CHAPTER 10

TAKAFUL
LEARNING OUTCOMES:
Upon completion of this chapter, you should be able to:
Explain the nature of takaful
Identify the pillars of takaful contracts
Discuss takaful operations in Malaysia
Understand retakaful and its functions
Discuss the classes of takaful business
Distinguish takaful from conventional insurance
INTRODUCTION

‘We will surely test you through some fear, hunger and loss of money,
lives and crops. (A-Baqarah 2:104)

The essence of insurance could be seen in the system of mutual help in

relation to the custom of blood money under the ancient Arab tribal
custom of al-aqila, when the whole community stood as guarantee
against the loss to any of its members.

The principle of compensation and group responsibility was accepted

by Islam and the Holy Prophet.
Insurance Elements That Are Not
Conforming To Islamic Law

Riba Gharar

Maysir
Insurance Elements That Are Not
Conforming To Islamic Law

• Increase, addition, expansion and growth

Riba • Increase upon usurious items and upon
debt, due to the deferred payment term.

• Uncertainty
Gharar • Make payment conditional upon the
outcome of an uncertain event.

• Gambling
Maysir • The elements of chance occurs in life
insurance
CONVENTIONAL INSURANCE
UNLAWFUL (HARAM)

The Islamic Fiqh The Commercial

Academy Insurance contract
with a fixed periodical
Resolution No.9
premium contains a
(Jeddah/ KSA 1985) major elements of risk.

The Conventional
Insurance companies
often invest in assets
that are strictly
forbidden by Shariah.
The Concept Of Takaful

Ta’awun Tabarru’
Tabarru’ Ta’awun
Donation, gifts or
Mutual-cooperation
contribution

Allow the
The participants
participants to
make an aqad to
provide financial
deposit as a
assistance to fellow
donation into a risk
participants who
fund.
have suffered loss
SECTION 2 of TAKAFUL ACT 1984

Takaful as a scheme based on

brotherhood, solidarity and
mutual assistance which provides
for mutual financial aid and
assistance to the participants in
case of need whereby the
participants mutually agree to
contribute for the purposes.
Legal Aspects of Takaful Contract –
Islamic Law

Islam is a Islamic law

Known as
complete derived from
Shariah
way of life the Quran
Objectives of Islamic Law

Protect religion and faith

Protect life

Protect the mind and intellect

Protect lineage

Protect property and wealth

 The
Quran

The
primary
Qiyas sources of Sunnah
Islamic
law

Ijma’
 The Sunnah
Quran Main foundation
Derived as a
narration from the
and sources of
conduct of Porphet
Islamic law
Muhammad

Message of Quran
are universal,
Independent
eternal,
sources of Islamic
fundamental,
law
unalterable and
unchangeable
Ijma’ Qiyas
Consensus of Analogical
opinion by deduction where
the the teachings
Islamic of the Quran are
scholars is an compared and
agreement of contrasted with
Muslim jurists those of the
at a particular Hadith
time on a
questions of Aims to extend
law the ruling of new
case based on the
shared ‘illah.
Takaful Contracts

Void
(batil)
Voidable
(Fasid)

Valid (Sahih)
Pillars of Takaful Contracts

Contracting
parties

Subject
Sighah al-
matter of
’aqd
contract

The
Pillars of
Takaful
Contracts
 Sighah al-’aqd

Expression of ijab The participants will

Ijab must be definite
and qabul needs to make the offers wile
and qabul must be
exist to indicate the takaful operator will
absolute
meeting of mind accept the contracts

Express our
intention and need Mutual consent
to be communicate
Contracting Subject
parties matter
The participant Subject matter
and the takaful existed, lawful
operator and have
financial value

Capable and
competent
Subject matter
have a legal
relationship
with the
contracting
parties
Types of Takaful Contracts in a
Takaful Operation

Wakalah
model

Mudharabah Wakalah-
model waqf model

Types of
Takaful
Contracts in
Takaful
Operation
The Takaful Operations

Takaful is a system of
Islamic Insurance based In Malaysia, takaful
on the principle of industry is one of the key
ta’awun (mutual components of the Islamic
cooperation) and tabarru’ financial system
(donation).

The principles of sharing

and pooling or mortality
and morbidity risk is the
core principles underlying
takaful operations
The Takaful Practices

The participant is a The takaful operator

rabb ul-mal (capital manages the fund in
provider) and has return for a share of
management and underwriting surplus
control over the fund and profits

Takaful business
models must be
approved by the
Shariah board or
regulatory authorities.
Principles of al-Mudharabah

Contractual agreement
between a capital provider
Known as Trustee profit
and enterpreneur for the
sharing
purpose of setting up a
business venture

Profit sharing
arrangement
Principles of Al-Mudharabah

Takaful operator as the The participant entrust

entrepreneur who funds as takaful
undertakes the business contributions to the
activities takaful company

The takaful contract

specifies the proportion of
profit or surplus to be
shared between the
participants and the
takaful operators.
 Mudharabah Waqalah
model model

Ta’awuni
Waqf model
model
Takaful
Business
Models
Ta’awuni model

Pure mudharabah (profit sharing)

The takaful operator and the

participant share the direct investment
income from the takaful fund.

The participant is entitled to 100% of

the surplus with no deduction made
prior to the distribution.
Mudharabah model

Profit and loss sharing model

The takaful operator acts as the

mudarib (manager) and the participant
acts as a rabb ul-mal (capital provider)

The takaful operato manages the

operation of funds, by providing takaful
protection and investing the fund
 In case of profit, the
takaful operator and the
participant will share the
proportions

However, in case of loss,

the capital provider will
bear the loss solely and
limited to the amount of
invested
Wakalah model

A contract of agent- The takaful operator will

principal relationship in manage the risk fund
which one party represent contributed by the
another as agent participants

The takaful operator is On top of the fee, the

paid a certain percentage takaful operator is paid a
of the contribution or a performance fee based on
fixed amount for the the agreed percentage for
services provided which managing the investment
known as ‘wakalah fee’. of the risk fund
Waqf model

The takaful operator

initiated the waqf fund by
Non-profit concept and contributing the initial
charitable trust sum into the fund, and the
participants make
donations.

The waqf becomes the

owner of all contributions
and has the right to deal
with investment,
compensation and surplus
sharingM
 Anyone who participates by
signing the proposal forms
The takaful operator acts as a
shall become the member of
manager and trustee
the scheme as well as
beneficiary of the waqf funds

Surplus and profits will not

distributed to the participant
but it will retained to support
the community and kept as
reserve to mitigate future
losses.
 Transaction whereby
one company agrees to
indemnify another
takaful operator against
all or part of the loss
that the latter sustains
under contract
For services rendered,
the ceding company
Islamic reinsurance
pays a contribution to
the retakaful operator

RETAKAFUL
EXCEPTION FOR TAKAFUL OPERATOR
AND RETAKAFUL IN DEALING WITH
CONVENTIONAL REINSURERS

Takaful operator are not

allowed to accept
Only allowed for a short
reinsurance commission
term period of time
if they retakaful with
conventional reinsurers
RETROTAKAFUL

Objective: To increase
Retrocession of
capacity of the ceding
retakaful business to
company and cede
other retakaful
part of the volatile
companies
business
Functions of Retakaful

Protection against
Increase the Spread and share
unforeseen and
capacity the risk
catastrophe losses

Profit Potential growth Bigger market

maximization in sales shares

Better
management of
solvency risk
Types and Method of Retakaful

Non-
Proport
proport
ional Working or
Automatic ional
per risk excess
proportional
of loss treaty

Catastrophe or
Non-automatic per event
proportional excess of loss
treaty

Semi-
Excess of loss
automatic
ratio treaty
proportional
 Modified
mudharabah
model
Wakalah-
Wakalah
mudharabah
model
model

Retakaful
Operational
Model
Family
takaful
The
classes of
takaful
business
General
takaful
 Family takaful
includes protection of
life, saving and
investment.

These types of product

Family takaful plans normally offer long-
are alternatives to the term coverage, thus,
conventional life providing long-term
insurance. saving and investment
opportunities

FAMILY
TAKAFUL
The Operations of Family Takaful

Contribution

Credited to
Participant Special
Participant Account
Account – Build up
and Participant
reserves (tabarru’)
Special Account

Participant Account –
Saving and investment
purposes
 Individual
family
takaful
plan.

TYPES OF Group
Investment
linked FAMILY family
takaful

TAKAFUL plan.

Annuity
Individual Group
family family
takaful takaful Protection given by
plan plan the employers,
Protection given to
associations or
the individual
societies to members
of organization

The plan includes The plan includes

education, medical group education,
and health, family group medical and
plan, mortgage rent health and group
n etc family plan
 Investment
Annuity
linked
Takaful operator
‘pension scheme’
will invest the fund

The participant will

Provides regular enjoy the investment
income to the profit and takaful
participants upon protection on death
retirement and permanent
disability
GENERAL TAKAFUL

Provide compensation to
individuals and businesses
against financial loss due to
The period of takaful coverage
damage or disaster inflicted
in short term in nature
upon properties or asset of the
participant by the defined
perils.

The contribution paid in a

lump sum or by monthly
instalments
The Operations of General Takaful

Contribution

Surplus – Sharing
between the takaful General takaful fund
operator and (tabarru’)
participant

Loss- Compensation
provided based on the
method of indemnity
TYPES OF GENERAL TAKAFUL
PLAN

Motor takaful Fire takaful Home takaful

scheme. scheme. scheme.

Workmen
Engineering Marine takaful
compensation
takaful scheme scheme
takaful scheme
 DIFFERENCES BETWEEN
CONVENTIONAL INSURANCE AND
TAKAFUL

CONVENTIONAL TAKAFUL

Based on commercial factors Based on mutual co-operation

and tabarru’

Exchange contract Profit sharing

Presence of riba, gharar and Free from riba, gharar and

maysir maysir

Buy-sale contract The participant is the capital

provider while the takaful
operator is the manager
Interest practice Profit will be shared based on the
proportions
END