Professional Documents
Culture Documents
The differences between Takaful and conventional insurance clearly have regulatory
1) A Takaful operator has an obligation to ensure that all aspects of the insurance
operations are compliant with Shari‟a rules and principles. To do so, it will draw on in-
implicitly, that its operations are in accordance with Shari‟a rules and principles.
Some regulators would consider they had a responsibility to ensure that such
3) In a Family Takaful plan there are generally no guarantees (i.e. they operate on a
„defined contribution‟ rather than a „defined benefit‟ basis). This implies that the risk
profile is different from the standard insurance product, where guarantees are
normally given in terms of maturity benefits, surrender benefits and death benefits.
This has implications both for capital adequacy and for disclosure to consumers.
4) The solvency regime needs to reflect the location of risk. For example, if there is a
deficit in the underwriting fund, how strong is the obligation on the operator to give an
interest free benevolent loan, and what account should be taken of this in the
solvency regime. This raises the issue in practice of whether liability can be extended
5) Because policyholders share in any surpluses and, in principle, meet any deficits in
the underwriting pool, there is a need to determine how their shares should be
obvious example). There are also limitations on the use of derivatives, for example to
hedge currency risk. The asset risk profile will therefore be different from that of a
conventional insurer.
procedure. While we determined that the audit firms inspected had put in place
systems and processes in line with global best practices, some specific areas for
improvements were identified. Other than instances where there was insufficient
documentation for the audit evidence obtained, there were instances where the
necessary audit procedures and evidence were clearly not performed or obtained.
providing insurance coverage for the general public. In the majority of cases the
companies are also listed on the stock exchange, where their shares are actively
9) Generally, many Takaful companies (especially those using the Mudaraba principle)
claim that their operations are based on the concept of mutual or co-operative
insurance as approved by the Muslim jurists. This claim is on the basis that:
o They receive the premium or contribution from the insured on the basis of the
(Mudarib) and the insured party the capital provider (Rab al-Mal).
o The insured party agrees to donate a certain percentage (or in some cases as
o Any surplus left in the fund after settlement of all claims is shared by the
insured party who has received compensation, the amount of which is greater
than what he could have received as a share of the surplus had he made no
be considered to be Shariah-compliant.
10) In this case, the parties to the contract are the company (which is owned in most
cases by the shareholders) on the one hand and the group of the insured parties on
the other hand. In other words, the company does not belong to either the insured
parties or the contributors. In fact, the company is a separate legal entity distinct from
the shareholders. Since the operation of the Takaful company is based on the
Mudaraba principle (as claimed), the insured parties are considered capital providers
the insured parties (Arbab al-amwal) and the company (Mudarib) according to the
scheme are entitled to share the surplus (or profit) in line with the contract, based on
11) Compensation or benefits to the insured parties are paid from the amount in the
Takaful fund, receiving the money from the premium or contribution paid by the
insured, which agree to pay the whole amount (or part thereof) as a donation
operation, the money in the Takaful compensation fund belongs legally to the
company and not to the insured-cum-investors (as in the case of A Family takaful
fund), and it is claimed (in line with the tabarru‟ principle) that by making the donation
(Tabarru‟), that is when the insured pay the premium or contribution, an individual
insured party is considered to waive his/her right to the money paid. However, if a
general view of Shariah is to be relied upon with regard to all the insured parties as a
group, the whole amount collected by the Takaful fund (particularly in the case of the
general takaful i.e. the compensation fund) must be considered either as trust money
or as a trust fund for the benefit of all the contributors. It can in no way be treated as
12) Furthermore it is not lawful in Mudaraba to stipulate that either or both parties to the
kind or money other than a share of the profit in an agreed ratio or percentage. If, for
amount of money or benefit other than the share of profit, the contract becomes void,
because of the possibility that the venture might not yield a profit. This would badly
affect the interest of the party who is not entitled to such favourable treatment due to
13) In a Takaful operation, there is seemingly a favourable stipulation for the benefit of
the investors/insured parties that in the case of certain events, they are entitled to an
discharge the specified civil monetary liabilities as listed in the contract. Technically
and legally this term in itself will render the Mudaraba contract void on the grounds of
unfair terms in the contract. In practice, however, the Takaful company agrees to the
insertion of such „unfair terms‟ because the company‟s actuaries have already
14) Thus such seemingly unfair terms are arguably not unfair to the Takaful Company
which is fully aware of the truth behind the matter. But the matter is not fully known to
the insured parties as individuals who will still hope to receive the benefits stated in
the contract. The Takaful Company knows from the very beginning that only a small
proportion of the insured will in the end claim benefits. There seems to be a
manipulation, some would argue, by the Takaful Company against the insured
15) In the case of the group, the accumulated contributions, which in fact belong to the
group (or at least held in trust for their benefit), will be shared in the end by the
company after all claims are paid. As for an individual insured, there is uncertainty as
to whether he will receive the stipulated Takaful benefits. In the end, what is shared
by the Takaful Company is nothing other than the proportion of the group‟s money
left in the Takaful account. It is therefore like paying the Mudaraba profit from the
capital provided by the investors, a practice which is not acceptable according to the
case of loss, the remaining capital of the mudaraba should be returned back to the
mudaraba investors, and not to be shared with the mudarib since what is supposed
to be shared is profit if there is any. This because in such a contract, the profit needs
to be paid or shared out of the actual profit (ribh) of the business. In the case of
Takaful, what is shared is a part of the capital left (after deduction made for payment
of claims) provided by all the insured as a group of investors (Arbab al-amwal). After
paying all the necessary claims, what normally happens is that the Takaful fund‟s
account would register a loss not a profit i.e. total amount of premium / contribution
paid (capital of the Mudaraba) minus total claims paid. This means that there is no
Mudaraba profit to be shared bearing in mind that profit is defined in Sharia law as
16) In accordance with Mudaraba principles and rules, there is thus no profit to be shared
as the business registers a loss. This clearly shows that the Takaful Company shares
what it is not entitled to share according to the principle of the Mudaraba contract. It
and its Mudaraba-based Takaful counterpart in this particular aspect. Above all, both
are owned by a certain group of people who are there to make a profit from the
17) This fact alone makes the mudaraba-based Takaful Company and its operations
applied. According to Abu Jayb in his book “al-Ta‟min bayn al-hazar wa‟l ibahah”,
mutual or co-operative insurance is principally valid under the Shariah according to
18) One major ground for the validity of truly mutual or co-operative insurance is based
on the Shariah principle that says uncertainty (Gharar) can be tolerated in Tabarru‟at
contracts (Mu‟awadat).
19) Since mutual or co-operative insurance / Takaful is entered into on the basis of a
the Tabarru‟, the parties are not really concerned about who gets what and at the
expense of whom since the core idea is to help one another in times of need, a true
where the prime motive is to make profit. The situation is akin, for instance, to when
one makes a donation or contribution to the tsunami relief fund. One does not expect
any particular return from one‟s donation. The intention is to help the victims of the
tsunami.
20) Additionally, in mutual insurance or Takaful, all contributors are partners in the
relevant entity having equal rights and obligations. The prime objective of the
Management of the entity is normally put in the hands of some of the members acting
on behalf on the rest. Salaried staffs, if any, are paid by the entity to run the same for
companies are owners of the entities, while at the same time receivers of benefits of
the coverage. It is thus unlikely that the entity will act in ways prejudicial to the
21) In commercial insurance/ Takaful, the situation is different. When the insurance or
Takaful companies sell their products to the insured parties (who do not own the
company), the companies‟ main concerns are to safeguard the interest of the
shareholders (who are in the business to make profit), and not, as a general rule, that
situation.
22) Although the commercial Takaful operation as is practiced today seems to be the
Modern commercial Takaful companies are more akin to normal business ventures
that they have provided the society with an alternative, which is closer to the spirit of
the Shariah, compared with those products available under conventional insurance.
23) However, there remain some dubious elements in the Mudaraba-based Takaful
emergence of new Takaful models in some parts of the world, based on the true
remedy the shortcomings of current Takaful operations, many of which are run on the
Mudaraba model.
24) Another alternative would be to run the Takaful operation on a basis similar to the
method applied in the running of Islamic unit trust companies, whereby the managers
of the fund are paid professional fees for the services rendered. The advantage of
this method is that it will make it clear that all funds collected belong to the
These are only examples, but they should be sufficient to indicate that regulatory regimes
Issue 1-6
1. http://www.iaisweb.org/__temp/issues_in_regulation_and_supervision_of_Takaful.pd
f, pp. 8
issue 7
2. http://www.theislamicglobe.com/index.php?option=com_content&view=article&id=2
00:auditing-concerns-for-takaful-firms&catid=7:article&Itemid=38
issue 8-24
3. http://islamiclawoffinance.blogspot.com/2010/03/shariah-issues-in-takaful.html