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GENERAL TAKAFUL BUSINESS

Prof. Dr. Mohd. Masum Billah1

Introduction
Takaful in Arabic, means joint guarantee. Thus it can be visualized as a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage that may inflict upon any of them as defined in the pact. Should any member or participant suffer a catastrophe or disaster he 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. In other words, the 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. It means mutual help among the group. Islamic scholars have accepted the importance and need for insurance and its legality if organized on a cooperative or Takaful basis. A number of Takaful insurance companies are operating in different countries. The basic trust of takaful is to foster the sprite of cooperation among the members of the society. The principle of bearing the losses by the participants on a cooperative basis ensure enhancement of this spirit. There are generally two types of takaful business, managed by the takaful companies and especially in Malaysia:
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Professor of Islamic Financial Regulations, King Abdul Aziz University, Jeddah. Professor of Islamic Financial Applications, University of Camden, USA. Assoc. Professor of Law (Insurance, Takaful, Islamic Banking, Finance & E-Commerce), Faculty of Economics and Management Sciences, International Islamic University Malaysia. He is also an Adviser and Consultant to several Companies and Institutions (Internationally & Locally ) on Insurance, Banking, Financial and IT regulations, Wealth & Asset Management, Islamic Bond Market, Gold Dinar and so on under both modern principles and Shariah Discipline. Also the author of http//.www.islamicinsurance.com. E-mail: masum2001@yahoo.com

Family Takaful General Takaful

The generally accepted view of the Muslim Jurists is that the operation of the conventional insurance as an exchange transaction under a buy and sells agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements: 1. Al-Gharar There is element of al-Gharar (unknown or uncertain factors in the operation of a contract) in both the life and general insurance policies. 2. Al-Maisir There is the element of al-Maisir (gambling), which arises as consequences of the presence of al-Gharar, in particular in the case of life insurance. 3. Al-Riba There is the practice of al-Riba (or interest) and other related practices in the investment activities of the conventional insurance companies, which contravene the rules of the Shariah. In Malaysia currently there are two major Takaful operators, they are: Syarikat Takaful Malaysia Berhad and Takaful Nasional. And these two takaful operator companies, their business operation are guided by the Takaful Act 1984. The prime idea of establishing Islamic insurance company is to provide the Islamic Banking system in Malaysia with a complete supporting institution that is in the line with Syariah. Thus, the existence of Takaful as an Islamic insurance company is needed in order to support the operation of Islamic Bank in this country. On top of that, the establishment of this company has some significant impacts to the Malaysia financial industry especially and to the Malaysian society at large generally. And last but not least, our objective in the making of this project paper is to study of the existing Takaful operator company in Malaysia especially Takaful Nasional Company in term of their products and business operation, particularly in the General Takaful Schemes. And in order to make this paper project has a value added, we are also going to give some recommendation or suggestion for the betterment and improvement of the Takaful operator companies performance in Malaysia.

CENTRAL IDEAS
In general, the takaful business is divided into two major categories:

Family Takaful General Takaful

Basically, the general Takaful scheme in Malaysia is based on tabarru and mudharabah principle, where the participants enter into a contract with the company (operator). This short-term contract of joint guarantee is to provide protection against losses, which may be due to the personal accidents and loss or destruction of property. The amounts of participants contribution are determined by the terms agreed in the contract, by considering the value of the property and risk involved.

In general Takaful, the company raises a fund, which called as tabarru fund or account, where the participants pay their contribution to the fund. The company will invest the remainder of the fund after deducting the operational cost of the scheme. Any profit or return from the investment will be returned back to the fund. If there is any participant who occurred loss or damage to his property or belonging, then the particular participant will be compensated from this fund, by considering the level of damages and losses that the participant has suffered.

The chart below will explain the details about the operations of the Takaful system, which currently applied in Malaysia:

Diagram 1: Takaful Operation System

As stated earlier, the profits from the investment out of tabarru fund will be returned back to the fund, so that the company will be able to apportion a greater amount of money into more profitable investment areas. Moreover, when the company is always making the profits from its investment, which generate a stable financial position throughout the company, then it enable the company to return the profits back to the participants.

The return of profits or profit sharing is the term or condition, which actually stated in the contract agreement between company and participants, which provides the portion of both parties to the profits arising from the investment. The profits will be divided just after deducting the operational costs, provided that it is still profit position after the deduction. However, the profits sharing will exclude those who get compensation from their claims. Generally, the sharing ratio will be determined by the both parties according to the principle of al- Mudharabah, such as 50:50 or 60:40.

In Malaysia, there are two main companies which currently operate the Takaful scheme, which are:

Syarikat Takaful Malaysia Takaful National

As we mentioned before, General Takaful Scheme provides a form of cover against material loss and damage. The General Takaful products offered by Takaful Nasional are as follows: fire, accident, motor, engineering, miscellaneous, and marine takaful schemes.

As todays Islamic movement starting to make its mark around the globe, especially in the Middle East region and some countries in South East Asia, and also in several major countries, which are non-Muslim such as United States and United kingdom, there is a high- enthusiastic among not jut the Muslim, but also the non- Muslim curiously to know about the Islamic system in managing the human life. Therefore, the takaful system is indeed a good instrument for attracting people and to promote Islam to them.

SYARIAH RULING
Generally, the syariah ruling for general takaful is almost the same with the syariah ruling for another takaful scheme. Takaful is derived from Arabic word which defined as joint guarantee, a pact among a group of person who agree to jointly indemnity tem themselves against any specified calamity or loss. The amount comes out of a common pool created with individual contributions of participating members. This is in line with the command of Allah to assist other those in trouble. Allah says in Al Quran:

Help one another in furthering virtue and God consciousness (taqwa) and do not help one another in furthering evil and enmity2

In this verse, Allah says that we need to help each other in doing good deeds but not help each other to commit sin and rancor. In Takaful there are rule and requirements of the Shariah rulings that govern its operation.

Allah also says in Al Quran (surah Al Maidah: 90):

O ye who believe! Intoxicants and gambling, (dedication of ) stone and (divination by) arrows, are an abomination of satans handiwork: eschew such (abomination), that ye may prosper.3

As we mentioned before in introduction that takaful is run in line with syariah and doesnt implement any elements which is contradicting with the command of Allah such a al-Gharar, al-Maisir and al-Riba. As long as Shariah is concern, all products under Takaful as well as General Takaful Scheme product not implement these three elements in their operation. It also in line with another verse in Surah Al Baqarah: 275,

Allah hath permitted trade and forbidden usury.


Surah Al Maidah:verse 2 2 :(surah Al Maidah : verse 90) 3

In addition, according to the majority of Islamic scholars and ulama now their made consensus that, Takaful will be acceptable in Islamic Ruling as long as there are no element of unjust and cruelty practice among both party. This syariah ruling is also applicable for General Takaful Scheme.
The spirit of tabarru is in line with the command of Allah that asked us to have sincere intentions in giving donations as Allah will reward him for his good deeds.

Narrated by Saad bin Abi Waqqas(R): The Holy Prophet (SAW) said: It is better for you to leaves offspring wealthy rather than leaving them poor asking others for help.

Syariah ruling for general takaful derived from Urf side. Urf is custom, practice or usage of the community. The development of takaful practice generally has in fact originated from a popular ancient Arab tribal custom (urf), the practice of Al Aqila. Al Aqila had been approved by the Holy Prophet (SAW) when two women from the tribe of Hudhail. Hence, it is clear that the Urf or custom of Al Aqila practiced by the ancient Arab tribe and approved by the Holy Prophet (SAW) could stand as a valid justification for the validity of takaful practice. 4

In other side, Takaful Nasional Company also owns the council that govern the case that dealing with the syariah which known as Syariah Supervisory Council. Besides, Jabatan Kemajuan Islam Malaysia (JAKIM) also plays an important role in giving the opinion about the Islamic insurance transaction.

PRACTICAL SCENARIO (APPLICATION) OF GENERAL TAKAFUL SCHEME IN TAKAFUL NASIONAL.

BACKGROUND OF THE COMPANY Takaful Nasional was incorporated on 15 October 1993 with an authorized capital of RM50 million and paid-up of RM25 million. The company is jointly owned by Malaysia National Insurance Berhad (80%) and Malaysian Islamic Economy Development Foundation (20%). The operation of Syarikat Takaful is regulated by the Takaful Act 1984. Section 4(2) and section 6(1). THE OPERATION OF THE GENERAL TAKAFUL General Takaful maybe participated in by an individual or a corporation in order to cover against any loss or damage of properties or goods due to fire, accident, flood, etc. Like Family takaful, participants of general takaful also enter into an
Masum Billah, (2002-2003) Principles and Practices of Takaful and Retakaful,IIUM Press,KL,p.51
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agreement based on Al-Mudharabah, which stipulates the right and responsibilities of parties involved. The contract clearly defines the rights and obligations of both parties. The participants pay installments as tabarru' to the company which are credited to the general takaful fund of the company. This fund is invested by the company according to the provisions of Shari'a and the profit generated from such investment is pooled back to the fund. In line with the virtues of cooperation, mutual assistance, and share responsibility as embodied in the concept of takaful. The company will pay compensation or indemnity to the fellow participants who suffered as loss consequent upon the occurrence of any disaster as outlined in the contract. If, after deducting all the operational costs, there is a surplus of the general takaful fund, it will be distributed between the participants and the company as per conditions of the agreement. PRINCIPLES OF GENERAL TAKAFUL OPERATION The but PARTICIPANTS INTEREST The competency of person to affect Takaful Contract is determined by his legal capacity to contract and his interest in the subject matter covered. cover afforded under a Takaful contract is not the subject matter covered the participants pecuniary in the subject matter.

UTMOST GOOD FAITH The Takaful contract cast a duty on the proposer discloses all material facts bearing on the contract. The duty of good faith applies to both the participant and the Takaful operator, like the proposer must not withhold information to the proposer, which led him into a less favorable contract. PROXIMATE CAUSE The essence of the Takaful contract is the provision of indemnity for financial loss suffered by the participant as a result of the happening of an event covered against under the contract. It is necessary to state the perils against which cover is given, so that the intentions of the parties are clearly defined. INDEMNITY (Taqnidz La Dirara Wala Dirara) The Takaful contract is a contract of indemnity, it is a contract to pay the actual loss sustained by the participant. It is a mechanism by which the Takaful Company provides financial compensation in an attempt to place the participant in the same pecuniary position after the loss as he enjoyed immediately before the loss. SUBROGATION (Hulul) AND CONTRIBUTION (Musahamah) The Takaful contract not only upholds the principle of indemnity but also Equity. Both the Subrogation and the Contribution principles are corollaries to the principles of indemnity and Equity.

GENERAL TAKAFUL PRODUCTS The coverage of the General Takaful products is similar with the conventional products except for the existence of takaful elements of Tabarru' and Mudharabah. The element of Tabarru' differentiates the general takaful products from the conventional products. Tabarru' means that the participant (i.e. the policyholder) agrees to donate his contribution (premium) to the fund with a mission to help other participants of Takaful covered under the various Takaful schemes when in distress. Therefore, it is the members who are carrying the risk and the Takaful Operator is merely a custodian. If the contributon is made with the right intention of helping the fellow participants in need (i.e. the spirit of tabarru') hence the elements of gharar (uncertainty) and maisir (gambling) are eliminated. The other is the element of Mudharabah or the profit sharing. The Takaful Operator is merely a custodian of the Takaful fund. The contribution receives from the participant will be kept in a fund and invested in the Islamic investments and at the end of the period of takaful, the profits (if any) will be shared with the participants provided there is no claim made by the participant. The profit sharing ratio will be made known to the participant up front and agreed by both parties. For General Takaful, the ratio is 50: 50. The General Takaful products offered are as follows: FIRE 1. Fire 2. Consequential Loss 3. House owners/Householders ENGINEERING 1. Contract Works 2. Equipment All Risk 3. Machinery Breakdown 4. Storage Tanks MISCELLANEOUS 1. All Risk 2. Burglary 3. Employer's Liability 4. Fidelity Guaranty 5. Money 6. Performance Bond 7. Plate Glass 8. Public Liability ACCIDENT 1. Group Personal Accident 2. Individual Personal Accident 3. Umrah Personal Accident MOTOR 1. Motorcycle 2. Private Car

MARINE 1. Cargo in Transit

9. Workmen's Compensation ONE OF THE EXAMPLES OF GENERAL TAKAFUL PRODUCTS (FIRE TAKAFUL SCHEME). Everybody should consider the possibility of a fire, as when it starts getting out of control, we may lose the fight. A fire that rages could be destructive. Takaful Nasional Company now offers the Takaful Fire Scheme to enable you to prepare yourself, in case of a fire. It is also a way to ensure a complete coverage for your assets. COVERAGE For loss or damages caused by fire, lightning or explosion (domestic) ADDITIONAL COVERAGE Additional coverage is extended to any damages caused by: a) b) c) d) e) f) g) h) Riot, strike or malicious damage Explosion Impact damage Bursting or overflowing of water tanks or pipes Earthquake or volcanic eruption Flood Aircraft damage Windstorm

ASSETS COVERED 1) Building and/or machines 2) Stocks 3) Householders COVERAGE AMOUNT Any compensation under the coverage will be based on the actual market value during the fire. INFORMATION NEEDED a) b) c) d) e) Location of building Structure of building Type of building Occupation of building Sum Covered

COMPANY CONCEPT

Takaful Nasional Company provides its business according to the principles of alTakaful and al-Mudharabah, which are aligned with syariah. Al-Takaful means the act of a group of people reciprocally guaranteeing each other, while alMudharabah is the commercial profit-sharing contract between the provider or providers of fund for a business venture and the entrepreneur. BENEFITS OF AL-MUDHARABAH The al-Mudharabah principles practiced by the company enables the participant to share any profits by the company from its investments activities. The ratio guide is 60:40 for the General Takaful Business or its up to the agreement in the contract between the takaful operator and participant (the takaful operator will gets higher proportion since facing more risk in the General Takaful Schemes).5

Income
Contribution

Distribution
Retakaful Takaful 60% General Takaful Fund Claims

Investment

Claims Recoveries

Surplus

Retakaful Profit

Tech Reserves

Participant 40%

Retakaful Charges

Allowed Costs

Fire Takaful Scheme.(2002). Takaful Nasional Brochures

AL MUDHARABAH EXPLAINED Sharing of surplus from the General Takaful Business on a: 60 % / 40 % basis Between the Takaful Operator (Company) and the participant based on the: Prerequisites set in the Takaful Contract and The basis of Al-Mudharabah operation adopted by the Takaful operator. Principle applied in distribution of the surplus to the fund in General Takaful operations. Calculation Example: Let say one participant (Mr. Ahmad) want to buy Fire Takaful Policy. He pays the contribution for RM 1000 for a year. Then the Takaful Operator invests the contribution paid by Mr. Ahmad in the investment company (Halal Investment Counter) according to principle of Al-Mudharabah. Let say from the investment the Takaful Operator get 10 % profit. So at the end the Takaful Operator will get RM 1100 (Principle + Profit). Then the amount of RM 1100 (In the General Takaful Fund) will be deducted for allowed cost such as: Retakaful, Claims, and Reserves. If there is a surplus (Profit) after deduction for allowed cost, then the sharing of surplus will be distributed to both Takaful Operator and Participant 60%: 40% respectively (Based on the agreement in the contract). FINANCIAL PERFORMANCE OF TAKAFUL NASIONAL Takaful Nasional has again, in its financial year under review, maintained an excellent growth record in its collection of annual takaful contributions. Throughout its eight years of operation, takaful Nasional had seen its Takaful contributions growing by no less than 40% annually. The Company continues to embark on an active promotional programmed especially in the rural areas. Inspite of its eight years presence, the bulk of the Malaysian population continue to remain unaware or at the best indifferent to the advantages and services afforded by takaful sector. Participation in the General Takaful funds managed by the company for the year 2000/2001 has increased by 21.6 % with gross contribution of RM 77.7 million recorded during the financial year compared to RM 63.9 million achieved in the preceding year. The increased capacity and better overall retention ratio have resulted in an increase in the net contribution after takaful at RM 50.7 million compared to RM 37.9 million for the previous year.

Nevertheless, there is a decrease in the margin for underwritting surplus before investment returns with recorded surplus of about RM 5.7 million for this financial year compared to RM 4.5 million for the previous year. This is due to the increase in the net claims which stood at RM 31.3 million as compared to RM 17.1 million for the proceeding year. From this amount, RM 20.8 million is attributed to takaful on motor vehicles. For the financial year under review, RM 4.9 million has been transferred from General Takaful fund to the profit and loss statement of the shareholder's fund compared to only RM 0.8 million in the previous financial year. This amount is the company's share of the overall surplus arising from its general takaful operation. At the same time, RM 5.0 million from this overall surplus remained in the General takaful fund for distribution to the participants.6

RECOMMENDATION
After we study and make research specifically in General Takaful Scheme, we realized that something we have to do in order to improve the performance of its operation. We divide the recommendation into four major fields as a diagram below:

Recommendation

Education Employees Awareness

Higher rate

Area of investment

a) Education The conventional insurance has dominated the all areas of insurance in Malaysia since the time of British colony governed the Malaya. Therefore, it has long been practiced this concept by the insurance companies and the insured parties in Malaysia. The majority of people in 30-40 years ago has totally involved in this kind of insurance because they did not have the opportunity to hear and learn about the Islamic insurance, which does not exist yet in Malaysia. When the Takaful Nasional Company has been established in 1983, the people still did not get enough and clear information about Takaful, due to the lack of marketing function and the difficulty in
Annual report Takaful Nasional Company ,2001 6

changing the perception of people towards a new kind of products. However, from time to time, Takaful has made aggressive efforts in promoting its products to people, and explaining the position of conventional insurance in Islamic syariah. Until today, the takaful has more than 500 staffs around the country, compared to 6 staff in the early of its establishment. Takaful faced a great growth in term of its market share which previous year data shown it has been extracting of more than 500,000 participants. However, it sad to say that todays people, particularly the Muslims, who still do not know about the kindness behind the Islamic insurance such as Takaful. Takaful has put a lot of investment in promoting its products such as in websites, but still people refused to accept it. Most Muslims nowadays know about the prohibition of conventional insurance in Islam and its punishment by Allah to those who practice it. Therefore, there is no reason for the Muslims to reject the Islamic insurance since they already have been explained about it in various kinds of resources such as the Internet. The Takaful Nasional thereby should provide the solution for this matter by increasing its efforts in promoting the products intensively to the people. There can be promotion in term of TV commercial, seminars and dialogues, and publications. b) Higher rate Some people today said that the Takaful Nasional imposes higher rate than the conventional insurances companies has charged. This makes sense since the takaful actual contribution rate is higher than most of the conventional insurances companies in Malaysia. However, this view is taken from a narrow perspective, which does not consider the factors, which lead to that situation. Firstly, we have to realize that Takaful Nasional is still considered a new company in this area. Therefore, it needs a great amount of money to fund its activities particularly relating to claims by the participants that occurred everyday. However, it does not has a big number of participants, which results that it has to charge more for the contribution paid by the participants in order to cover its small fund. Therefore, people have to understand about this matter clearly in order to avoid them to blame Takaful without investigation. They have to know that the slightly high rate of contribution is actually may increase the capability of the fund to cover more claims by the participants, and eventually increase the reward from Allah and also in term of policy benefits will be received by them (participants). c) Area of investment

The operation of Takaful Nasional specifies that company be not required to tell to the participants where the investments are made. It also states that participants should not know about it since it has been treated as the companys confidential data. However, this has raised a doubt among us especially to the participants, which have the right to know about the place where the money is invested. The Takaful Nasional has to put this matter into consideration, even though its principle, which regards the contribution as donation (sadaqah), which eliminates the ownership title from participant on that contribution. However, the participants still involved in the activities of the company such as in term of mudharabah principle (participants get share of profits), and the amount claimed by them. Therefore, they have to know about the areas of investments since they will be considered as syubahah if the operation of Takaful supposes to be involved in prohibited activities. d) Employees awareness Some of the Takafuls employees do not have much awareness towards to what they are involve in. they still dreaming on the day, rather than trying to equip themselves with the relevant knowledge about the takaful operation. This phenomenon can be seen in most of the Takafuls agents especially the new ones, who still cannot afford to elaborate the basic principle of application in Takaful. This is a shame since they are the main tools for the company to get the confidence from clients. As solution, the Takaful management has to provide their staffs with the necessary knowledge and skills in order for them to attract customers and to compete with the conventional insurance's agents. It can be realized by conducting the training programs, seminars, or even the incentive for the employees in order to increase the level of motivation, which may improves their works performance. This is very important since the employees are playing the main role behind the achievement or an organization.

CONCLUSION As a conclusion, general takaful is one of the takaful schemes under Takaful Nasional Company. Actually there are two main types of takaful scheme under this company: family takaful and general takaful. As we mention before, general

takaful is a policy of mutual liability and co-operation against unpredicted risk or catastrophe, in which parties involved are expected to contribute genuinely. General Takaful is a short-term scheme. Under this scheme, participants and operator practice mutual liabilities, co-operation, assistance and help among others. Islam orders its believers to help and assist other for virtue and do not help others in committing a sin. Allah says in the Quran: Help one another in furthering virtue and God-consciousness (taqwa) and do not help another in furthering evil and enmity (Quran 5: 2). Generally there are several types of general takaful like fire, motor and engineering takaful scheme. After we study this topic, we found that there is still a space for improvement in the implementation of General Takaful Scheme in Takaful Nasional Company. As a result, we conclude the recommendations into four fields: through education, payment rate, and area of investment and employee awareness. Finally, the operation of general takaful will be better and better in the future if the company is improving their services from time to time and others parties like government and consumers give support .