issues in taka ful by imran us man i
TRANSCRIPT
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Takaful
Dr. Muhammad Imran Usmani
SECP Takaful Conference March 14, 2007
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Conventional Insurance
How Qimar & Riba exist in Conventional Insurance
Definition of Takaful
Mudarabah Model
Wakalah Model
Wakalah based on Waqf Model
Application of Takaful
Presentation Outline
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Definition
A way to provide security / and compensation to whatis valuable in the event of its loss, damage or
destruction based on the principle of risk taking andspeculation
Conventional Insurance
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Tw o Aspects of I nsuranceAccording to Shariah rules there are two aspects of
Conventional Insurance, namely:
1. Conceptual Aspect2. Practical Aspect
So far as the Concept of Insurance is concerned, it is tocover the risk of loss, or fortunate many helping theunfortunate few.
This concept is not only recognized, but alsoappreciated and rewarded by Islam.
Conventional Insurance
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"Help ye one another in righteousness and piety, buthelp ye not one another in sin and rancor".
Principles of Muwalat, Maaqil, and Kafalah and
establishment of Islamic welfare state by the HolyProphet (SAW), Waqf and Tabrru are examples forrecognition of this concept.
Al-Maidah verse # 2:
Conceptual Aspect
W hy this Concept is rew ardable?
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Second Aspect of Insurance is practical Aspect, it isforbidden due to two reasons:
1. Qimar or Maisir2. Riba
Since these two things have been clearly prohibited byIslam, they cannot be justified on the conceptualaspect of helping victims of various accidents or
losses.
Practical Aspect
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O believers! Intoxicants and gambling and Al Ansab (Animalssacrificed for idols) and Al Azlam (arrows for seeking luck ordecision) are an abomination of Satan's handiwork. So avoidthem in order that you may be successful. Satan wants only toexcite enmity and hatred between you with intoxicants andgambling and hinder you from the remembrance of Allah and
from prayer. So, will you not then abstain? (Al Maidah 90 91)
Quranic view on Gambling & Risk
Practical Aspect
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Practical Aspect
How Qimar & Riba exists ?
QIMAR or MAISI R has been clearly prohibited byQuran and Hadith of the Holy Prophet (SAW).
Maisir has two basic elements which cause to prohibit.namely:
1. Gharar
2. Khatar
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Khatar
Taleequ l milki al alkhatr, w al mal fil jan ibain
To stipulate/conditionalize theownership/profitability on uncertain event,whereas money is involved in the both sides.
However, if money is not involved from both sidesi.e. one party voluntarily (without anycompensation) declares We shall compensate you
on a particular event of loss, it would not beMaisir.
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Gharar
Gharar literally means Uncertainty
Forms of Gharar :Any bilateral transaction in which the liability of theparty in the transaction is either uncertain or
contingent.Consideration of either is not known.
Ultimate outcome of any one party is uncertain.
Delivery is not in the control of the obligor.Payment form one side is certain, but from the otherside is contingent.
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Gharar & Khatar
Presence of Gharar and Khatar makes Qimar,
Speculation, Gambling and Conventional Insuranceprohibited.
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Qimar
I ndication of P resence of Qimar in a transaction
If in any transaction one partys profit isdependent on the loss of the other then this is anindication that the transaction involves QimarQimar .
In the permissible modes of business any profit orloss is equally shared & is fair to every party. Forexample, in partnership (Musharakah) both the
parties share profit & loss. Similarly in other tradeslike sale, purchase, hiring or leasing each partysconsiderations are certain.
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Conventional Insurance
Problems
The participant contributes a small amount of premium in a hope to gain a large sum - Khatar.
The participant loses the money paid for the
premium when the insured event does not occur -Gharar.
The company will be in deficit if the claims are higher
than the amount contributed by the participants -Gharar.
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Riba
The element of Riba (Interest) exists in lending or
borrowing funds/investments at fixed interest, andother related practices in the investment activitiesof the conventional insurance companies
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The Solution
Islamic Cooperative Insurance
( Takaful)
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Takaful
Takaful is an Arabic word that means Guaranteeing each other"
It is a system of Islamic Insurance based on theprinciple of TAAWUN (mutual assistance) andTABARRU (Gift, Give away, donation) where the
risk is shared collectively by the groupVOLUNTARILY.
This is a pact among a group of members or
participants who agree to jointly guarantee amongthemselves against loss or damage to any of themas defined in the pact.
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Models of Takaful
1. Mudarabah Model
2. Wakalah Model (hybrid of Wakalah &
Mudarabah)
3. Wakalah based on Waqf Model
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Mudarabah Model
The participant and the operator enter into aMudarabah contract from the beginning of therelation, for indemnification and share of theunderwriting results.
The Surplus is shared between the participants andthe takaful operator in an agreed ratio.
This model allows the takaful operator to share in theunderwriting results from operations as well as thefavorable performance returns on investedpremiums.
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Mudarabah Model
Shariah Concerns
The relation between the participants is that of tabarru and not Mudarabah, Profit Sharing cant beapplied here. Donation cannot be Mudarabah capitalat the same time.
In a Mudarabah contract, a profit is to be generatedto be distributed. Profit is not the same as Surplus (excess pf premiums over claims, reserves and
expenses) and in the insurance context no definitioncan be generated by definition.
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Mudarabah Model
Shariah Concerns
The sharing in underwriting surplus itself issomething which is similar to making this into acommercial business venture and not a mutualcontract for assistance and protection.
The requirement to provide Qard Hasanah (in case of a deficit) in a Mudarabah contract by definition isagainst the concept of Mudarabah which is a profit
sharing contract and a Mudarib cannot be aguarantor.
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Wakalah Model
Cooperative risk sharing occurs among the
participants whereas the takaful operator earns a feefor services (as a Wakeel or Agent).
The operator earns an upfront deductible fee and
shares the profit of investments, it does not sharethe results of underwriting.
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Waqf Model
In order to eliminate the element of Mayser, the
concept of Waqf and Tabarru is incorporated. Inrelation to this participants shall agree to relinquishas donation certain amount of money.
The Takaful Fund, consisting of the contributions paidas Tabarru, will be further invested by the Companybased on the principle of Islamic modes of Trades,through which the element of interest (riba) will bereplaced.
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PROFIT / LOSSATTRIBUTABLE TO
SHAREHOLDERS
INVESTMENTBY FUND
PROFITS FROMINVESTMENT
DONATIONPAID BY
PARTICIPANT
WAQFFUND75 %
TO70 %
WAQFFUND
OPERATIONALCOST OFTAKAFUL
/ RETAKAFUL
SHARE OFSURPLUS FOR
THE PARTICIPANT100%
SURPLUS
COMPANY
PARTICIPANT
60 %
SHARE OFPROFI T FOR THE
COMPANY
40%
MANAGEMENTEXPENSES OF
COMPANY
WAQF
INITIALDONATION BY
SHAREHOLDERSTO CREATE WA QF
FUND
TAKAFUL OPERATORFEES FOR
ADMINISTRATIONEXPENSES
25% TO 30%
PROFIT SHARING ONMUDARABHA BASES
Waqf Model
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Waqf Model
Basic Features
A Waqf Fund is established by the shareholders of Takaful Company through the contribution of Cedingamount (part of the Capital) to compensate thebeneficiaries or participant of Takaful scheme. The
Ceding amount of the Waqf will remain invested.
Any person by signing the proposal form,contributing to the Waqf and subscribing to the policy
documents shall become the member of the Waqf fund.
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Waqf Model
Basic Features
The Waqf fund shall work to achieve the followingobjectives:
a. To extend financial assistance to itsmembers in the event of losses.
b. To extend benefits to its members strictly inaccordance with the Waqf Deed.
c. To donate to Charities approved by the
Shariah Supervisory Board
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Basic Features
The Waqf Fund will lay down the rules fordistribution of its funds to the beneficiaries and willdecide how much compensation should be given toa subscriber/member .
The Waqf will become owner of all contributions andhas the right to act as a legal entity as per its termsfor investment, compensations and dealing with thesurplus amounts.
Waqf Model
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Waqf Model
Basic Features
The Takaful Company may distribute the surplusamounts on the following three basis:
a. A portion of surplus should be kept asreserve to mitigate the future losses.
b. A portion of surplus should be distributedamong the participants to differentiate itfrom the conventional insurance procedures.
c. A portion of surplus should be utilized forthe charitable purposes every year.
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Basic Features
As per the rules of the Waqf, if the fund isliquidated, the outstanding balance, after paying alldues and payables, will be utilized to charitablepurposes.
The Takaful company, while managing the Waqf Fund, will play two different roles simultaneously:
a. Operator/Manager
b. Mudarib
Waqf Model
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Basic Features
As Operator/Manager, the Takaful Company willperform all functions necessary for the operationsof the Waqf against a Wakala fee to be deductedfrom the Contributions of the Participants.
As Mudarib of the fund, the Takaful Company willmanage the investment of the excess funds of theWaqf into Shariah compliant investments and willparticipate in the profit of the funds investmentsat a fixed ratio of profit.
Waqf Model
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Application
Takaful can be used to cover :
Property e.g. house, factory, mosque, officesVehicles (car, motorcycle etc..)
Goods ( For Import or Export )
Valuables
Health, accidents and Life