TAKAFUL

THE ISLAMIC INSURANCE

Conventional Insurance
It means a way to provide security / and
compensation of what is valuable in the event
of its loss, damage or destruction based on the
principle of risk taking and speculation.

Problems with
Conventional Insurance
1. Gharar ( uncertainty )
Literally Gharar means: Uncertainty; cheating; (Jahalah) ambiguity.
There are two types of Gharar:

1. Jahalah which causes to dispute. E.g. un specified or

un quantified subject matter in sale.
2. Uncertainty of one party s profit. E.g. One party s
(such as policy holder s) profit in Insurance.
2. Khatar: ( Risk)
Taleequl milki al alkhatr, wal mal fil janibain:
To stipulate ownership (of any amount) on a risk, where both
consideration is money or commodity

Problems with
Conventional Insurance
2. Mayser ( Qimar or Gambling )
Mayser means Qimar in Arabic language.
Mayser has two basic elements which cause to
prohibit Mayser namely:
1. Gharar (2) Khatar
Having the above two elements speculation,
gambling and insurance is prohibited.

Problems with
Conventional Insurance
The participant contributes a small amount of
premium in a hop/risk to gain a large sum is
Khatar.
The participant loses the money paid for the
premium when the insured event does not
occur is Gharar.
The company will be in deficit if the claims
are higher than the amount contributed by
the participants is Gharar.

Problems with
Conventional Insurance
3. Riba
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)

Definition for Takaful

Takaful is an Arabic word that means
"guaranteeing each other".
It is a system of Islamic insurance based on the
principle of TA-AWUN (mutual assistance)
and Tabarru (Voluntarily) where the risk is
shared collectively by the group Voluntarily.
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.

Basic Principle behind Takaful

1.The principle of fortunate many helping the
unfortunate few" is a concept recognized by
Islam.
2.The Quran states in Surah Al-Maidah verse # 2:
"Help ye one another in righteousness and
piety, but help ye not one another in sin and
rancor".
3. Principles of Muwalat, Maaqil, and Kafalah
are examples for its permissibility.

Features
Firstly, the participation into a Takaful fund must be
performed with utmost sincerity in order to help those
faced with difficulties.
Every policy holder would pay his subscription in
order to assist those who need assistance
Any member or participant suffering a catastrophe or
disaster would receive a certain sum of money or
financial benefit from a fund, as also defined in the
pact, to help him meet the loss or damage

Operation of Takaful Fund

The transactional aspect of the commercial activity of
Takaful must be subject to the Islamic contractual
laws in order to ensure its compliance with the
Shariah .
The Company involved in takaful business, as the
operator, will accept payment of the takaful
installments or takaful contributions (premium) from
the participants (clients) for the takaful plan or takaful
scheme they wish to participate.

Operation of Takaful Fund

In order to eliminate the element of uncertainty
in the Takaful contract, the concept of tabarru (to
donate, to contribute, to give away) is
incorporated in it. In relation to this a participant
shall agree to relinquish as gift certain portion
of his Takaful installments .
For the service rendered as manager of the Takaful
Operations the company will charge a
management fee.

Operation of Takaful Fund

The Takaful Fund, consisting of the contributions
paid as Tabarru, will be further invested by the
Company based on the principle of Al Mudarabah,
through which the element of interest (riba) will be
replaced.
All premium holders will participate in pofit and loss.
Profit will be shared on agreed ratio.

Uses of Takaful
Takaful can be used to cover
Property like house, factory, mosque, offices
Vehicles (car, motorcycle etc..)
Goods ( like during import or export )
Valuables
Health, accidents and Life

Takaful

Contents
Market Overview
What is Takaful Insurance?
How is Takaful Insurance Different?
Takaful Models
Regulation
Challenges
16

Market Overview
Market born in Sudan in 1979
Global Presence
Largest market in the GCC and South East Asia
Global contributions of $2-3bn (2006) (60% GI, 40% LA and Pensions)
Annual growth of 15-20% over the past 3 years

African Presence
Largest markets in Sudan, Egypt, Tunisia, Algeria, Senegal
Smaller presence in South Africa, Gambia

Industry driven
High economic growth
Increased awareness
Increase in Sharia compliant financing

17

What is Takaful
Insurance ?
Compliant with Sharia principles (Islamic law)
Literally translated means

joint guarantee

Similar to co-operative or mutual insurance

Policyholders underwrite the risk
Policyholders own the company

Allowance for a charitable donation of surplus

Terminology
General Takaful general insurance
Family Takaful life assurance and pensions

18

How is Takaful Insurance

Different ?
Certain aspects of normal insurance conflict with Sharia
principles
Maysir
(Gambling)

insurers make bets on the loss occurrence

and this is deemed to be gambling

Gharar
(Risk & Uncertainty)

timing and amount of the loss are

uncertain

Riba
(Interest)

investments in interest bearing securities

and possible interest on loans

investments in commodities or involvement

in activities that are forbidden (alcohol, pork
etc).
19

Haram
(Forbidden / Unlawful)

How is Takaful Insurance

Different ?
Important Practical Implications of
Uncertainty No term or endowment assurance products
allowed
Interest Bond investments not allowed, equity investments
permissible since market risk replaces credit risk.
Haram Trading in futures is forbidden

20

Takaful Models
Differ in the way funds are shared between policyholders and the Takaful
operator
Wakalah (Fee based) Model
Operator acts as an agent, administers funds on behalf of participants
Receives a fee for operating expenses

Mudharabah (Profit share) Model

Operator acts as Mudarib (entrepreneur) with participants as the capital
providers
Losses paid by participants with a pre-agreed profit sharing agreement

Wakalah/Mudharabah (Fee based/Profit share) Hybrid

Wakalah for insurance activities and Mudharabah for investment profits
21

Wakalah Model
Management
Expenses

PARTICIPANTS

1
Contribution

Wakalah Fee (eg 30%)

3
Claims

4
Shariah compliant
Investments

Shareholders
Fund

Reinsurance/
Retakaful

Takaful
Fund

Reserves

Investment Profits

Underwriting Profit

Qard
Hassan

Surplus/(Deficit)

6
22

1.

Participants contribute under the takaful scheme.

2.

The contributions are divided into agency fee and takaful fund. The
division is based on the agreed ratio between the takaful operator
and the participants

3.

Agency fee which consist of agents remuneration and administration

expenses will be channeled to the takaful operator.

4.

The group takaful fund will be invested and any income or profit will
be returned to the group fund.

5.

Takaful operator will be entitled to a performance fee (as

commission) for managing the investment on behalf of the
participants

6.

End of year surplus (after deducting claims, re-takaful and reserve)

will be distributed to the participants.

23

Mudharabah Model
Management
Expenses

PARTICIPANTS

Contribution

Claims
Reinsurance/
Retakaful

Takaful
Fund

Shariah compliant
Investments

Reserves

Underwriting Profit

Investment Profits

Surplus/(Deficit)

X% of Surplus

Shareholders
Fund

Qard
Hassan
(interest
free loan)
In case of a
deficit in
the fund to
be repaid
from
surpluses in
future years

100% - X% of Surplus

Charitable donation
24

Wakalah / Mudharabah Hybrid

Management
Expenses

PARTICIPANTS

Contribution

Wakalah Fee (eg 30%)

Claims

Shariah compliant
Investments

Shareholders
Fund

Reinsurance/
Retakaful

Takaful
Fund

Reserves

Investment Profits

100% - X% of
Investment Profits
Charitable donation

Underwriting Profit

X% of Investment Profits

Qard
Hassan

Surplus/(Deficit)

100% of Surplus
25

Challenges
Not as developed as conventional insurance
Lack of global awareness
Shortage of skilled resources in the Takaful market
Limited Shariah compliant investments
Lack of harmonised regulation of Takaful industry

26

Summary
Takaful Insurance is based on Sharia principles
Market is developed in Far East and Middle East but less of a
presence in Africa
Similar to a mutual or co-operative, where policyholders
underwrite risk
Gambling, uncertainty, interest and forbidden activities are
removed
Models differ in the way funds are shared between
policyholders and the Takaful operator
Compliance is overseen by a Sharia Advisory Board
Still require a harmonised global regulatory framework
27

Questions ?

28

!
TAKAFUL!OPERATIONS!
Takaful'Business'Models'

(I) 'INTRODUCTION'
Currently!there!are!various!takaful!business!models!that!are!being!
used!in!the!various!jurisdicEons!throughout!the!world,!namely:!

The!Mudarabah!Model!
The!Wakalah!Model!
The!Hybrid!Model!
The!Waqf!Model!
The!Taawuni!or!CooperaEve!Model!

However,! the! most! widely! pracEced! models! are!

the! Mudarabah! and! Wakalah! models.! ! All! these!
models,! must! be! approved! by! the! Syariah! or! in!
30

 According!to!the!legal!structure!a!takaful!enEty!can!be!set!up!as!
follows:!
Takaful'En:ty'

!
Non=prot'
(Taawuni)'

Mutual'

Coopera:ve'

Commercial'
(Tijari)'

Stand'alone/'
subsidiary'

Branch''

Division'/'Unit'
(Window)'

!Elements!of!the!takaful!model:!
! CooperaEve!riskQsharing!for!protecEon!amongst!parEcipants;!
! Clear!segregaEon!of!roles!for!parEcipants!and!operators;!
! Incorporates!tabarru!or!waqf!concept!to!eliminate!gharar;!
! Avoids!riba!and!maisir;!
! All!transacEonal!aspects,!i.e.!investments;!are!in!compliance!to!Shariah!Law;!
31
! There!must!be!Shariah!Advisory!Council!as!advisors.!

(II) ' 'TAKAFUL'MODELS'

a) Mudarabah!Model!
A! mudarabah! contract! is! a! commercial! prot! sharing! contract!
between!the!provider!or!providers!of!fund!for!a!commercial!venture!
and!the!entrepreneur.!!In!the!mudarabah!model,!the!takaful!operator!
acts!as!a!mudarib!(entrepreneur)!and!the!parEcipants!as!Rab!ul!Mal!
(capital! provider).! ! The! takaful! operator! manages! the! operaEons! of!
the!fund!in!return!for!a!share!of!the!surplus.!!This!surplus!is!shared!in!
the!preQagreed!proporEon!between!the!operator!and!parEcipants!of!
the!fund.! !Any!losses!or!decit!arising!from!meeEng!the!liabiliEes!of!
the!fund!are!to!be!borne!solely!by!the!parEcipants!as!providers!of!the!
capital! on! the! condiEon! that! the! operator! is! absolved! from! any!
misconduct! and! negligence! acEons,! and! in! that! case! the! mudarib! is!
not!enEtled!to!receive!any!compensaEon!for!his!eorts.!
32

 The! mudarabah! model! appeared! in! two! forms.! ! In! the! pure!
mudarabah! models,! the! management! expenses! and! any! direct!
expenses! from! management! of! the! fund! will! be! borne! by! the!
operator!for!the!shareholders!fund!an!its!share!of!the!surplus!of!
the! underwriEng! and! investment! returns.! ! At! the! end! of! the!
nancial!year,!if!there!is!surplus!from!the!fund!a[er!meeEng!all!
liabiliEes!and!direct!expenses!such!as!retakaful!costs,!this!will!be!
shared! between! the! parEcipants! and! the! operator! in! the!
proporEons! that! have! been! agreed! at! the! outset! of! the! takaful!
contract.!
A! variaEon! from! the! mudarabah! model! is! the! modied!
mudarabah! model,! where! the! operator! and! the! parEcipants!
share! both! the! investment! prot! as! well! as! the! underwriEng!
surplus.!!Under!this!model!expenses!related!to!markeEng!will!be!
borne!by!the!takaful!fund.!
33

 The! following! are! diagrammaEc! illustraEon! of! the! mudarabah!

model:!
ParEcipants!!
!

Takaful!
Fund!
ParEcipants!
Accounts!
(Savings)!

!
ParEcipants!
Special!
Account!
(Tabarru)!
!

Investment!!
Prot!

Surplus!

deducted'

Takaful!
Operator!
(Shareholders!
Fund)!

Opera:on'of'Family'Takaful'in'a'Mudarabah'Model'
34

! Claims!
! Retakaful!
! Reserve!

Management!
Expenses!

deducted'

Opera:on'of'General'Takaful'in'a'Mudarabah'Model'
35

 For!the!general!takaful!mudarabah!model:!
ParEcipants! pay! takaful! contribuEons! which! form! a! takaful!
fund!
The!fund!will!be!invested!in!ShariahQcompliant!investments!
The!prot,!if!any,!will!be!shared!among!parEcipants!and!the!
takaful!operator!on!a!preQagreed!raEo!
At! yearQend,! the! surplus! (a[er! deducEng! claims,! retakaful!
costs,!reserve!and!management!expenses)!will!be!distributed!
to! the! parEcipants! (shared! with! the! operator! in! modied!
mudarabah).!
36

 For!the!family!takaful!mudarabah!model:!
ParEcipants! pay! takaful! contribuEons! which! form! a! pool! of! the!
parEcipants!fund.!
ParEcipants! fund! are! divided! into:! parEcipants! account! for! savings! and!
parEcipants!special!account!for!tabarru,!!based!on!a!preQagreed!raEo.!
The! funds! in! both! accounts! will! be! invested! in! ShariahQcompliant!
instruments.!
Investment! prot! will! be! shared! between! parEcipants! and! the! takaful!
operator.!
Amounts! in! the! parEcipants! account! will! be! paid! to! parEcipants,! upon!
death,!maturity,!etc.!
Amounts! in! the! parEcipants! special! account! will! be! paid! for! claims,!
retakaful,!reserve!and!management!costs.!
Any! surplus! will! be! distributed! among! parEcipants! (and! operator! in! the!
case!of!modied!mudarabah.!

37

b) The!Wakalah!Model!
In!a!wakalah!model,!the!takaful!operator!acts!as!the!agent!(wakil)!on!
behalf! of! the! parEcipants.! ! The! operator! is! paid! a! preQagreed!
management! fee! for! the! services! in! respect! of! underwriEng!
management! and! investment! of! the! fund.! ! The! operator! does! not!
share!in!the!underwriEng!surplus.!
In! underwriEng,! the! takaful! operator! manage! the! takaful! fund! on!
behalf! of! the! parEcipants.! ! Any! liabiliEes! for! risks! underwri\en! are!
borne! by! the! fund! and! any! surplus! arising! there! from! belongs!
exclusively! to! the! parEcipants.! ! The! operator! is! not! liable! for! any!
decit!of!the!fund.!
As! for! the! management! of! investment! acEviEes! of! the! fund,! the!
operator! is! also! paid! a! wakalah! fee! or! performance! fee! based! on! an!
agreed!percentage.!
38

!Below!are!diagrammaEc!illustraEon!of!the!model:!
!

deducted'

Opera:on'of'General'Takaful'in'a'Wakalah'Model'
39

Management'Expenses'
Agency'Fee'

Par:cipants''

Takaful'Operator'

Surplus''
Takaful'Fund'
!
!
!

'
Par:cipants'
Special'Account'
(Tabarru)'
'

Par:cipants'
Accounts'
(Savings)'

Claims'
Retakaful'
Reserve'

deducted'

Investment''

Prot''

Performance'Fee'

Opera:on'of'Family'Takaful'in'a'Wakalah'Model'
40

 For!the!general!takaful!wakalah!model:!
ParEcipants!pay!contribuEons!under!the!takaful!scheme.!
The!contribuEons!are!divided!into!(a)!agency!fee;!(b)!takaful!
fund,!based!on!an!agreed!raEo.!
The! agency! fee! consists! of! the! agents! remuneraEon! and!
administraEon!expenses.!
The!takaful!fund!will!be!invested!and!any!income/prot!will!
be!returned!to!the!fund.!
Takaful! operator! will! be! enEtled! to! a! performance! fee! for!
managing!the!investment.!
End!of!year!surplus!will!be!distributed!to!the!parEcipants.!

41

 For!the!family!takaful!wakalah!model:!
ParEcipants!pay!contribuEons!under!the!takaful!scheme.!
The!contribuEons!are!divided!into!(a)!agency!fee;!(b)!takaful!fund.!
The! agency! fee! consists! of! the! agencys! remuneraEon! and!
administraEon!expenses.!
Takaful! fund! divided! into,! parEcipants! investment! account! for! savings!
and!parEcipants!special!account!for!tabarru!purposes.!
Fund!in!both!accounts!are!invested!in!ShariahQcompliant!instruments.!
Investment! prot! is! returned! into! the! takaful! fund.! ! For! managing! the!
investment,!the!operator!will!be!enEtled!to!a!performance!fee.!
The! amounts! in! the! parEcipants! account! will! be! paid! upon,! death,!
maturity!of!the!scheme.!
The! amounts! in! the! parEcipants! special! account! will! be! used! to! pay!
claims,!reserve,!retakaful.!
Year!end!surplus!will!be!distributed!among!parEcipants.!

42

c) A!Hybrid!of!Wakalah!and!Mudarabah!Model!
This! model! basically! combines! some! features! in! both! the! wakalah! and! mudarabah!
model.!!The!wakalah!principles!is!applied!in!underwriEng!acEviEes!while!a!mudarabah!
contract! is! used! in! investment! of! the! takaful! funds.! ! Thus,! the! takaful! operator! is!
enEtled! to! agency! fee! for! managing! the! fund! as! a! wakil! and! a! share! of! prot! for!
managing!the!investment!of!the!fund!as!a!mudarib.!
A!diagrammaEc!illustraEon!of!the!model!is!as!follows:!
!

Agency'Fee'

Par:cipants''

Takaful'Operator'

Surplus''
Takaful'Fund'
deducted'

!
!
!

Claims'
Retakaful'
Reserve'

Investment''

Prot''

Opera:on'of'General'Takaful'in'a'Hybrid'Model'
43

 For!the!general!takaful!hybrid!model:!
ParEcipants!pay!contribuEons!under!the!takaful!scheme.!
The! contribuEons! are! divided! into:! (a)! agency! fee,! and! (b)!
takaful!fund.!
Agency! fee! consists! of! agency! commission! and!
administraEon!expenses.!
The! funds! are! invested! in! ShariahQcompliant! investments.!!
The!prot,!will!be!shared!among!parEcipants!and!the!takaful!
operator.!
At! yearQend,! the! surplus! will! be! distributed! to! the!
parEcipants!only.!

44

d)

A!hybrid!of!Wakalah!and!Waqf!Model!
The!general!concept!of!the!takaful!waqf!plan!is!designed!to!enable!any!
individual!to!save!regularly!with!the!aim!of!accumulaEng!a!fund!that!
can!be!le[!as!a!donaEon!under!the!waqf!system.!
In! this! model,! the! shareholders! of! the! takaful! operator! will! iniEally!
make! a! donaEon! to! establish! the! waqf! fund.! ! The! fund! needs! to! be!
invested! in! a! ShariahQcompliant! investment,! and! the! returns! will! be!
used! for! the! benets! of! the! parEcipants.! ! The! tabarru! fund! from!
parEcipants!special!account!also!becomes!part!of!the!waqf!fund.!
Based!on!waqf!principles,!the!donors!(shareholders!and!parEcipants)!
would! lose! ownership! rights! on! their! monetary! contribuEons! in! the!
waqf!fund.!!The!monies!eventually!become!the!property!of!waqf!fund!
which!can!only!be!used!for!benets!of!all!parEcipants.!
!

45

 The! shareholders,! who! act! as! the! owner! of! the! waqf! fund,!
delegates!authority!to!the!operator!to!become!administrator!of!
the! fund,! whose! funcEon! among! others,! include! paying! claims!
from! t! he! fund.! ! The! operator! also! undertakes! the! role! of!
investment!agent!and!is!enEtled!to!a!certain!percentage!in!the!
investment!prot!as!a!performance!fee.!
Generally,! there! are! two! types! of! waqf! model! in! respect! of!
surplus!sharing,!namely:!
Pakistani! model,! in! which! the! underwriEng! surplus! is! returned! to! the!
waqf!fund,!thus!not!distributed!to!either!the!parEcipants!or!operator.!
Commercial!waqf!model,!in!which!the!terms!on!surplus!sharing!are!spelt!
out! in! the! waqf! deed! in! accordance! to! the! intenEon! of! the! contracEng!
parEes!involved!in!the!waqf!arrangement.!
!
46

As'an'illustra:on:'
' ParEcipan

ts!

Agency!
Fee!

Takaful!
Fund!

Waqf!
Fund!
Investme
nt!
Prot!

Ini:al'dona:on'to'
create'waqf'

Takaful!!
Operator!

Surplus!!
deducted'

Claims!
Retakaful!
Reserve!

Opera:on'of'Wakalah'Waqf'Model'
47

Performa
nce!
Fee!

 For!the!above!wakalah!waqf!model:!
ParEcipants! pay! takaful! contribuEons! which! form! a! pool! of!
the!parEcipants!fund.!
A!waqf!fund!(iniEal!donaEon!from!shareholders)!is!formed.!
Agency!fee!deducted!from!the!waqf!fund.!!The!fee!consists!of!
agents!remuneraEon!and!administraEon!expenses.!
Waqf!fund!invested!in!ShariahQcompliant!investments.!
Investments!prot!will!be!channeled!into!the!waqf!fund.!!The!
takaful!operator!will!be!enEtled!to!a!performance!fee.!
Accumulated!amounts!will!be!uElized!to!pay!claims,!retakaful!
costs!and!maintaining!a!reserve.!
YearQend!surplus!will!be!returned!to!the!waqf!fund.!
!
48

e) Taawuni!or!CoQoperaEve!Model!
OriginaEng!from!Sudan!and!Saudi!Arabia,!this!model!emphasizes!
cooperaEon!where!donors!contribute!to!the!fund,!which!is!used!
to! generate! prots.! ! The! prots! will! be! shared! accordingly!
between!the!operators!and!the!contributors.!
However,!the!prot!to!be!distributed!does!not!include!deducEon!
of! expenses! (sta! costs,! establishment! and! administraEve!
expenses)! which! means! the! prot! distributed! to! customers! are!
actually!gross!prots.! !The!expenses!will!instead!be!deducted!
from!the!operators!share!of!prot,!which!means!the!returns!to!
the!operators!is!a!net!prot,!a[er!deducEon!of!expenses.!

49

Par:cipant'
Opera:ng'
Expenses'
Takaful'
Fund'

Claims'
Reinsurer'
Reserve'
'
Underwri:
ng'
Surplus'
'

Investmen
t''
Prot'

100% Total
Surplus

50

Coopera:ve'/'Mutual'Model'