Hailey Collage o f Banking & Finance

Punjab University- Lahore.

13th August, 07

Takaful
An emerging niche market
By:
Capt. M. Jamil Akhtar Khan
ACII, MCIT, Master Mariner

Chief Executive Officer

TAKAFUL PAKISTAN LIMITED

Outline of Presentation

Introduction to Takaful
Objections to Conventional Insurance
Difference b/w Conventional Insurance & Takaful
Takaful Through Time
Takaful Models
Takaful Types
BancaTakaful
ReTakaful
Foundations of Takaful in Pakistan
Takaful Prospects in Pakistan
Challenges to Takaful
Introduction to TAKAFUL PAKISTAN LIMITED

Introduction to
Takaful

Meaning of Takaful

Takaful comes from the Arabic root-word

kafala guarantee.

Takaful means mutual protection and joint

guarantee.

Operationally, takaful refers to participants

mutually contributing to a common fund with
the purpose of having mutual indemnity in
the case of peril or loss.

Reference Al Quran:

Help (taawan) one another in furthering

virtue (birr) and Allah consciousness
(taqwa) and do not help one another in
furthering evil and enmity. Al Maidah:
verse 2 (5:2).

Takaful is a form of mutual help (taawun)

in furthering good/virtue by helping others
who are in need / in hardship .

Reference Hadith:

tie the camel first, then

(tawakkal) to the will of Allah

submit

The hadith implied a strategy to

mitigate/reduce risk.
Takaful provides a strategy of risk
mitigation/reduction
by
virtue
of
collective risk taking that distributes risks
and losses to a large number of
participants. This mitigates the otherwise
very
damaging
losses,
if
borne
individually.

Declaration by Shariah scholars

rendering conventional insurance unIslamic

Fatwa issued in Judicial Conference held in

Makkah in Shaban 1398 AH.
Verdict of Supreme Court of Egypt on Dec.
27, 1926.
Unanimous resolutions and fatwa by Ulama
in the Muslim League Conference in Cairo
in 1965.
Unanimous decision by Muslim Scholars in
seminar held in Morocco on May 6, 1972.

Judicial Opinions and Fatwas

confirming validity of Takaful

Fatwa issued by Higher Council of Saudi

Arabia in 1397 A.H.
Fatwa Issued by the Fiqh Council of Muslim
World League in 1398 A.H.
Fatwa issued by the Fiqh Council of the OIC
in 1405 A.H. (1985).

Fiqh Academy Resolution 1985

Islamic Fiqh (science of Shariah) Academy, emanating

from the Organization of Islamic Conference, meeting in
its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ulThani, 1405 A.H. (Dec 1985) issued a Resolution which in
summary stated the following:

The commercial Insurance contract is prohibited

(Haraam) according to the Shariah.
The alternative Takaful contract which conforms to the
principles of Islamic dealings is Halaal, being the contract
of cooperative insurance, which is founded on the basis of
charitable donation and Shariah compliant dealings.

Basic Elements of Takaful

Mutuality and cooperation.

Takaful contract pertains to Tabarruat as against
muawadat in case of conventional insurance.
Payments made with the intention of Tabarru

(contribution)

Eliminates the elements of Gharrar, Maisir and

Riba.
Wakalah/Modarabah basis of operations.
Joint Guarantee / Indemnity amongst participants
shared responsibility.
Constitution of separate Participants Takaful
Fund.
Constitution of Shariah Supervisory Board.
Investments as per Shariah.

Main drivers of Takaful

Piety (individual purification)

Brotherhood (mutual assistance)

Charity (Tabarru or contribution)

Mutual Guarantee

Community well-being as opposed to profit

maximization.

Objections to
Conventional
Insurance

Insurance Defined

Definition of an Insurance Contract

An agreement whereby one party, the insurer, in

return for a consideration, the premium, undertakes
to pay to the other party, the insured, a sum of
money or its equivalent in kind on the happening of
a specified event, which is contrary to the insureds
financial interest

Subject-matter of an Insurance Contract

what is it that is insured in a fire policy? Not the

bricks and materials used in building the house, but
the financial interest (i.e. money) of the insured in
the
subject-matter
of
insurance

(Lord Justice Brett in Castellian v. Preston 1883)

Objections to Conventional
Insurance

Scholars view the insurance contract as an

exchange contract money is being exchanged for
money over time.
This brings about the problem of gharrar (which
leads to maisir) and in investments aspect, riba.
Elements of:
Uncertainty Gharrar
Gambling Maisir
Interest Riba
UW + Investment Profit belongs to the
Company
Note that the Scholars do not object to insurance
per se but only to certain weaknesses in the
insurance contract.

Uncertainty Gharrar

Conventional insurance contract is basically a

contract of exchange (muawadat) i.e. buying and
selling whereby policy (indemnity) is sold as goods,
with the premium as the price or consideration.
The consideration must be certain for exchange
contract.
Gharrar in insurance contracts pertains to
deliverability of subject matter, i.e. uncertainty as
to:
Whether the insured will get the compensation
promised?
How much the insured will get?
When will the compensation be paid?
Thus, it involves an element of uncertainty in the
subject matter of the insurance sales contract, which
renders it void under the Islamic law.

Gambling Maisir

Insurance is a contract upon speculation. Good

faith forbids either party from concealing what he
privately knows, to draw the other into a bargain,
from his ignorance of that fact, and his believing to
the contrary (Lord Mansfield in Carter v. Boehm

1766).

The insured loses the money paid for the premium

when the insured event does not occur.

The company will be in deficit if claims are higher

than premium.

Interest Riba

. Allah has permitted trading and

forbidden riba (Al Baqarah 2 : 275).

Insurance funds are invested in financial

instruments which contain the element of
Riba.

Comparing Takaful to Conventional Insurance

Issue

Conventional Insurance

Takaful

Organization Principle

Profit for shareholders

Mutual for participants

Basis

Risk Transfer

Co-operative risk sharing

Value Proposition

Profits maximization

Affordability and spiritual

satisfaction

Laws

Secular/Regulations

Sharia plus regulations

Ownership

Shareholders

Participants

Management status

Company Management

Operator

Form of Contract

Contract of Sale

Cooperative,
Islamic contracts of Wakala or
Mudarbah with Tabarru
(contributions)

Investments

Interest based

Sharia compliant, Riba-free

Surplus

Shareholders account

Participants account

Takaful Through Time

Takaful through Time

Origins in the First Constitution of Madina.

It evolved and continued in one form or the other

throughout the Abbaside period and even later during the
Ottoman empire.

Serious efforts were made in modern times, in 1970s to

come up with an Islamic alternative to the conventional
insurance.

The first Takaful company was set up in Sudan in 1979,

almost simultaneously followed by another one set up in
Bahrain.

Takaful through Time (Contd.)

There are now 85+ Takaful companies in over 25

countries.

The total insurance premium of OIC countries for 2004

was USD 50 Billion; of this, Takaful contribution
accounts for 5% (i.e. USD 2.5 Billion). This is expected to
increase to USD 15 Billion by 2015.

Poor Insurance penetration in the Muslim countries (<1%

of GDP).

Average growth rate higher than conventional insurance

companies (around 25%).

NonMuslims increasingly opting for Takaful products for

commercial benefits.

Takaful Models

Mudaraba Model

The surplus is shared between the

participants with a takaful operator. The
sharing of such profit (surplus) may be in a
ratio 5:5 , 6:4 etc. as mutually agreed
between the contracting parties. Generally,
these risk sharing arrangements allow the
takaful operator to share in the underwriting
results from operations as well as the
favourable performance returns on invested
premiums.

Profits
attributable
to
Shareholders

Mudaraba Model

Companys
Admin. &
Mangt.
Expenses

Company

Investment
By
Company

Profit
From
Investments

Companys
Share from
Surplus
Participant

Takaful
Contribution
paid by
Participant

General
Takaful
Fund

General
Takaful
Fund

Operational
Cost of
Takaful

Surplus
(Profit)
Participants
Share
from Surplus

Wakala Model

Cooperative risk sharing occurs among

participants where a takaful operator earns a
fee for services (as a Wakeel or Agent) and
does not participate or share in any
underwriting results as these belong to
participants as surplus or deficit. Under the
Al- Wakala model, the operator may also
charge a fund management fee and
performance incentive fee.

Wakala Model
Company
(Capital)

Mudarib's
Share
of PTFs
Investment
Income

Profit
From
Investments

Wakala
Fee
(30% to 35%)

Management
Expense
of the Company

Profit/Loss
attributable to
Shareholders

Takaful

Contribution

Investment by
the Company

paid

Investment Income Sharing

on Mudaraba Basis

by Participant

Participants
Takaful Fund

General
Takaful
Fund

Investment
Income

Operational
Cost of
Takaful/
ReTakaful

Reserves

Surplus
(Profit)

Surplus
Distribution
to
Participants

Wakala -Waqf Model

It is a WAKALAH model with a separate legal entity of WAQF inbetween.

The relationship of the participants and the operator is directly

with the WAQF fund. The operator is the Wakeel of the fund
and the participants pay contribution to the WAQF fund by way
of Tabarru.

The contributions received would also be a part of this fund

and the combined amount will be used for investment and the
profits earned would again be deposited into the same fund
which also eliminates the issue of Gharar.

Losses to the participant are paid by the company from the

same fund.

Operational expenses that are incurred for providing Takaful

services are also met from the same fund.

Wakala-Waqf Model
SHARE

Share
Holder
Wakalah
Fee

H O L D E R S

Investmen
t
Income

F U N D (S.H.F.)

Mudaribs
Share of PTFs
Investment
Income

Management
Expense of
the
Company

Profit/Loss

Takaful
Operator
Investment by
the Company

WAQF

Participant

Operational
Cost of Takaful
/ ReTakaful

Investment
Income

Claims &
Reserves

Surplus
(Balance)

P A R T I C I P A N T S T A K A F U L F U N D
(P.T.F.)

Models The beauty of Islam lies

in its
plurality !

ISLAM

AQIDAH
Faith & Belief

SHARIAH
Practices & Activities

IBADAH
Man-to-God Worship

Political
Activities

AKHLAQ
Moralities & Ethics

MUAMALAT
Man-to-Man Activities

Economic
Activities

Risk Management
Takaful

Social
Activities

General Takaful Types

General Takaful offers all kinds of nonlife risk coverage. It is normally divided into
following classes:
Property Takaful
Marine Takaful
Motor Takaful
Miscellaneous Takaful

Types of Family Takaful

Term Life Takaful

Whole Life Takaful

Endowment Takaful

Universal Takaful

Marriage Plan
Education Plan

Takaful Policy Document /

Participants Membership Document

Preamble:

This is to acknowledge that the applicant (hereinafter called the

'Participant'), as more fully described in the schedule hereto:

i.
Is accepted as a member of the Participants' Takaful Fund
(hereinafter called the 'Fund') operated by Takaful Pakistan Limited
(hereinafter called the 'Company').

ii.
Being a member of the Fund, he/she is acknowledged as a
beneficiary under the attached Indemnity Policy of the Fund, and of the
benefits declared by the Fund from time to time under this policy, in
accordance with the Waqf rules governing the Fund.

iii.
Subject to the participant continuing as a member of the Fund
and complying with his/her undertaking under his/her declaration
made in the proposal form, he/she is indemnified by the Fund as one of
its beneficiaries against the perils/events described, in the manner and
to the extent as stated hereunder.

Takaful Policy Document /

Participants Membership Document

Duration:

Normally policies are issued for the duration of

twelve months.
Extended coverage on project policies.
MARINE POLICY : The membership under this
document shall be for the period of _________
months. However, the benefits under this
document, except Surplus if any, shall cease on the
arrival of goods at destination.

Takaful Policy Document /

Participants Membership Document

Cancellation Clause:

This Policy may at any time be terminated at the

option of the Company, on 14 days' notice to that
effect being given to the Participant at his last known
address. In that case, the Participant shall be GIVEN
an amount equivalent to a ratable proportion of the
contribution for the unexpired Period of Policy from
the date of such cancellation. This Policy my also be
terminated at any time at the request of the
Participant, in which case the Participant will be
PAID an amount equivalent to the actual contribution
made initially by him/her, less the amount worked as
per the following scale applicable to the period during
which the policy has been in force:

Takaful Policy Document /

Participants Membership Document

TAKAFUL OPERATOR'S FEE

The Company shall deduct Takaful Operator's fee out
of the Contribution received under this Policy. Such
fee shall be based on the Wakala principle since the
Company hereby acts as a Wakeel on behalf of the
Fund.
INVESTMENT MANAGEMENT SHARE
The Company shall act as a Mudarib for the purpose
of managing the investment of the Participant's
Contribution. As such, the Company stands entitled to
a share in the investment income thereof as Mudarib.

Takaful Policy Document /

Participants Membership Document

SURPLUS DISTRIBUTION
If, at the end of the period of Policy stated in
the Schedule, there is a surplus in the General
Takaful Fund, the same shall be distributed
among the Participants. Provided that, in case
the Participant has made any claim or
received any benefits under this Policy, that
claimed amount shall be deducted from the
net amount worked out as due to the
Participant.

BANCATAKAFUL

Background
Range of Products
Savings

Personal
Accident,
Homeowners
Comprehensive,
Credit
Cards, etc.
Financing,
Individuals Car Ijarah,
Housing Musharika, Mortgage Takaful.
Financing, SMEs Trade Credit Takaful,
Business, Office, Equipment, Assets.
E-Commerce

BANCATAKAFUL (Contd.)
Advantages of BancaTakaful:
Facilitation Desk / Equipment.
Fast Turnaround Time.
One-Stop shop for Clients.
Concept of Islamic Financial Supermarket.
Value Added Services.
Law of Large Numbers.
Lower Contribution Rates.
Attraction for Depositors.
Synergy.

ReTakaful

Currently few ReTakaful companies worldwide offering a

relatively small capacity:

Sudan (1979) National Reinsurance.

Sudan (1983) Sheikhan Takaful Company.
Bahamas (1983) Saudi Islamic Takaful and ReTakaful
Company.
Bahrain/Saudi Arabia (1985) Islamic Insurance and
Reinsurance Company.
Tunisia (1985) B.E.S.T. Re
Malaysia (1997) ASEAN ReTakaful International.
Dubai (2005) TakafulRe by ARIG.
Lloyds of London to have a ReTakaful Syndicate in 2007.
SwissRe has formed a separate ReTakaful Pool
MunichRe to form a separate ReTakaful Pool
Provision in Takaful Rules 2005.

T I M E L I N E T A K A F U L I N

Report by the
Council

Objectives
Resolution

1983

Review by Council
of Islamic Ideology

2000

Insurance
Ordinance

Takaful
Rules
2005

1992

1949

P A K I S T A N

2006

TAKAFUL
PAKISTAN
LIMITED

Takaful Prospects in Pakistan

97% Muslim population.

Demand for insurance increasing with increase in

per capita income.

Personal lines insurance business (leasing, health,

Medicare) growing at a higher rate than other
conventional classes.

Islamic banking on sound footing with support of

the Govt.

TAKAFUL - TARGET MARKET

People who do not insure due to

religious reasons.

People who insure and are insensitive to

religious reasons.

People who currently do not insure at all.

Challenges to Takaful

Skepticism.

Lack of uniformity in Shariah decisions.

Windows issue.

Regulatory issues.

Capacity constraints
ReTakaful.

Limited Investment avenues.

H.R. issues.

due

to

inadequate

Introduction to

TAKAFUL PAKISTAN
LIMITED

TAKAFUL PAKISTAN LIMITED

Takaful Pakistan is a joint venture of prestigious local

& foreign institutions, including:
House Building Finance Corporation.
Emirates Global Islamic Bank.
Arif Habib Securities.
Sitara Chemicals.
Emirates Investment Group (Sharjah).
Al-Buhaira National Insurance Co. (U.A.E.)

Large initial paid-up Capital.

TAKAFUL PAKISTAN LIMITED (Contd.)

Managed by dedicated professionals, committed to the

cause.

ReTakaful

arrangements

with

consortium

of

internationally reputed ReTakaful operators.

Shariah Board comprises of eminent scholars.

BancaTakaful and MicroTakaful products.

We intend to be the trend-setter for excellent Clients

Servicing, Operational bench marks and prudent
Underwriting practices.

Conclusion

Takaful defined.

Comparison with conventional insurance.

Takaful Models

Takaful Types

BancaTakaful

ReTakaful

Takaful Pakistan Limited

Thank you for your attention