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Dr Azman Mohd Noor
AIoi Nissei Dowa Insurance Endowmend Course
Waseda University
May 17, 2012.
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PRESENTATION OUTLINE
1
Introduction to Islamic Finance in Malaysia and Takaful
2
Differences between Takaful and Conventional Insurance
3
Legal and Regulatory Framework for Takaful
4 Types and Models of Takaful
5 Shariah and Legal Issues
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17 Full fledge Islamic Banks
10 Conventional banks with Islamic window
4 International Islamic Banks
Islamic Finance in Malaysia
Financial System in Malaysia Conventional
Banking
Islamic Banking
Takaful Islamic Money
Market
Islamic Capital Market
Insurance Money Market
Capital Market
Islamic Banking Takaful
12 Takaful Oprators
4 Retakaful Operators
Money Market for Islamic Banks
Daily Transactions RM 1 billion Bursa Suq Al Sila as a platform
for Commodity Murabahah trading since 2009
International Islamic Liquidity Management initiated 2011.
Money Market Capital Market
88% halal counters/stocks traded at Bursa Malaysia
57% of private debt securities are sukuk
14 Islamic Fund Management institutions
152 Islamic funds 36 Islamic Fund Management
Institutions with Islamic mandate
Labuan Offshore FSA
Islamic Banking 6 Islamic Banks and 9 Conventional banks with Islamic window. 3.8% of total banking industry.
Takaful & Retakaful 7 retakaful and 9 conventional reinsurance with Islamic window
-
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Average total asset growth (2001-2010): 20.3% (asset)
The Growth of Islamic Banking in Malaysia (RM3:1 USD)
Asset : 20.8% (RM351b)
Financing : 22.7% (RM223.3b)
Deposit: 22.6% (RM277.5b)
Average Profit of Islamic Banking 15.4%
* Sumber: BNM Sistem Statistik Institusi Kewangan
RM
0
00
mill
ion
Asset Financing Deposit
Total Asset, Financing & Deposit of Islamic Banks (2001- 2010)
-
Singapore
0.1%
UAE
4%
Bahrain
2%
Saudi Arabia
7%
others
1%
Ofshores
17%
Indonesia
4%
Malaysia
65%
(USD 96 bilion)
Growing Financial Market
Malaysia the largest
sukuk issuer in the
world
Total Immatured Global Sukuk a
USD 148 bilion
Immatured Private Debt Securitiies (as of Dec 2010)
Islamic
57%
Conventional
43%
* Source: FAST
RM 323 b (USD 96b)
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Definition of Takaful
Arabic Root-Word KAFALA Guarantee
TAKAFALA Joint Guarantee
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=
Participants mutually contribute to the same fund with the purpose of having mutual indemnity in the case of peril or harm
TAKAFUL
2
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Introduction to Takaful The nature of life uncertain.
People need protection to at least mitigate (or lessen) the burden of uncertainty of life
This has given rise to the practice of conventional insurance
Problem with conventional insurance:
Gharar
Maysir
Riba
Hence Conventional Insurance has been declared to be prohibited by Shariah
7
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Gharar Literally: risk / uncertainty / hazard.
Concept of gharar broadly defined in two ways:
First: gharar implies uncertainty, Second: It implies deceit.
Al Sarakhsi : any bargain or transaction in which the result of it is hidden.
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cont No verse from al-Quran prescribes gharar
explicitly
However, Muslim jurists recognized that prohibition of devouring others property in vanity (batil) in many verses of al-Quran includes the prohibition of gharar
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Cont
Nevertheless, prohibition of gharar has been
made conclusive in various hadiths from the
Prophet. E.g: The Companions related that the
Prophet has forbidden gharar in trading
Abu Hurayrah reported that two types of
transactions (because of gharar) were
prohibited by the Prophet : al Mulamasah (by
touching only without looking at good) and al
Munabadhah (throwing something at a number
of goods).
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cont The prohibited gharar (uncertainty) is excessive (gharar
fahish). Unlike Riba whereby its prohibition is absolute,
some degree of gharar is acceptable.
Occurs in contracts of exchange (uqud al-muawadat)
which is bilateral.
Gharar can be tolerated in the gratuitous contract
(tabarru) i.e. donation which is unilateral in nature.
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MEANING OF RIBA
Literally: excess, expansion, increase, addition,
growth, extra.
Riba in general is to charge interest in loan or debt.
Riba includes Any unjustified excess above and
over the capital, whether in loans between creditor
and debtor or in exchanging ribawi commodities
with ribawi commodities. Ribawi commodities
include gold, silver, currencies, staple foods.
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cont i) Riba in loan contract (riba al-duyun) riba
al-nasiah (excess due to delay in payment) also known as riba in the Quran.
ii) Riba in exchange ribawi commodities (riba al-buyu), also known as Riba based on al Sunnah
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Maysir Gambling or maysir or also known as qimar defined
as any activities which involve betting whereby the winner will take the entire bet and the loser will lose his bet. It means pure games of chance where any party might gain at the expense of the loss of the other party.
The Quran has explicitly condemned and prohibited gambling in the following verse: O believers, wine and gambling (maysir), idols and divination by arrows are but abominations devised by the Satan, avoid them so that you may prosper.
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Rulings Fatwa by National Council for Islamic Religious Affairs of
Malaysia (1972) that life insurance is not lawful as it contains gharar, maysir and riba
Resolution of Fiqh Academy (Jeddah (1406 1985).
The Commercial contract of insurance and reinsurance based on a fix premium is in reality a contract of exchange. This contract is fraught with element of gharar. It must be noted that the existence of gharar has rendered the contract null and void. The alternative valid contract in Shariah is the co-operative insurance, which is based on tabarru and co-operation among the policyholders
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5
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Alternative to conventional insurance
Qardawi:
In my view, insurance against hazard can be modified in a manner which would bring it closer to the Islamic principle by means of a contract of donation with a condition of compensation
A further requirement is that the company must be free from usurious business
(source: The Lawful and The Prohibited in Islam, p.276)
1
6
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Definition of Takaful Kafala: Guarantee
Takafala (Takaful)
- An Arabic words which means mutual help and cooperation among a group of people
Mutual Help and Cooperation
and help you one another in righteousness and piety ..
Al-Quran, al-Maidah 5:2
17
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Definition, cont Joint-guarantee; a pact among a group of
persons to indemnify a member of this group if he suffers a specified calamity or loss. The amount comes out of a common pool created with the individual contributions of participating members.
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 that purpose.
Section 2 of the Malaysian Takaful Act 1984 1
8
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Definition, cont.
A scheme based on mutual assistance in compliance with the provisions of Islamic Shariah, and which provides for mutual financial aid and assistance to the participants in case of occurrence of certain contingencies and whereby the participants mutually agree to contribute to the common fund for that purpose.
Pakistan Insurance Ordinance 2000
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The Simple Flow
2
0
Policyholders (Takaful
Participants)
1) Payment of claim
2) Distribution of Surplus
Takaful Fund
Takaful Operator
Contributions
The Takaful Operator provides services: 1) Managing the fund 2) Investing the fund
Outcome
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Essential Salient Features Major salient features of takaful as compared with
conventional insurance are:
1. Antidotes to the reasons for the prohibition of conventional insurance
Uncertainty (gharar)
Interest (Riba)
Gambling (Maisir)
Taking peoples money unjustly. (Akl amwal al-nas bi al-batil)
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Cont.. features 2. Shariah compliant investments.
3. Underwriting Shariah compliant risks.
4. Prudent Shariah governance and supervision : In house and regulatory level.
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Essential Features of Takaful model
Based on co-operation, brotherhood, solidarity and mutual help.
The joint guarantee is essentially agreed and concluded between a participant and other participants.
Structured along the tabarru concept (Gratuitous contract). Gharar is not avoided but tolerated and shared.
Takaful Operator is not part of this donation and mutual assistance arrangement, but it is an agent of the participants to manage the fund with fee.
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cont
Iltizam bi al-tabarru (commitment to donate).
Indemnification commitment Providing compensation for injury as per regulations and underlying constituent documents
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Cont.
AAOIFI STANDARD 5/8
The Takaful operator must strictly adhere to Shariah principles and rules in its operations, activities, investment and underwriting, particularly not to accept risk from non-halal things or any business leads to haram.
Accounting and Auditing of Islamic Financial Institution (AAOIFI)
which based in Bahrain is a governing body for Islamic financial institutions
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Cont Shariah Governance
The establishment of Shariah Advisory Council, Shariah department/ secretariat to conduct Shariah advisory, supervisory, control, research and audit tasks.
Internal Shariah supervision
Regulatory level
Market Demand
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Contractual Relationship in Takaful
The policy holders among themselves
Musharakah and Taawun (cooperation) ,
Iltizam bi al-tabarru (commitment to donate),
Indemnification commitment Providing compensation for injury as per regulations and underlying constituent documents
Company and policyholders Wakalah
Managing the fund under Wakalah to manage the fund, e.g. payment of claim, provisions for reserve, retakaful etc.
Investing the Fund
Mudharabah - Profit sharing ratio
Wakalah bi al-istithmar - Certain fees
27
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Model: Commercial Enterprise vis--vis co-operative and mutual insurance
Some believe that takaful which is based on co-operation, brotherhood, solidarity and mutual help should not be established for the purpose of making profit.
Profit Making Model
Co-operative Insurance Model
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Cont. Most of Takaful operations are not wholly
cooperative but a hybrid of cooperative and commercial bussiness. This implies:
The permissibility for the operators to make profit.
It is suggested that the policy holders as participants and contributors be given platform to vote via AGM on business operations, activities and underwriting policy.
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Takaful operators in malaysia Bank Negara Malaysia, the central bank and insurance
regulator, last week issued the licenses to joint ventures to be established by i) American International Assurance Berhad (70 percent) and Alliance Bank Malaysia Berhad (30 percent); ii) AMMB Holdings Berhad (70 percent) and Friends Provident Group plc, UK (30 percent); iii) ING Management Holdings (Malaysia) Sdn Bhd (60 percent), Public Bank Berhad (20 percent) and Public Islamic Bank Berhad (20 percent); iv) and The Great Eastern Life Assurance Company Limited (70 percent) and Koperasi Angkatan Tentera Malaysia Berhad (30 percent).
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Cont This brings the number of Takaful operators in Malaysia
to 12. The other Takaful operators include CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad and Takaful Ikhlas Sdn. Bhd.
Arab News, Sep 6, 2010
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Takaful Assets Globally, the takaful industry has been growing
rapidly, appealing to both Muslims and non-Muslims. The industry is expected to grow by 15-20% annually, with contributions expected to reach USD7.4 billion by 2015. Currently, there are more than 110 takaful operators worldwide.
Central Bank of Malaysia (Bank Negara of Malaysia website),
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Legal and Regulatory Framework
In Malaysia, Takaful business is regulated by the Takaful Act 1983
The Act consists of 68 sections, divided into 4 main sections
Preliminary
Conduct of Takaful Business
Return, investigation, Winding Up and Transfer of Business
Miscellaneous and General 33
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Establishment of takaful company
Restriction on Takaful term - use of word takaful or any of its derivative in any language, or
any other word indicating that such person carries on Takaful business in the name, description or title under which it carries on business in Malaysia is not allowed unless with the consent of the Director General of Takaful (DGT)(Section 6)
Director-General of Takaful
DGT is the Governor of Bank Negara Malaysia (BNM) (Section 54(1))
Registration of Takaful operator
- By DGT, with or without conditions (Section 8)
- May impose conditions of registration for Takaful operators that are already registered (Section 8)
34
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Criteria for Takaful Operators (Section 4 (2)
Registered under Act in respect of the class of Takaful business
Maintains a surplus of assets over liabilities not less than
the amount prescribed from time to time
Makes deposit with the Accountant-General not less than
the amount prescribed from time to time (also Section 13;
alternative - banks covenant to deposit under Section 14)
Membership in a Takaful association approved by Minister
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Security for takaful participants
Similar to deposit insurance scheme for bank deposits
Establishment of takaful guarantee scheme funds by DGT in respect of family solidarity business and general business carried out by takaful operators
Income for the takaful guarantee scheme funds derived from levies imposed and collected from Takaful operators
Sums from the takaful guarantee scheme funds may be withdrawn/utilized with approval/direction of DGT inter alia to meet the liabilities of any insolvent operator as may be prescribed
(Section 21)
36
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SHARIAH COMPLIANCE FRAMEWORK (1) Section 8(5) Internal Controls
aims and operations of Takaful operator do not involve any element not approved by the Shariah
articles of association of the Takaful operator provide for establishment of Shariah Advisory Body as may be approved by DGT to ensure operations of its takaful business are in compliance with the Shariah
Section 53A Advisory powers of SAC BNM
any person involved with Takaful business may seek the advice of the Syariah Advisory Council (SAC) of BNM (established under Central Bank of Malaysia Act 1958), and such person must comply with such advice provided by the SAC of BNM
37
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Shariah compliance framework
SAC BNMs authority over takaful matters
Section 16B Central Bank of Malaysia Act 1958 SAC of BNM shall be the authority for the ascertainment of Islamic law for the purposes of takaful business or any other business which is based on Syariah principles and is supervised and regulated by BNM
38
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cont
SAC BNMs role in court/arbitration proceedings involving takaful business
if, in any proceedings relating to takaful business before any court or arbitrator, a question arises concerning a Syariah matter, the court or arbitrator may refer such question to the SAC BNM for its ruling (Section 16B(8) CBMA)
any ruling made by the SAC BNM pursuant to such reference shall be taken into consideration by the court in arriving in its decision/ be binding on the arbitrator (Section 16B(9)CBMA)
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Types and Models of Takaful
General Takaful Family Takaful
Motor
Fire (Property)
Engineering
Liability
General Accident
Family
Education
Savings
Investment -Link
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Model: Mudarabah, wakalah, waqf
Mudarabah with only sharing of investment profit Mudarabah with sharing of investment profit and surplus
with operator Wakalah on the contribution with no profit/surplus
sharing with operator Wakalah on the contribution with sharing of investment
profit and/or surplus with operator Waqaf on the first contribution (to set up the fund) and
appointment of company based on wakalah with fees.
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41
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GENERAL TAKAFUL MODELS AND PRODUCTS Mudharabah with only sharing of investment profit
Mudharabah with sharing of investment profit and surplus with operator
Wakalah on the contribution with no profit surplus sharing with operator
Wakalah with sharing of surplus with operator
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1) MUDHARABAH WITH ONLY SHARING OF INVESTMENT PROFIT
43
Participants
Contrib
utions
Contributions +
Profit Surplus
Takaful Operator
Participants
Y%
X%
Profit
Expenses
This model is acceptable by AAOIFI Shariah Standard
100%
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2) MUDHARABAH WITH SHARING OF INVESTMENT PROFIT AND SURPLS WITH OPERATOR
44
Participants
Contrib
utions
Contributions +
Profit Surplus
Takaful Operator
Participants
Y%
X%
Profit
Expenses
This Model is not accepted by AAOIFI Shariah Standard
X%
Y%
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3) WAKALAH ON THE CONTRIBUTION WITH NO PROFIT / SURPLUS SHARING OPERATOR
45
Participants
Contrib
utions
Contributions +
Profit Surplus
Participants
Expenses
This Model is accepted by AAOIFI Shariah Standard
100% Fees
Profit
45
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4) WAKALAH WITH SHARING OF SURPLUS WITH OPERATOR
46
Participants
Contrib
utions
Contributions +
Profit Surplus
Takaful Operator
Participants
Expenses
This Model is not accepted by AAOIFI Shariah Standard
X%
Y%
Fees
Profit
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FAMILY TAKAFUL MODEL AND PRODUCTS Mudharabah with only sharing of investment profit
Mudharabah with sharing of investment profit and surplus with operator
Wakalah on the contribution with no profit surplus sharing with operator
Wakalah with sharing of surplus with operator
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1) MUDHARABAH WITH ONLY SHARING OF INVESTMENT PROFIT
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Participants
Contrib
utions
Risk (P) Account
Saving (PS) Account
Surplus
Takaful Operator
Participants
Y%
X%
Profit
Saving (PS) Account
Risk (P) Account
Expenses
100%
48
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2) MUDHARABAH WITH SHARING OF INVESTMENT PROFIT AND SURPLUS
49
Participants
Contrib
utions
Risk (P) Account
Saving (PS) Account
Surplus
Takaful Operator
Participants
Y%
X%
Profit
Saving (PS) Account
Risk (P) Account
Expenses
X%
Y%
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3) WAKALAH ON THE CONTRIBUTION WITH NO PROFIT/SURPLUS SHARING WITH OPERATOR
50
Participants
Contrib
utions
Risk (P) Account
Saving (PS) Account
Surplus
Takaful Operator
Participants
100%
Saving (PS) Account
Risk (P) Account
Expenses
100% Fees
Profit
50
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4) WAKALAH ON THE CONTRIBUTION WITH SHARING OF SURPLUS WITH OPERATOR
51
Participants
Contrib
utions
Risk (P) Account
Saving (PS) Account
Surplus
Takaful Operator
Participants
X%
Saving (PS) Account
Risk (P) Account
Expenses
Y%
X%
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Fees
Takaful Operator
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Legal and Shariah Issues Capacity to contract
Insurable interest
Utmost Good faith
Payment to Claimant
Sharing of surplus
Takaful Benefit
Death due to suicide or prohibited acts
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Capacity to contract
Takaful: minimum age for policy holder: 18 years old (Section 64 Takaful Act)
A person under the age of eighteen years shall not have the capacity to enter into a contract of takaful.
Opinions of jurists on age of majority
Compare to conventional Insurance: Policy holder must be of minimum age of 16 years old; those between 10-16 years need to obtain guardians written consent (Section 153 Insurance Act)
53
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Insurable Interest The name given to the financial interest which a person has in
the subject matter of the cover. Generally, it is the particular relationship between the person
taking the insurance policy and subject matter of the insurance.
Explicitly required in conventional insurance, without which the contract will be illegal, void or simply unenforceable (Insurance Act 1996 (sec. 152 (1) & (2)
Does takaful requires the same? Silent in both family and general takaful
Not required, as it is about mutual assistance? Covered by sec. 31 of the Contract Act against wagering
agreement. By virtue of this sect., a participant is required to show sufficient interest in the subject matter, both at the time of inception and at the time of loss.
54
54
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Utmost Good Faith (Uberrimae Fidei)
Sec 28 of Takaful Act imposes the disclosure of all material facts Known as the duty of utmost good faith. Defined as: a positive
duty to voluntarily disclose, accurately and fully, all facts material to the risk proposed, whether asked for them or not
Means that the parties to the contract is required to disclose to each other all the material facts about the risk and cover, fully, truly and faithfully.
It is imposed upon both, the participants and the operator and the failure will subject the person to a fine not exceeding twenty thousand ringgit or imprisonment for a term not exceeding one year or both
In compliance with the Syariah that requires honesty, sincerity, transparency and full disclosure in contract.
The effect of non-disclosure as to the takaful contract
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Payment to the claimant
The payment of claim made by the takaful operator is similar to compensation made by conventional insurance. It looks like the premium is exchanged for the compensation.
Generally held that the payment comes from the other participants money, not from the claimants money.
Some advocate the concept of trust, in which the participants (as settlors) can also benefit (as beneficiaries) from the trust fund.
56
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Sharing of Surplus The excess of the total premium contributions paid by
policyholders during the financial period over the total indemnities, paid in respect of claims incurred during the period not of re-takaful and after deducting expenses and changes in technical provisions
Methods in distributing the surplus All policyholders Policyholders that have not claim Policyholders that do not claim or claim less that their
contribution Policyholders and takaful operators
Can the takaful operator share the surplus with the participants, on the concept of mudharabah, wakalah or jualah?
Can the claimants share the surplus or be excluded from
the sharing?
57
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Cont. Mudharabah:
underwriting surplus cannot be shared.
Takaful operator shares only in the investment returns.
Wakalah:
The underwriting surplus belongs to the participants (i.e: Takaful operator does not share in UW surplus).
Takaful operator shares only in the investment returns.
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Cont (legitimacy) Rational:
UWS belongs exclusively to the participants.
The shariah issue: ownership issue.
Does the UWS really belong to the participants after making tabarru (donation) to the Risk Fund?
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Cont (legitimacy) Some other scholars provide the following shariah
evidence:
Hibat al-thawab as a ground for distributing surplus exclusively to participants.
The hadith of Nahd as a ground for distributing surplus exclusively to participants.
Sharing in the underwriting surplus is a kind of taking peoples property unjustly.
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Cont (legitimacy) b. 2nd approach: TO can share in the UWS.
Shariah evidence:
Islamic legal doctrine of shurut (conditions).
Absence of any prohibitive texts from the primary sources of Shariah, i.e: Quran and Sunnah.
The Islamic legal doctrine of rida (satisfaction in trade).
The principle of incentive for better risk selection.
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Takaful benefit In case of the death of the participant (in Family Takaful),
how to distribute the takaful benefit (from risk account and investment account)?
The nominees can be either the sole beneficiary or as a trustee/ executor where the benefit will be distributed based on law of faraid?
Sec 65 (1) of Takaful Act: Proper Claimant, No express provision as administrators or beneficiaries
Insurance Act (Section 166 & 167): express provisions providing that for:
Muslim policy holders, nominee is treated as executor and not sole beneficiary, any moneys paid would be treated as part of the deceaseds estate; i.e. faraid
non-Muslim policy holders, nominee is the absolute beneficiary and moneys paid are not part of the estate
62
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Contd Insurance Act provides that both accounts be
considered as part of faraid. Family Takaful consists of two portfolios, i.e risk
account and investment account. Takaful Act Just to proper claimant. Not part of
faraid? Should provision of Insurance Act be applied here.
AAOIFI Shariah Standard: Risk Account: Be given to the nominees, i.e. proper
claimant as it is the contribution of other participants.
Investment Account (if any), be considered as part of faraid, so must be distributed to the beneficiaries according to law of faraid (Standard no 26 (6/2/
63
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Death Due to Suicide or Prohibited Acts.
Payment from the participant special account (risk account) will only be made if the death of the participant is not due to or arising from suicide and other causes prohibited by Shariah
Not claimable? Why? Who committed the sin. Philosophy behind takaful. Mutual assistance, but to whom?
Closing of the means to an evil act.
64
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THANK YOU VERY MUCH FOR YOUR ATTENTION AND YOUR PATIENCE
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