TAKFUL (Islamic Insurance): AN ECONOMIC PARADIGM

Mohd. Ma'sum Billah (Ph.D.)

E-mail: masum2001@yahoo.com
1

Introductory Remarks Islamic jurists resolved that the system of insurance, which falls within the confines of Islamic framework, should be founded on the concept of al-Takaful. An Islamic insurance transacting is a policy of mutual co-operation, solidarity and brotherhood against unpredicted risk or catastrophes, in which the parties involved are expected to contribute genuinely. The nature of the principles of Takaful is fundamentally different from the principles of conventional insurance. An attempt is however made in this paper to analyze the conceptual framework of Takaful practices in the contemporary economic reality. Conceptual Framework The concept of insurance (Takaful), according to the jurists, is acceptable in Islam for the following reasons: the policyholders would co-operate2 among themselves for their common good; every policyholder would pay his subscription in order to assist those of them who need assistance; it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system; the element of uncertainty is eliminated insofar as subscription and compensation are concerned; it does not aim at deriving advantage at the cost of other individuals. Under Islamic law, generally, any transaction that has the following elements: unjustified enrichment, uncertainty, risks, riba would vitiate a contract.3 Clearly, the contract of insurance under Islamic law would not be valid unless it were free from these elements. Thus in consonance with the above characteristics the jurists resolved that the system of insurance which falls within the confines of Islamic framework should be founded on the concept of al-Takaful. An Islamic insurance transaction is a policy of mutual co-operation, solidarity and brotherhood4 against unpredicted risk or catastrophes, in which the parties involved are expected to contribute genuinely.
The Copy right of this work is entirely reserved by the author. . Assoc. Professor of Law (Islamic Insurance, Banking, Finance & E-Commerce), Dept. of Business Administration, International Islamic University Malaysia. 2 See the Takaful Act (Malaysia) 1984 at S. 2. 3 See the Fatwa of Sheikh al-Azhar in Iqtisad al-Islam, 1995 at p. 60. 4 The Takaful Act, Op. Cit., at. S. 2.
1

The nature of the principles of Takaful is fundamentally different from the principles of conventional insurance. First of all, the operations of Takaful must be in line with the Shariah principles.5 A Takaful operation may be held void ab initio if any aspects of its operation is proven to be contrary to the Shariah principles. The operation of Takaful is generally based on the governing principles of alMudharaba, profits and loss sharing financing technique,6 which is an alternative to the interest (riba), based financing technique as adopted by the conventional insurance practices. The operation of Takaful practices is generally supervised by an independent body called the Shariah Supervisory Council.7 It is the duty of the council to advise the Takaful operator(s) in any given organization on their operations for the purpose of ensuring that no aspect of the company(s) operations involves any element which is not approved by the Shariah principles. In other words, the establishment of a Shariah Supervisory Council for every individual Takaful operator is a prerequisite prior to the commencement of the Takaful operation. It is also within the fundamental principles of Takaful operation to maintain utmost good faith in Takaful operations. This is because a Takaful policy can at any time be called in question should either party (operator or participant) be able to prove the counters breach of good faith in the material matters or facts of each respective policy. Therefore, the duty to disclose material facts or matters is not imposed only on the operator and also the participant equally.

Analysis on Principles of Takaful It has been observed that the principles and practices of Takaful, Islamic insurance is still in the developmental stage but in some countries it has made significant progress. Despite the developments in the field of Takaful, there is still room for improvement and also necessary changes need to be made in order to make Takaful more beneficial to the Islamic world and not only for the present century but also for the centuries ahead. An attempt is made in the following sections to discover some of the points lacking in both the principles and practices of Takaful. (i) An Islamic insurance transaction is a policy of mutual co-operation, solidarity and brotherhood8 against unpredicted risk or catastrophes, in which parties involved are expected to contribute genuinely. There is therefore no room for cheating and the policy, as well as the benefits of the policy, are regarded as the legitimate wealth of the policyholder. Hence, there should be a legitimate relationship between the parties, whereby the beneficiaries are not barred from claiming the benefits over the policy. Such a relationship is referred to as insurable interest. It is one of the fundamental aspects in insurance practices

5 6

Rules of the Shariah Advisory Board, Sudan at p. 11. Ibid at 37. 7 See The Takaful Act, Op. Cit., at S. 8(5)(b). 8 Ibid at S. 2.

and under Islamic law can only be determined based on the principles of Mirath and Wasiyah. The person who will be the beneficiary is determined based on the principles of Faraid.9 The insurance policy will not be held valid unless there is an insurable interest between the policy buyer and the proposed beneficiary. This is because having a policy without ensuring an insurable interest is like a policy for gain, which will violate Shariah principles. (ii) An insurance policy is a financial transaction which binds both the operator and participant based on the general principles of al-Aqad (contract). The minimum age of the contracting parties in a contract under Islamic law has been set by the Islamic jurists and they have unanimously agreed that the minimum age of the contracting parties should be the age of rushd (puberty or majority).10 However, there are diversifications of views amongst Islamic jurists in setting the exact year of the age of rushd. It is recognized generally, that agents and the brokers in the field of insurance practices are the ones who contribute, inter alia, to the development of insurance practices in commercial societies at large. Unfortunately, this is not the position with regards to the practice of Takaful. The main reason for this may be due to the lack of publicity about the concept, significance and importance of involvement in Takaful practices. It is submitted that the agent and the brokers could be used in the development of Takaful operations in view of making it more popular and to make the Muslim world realise its importance.

(iii)

An Analysis on Practices of Takaful (i) Theoretically, in general Takaful participants are required to pay contributions, al-Tabarru (donation or charity). However in practice, the Takaful operator and participant in the general Takaful, mutually agree that in consideration of the paid contributions, the Takaful operator would undertake the responsibility of providing a pecuniary coverage for the participant should the risk over run the subject matter within the policy period. According to Islamic principles of al-Tabarru, which has a synonymous idea to and similar legal consequences with al-Sadaqah (charity), al-Hiba (gift), and al-Khairat (donation), wherein anything once given away as donation in favour of something or someone, the donated property cannot generally be retracted. The donor automatically loses title over the donated property soon after it is made as al-Tabarru or al-Sadaqah or al-Hiba or al-Khairat. The comment here, relying on the aforementioned analysis, is that, if the paid contributions in the general Takaful are regarded as al-Tabarru, according to Islamic law the contributions cannot be reclaimed as it has been given away as Tabarru. In practice, however the participant continues to hold a right of
9

10

See The Insurance Act (Malaysia) 1996 at S. 167(1). Cf. The Takaful Act, Op. Cit., at S. 64.

claim in consideration of the paid contribution against the risk on the subject matters. Therefore, it is not clearly understood what provision can justify paid contributions being regarded as al-Tabarru in a general Takaful. (ii) Non-Muslims may be allowed to buy a policy from Takaful operator but it does not mean that the Takaful operator should allow himself to adopt something in favor of the non-Muslim participants which may clash with the main nature of a Takaful operation. The operations of the Takaful must be in total compliance with Shariah sanctions. In a family Takaful, it has been observed in practice that, if the policyholder is a non-Muslim who makes a nomination of someone, the nominee is to be regarded as an absolute beneficiary.11 In such a policy where the nominee is regarded as an absolute beneficiary, this may clash not only with the Islamic Law of Faraid, but also with the law of inheritance of other faiths of personal laws, as it may deprive the remaining heirs of the participant. Moreover, allowing a non-Muslim policy holder to regard his nominee as an absolute beneficiary may also encourage the non-Muslims to hope for again in favour of the nominee himself without regarding the others who may be affected by the death of the participant. Therefore, such an opportunity for the nominee to gain absolutely is contrary to the main objective of Takaful operation, which is maintaining the notion of brotherhood, solidarity and mutual co-operation. (iii) With regards to the life expectancy of any person, no creature can determine ones life expectancy based on mere imagination or prediction. In certain cases on the determination of life expectancy, it has been observed that Takaful operators use the test of probability. In so doing they impose charges at lower rates, and give higher annuity rates on females than males. Such sex discrimination in the imposition of charges and the provision of annuity rates is based on the idea that Takaful operator believes that the probability of the death of females is generally lower as compared with the death of males. Such sexual discrimination by the Takaful operator creates a doubt as to whether it could be justified by the Shariah principles or not. The life expectancy of human being is determined only by Allah (s.w.t.) regardless of the sex of the creature and, therefore, no creature should overrule the power of Allah (s.w.t.). Furthermore, it is a fact that sometimes male dies earlier than female, or it could be reversed. Therefore it is groundless to make sex discrimination on ones life expectancy. (iv) In the practice of re-Takaful coverage two system are available, i.e. the treaty system and the facultative system. The coverage through facultative system is by using two categories of re-insurance companies; a local re-insurance company, which operates based on the conventional principles while the other coverage through facultative system is based on Shariah principles. The coverage based on the treaty system operates with the aid of the relevant

11

The Insurance Act (Malaysia) at S. 166(1).

brokers at the international levels in which the brokers take the policy from both conventional and also Islamic re-insurance companies. The question that arises is the justification of the Islamic companies in seeking coverage from re-insurance companies that operate based on the conventional principle. It is argued that these practices may create an obvious clash with the objective of Takaful operations. Moreover, having a mutual co-operation between the Islamic and non-Islamic based insurance companies in operations may be regarded as a mixture between truth and falsehood, which has no place in the fundamental teachings of Islam as enshrined in the Holy Quran:

And cover not truth with falsehood, no conceal the truth when you know (what it is).12
Possible Suggestions for Further Development of Takaful Principles As previously mentioned despite the developments in the operations of Takaful, there are still some aspects both in principles and practices of Takaful which need to be further developed in order to make the Takaful operation an alternative to the insurance scheme practiced under the banner of conventional economy. This section seeks to come up with some possible suggestions, which may contribute to the further development of the principles and practices of Takaful in the contemporary Muslim world of economy. (i) The objective of having the governing principles of insurable interest is to make the policy and its benefits clean, while ensuring that a policy should not be used as a tool to cheat one and gain with unpredicted material means. Therefore, conformity to the principles of insurable interest in a policy is one of the fundamental aspects of insurance. It is suggested that statutory provisions should contain comprehensive provisions relating to insurable interest justified by the Shariah sanctions. In relation to this, it is reiterated that the general principles of insurable interest should be based on the principles of Faraid,13 in which the benefits over the policy should be regarded as the estate of the participant. Further that, insurable interest can only be vested on those, who according to the general principles of Faraid, have the beneficial rights over the estate of the participant after his death. Even though an insurance transaction is generally based on the principles of al-Aqd (contract), the nature of this transaction is quite different from other forms of commercial contracts. This is because an insurance policy is for the purpose of sharing responsibility to provide some material security against unpredicted loss or damage resulting from unexpected risks on both life and property. The agent and the broker in the insurance practices play an important role as the promoters of insurance practices among the societies at large. For the

(ii)

(iii)

12 13

Al-Quran, 2: 42. See The Fatwa in (1994) 1MLJX

purpose of making the Takaful operations popular with their societies, and attract them to the practices of Takaful in a wider sense, it is humbly suggested that Takaful operations should in practices recognize licensed agents and broker who may specifically work for the development of Takaful operations in reality. (iv) For the purpose of having a reliable authority relating to the principles of Takaful operations it is suggested that statutory provisions should contain an express provision relating to the principles of Takaful operations. For example, al-Mudharaba financing technique, so that no one should have the opportunity to create a doubt as to whether Takaful operations are based on al-Mudharaba financing in the practical sense.

Possible Suggestions for Further Development of Takaful Practices (i) Since al-Tabarru has the synonymous nature and also legal consequences with the terms of al-Sadaqah, al-Hiba, al-Khairat, which all generally carry the meaning of donation. Further in accordance with Islamic law, the donor ceases the right automatically and immediately over the donated property once it is made as al-Tabarru in favor of someone or something. Then if the paid contribution in the general policy is regarded as al-Tabarru (in consideration of which the participant holds a right to claim the coverage against the risk on the subject matter of the policy from the operator), this may clash with the fundamental principles or Islamic law of charity. It is therefore suggested here that the paid contribution in the general Takaful may be regarded as al-Musahamah (contribution) instead of al-Tabarru (donation). This is because if the paid contribution in the general Takaful is regarded as al-Musahamah (contribution) the participant has no restriction in Islamic law to make a claim against the risk on the subject matter of the policy. It is again strongly believed that there is no provision in the Shariah which may prohibit the contributor from making a claim or seeking for a benefit over his own contributed fund. The establishment of such a contributed fund can also be justified by the Quranic sanction of mutual co-operation:

Help you another in righteousness and piety.14

(ii) With regards to the nomination in a family Takaful nominated by a nonMuslim policy holder, the current practice of Takaful operators is that the nominee nominated by a non-Muslim policyholder should be treated as an absolute beneficiary15 over the benefits of the policy. This practice may be contrary to Shariah principles. Being a non-Muslim policyholder cannot be excuse to treat the nominee as an absolute beneficiary. Furthermore, it is strongly believed that if the nominee is treated as a mere trustee over the policy and he may distribute the benefits among the heirs of the policyholder.

14 15

Al-Quran, 5 : 2. The Insurance Act, Op. Cit., at S. 166(1).

This may make a fair judgement to the right beneficiary over benefits of the policy. Therefore, it is suggested here that since Takaful is a Shariah based financial institution, it should not be subject to the laws and faiths which may clash with Shaiah principles. Thus the nominee in the family Takaful, regardless of the religion of the policyholder, should be treated as a mere trustee or executor (but not an absolute beneficiary). In addition should have the responsibility to receive the benefits over the policy and distribute them among the right beneficiary(s) in accordance with the principles of inheritance of their respective religion or faith. The reason for this is, if the Takaful operator should allow himself to adopt certain elements (like treating the nominee nominated by the non-Muslim policyholder as an absolute beneficiary), this may clash with Shariah principles. Also he may not have any justification to do so as this is considered as believing particular aspects of the Shariah principles while neglecting the rest of them, which has no place in the Shariah teachings. (iii) With respect to the discrimination of ones sex in a financial transaction, it is clear that it is groundless for the Takaful operator to assess life expectancy and discriminate males and females through imposing or giving higher or lower rates of charges an annuity respectively in family Takaful practices. Therefore, it is suggested that Takaful operator should impose and give reasonable rates of charges and annuity to the participant regardless of any ones sex. As far as re-Takaful is concerned, the Takaful operator should not obtain coverage from the conventional re-operators as this practice runs contrary to Shariah principles. The Holy Quran expressly provides that Muslim should not co-operate nor should seek help from the non-believers. Allah (s.w.t.) commanded:

(iv)

Let not the believers take for friends of helpers unbelievers rather than believers, if any do that, in nothing will there be help from Allah (s.w.t.), except by way of precaution, that you may guard yourself from them. But Allah (s.w.t.) cautions you (to remember) himself for the final goal is to Allah (s.w.t.).16
Therefore, in view of the above, Takaful operators may seek re-Takaful coverage only from other Takaful companies which operate based on the Shariah principles. For the purpose of seeking a further comprehensive re-Takaful coverage, Muslim countries of the contemporary world should come forward to establish necessary re-insurance companies both at local and international levels justified by the absolute principles of Shariah. There are already, so far, five re-insurance companies established and operating based on Islamic principles namely: The ASEAN Takaful Group (ATG) (Malaysia), Asean Re-Takaful International (L) Ltd. (Malaysia), IIR Co. (Bahrain), Islamic Re-Takaful Ltd. (Bahamas), and Best Re (Middle East). This may enable the Islamic insurance companies of the contemporary world to seek re-insurance coverage
16

Al-Quran, 3 : 28.

through both facultative and treaty systems without further depending on the conventional one. Concluding Remarks Despite the progress made in this area, there is room for development both in principles and practices of Takaful operations, which may act as an alternative in the true sense to the insurance practices offered under the banner of conventional systems. Simultaneously, such a comprehensive operation of Takaful may meet the expectations of the global Muslim Ummah of this century and the centuries ahead. It is sincerely hoped that the possible suggestions made above for further development of Takaful may contribute to the future standing of Takaful both in principles and practices. Further that it may meet the Ummahs expectation of benefiting from the application of Islamic insurance in a wider range, without further depending on the insurance practices operated under the banner of conventional economy.