ISB654 ADVANCE FIQH MUAMALAT

MUDHARABAH CONTRACT AND PRACTICE IN TAKAFUL INDUSTRY. 1.0 Introduction Mudharabah (profit-sharing) is one of the contracts highlighted in Islamic banking and Takaful industry. Mudharabah contract is widely used in the system as one of the financial instruments offered by the banks. Mudharabah can be defined literally as increase or profit and technically as the contract of partnership where one provides capital and the other parties usually the entrepreneur will provide labour skills with the profit being shared among these two parties. The practice of Mudharabah had been long known as early as during the Prophet era where Prophet had once act as the mudarib (entrepreneur) to his wife Saidatina Khadijah R.A where she was the rabul-mal (capital provider) the profit had been shared between them after Prophet done with the business. Takaful industry in Malaysia had started as early as in the year of 1984 where the implementation of Takaful Act 1984 comes into picture. Takaful had opened up option to the Muslims to have protection scheme which is in accordance in Shariah. According to Takaful Act 1984, takaful can be defined as a scheme which is based on brotherhood, unity and helping out each other (participants) financially where all the participants had agreed to contribute some portion of money for that purpose. Takaful practice had been divided into two main broad categories which are General Takaful and Family Takaful.

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2.0 Framework 2.1 The Framework of Mudharabah Mudharabah is basically a contract which involved two persons. One will act as the capital provider and the other one is the entrepreneur. Entrepreneur will provide the labour skills and expertise in the field especially in the business field. The capital provider will act more like a sleeping partner in this contract. When the project joined by the parties had come to an end, the profit gain will be shared among the parties and if the project suffered loss the loss will be borne by the capital provider. Illustration of the process is as follows:1. Provide capital usually in monetary form 2. Provide labour skills

Capital Provider (Rabul-mal)

Entreprenur (Mudarib)

3. Capital received will be used in making the project Project A

Profit

Loss

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2.2 The Framework of Takaful In takaful usually there are involvement of four parties who are the participants, the takaful operator, the insured and beneficiary. The nature of Takaful is that anybody in the society can contribte a sum of money to a mutual-cooperative fund or also known as tabarru which ensure material security for others against a defined risk encountered by another s life or property. Illustrations are as follow which highlight Mudharabah/ Tijari model for General and Family Takaful. 2.2.1 General Takaful General Takaful basically covers matters pertaining to material loss of individuals as well as corporate bodies. This kind of protection focuses on properties, assets or other belonging of its participants. Some example of General Takaful schemes are, Fire Takaful, Motor Takaful, Accident/Miscellaneous Takaful, Marine Takaful and Engineering Takaful. From these schemes there are many divisions made which will specialized in more details product that will suit the customers needs.

General Takaful

Mudharabah Model

Contribution (Tabbaru ) Risk Management y y y y Re-takaful Claim Reserve Un-earned (UE) contribution Incurred but not reported (IBNR) Investment (Profit)

Company (%) Participant on no-claim ground (%) Gross Profit

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2.2.2 Family Takaful Family Takaful are designed to serve the requirements of individuals as well as corporate bodies. A family takaful plan for the individual is a long-term saving and investment programme. Apart from having protection, participants will enjoy return in certain period of time and at the same time will have the advantage of having protection when needed. For instance, Takaful Plan with maturity period, supplementary contract which relates to hospitalization, accident and permanent total disability, takaful mortgage plan, takaful plans for education and group takaful plan.

Family Takaful

Mudharabah Model

Contribution (Tabbaru ) Risk Management y y y y Re-takaful Claim Reserve Un-earned (UE) contribution Incurred but not reported (IBNR) Surplus Gross Profit Investment (Profit)

Company (%) Participant on no-claim ground (%)

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3.0 Mudharabah Contract as practice in Malaysia s Takaful Industry (Product) In Malaysia, nine takaful operators had been licensed. There are Syarikat Takaful Malaysia Berhad, Takaful Nasional Sdn. Berhad, Mayban Takaful Berhad, Takaful Ikhlas Sdn. Berhad, Commerce Takaful Berhad, Prudential BSN Takaful Berhad, HSBC Amanah Takaful (M) Sdn. Berhad, Hong Leng Marine Takaful Berhad and MAA Takaful Berhad. These takaful operators basically used Mudharabah contract in their product which will be focuses on Family Takaful product. Mudharabah contract had been used in many contracts as it will provide a better prospect of return to the customers as well as to attract them to join the scheme. In General Takaful, the contract is still used but the profit sharing will be put back in the risk fund (tabarru fund) where it will help to expand the pool. Application of this contract can be clearly seen in the product offered by Takaful Ikhlas Sdn. Bhd. under the product named IKHLAS Capital Investment-Linked Takaful. Investment link here means that the amount the customers paid in the form of premium contribution every month will be put in two separate accounts which are Risk Fund (Tabarru Fund) and the other one in the participant s saving account which the money will be invested in Shariah-compliance sectors to accumulate profit. Every takaful operators offer different benefits in their product. In this product (IKHLAS Capital InvestmentLinked Takaful) the participants will be protected from any occurrence that will lead to death and total permanent disability. The sum of coverage will be 100% of the total contribution or equally up to 125% including all of the money generated from the investment accounts of the participants which will be compensated to the participants or the beneficiaries which are the family members. This product will be most suitable for those who are looking for high-investment link return. Another one product which also used Mudharabah principle is Pru-BSN Firstlink which is offers by Prudential BSN Takaful Berhad. This product is targeted to those people aged 19-25 years old. The product also comes with investment and saving for long-term as this product is made until the

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participants reach the age of 80 years old. This is one of the most comprehensive products offer in the industry. With this product come many benefits such as protection for death due to major sickness, permanent total disability, accidental death, medical card and hospital benefits. The coverage can be up to RM 500,000 per case. 3.1 Illustration of the product. 3.1.1 IKHLAS Capital Investment-Link Takaful

Participants

Premium

Risk Fund

Investment Fund

Investment

Growth Fund Balance Fund Fixed Income Fund

Profit

Operator

Profit

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3.1.2 PruBSN Firstlink Participants

Premium

Risk Fund

Investment

Investment Fund

Profit

Operator

Profit

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4.0 Advantages of having Mudharabah contract in Takaful There are many advantages that participants can get from having Mudharabah (profit-sharing) contract in Takaful product. Firstly in terms of investment and saving, having this kind of investment expose the participants to less risk compared to any other financial instruments such as money market which is exposed in high risk of investment. In a long term, this kind of investment will provide ease especially when dealing with medical assistance and so on. Besides, this kind of contract will act as a quarantee to the participants in any cases of company s breakdown the participants will not lose anything in term of money as the company will bear for losses. Other than that, in the perspective of the takaful operators, this is one of the contract that will act as an advertisement catalyst to attract the potential clients out there to join the scheme not only they will get protection but also they will enjoy some amount of money when the policy ends which make it unique compared to the conventional insurances practice.