominant Models
Hashcm Abdullah AlNcmcr
Abstract
Takaful is a growing and fast-developing industry, which oers
an insurance policy that complies with Islamic law. Such business is
highly recommended by most Muslim scholars because it reects the
real meaning of brotherhood in protecting individual and corporate
bodies against loss or hazards to themselves and their properties.
As a result, a number of operational models have been applied by
takaful operators
1
by adopting one or more contracts, such as Mu-
darabah, wakalah or waqf. Tis paper will therefore highlight im-
portant issues that deal with the background of Islamic insurance in
terms of denition, functions, as well as exploring takaful contract
constructions and various mechanisms linking the contract parties.
Finally, this paper will highlight the most dominant and practiced
models used by takaful operators worldwide.
Keywords: denitions, Functions, contract mechanisms, models.
Introduction
Takaful is thc !slamic countcrpart ol convcntional insurancc. Takaful
prcmiums havc rcportcd a gradual, yct incrcasingly high ratc ol growth.
Tc global takaful markct was cstimatcd to bc at a lcvcl ol ovcr U.S. 8 2.1bn
ol prcmiums lor 2002. 8y 2008 thc cstimatcd sizc ol thc global takaful
prcmium was US 8 5.3bn and to rcach US 8 8.9bn in 2010 (8hatty, 2010).
Tis was cxpcctcd to risc to a gurc ol US 8 12.5bn by 2015 (Lcwis et al.,
Lccturcr in Financc, King Abdulaziz Univcrsity Jcddah, Saudi Arabia,
mail: dr.hashcm.alncmcrCgmail.com
Afro Eurasian Studies, Vol. 2, Issues 1&2, Spring & Fall 2013, 231-253
232
2007). !ntcrcstingly, this gurc lor 2015 was rcviscd lrom an carlicr similar
cstimatc ol 87.5 billion madc in 1999, which to a grcat cxtcnt indicatcs
that busincss cxpcctations may havc bccn matcrializing at a lastcr pacc
than initially anticipatcd, drivcn largcly by strong markct growth in thc
Gull rcgion and in particular Malaysia (Abdul Vahab et al., 2007). Tcrc
wcrc somc 179 takaful companics and windows (20) in 2008, and thc
numbcr ol such cntcrpriscs in 2010 can casily bc said to bc in cxccss ol 200.
Tc total capital committcd within thc takaful industry in 2007 was around
US8 3.5bn (8hatty, 2010). Saudi Arabia rcmains thc largcst takaful markct
in thc GCC with contributions ol US8 2.9 bn in 2008 ( & Y, 2010).
Tc high growth ratc ol Takaful is strongly bascd on thc uniquc
charactcristics ol thc takaful busincss contract, which dicr lrom com
mcrcial insurancc busincss, in that thc lattcr arc bascd on salc and pur
chasc ol policy or protcction covcr in rcturn lor a prcmium paymcnt,
and all associatcd prcmiums and any invcstmcnt rcturn prot or un
dcrwriting surplus arising lrom thc policyholdcrs collcctcd pools will
bc automatically dircctcd to thc insurancc company lund. Howcvcr, in
casc ol thc takaful busincss, thc prcmium paymcnt by thc participants
2
is considcrcd as a donation contribution or tabarru, which is paid
lor thc purposc ol brothcrhood or mutual indcmnity among all par
ticipants. Tc Takaful- opcratcd company is considcrcd as an agcnt to
managc thc lund contributcd to by participants with thcir lull conscnt.
Tus, a clcar scgrcgation bctwccn thc sharcholdcrs and participants
lund(s) is onc ol thc principlcs on which thc takaful busincss is con
structcd, which satiscs thc compliancc rcquircmcnts ol thc Shariah
3
compliancc rcquircmcnts. Accordingly, takaful busincss will havc dicrcnt
opcrating modcls and contractual tcrms, conccpt and mcchanisms than
convcntional insurancc systcms.
Denition of Takaful
Takaful is dcrivcd lrom thc Arabic root word kafala, a vcrb which
mcans guarantcc, bail, warrant or an act ol sccuring oncs nccd (ngku et
al., 2008).
Takaful is also dcncd in Scction 2 ol thc Malaysian Takalul Act
1984 as,
233
A schcmc bascd on brothcrhood, solidarity and mutual assistancc which
providcs lor mutual nancial aid and assistancc to thc participants in casc
ol nccd whcrcby thc participants mutually agrcc to contributc lor that pur
posc.
AA!F!s
4
, also dcncd !slamic insurancc on (2004/2005) as pcr thc
Financial Accounting Standard No. 12, in Appcndix ,
!slamic insurancc is a systcm through which thc participants donatc
5

part or all ol thcir contributions which arc uscd to pay claims lor damagcs
sucrcd by somc ol thc participants. Tc companys rolc is rcstrictcd to
managing thc insurancc opcrations and invcsting thc insurancc contribu
tions.
8y 2007 AA!F! dcncd !slamic insurancc as bcing in linc with
shariah Standard 26 (2) 2007,
!slamic insurancc is an agrccmcnt bctwccn pcrsons who arc cxposcd to
risks to protcct thcmsclvcs against harm arising lrom risk by paying con
tributions on thc basis ol a commitmcnt to donatc. Following lrom that
(principlc) thc insurancc lund is cstablishcd and is trcatcd as a scparatc
lcgal cntity which has indcpcndcnt nancial liability. Tc lund will covcr
compcnsation against harms that bclall any ol thc participants duc to thc
occurrcncc ol thc insurcd risks (pcrils) in accordancc with thc tcrms ol thc
policy.
Functions of Takaful
!t may bc thought at rst glancc that takaful docs not dcviatc lrom
convcntional insurancc, sincc both typcs dcpcnd on thc conccpt ol pool
ing moncy lrom a group lor thc sakc ol hclping thc unlortunatc ol thc
samc group in thc cvcnt ol cncountcring nancial loss. Howcvcr, unlikc
takaful, spiritual mutual support is not a rcquisitc ol commcrcial insur
ancc. Commcrcial insurancc is bascd on a lorm ol cxchangc whcrcby
thc insurcd pays a prcmium in cxchangc lor protcction in casc ol ca
lamity cxposurc, with no compcnsation
6
in a casc ol no loss. Howcvcr,
thc takaful mcchanism is bascd on thc conccpt ol tabarru (donation)
7
234
combincd with thc intcntion (niah) to participatc in thc pooling aid mcch
anisms. Hcncc, thosc who participatc in thc takaful mcchanism will bc lcss
likcly to cncountcr thc lccling ol rccciving nothing il no claim occurs. Tcy
will lccl sucicntly satiscd to hclp thcir collcaguc in thc samc pooling
group in thc loss hc incurs.
Anothcr uniquc lunction ol !slamic insurancc is thc strong rclation
ship bctwccn takaful opcrator and participants, in that thc takaful opcrator
will go cvcn bcyond thc provisions ol thc nccds ol spiritual satislaction
8
,
by providing nobcl scrviccs which will bc rcwardcd by God only such as thc
lollowing bcncts lor thc dcccascds lamily upon thc participants dcath.
(i) To propcrly distributc thc dcccascds cstatc upon his/hcr dcath.
(ii) To calculatc and distributc Zakah on bchall ol all participants.
(iii) To mandatc othcrs to pcrlorm Hajj on bchall ol thc participant
upon his/hcr dcath.
(iv) To makc arrangcmcnts lor Sadaqah Jariah
9
(Nordin, 2007).
Tc convcntional mcthod ol satislying a customcr is rcaliscd by lul
lling thcir matcrial or worldly nccds with bcncts such as low priccs,
highcr rcturns, lastcr dclivcry or cvcn bcncting thc dcccascds lamily
mcmbcrs altcr his dcath in thc lorm ol lilc insurancc. Howcvcr, this docs
not mcan that customcr satislaction in tcrms ol pricc, quality, dclivcry and
prccision arc not important to thc takaful opcrator, in lact thcy rcmain
important whilc thc satislaction ol thc customcrs spiritual nccds arc also
mct. So whcn Muslims buy !slamic insurancc thcy can combinc two bcn
cts, (i) Tcy rcccivc !slamic protcction that complics with Shariah rulcs
against nancial loss, in thc samc way as convcntional insurancc guar
anrtccs, as wcll as (ii) distancing thcmsclvcs lrom thc possibility ol sin
10
incurrcd by purchasing convcntional insurancc.
Finally, although a bclicving Muslim is rcquircd to acccpt dcstiny,
which may incorporatc ccrtain mislortuncs, !slam cncouragcs Muslims to
takc cxtra prccaution to minimizc potcntial mislortunc, losscs or injury
arising lrom unlortunatc cvcnts. Tus, having an insurancc policy is not
considcrcd to bc against thc will ol Allah, rathcr thc will ol Allah can bc
cnhanccd by holding an insurancc policy to osct (:) thc uncxpcctcd risk
that cxists in day to day lilc. (AlZarqa, 1962, Attar, 1983).
235
Takaful Contract
Tc majority vicwpoint hcld by contcmporary !slamic scholars is
that takaful contract is lully consistcnt with Shariah principlcs (Fishcr et
al., 2000, AlSalih, 2004). Akin to nglish law dcaling with contracts, !s
lamic Law has cstablishcd lundamcntals which arc rcquircd in an insur
ancc policy, such as partics to thc contract, lcgal capacitics ol thc partics,
ocr and acccptancc, considcration, subjcct mattcr, insurablc intcrcst and
utmost good laith (accy, 1989). Tc prcscncc ol ccrtain clcmcnts and thc
abscncc ol othcrs can makc a dicrcncc bctwccn a valid or void contract in
thc cycs ol the Shariah.
As lor thc mcchanisms ol thc takaful contract, Tcrc arc lour partics
involvcd in a takaful contract, namcly: thc participant
11
, opcrator
12
, insurcd
pcrson, and bcncciary
13
. Hcncc, coopcration among thcsc partics crcatcs
lour mcchanisms in thc takaful schcmc.

(i) Contract bctwccn participant and lund
Tc moncy bclonging to thc participant is translcrrcd to thc lund.
!n currcnt practicc, thc lund is bascd on thc principlc ol tabarru. !n
casc ol loss risk, thc participant ,as is also thc casc with thc mcmbcrs
ol thc lund, can rcccivc bcnct by thc covcr that thc lund providcs.
Tus, thc moncy bclonging to thc lund is translcrrcd
14
to thc par
ticipant. Tc currcnt takaful practiccs arc bascd on commitmcnt to
tabarru
15
, i.e. thc takaful opcrator as thc agcnt ol all participants can
claim a prcmium lrom participants, bccausc thc owncrship has bccn
translcrrcd whcn thc agrccmcnt was signcd. Howcvcr, il thc contract
is bascd on (purc tabarru) thcn thc takaful opcrator cannot makc dc
mands to thc participant to pay thc prcmium, bccausc thc owncrship
was absolutcly translcrrcd whcn thc participant dclivcrcd his prc
mium and dclivcry did not occur whcn thc agrccmcnt was signcd.
16

(ii) Contract bctwccn company and participant
Tc rclationship hcrc is not as insurcrinsurcd rathcr than ol a par
ticipantsopcrator onc, thc participants insurc thcmsclvcs, whilc thc
takaful opcrator is cngagcd by thc participants to managc thc takaful
schcmc on bchall ol thcm (ngku et al., 2008). Tc participant in a
takaful contract is considcrcd to bc a muwakkil (principal) and thc
company as a wakil (agcnt) to managc thc participants moncy. Tc
236
dutics ol thc company as a wakil or agcnt ol thc participant, is to
managc thc lund in tcrms ol a contractual arrangcmcnt, and to un
dcrtakc all administrativc mattcrs, undcrwriting activitics and tcch
nical issucs, as wcll as to managc thc invcstmcnt portlolio ol thc
lund. cpcnding on thc typc ol thc undcrlying contract, thc takaful
opcrator may rcccivc a lcc, or sharc thc prot on invcstmcnts as a rc
ward lor managing thc takaful schcmc. Tc takaful company and thc
participant will cntcr into a longtcrm takaful contract, whcrcby thc
contract spclls out clcarly thc rights and obligations ol thc partics to
thc contract. Tc participants arc thcn rcquircd to pay thc takaful in
stalmcnts on a rcgular basis. !n rcturn lor participation in thc takaful
plan, thc customcr dccidcs thc amount ol takaful instalmcnts that hc/
shc wishcs to pay subjcct to thc company minimum sum at thc timc
ol signing thc contract. (Hassan et al., 2007)
(iii) Contract bctwccn company and lund:
Tc rclationship hcrc is to bc rcgardcd as a contract to invcst thc par
ticipants moncy, thc moncy bclonging to thc lund is translcrrcd to
thc company, acting as a wakil
17
or as mudharib
18
. Tc mudharib will
invcst thc gcncral takaful lund in linc with Shariah principlcs and all
rcturns on thc invcstmcnt will bc poolcd back into thc lund. n thc
othcr hand, thc participants agrcc that thc company shall pay lrom
thc gcncral takaful lund, compcnsation or indcmnity to lcllow par
ticipants who havc sucrcd a dcncd loss. Tc lund shall also pay lor
othcr opcrational costs ol gcncral takaful busincss such as rctakaful
arrangcmcnts and thc sctting up ol tcchnical rcscrvcs (Tolclat, 2008).
(iv) Contract ol thc participants mutual assistant:
Undcr this systcm, participants mutually and voluntarily agrcc to
contributc moncy to support a common goal ol providing mutual
nancial aid to mcmbcrs ol thc group in casc ol spccic nccd
19
, this
systcm is bascd on mutual protcction and solidarity
20
, thc partici
pants should cmbody ccrtain principlcs and bclicls
21
whcn dcaling
with cach othcr (Ali, 2006).
n thc othcr hand, cvcryonc is allowcd to buy a takaful policy whcth
cr Muslim or not. !n lact, in Malaysia, nonMuslims makc up thc largcst
portion ol takaful policy purchascrs by 2007 with a sharc ol 60 (8hatty,
2008). Howcvcr not cvcryonc is allowcd to scll takaful policy.
237
Types & Models Of Takaful Contract
Tc takaful products arc availablc in two lorms: general
22
and family
23
,
thc product shcll ol thc gcncral takaful agreement is morc comprchcnsivc
than that ol thc lamily takaful . Tc global avcragc markctsharc gurcs lor
mix-life and gcncral takaful wcrc 30 lilc to 70 nonlilc by 2007. How
cvcr thcrc arc somc rcasons that lcad lamily takaful to lag bchind gcncral
takaful (8hatty, 2008).
(i) Rcligious conccrns,
(ii) Lilc insurancc appcarcd to bc morc as a wagcr on lilc, sincc it
has intangiblc bcncts.
(iii) !slamic invcstmcnt tools wcrc short tcrm in naturc and vcry
limitcd.
(iv) Tc nccd lor wcllcducatcd and talcntcd pcoplc to handlc gcn
cral takaful products.
Sudan was thc rst nation to introducc lamily takaful lollowcd by
uropc and Malaysia in carly 1980, and Qatar and 8ahrain in 2001 and
2002 rcspcctivcly. Tc Arab countrics arc morc locuscd on thc group lam
ily takaful. Malaysia, Singaporc, and !ndoncsia arc ocring scvcral plans
24
lor lamily takaful. !n contrast, Gcncral
25
takaful startcd rst in Sudan in
1979 and had thcn wcrc crcatcd lor thc Middlc ast markcts by carly
1980s including: thc UA in 1980, Saudi Arabia in 1983, 8ahrain in 1989
and Qatar in 1995, drivcn by thc boost in cconomic dcvclopmcnt as a rc
sult ol high oil priccs.
n thc othcr hand, thcrc arc scvcral takaful opcrational modcls that
havc bccn adoptcd by takaful opcrator companics worldwidc such as mu-
darabah, wakalah, waqf, hybrids ol mudarabah and wakalah, taawuni and
nonprot lunds. Howcvcr thc rst two modcls arc most dominant, duc
to thc lact that thc mudarabah is widcly uscd in Asia, whilc wakalah has
bccomc popular in thc Middlc ast (Smith, 2007).
Basic Wakalah Model
General takaful
Tcrc will bc scparatc contracts in thc wakalah modcl, ol which onc
is uscd lor undcrwriting and thc othcr is uscd lor thc invcstmcnt activitics
238
ol takaful lunds. Although thc wakalah modcl has bccn widcly practiscd by
takaful opcrator companics in undcrwriting activitics, it is rarcly adoptcd lor
invcstmcnt activitics (Tolclat, 2008). !n thc wakalah modcl thc participants
placc thcir contribution into a pool ol donation (tabarru), hcncc thc wakalah
opcrator, is cntitlcd to a lcc (wakalah lcc), lor thcir cort to managc thc
takaful lund rcgardlcss ol thc pcrlormancc ol thc pool. !t is an (uplront lcc)
26
which is calculatcd bascd on an agrccd pcrccntagc ol thc total lund. Tc
wakalah lcc should bc approvcd by thc shariah supcrvisory board (SS8)
27
.
Tcrcby, most ol thc opcrators will dcclarc thcir wakalah lcc at thc bcgin
ning ol thc contract, but thc loading will bc calculatcd at thc cnd ol thc
ycar oncc thc actual cncountcrcd cxpcnscs havc bccn dcclarcd according
to an accuratc lcc calculation. Tc wakalah lcc should bc dircctcd to thc
sharcholdcrs lund as an incomc lor thc opcrator. Altcr that action is con
ductcd, thc opcrator managcs thc lund by complying with thc lollowing
proccdural stcps.
(i) All dircct cxpcnscs
28
arc dcductcd lrom thc rcmaining lund.
(ii) !ndircct cxpcnscs
29
arc paid by thc opcrator only il thcrc is a
surplus in thc takaful lund that has bccn sharcd bctwccn thc
opcrator and thc participants, othcrwisc it will bc paid lrom thc
takaful lund (Lcwis, 2003).
(iii) Participants will givc thc right to thc opc tor to invcst thcir
lunds lor an opcrator invcstmcnt lcc
30
.
(iv) Tc takaful lund at this stagc rcprcscnts thc incomc gcncratcd
lrom invcstmcnts altcr dcduction ol thc managcmcnt lcc lor
thc opcrator with thc undcrwriting surplus addcd. Tc combi
nation ol both ol thcsc amounts rcprcscnts thc total surplus in
thc takaful lund.
(v) Tc opcrator takcs part ol thc surplus as a rcscrvc to strcngthcn
thc position ol thc takaful lund.
(vi) Tc rcmaining surplus in thc takaful lund is solcly owncd by thc
participants
31
and thc opcrator has no right ovcr this lund as pcr
AA!F!
32
.
As a rcsult, thc takaful opcrator has thrcc sourccs ol incomc (i) thc
wakalah lcc lrom undcrwriting activitics, (ii) thc lund invcstmcnt lcc and
(iii) invcstmcnts on thc opcrators own capital.
239
Figure 1: 8asic Wakalah Modcl lor Gcncral pcrational

Source: ngku ct al. (2008, 53), !FS8 (2009, 28)
Family takaful
Likc thc gcncral wakalah modcl, thc modcl hcrc uscd lor undcrwrit
ing and invcstmcnt activitics, thc modcl hcrc can bc dcviatcd according to
thc naturc and scnsitivity ol thc undcrwriting policy cncountcrcd (Tolclat,
2008). For cxamplc, il thc policy conccrns (i) risk protcction lrom dcath,
thcn thc contribution splits into two channcls. Tc rst contribution gocs
to thc wakalah Agcnt, lor thcir managcmcnt cort and othcr lccs rclatcd
to thc lamily policy il any, whilc thc sccond contribution gocs to thc
Participants Spccial Account PSA, in thc lorm ol donations
33
(tabarru)
to participatc in thc risk ol dcath protcction pooling. n thc othcr hand,
il thc policy is writtcn as (ii) a Family Takaful savings policy, thcn thc con
tributions arc split into thrcc channcls. Tc rst two channcls lollow thc
alorcmcntioncd policy. Howcvcr, a small portion this timc gocs to thc PSA
to covcr mortality risk, whilc a substantial portion gocs to thc Participants
Account PA lor thc purposc ol savings and invcstmcnts. Furthcrmorc, thc
PSA, and sharcholdcrs lund opcratc in thc samc way as thc takaful opcr
atcs in gcncral. Vhilc thc PA rcprcscnts thc savings policics, most ol thc
invcstmcnts hcrc arc accomplishcd on a long tcrm basis, thcrcby thc takaful
opcrator dcscrvcs a managcmcnt lcc which is calculatcd as a pcrccntagc ol
thc total invcstcd asscts, and this lcc rcprcscnts thcir cort to managc such
an invcstmcnt lund. Tc takaful opcrator as a rcsult has lour sourccs ol
incomc, (i) the wakalah lcc lrom undcrwriting activitics, (ii) a lund invcst
mcnt lcc lrom thc PSA, (iii) a lund invcstmcnt lcc lrom thc PA and (iv) an
inccntivc pcrlormancc lcc il allowcd pcr thc opcration proccdurcs.
240
Figure 2: 8asic Wakalah Modcl lor Family pcrational

Source: !FS8 (2009: 28)
Basic Mudarabah Model
General takaful
Tc contract undcr thc mudarabah modcl will involvc prot shar
ing bctwccn thc invcstor
34
(rabb al-mal) and thc lund managcr (mudarib),
according to a prcdctcrmincd ratio. !n thc classical contract thcrc is no
xcd rcturn lor invcstors as prot is undctcrmincd and thc opcrator or thc
mudarib has lull control, i.e. rabb al-mal cannot participatc in thc ordinary
coursc ol busincss conductcd by thc mudarib. Howcvcr thc mudarabah in
vcstmcnts arc considcrcd a sidc activity to optimizc thc usc ol lunds until
claims arc madc or othcr cxpcnscs arc incurrcd (ngku et al., 2008). Tcrc
is only onc contract to covcr both undcrwriting and invcstmcnt activitics,
thc contract schcmc usually opcratcs on thc basis ol oncycar participa
241
tion. Tcrc will also bc no uplront managcmcnt lcc or invcstmcnt lcc to
bc takcn out ol thc contribution toward thc sharcholdcrs lund as in thc
wakalah modcl, howcvcr othcr cxpcnscs such as claims, rctakaful arrangc
mcnt and dircct cxpcnscs arc dcductcd dircctly lrom thc takaful lund that
was paid by thc participants, whilc othcr indircct cxpcnscs such as salarics
and rcnt will bc paid lrom thc sharcholdcrs lund (Hassan et al., 2007).
Furthcrmorc, thc opcrator and thc participants only sharc dircct invcst
mcnt incomc in accordancc with a mutually agrccd mudarabah prot sharc,
whilc thc undcrwriting surplus altcr dcduction ol all claims and rcscrvcs
should not in principlc bc sharcd with thc opcrator bccausc thcy arc not
a mudarabah invcstmcnt prot, but instcad a rcsiduc ol thc takaful lund
(ngku et al., 2008). Tc Takaful opcrator as a rcsult has two sourccs ol
incomc: (i) prot sharc in thc invcstmcnt activity surplus and (ii) prot on
thcir capital invcstmcnt activitics.
Figure 3: 8asic Mudarabah Modcl lor Gcncral pcrational

Source: !FS8 (2009: 28)
Family takaful
Tc opcrator schcmc hcrc lollows thc samc opcration channcls as
thosc ol thc sharcholdcrs lund and thc PSA that wcrc adhcrcd to in thc
wakalah lamily modcl. Howcvcr, sincc thc PA contains only a saving clc
mcnt ol lamily takaful, thcn thc opcrator sharc prots arc gcncratcd lrom
thc invcstmcnt activitics ol thc PA. Tc Takaful opcrator as a rcsult has two
sourccs ol incomc, (i) thc prot sharc lrom invcstmcnt activitics lor PSA
and (ii) thc prot sharc lrom thc assct invcstmcnt undcr PA.
Mudarabah
!nvcstmcnt
Prots
Takalul
pcrator
Contribution
Prots
Contribution
Participants
Tabarru
Surplus Claims
Lcss
100
100x
x
242
Figure 4: 8asic Mudarabah Modcl lor Family pcrational
Source: !FS8 (2009: 28)
Modied Wakalah & Mudarabah Model
Modied wakalah model
Tc modicd wakalah modcl lollows thc samc opcrational conccpt
as in thc (basic) gcncral wakalah modcl. Howcvcr, as thc opcrator hcrc will
sharc in thc nct undcrwriting surplus
35
ol thc participants lund, such
an act should bc conductcd only with thc lull conscnt ol thc participants
(ngku et al., 2008, Asaria, 2009). Tc Takaful opcrator as a rcsult has lour
sourccs ol incomc: (i) a wakalah lcc lrom undcrwriting activitics, (ii) a lund
invcstmcnt lcc, (iii) invcstmcnts on thc opcrators own capital and (iv) an
inccntivc pcrlormancc lcc, i.e. sharing in thc nct undcrwriting surplus ol
thc takaful lund.
Contribution
Prots
Participants
Account, PA
Participants
Contribution
Participants
Spccial
Account, PS
Contribution
Prots
!nvcstmcnt
!nvcstmcnt
Risk Fund
Participants
Participants
Takalul
pcrator
Takalul
pcrator
243
Figure 5: Modicd Wakalah Modcl pcrational

Source: Asaria (2009:11)
Modied Mudarabah model
Tc modicd mudarabah modcl lollows thc samc opcrational con
ccpt ol thc basic mudarabah modcl. Howcvcr thc opcrator will sharc in thc
nct undcrwriting surplus, whilc thc invcstmcnt incomc is ploughcd back
into thc takaful lund, i.e. thc opcrator will not sharc with thc participants
in any prot arising lrom thc mudarabah invcstmcnt (ngku et al., 2008,
Asaria, 2009).
Tc prots arc dcncd as thc positivc dicrcncc (or surplus) bctwccn
thc balancc ol thc takaful lund at thc cnd ol thc mudarabah contract and
thc balancc ol thc takaful lund at thc bcginning ol thc mudarabah contract,
i.e. thc opcrator trcats thc nct undcrwriting surplus as mudarabah prot
and sharcs thc surplus according to an agrccd prot sharing ratio
36
. Tc
Takaful opcrator as a rcsult has two sourccs ol incomc undcr this modcl:
(i) prot sharc in nct undcrwriting surpluscs, and (ii) prot on thcir capital
invcstmcnts activitics.
!nvcstmcnt
Prots
Takalul
pcrator
Contribution
Prots
Vakala
Managcmcnt
Managcmcnt
Frcc
Pcrlormancc Frcc
Contribution
Participants
Tabarru
Surplus
Claims
Claims
Lcss
100
244
Figure 6: Modicd Mudarabah Modcl pcrational

Source: Asaria (2009:10)
Mixed Module
General Takaful (Wakalah for Underwriting & Mudarabah for
Investments)
Undcr this modcl
37
thc wakalah contract is uscd lor undcrwriting
activitics, risk asscssmcnts, rctakaful and in rcturn lor claim managcmcnt,
thc wakil chargcs a spccicd and agrccd managcmcnt lcc. Tis lcc may
vary bascd on thc pcrlormancc ol thc takaful opcrator (ngku et al., 2008,
Asaria, 2009). At thc samc timc, a mudarabah contract is uscd lor thc pur
posc ol invcstmcnts in which thc opcrator acts as a mudarib on bchall
ol thc participants, that is thc opcrator managcs thc takaful lund asscts
and sharc in thc incomc gcncratcd lrom thc invcstmcnts bascd on a prc
agrccd prot ratio at thc contract inccption pcriod to satisly thc Shariah
rcquircmcnts. Unlikc, thc wakalah modcl, thc opcrator rcccivcs a sharc in
thc prot oncc gcncratcd lrom invcstmcnt, othcrwisc thcrc would bc no
incomc gcncratcd lor thc opcration, howcvcr, thc participants rcmain li
ablc lor a loss cncountcr. Tc Takaful opcrator undcr this modcl has lour
main sourccs ol incomc, (i) prot lrom thc wakalah lcc lor undcrwriting
activitics, (ii) thc prot sharc gcncratcd lrom assct managcmcnt ol thc
takaful lund, (iii) prot lrom thc opcrators own capital invcstmcnts, and
(iv) a possiblc sharing on thc invcstmcnt rcturn, as an inccntivc lcc lor
good pcrlormancc.
Mudarabah
!nvcstmcnt
Prots
Takalul
pcrator
Contribution
Prots
Contribution
Tabarru
Surplus
Claims
100
100x
x
Participants
245
Figure 7: Gcncral Wakalah-Mudarabah Modcl pcrational

Source: ngku ct al. (2008: 53)
Family Takaful (Wakalah for Underwriting & Mudarabah for
Investments)
Undcr this schcmc thc sharcholdcrs lund and thc PSA opcratc thc
samc way as in thc gcncral mixcd modcl, whilc thc opcrator invcsts in thc
PA lund on a mudarabah basis, thc gcncratcd prot will bc sharcd bctwccn
thc opcrator and thc participants upon thc agrccd ratio. Tc opcrator has
vc main sourccs ol incomc in this modcl: (i) prot lrom the wakalah lcc
lor undcrwriting activitics, (ii) a prot sharc undcr PSA invcstmcnt activi
tics, (iii) a prot sharc undcr PA invcstmcnt activitics and (iv) prot lrom
thc invcstmcnt ol thc opcrators own capital couplcd with (v) thc possibil
ity ol inccntivc paymcnts or good pcrlormancc lccs.
!nvcstmcnt Rcvcrsc
RcTakalul
Mudarabah
Prots
Prots Sharing
(100x)
Prots Sharing x
Takalul Fund
Takalul
pcrator
Participants
Cash rcturn
Tabarru
Surplus
Claims
Claims
Lcss
Vakalah
Managcmcnt
Vakalah
Frcc
246
Figure 8: Family Wakalah-Mudarabah Modcl pcrational
Source: !FS8 (2009:30)
Waqf Takaful Model
A Waqf
38
is cstablishcd by thc cquity holdcrs ol thc takaful company
to compcnsatc thc bcncciarics or participants ol thc takaful schcmc in
thc utmost sinccrity in ordcr to hclp thosc laccd with dicultics (!smail,
2006). Tc participants ol thc Takaful will givc a prcmium undcr thc intcn
tion ol a donation or Tabarru to thc waqf to participatc in thc objcctivcs
ol thc takaful principlcs, thc donation ol thc waqf can bc dctcrmincd by thc
takaful company on thc basis ol an actuarial cstimatc. Any pcrson signing
thc proposal lorm, contributing to thc waqf and subscribing to thc policy
documcnts shall bccomc a mcmbcr and a bcncciary ol that waqf lund
(!smail, 2006). Howcvcr, sharcholdcrs do not havc thc right to acccss thc
waqf lunds capital, asscts or prots but rathcr thcir job is to makc rulcs lor
and administcr thc lund (Tolclat, 2008).
Contribution
Prots
Participants
Account, PA
Participants
Contribution
Vakalah
Fccs
Participants
Spccial
Account, PS
Contribution
Prots
!nvcstmcnt
!nvcstmcnt
Risk Fund
Participants
Participants
Takalul
pcrator
Takalul
pcrator
247
Claims on surplus altcr dcduction and othcr cxpcnscs will bc dis
tributcd according to thc waqf dccds into thrcc options: (a) a portion will
bc uscd as a rcscrvc to mitigatc any luturc losscs, (b) a portion is to bc dis
tributcd back to thc participants, and a portion is to bc distributcd to thc
poor and lor charitablc purposcs (ngku et al., 2008). !n casc ol a dccit
in thc lund thc opcrator will providc qard hassan to covcr thc dccit. Tc
qard hassan will bc rcpaid lrom luturc surplus in thc lund (Tolclat, 2008).
Waqf is considcrcd a lcgal cntity that can cxcrcisc owncrship rights ovcr
thc contribution amount subjcct to thc tcrms ol thc waqf dccd, particularly
on invcstmcnts, compcnsations and thc status ol surplus amount (ngku
et al., 2008). Finally, il thc lund is liquidatcd, thcn thc outstanding balancc,
altcr thc paymcnt ol all ducs and payablcs, will bc utilizcd lor charitablc
purposcs (!smail, 2006).
Figure 9: Tc rclationship bctwccn participants and thc takaful opcrator in thc Waqf schcmc.

Source: Cizakca (1998)
Takaful-Waqf operation models
Tc takaful opcrator is thc managcr ol thc takaful waqf lund, hcncc
thcy will administcr thc lund bascd on two lorms,
(i) Wakala waqf
As pcrator/Managcr, thc takaful company will pcrlorm all lunc
tions ncccssary to managc thc insurancc activitics ol thc waqf, such as
thc undcrwriting ol contributions , thc actuarial asscssmcnt ol risks
and paymcnt ol claims. Tc managcmcnt will bc conductcd undcr a
wakala lcc to bc dcductcd lrom thc contributions ol thc participants.
Allocatc
Moncy
onation Paid
by Participants
As a Vakccl
Takalul pcrator Vaql Participants
Vaql Fund
As a Mudarib
Company
248
(ii) Mudarabah waqf
As mudarib ol thc lund, thc takaful company will managc thc invcst
mcnt ol thc cxccss lunds ol thc waqf into Shariahcompliant invcst
mcnts and will participatc in thc prot ol thc lunds invcstmcnts at a
xcd, prcagrccd prot ratio.

Other Takaful Models
Te Sudanese model
Tc systcm ol takaful opcrating in Sudan workcd thc samc way as thc
mixcd wakalah mudarabah modcl that wakalah uscd lor undcrwriting ac
tivitics and mudarabah uscd lor invcstmcnt activitics. Tc opcrator acts as a
managcr looking altcr participants lunds and dcaling with tcchnical issucs
lor a wakalah lcc, howcvcr thc lcc is not calculatcd as a pcrccntagc ol thc
total availablc lund rathcr as a lump sum to bc uscd as rcmuncration to thc
board ol sharcholdcrs. Tc rcmuncration amount is considcrcd ncgligiblc
comparcd with thc rcgular wakalah pcrccntagc lcc. A wakalah pcrccntagc
lcc ol thc total contributcd amount was prohibitcd by thc Highcr Shariah
Supcrvisory Council (HSSC) in Sudan, thcy considcrcd thc wakalah pcr
ccntagc lcc as riba in thc scnsc that thc moncy is accumulatcd without
any cort on thc part ol thc company (Alarir, 2004). Alariar argucs
that thc participants ol an !slamic insurancc company should cstablish thc
company and should act as sharcholdcrs ol thc company in thc samc way
as in thc mutual insurancc company. Hc also bclicvcs thcrc is no nccd lor
capital in thc !slamic insurancc company cxccpt to satisly thc lcgal rcquirc
mcnts to cstablish thc company. Tc sharcholdcrs arc not allowcd to sharc
thc surplus ol thc takaful lund or to sharc in thc invcstmcnts prots, and
arc also not rcquircd to providc qard-hassan in thc casc ol dccit. Tc loan
amount can bc takcn lrom thc availablc lund rcscrvcs, il thc rcscrvcs arc
not sucicnt to compcnsatc thc dccit, thcn thc opcrator will cstablish a
ccntral lund to act as thc lcndcr (Alarir, 2004).
Te Saudi Arabian cooperative insurance model
Tc Saudi Arabian Monctary Agcncy (SAMA) rcquircs all insur
ancc companics to opcratc undcr a coopcrativc insurancc busincss modcl,
which is a kcy lcaturc ol thc takaful modcl ( & Y, 2010). Shariah schol
ars havc indicatcd that thc Saudi coopcrativc modcl is similar to a takaful
modcl (in that it incorporatcs lunds scgrcgation and surplus distribution).
249
Tc coopcrativc insurancc modcl works in thc samc way as thc takaful
modcl. Tc SAMA dircctivcs , ocially sct out in thc !mplcmcntcd Rcgu
lations, Articlc 70, has idcnticd thc surplus distribution as bcing bctwccn
thc company and thc participants. SAMA has indicatcd that 10 ol thc
nct surplus shall bc distributcd to thc policyholdcrs cithcr dircctly or in
thc lorm ol rcduction in prcmiums lor thc ncxt ycar. Tc rcmaining 90
ol thc nct surplus shall bc translcrrcd to thc sharcholdcrs incomc statc
mcnt. Sharcholdcrs nct incomc shall bc translcrrcd to thc statcmcnt ol
sharcholdcrs cquity similar to how this is conductcd in thc takaful modcl.
Furthcrmorc, 20 ol thc nct sharcholdcrs incomc shall bc sct asidc as a
statutory rcscrvc until this rcscrvc amounts to 100 ol thc paid capital
(SAMA, 2005). Tcrclorc, any dccit in thc policyholdcrs lund is bornc
solcly by thc sharcholdcrs. cspitc SAMA rcgulations, which arc dircctcd
towards coopcrativc insurancc, only a numbcr ol coopcrativcs opcratc as
solc T ( & Y, 2010, 2011). xamplcs ol thcsc opcrators arc (AlJazira,
2008, SAA8, 2009, AlAhli, 2010).
Conclusion
Tc main issuc that distinguishcs takaful lrom convcntional insur
ancc is thc conccpt ol taburru and thc uniquc and lair trcatmcnt ol par
ticipants which is quitc obvious by scparating thc sharcholdcrs lund lrom
thc participants lund, in that cach party will havc his own balancc shcct.
Furthcrmorc, somc opcrators might usc a homogcncous modcl such as
wakalah or mudarabah, whilc thc othcr might usc a hybrid ol wakalah and
mudaraba; namely, thcy usc thc wakalah modcl lor undcrwriting and thc
mudarabah onc lor invcstmcnt. Such a mixcd approach has bccn adoptcd
by scvcral opcrators worldwidc
39
. Accordingly, takaful contractual conccpts,
tcrms and mcchanisms will dicr lrom convcntional insurancc in that in
thc takaful busincss thcrc will bc a strong rclationship bctwccn partici
pants and opcrators, participants and participants, participants and lund,
opcrator and lund. Finally, takaful is still at thc dcvclopmcnt stagc with a
numbcr ol challcngcs yct to ovcrcomc, such as innovativc products, build
ing re-takaful capacity, assct managcmcnt and markcting channcls, and thc
standardisation ol takaful modcls worldwidc.
250
xbxo:vs

1 Tc word opcrator uscd in thc takalul busincss instcad ol insurcr, which shows a
strong rclationship bctwccn takalul company and its participants, that thc opcrator
considcrcd as a custodian ol thc participants lund and not thc owncr ol thc lund,
which comcs in contrast ol thc convcntional insurancc that thc convcntional insurcr
is considcrcd thc owncr ol thc lund.
2 Policyholdcrs.
3 Tc !slamic law.
4 Accounting Auditing rganization lor !slamic Financial !nstitutions
5 Tc conccpt ol donation is considcrcd to bc thc backbonc ol takalul in supporting
thc rcal mcaning ol mutual coopcration, as pcr |Quran, 5:|.
6 Tc insurancc valuc will bc so intangiblc that its valuc cannot bc apprcciatcd
7 AlQaradawi suggcsts that donation should bc thc basis ol thc contract, il insurancc
is to bc sharia compliant (AlQaradawi,2003). Tc spirit cmbodicd in thc conccpt
ol tabarru is that thc participants arc not thinking only ol thcir own protcction but
thcy should also bc thinking ol hclping othcr participants, without thc conccpt ol
donation thc contract will bc that ol buying and sclling ol insurancc. (Lcwis, 2003)
8 implcmcnting thc !slamic law whcn dcaling with insurancc
9 Continucd charity such as building mosqucs, librarics, hospitals and schools on bc
hall ol thc participant upon his/hcr dcath
10 8ascd on thrcc prohibition clcmcnts: (1) unccrtainty ol outcomc (gharar), (2) gam
bling (maisir), and (3) dcaling with !ntcrcst (riba) which is lrowncd upon by Shariah
law.
11 Tosc among thc participants who lacc thc risk and arc assistcd by thc lund arc
known as insurcd (almoaman alih).
12 Tc opcrator is dcncd according to Scction 2 ol thc takalul Act 1984 as a pcrson
who carrics on Takalul busincss as Takalul opcrator, Takalul agcnt and Takalul bro
kcr rcspcctivcly.
13 Tosc who contributcd to thc mutual lund (ras almal) arc known as participants
(sahib almal), whilc thosc who actually bcnct lrom thc lund arc known as thc
bcncciarics (almostad) ol thc coopcrativc lund.
14 Vhcn thc risk cvcnts occur.
15 Tc dicrcncc bctwccn purc tabarru and commitmcnt to tabarru dcpcnds on thc
timing ol thc translcr ol thc owncrship. !n purc tabarru thc owncrship ol thc muta
barri (donator) is not translcrrcd by thc absolutc contract wording, but rathcr trans
lcr occurs whilc handling thc donation to thc nccdy, i.c. owncrship ol such matcrials
moncy has bccn translcrrcd lrom thc donator to thc nccdy oncc it rcachcs thc
nccdy custody. !n thc commitmcnt to tabarru, thc owncrship is automatically trans
lcrrcd to thc mutabarra (donatcd pcrson) by thc absolutc contract
16 8ascd on an !ntcrvicw with r. Abdul Sattar Abu Ghuddah, Mcmbcr ol thc !slamic
Fiqh Acadcmy, Jcddah, at thc First Public Mccting with 8ank AlJazira Sharia 8oard
Mcmbcrs, Hilton Hotcl Jcddah, ct. 2009.
17 il thc contract is bascd on wakalah
18 il thc contract is bascd on mudharabah
19 Such as pcrils or hazard.
20 !l thc participants arc intcnding to invcst somc ol thc moncy as thcir savings and
donatc somc portions lor mutual indcmnity, thcn thc govcrning contract is mush
arakah, togcthcr with tabarru or donation ol a portion ol thc contribution to thc
takalul lund (Ali and dicrno, 2008).
251
21 Such as picty purication, brothcrhood, charity (tabarru or contribution), mutual
guarantcc, community wcllbcing as opposcd to prot maximization.
22 !slamic Gcncral !nsurancc.
23 !slamic Lilc !nsurancc.
24 Vithin thc scopc ol Family takalul arc ocrcd dicrcnt typcs ol saving and protcc
tion products, such as cducation, mortgagc, rctircmcnt plans, protcction lor critical
illncss or disability, rctircmcnt annuitics and waql plans. A lamily plan may last as
long as 10, 15, 20 ycars or morc (8hatty, 2008).
25 Gcncral takalul is morc conccrncd with causality typcs ol product in thc lorm ol in
dividual rctail products such as houschold rc protcction, motor, mcdical and hcalth
covcr, pcrsonal accidcnt protcction during Hajj scason, or corporatc scgmcnt prod
ucts such as marinc and aviation to covcr transit cargo, cnginccring, or rc, thc con
tract lor which normally stands lor onc ycar.
26 Tc opcrator cannot ask lor an additional wakalah lcc in thc luturc il thc calculatcd
lcc was undcrcstimatcd.
27 CC8 Rulcbook, 2005.
28 Such as claims, cxpcnscs, lcgal claims costs and rctakalul arrangcmcnts.
29 Such as salarics and rcnts.
30 8ascd on an agrccd pcrccntagc ol thc total managcd asscts rcgardlcss ol thc invcst
mcnt pcrlormancc.
31 !t is wisc to mcntion that somc companics distributc thc surplus lor all participants
including thosc who incurrcd a claim to satisly thc main purposc ol insurancc in
!slam.
32 AA!F! shariah standard No. 26 (5/5) ol 2007 rulcs statcd Surplus can only bc
distributcd back to thc participants and cannot bc takcn by thc takalul opcrator, thc
distribution ol surplus will bc bascd on thc participants donation pcrccntagc sharc.
33 Participants donation varics in accordancc to his agc at thc timc ol thc contract
(Hassan and Lcwis, 2007).
34 Tc participants do not pay thcir contribution lor thc mudarabah invcstmcnt capital
as a principal objcctivc. Tc main objcctivc rcmains to cntcr into a brothcrhood mu
tual indcmnity schcmc by implcmcnting thc donation or tabarru contract.
35 Tc undcrlying argumcnt is that sincc thc opcrator will providc qard hassan to covcr
any dccit in thc takalul lunds, thcn thc opcrator is cntitlcd to sharc in thc positivc
pcrlormancc ol takalul lunds. Additionally thcy arguc that thc surplus is a rcsult ol
good and cxpcrt managcmcnt by thc takalul opcrator cspccially in thc undcrwriting
ol contributions, asscssmcnt ol risks and claim managcmcnt. n account ol thc lact
that good managcmcnt has contributcd to thc availability ol thc surplus , thcy should
bc conscqucntly rcwardcd lor such good pcrlormancc.
36 Such a practicc bccn criticizcd as not complying with thc dcnition ol prot in
mudarabah and thus is not compliant with mudarabah rulcs gcncrally (ngku ct al.,
2008, Asaria, 2009).
37 Tis modcl is highly rccommcndcd by thc AA!F! to bc uscd by thc takalul op
crator (AA!F!, 2003). !t has a dominating prcscncc on both Middlc astcrn and
global markcts.
38 Tc word waql and its plural lorm awqal arc dcrivcd lrom thc Arabic root vcrb
waqala, which mcans causing a thing to stop and stand still. Tc sccond mcaning is
simply pious (charitablc) loundations (Cizakca, 1998). !n Shariah, waql is a volun
tary, pcrmancnt, irrcvocablc dcdication ol a portion ol oncs wcalth in cash or any
othcr kind to Allah (!smail, 2006).
39 Takalul intcrnational in 8ahrain, National Takalul in Malaysia, !slamic !nsurancc
company in Qatar.
252
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