CHAPTER 3 : Concept and Takaful Practices

Objectives Definition and basic principle of takaful Concept of Takaful Contract Element of Tabarru Practices of Takaful in Malaysia Differences between takaful and conventional insurance contracts and operations

1. Basic Principles of Takaful

1.1 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. 1.2 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. 1.3 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.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.

2. Concept of Takaful Contract

Takaful must be a valid contract compliant with Shariah principles and it consist of three important concepts i.e, Al-Takaful (Joint guarantee), Al-Mudharabah (Profit sharing) and AlTabarru (donation).

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2.1 Al-Takaful (Joint Guarantee) In Arabic means joint guarantee. In Takaful contract, there must exist a group of people jointly guaranteeing each other on a defined risk. 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. Therefore, mutual assistance has been created among the group. In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance. These fundamentals are based on the sayings of Prophet Mohammed (S.A.W.). Based on the hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some of the examples are: Basis of Co-operation: Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2) Allah will always help His servant for as long as he helps others. (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud). Basis of Responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim) One true Muslim (Mumin) and another true Muslim (Mumin) is just like a building whereby every part in it strengthens the other part. (Narrated by Imam al-Bukhari and Imam Muslim). Basis of Mutual Protection: By my life, which is in Allahs power, nobody will enter Paradise if he does not protect his neighbour who is in distress. (Narrated by Imam Ahmad bin Hanbal).

The basic fundamentals underlying the Takaful concept are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic Law.*

2.2 Al-Mudharabah (Profit Sharing) In principal, Al- Mudharabah is a commercial profit sharing contract between the provider or providers of fund for a business venture and the entrepreneur. The entrepreneur 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.

http://takafulproduct.blogspot.com/2008/12/principles-of-takaful.html

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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.

2.3 Al-Tabarru Takaful cannot accept the same concept as Insurance because Islamic law requires the contract of exchange to be free from gharar. (risk protection is not equal value to the premium charged) To make it legal, takaful contract must be based on tabarru (donation) contract. In relation to this a participant shall agree to relinquish as tabarru', certain proportion 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. The donor did not receive any predetermined consideration for this act. In essence, tabarru' would enable the participants to perform their deeds in sincerely assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. Issues of uncertainty, mistake, fraud or misrepresentation does not relevant because the donor has voluntarily gives away his portion of contribution The sharing of profit or surplus that may emerge from the operations of takaful, is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure. Therefore the provision of insurance cover as a form of business in conformity with Shariah is based on the Islamic principles of al-Takaful and al-Mudharabah. However, Tabarru should not be used for commercial purpose. Takaful operator cannot use the tabarru fund to cover the management operational cost, whereby it shall benefit the recipients alone. This action is on goodwill (favor on the donor i.e Participant). The doctrine of tabarru is traditionally considered to make takaful contracts a form of a unilateral contract with the takaful operator i.e a donation made without expectation of any return and in turn takaful operator also is deemed to enter into a unilateral contract with the donor to cover its risks. However, this analysis does not reflect what is happening in practice and in reality a customer who provides a contribution will do so expecting something in return, namely, the payment of claims. Consequently many contracts issued by takaful operators nowadays, appear substantially similar to those provided by their conventional counterparts and take the form of a bilateral contract.

http://www.clydeco.com/knowledge/articles/the-future-of-takaful-potholes-in-the-streets-of-gold.cfm

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3. Takaful Practices in Malaysia

A paper on Islamic economic system was presented and debated in the Malaysian Islamic Conference in 1969 which was mainly on insurance. A few resolutions was achieved : Insurance containing riba is unacceptable Although the present system is not Islamic, but it is permitted as there were no other alternatives. The government was asked to study the implementation of an Islamic insurance provider. The National Fatwa Committee has taken the initiative to discuss the matter and found that the present insurance system is unacceptable.The decision was brought to the attention of the National Fatwa Council and studies were done with cooperation from the middle east countries. In 1982, the Islamic Consultation Body established a special consultation body for the purpose of creating an Islamic insurance company in Malaysia.The special body proposed that an act called the Takaful Act be enacted to control the takaful business. Therefore, the Takaful Act 1984 was enacted, based on the Insurance Act 1963, and modified in order to ensure that the shariah is observed in the running of the business. Syarikat Takaful Malaysia Sdn Bhd was established in 1984 as the first Takaful Operator, following the enacted act The Islamic Fiqh Academy, emanating from the Organization of Islamic Conference, meeting in its Second Session in Jeddah, Kingdom of Saudi Arabia, from 10 to 16 Rabiul Thani (Rabiul Akhir), 1406 H (corresponding to 22-28 December 1985) has made a resolution concerning Insurance and Re-Insurance as Resolution No. (9):. And after reviewing the presentations made by the participating scholars during the Session on the subject of ` Insurance reinsurance`. And after discussing the same; And after closely examining all types and forms of insurances and deeply examining the basic principles upon which they are founded and their goal and objectives; And having looked into what has been issued by the Fiqh Academics and other institutions in this regard; RESOLVES The Commercial Insurance Contract, with a fixed periodical premium, which is commonly used by commercial insurance companies, is a contract, which contains major element of risk, which voids the contract and, therefore, is prohibited (Haram) according to the Sharia The alternative contract, which conforms, to the principles of Islamic dealings is the contract of co-operative insurance, which is founded on the basis of

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charity and co-operation. Similarly is the case of re- insurance based on the principles of co-operative insurance.

The following are the local takaful operators in Malaysia: List of Takaful Operators in Malaysia Syarikat Takaful Malaysia Sdn. Berhad Takaful Nasional Sdn. Berhad Takaful Ikhlas Sdn. Berhad CIMB Aviva Takaful Berhad Prudential BSN Takaful Berhad HSBC Amanah Takaful Berhad Hong Leong Tokio Marine Berhad MAA Takaful Berhad Year Incorporated 1984 1993 2003 2005 2006 2006 2006 2006

On 10 December 2010, a foreign-based takaful operator Great Eastern Takaful Sdn Bhd was launched in Kuala Lumpur, after a joint-venture with Koperasi Angkatan Tentera (M) Bhd.

4. Difference of Insurance Company and Takaful Operators Operations

Insurance Company Takaful Operators (TO)

Insurer provides indemnity in return for a premium paid by insured/policyholder

TO is not an indemnity provider. Obligation to pay benefit lies with Takaful Fund. Participants agree to join a scheme of mutuality of contribution and protection. Participants given up their ownership on some amount of donation from their contribution (tabarru)

Premium paid by insureds as a price for risk- transfer to insurer.

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Loss /Claims: Insured benefit.

Participant will benefit from the donation fund (Participants account)

No Loss/claims: Insurer earn a profit.

Participant and TO will share the profit by Mudharabah.

All premiums received are for the sole benefit of insurance company.

Contributions divided into Participant Account and Participants Special Account

Commercial gain : from underwriting surplus and investment yields on the funds provided by premiums

Commercial gain : Wakalah Fee and/or Mudharabah (profit sharing) from the investment yield and underwriting surplus.

All cost of claims will be paid by insurer

Not enough fund to pay claims: TO responsible to provide interest-free loan (qard hassan) to ensure solvency of Takaful Fund

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