Presentation onPresentation on

TakafulTakaful

An emerging niche market

By:

Capt. M. Jamil Akhtar Khan ACII, MCIT, Master Mariner

Chief Executive Officer

TAKAFUL PAKISTAN LIMITED

Modaraba Association of Pakistan

May 8, 2008.

Outline of PresentationOutline of Presentation

Introduction to TakafulIntroduction to Takaful Objections to Conventional InsuranceObjections to Conventional Insurance Difference b/w Conventional Insurance & Takaful Difference b/w Conventional Insurance & Takaful Takaful Through Time Takaful Through Time Takaful ModelsTakaful Models Takaful TypesTakaful Types BancaTakafulBancaTakaful ReTakafulReTakaful Foundations of Takaful in PakistanFoundations of Takaful in Pakistan Takaful Prospects in PakistanTakaful Prospects in Pakistan Challenges to TakafulChallenges to Takaful Takaful Pakistan LimitedTakaful Pakistan Limited

Introduction to Introduction to TakafulTakaful

Takaful comes from the Arabic root-word Takaful comes from the Arabic root-word ‘‘kafalakafala’ — guarantee.’ — guarantee.

Takaful means mutual protection and joint Takaful means mutual protection and joint guarantee.guarantee.

Operationally, takaful refers to participants Operationally, takaful refers to participants mutually contributing to a common fund with mutually contributing to a common fund with the purpose of having mutual indemnity in the purpose of having mutual indemnity in the case of peril or loss.the case of peril or loss.

Meaning of TakafulMeaning of Takaful

Reference — Al Quran:Reference — Al Quran:

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

Takaful is a form of mutual help (ta’awun) Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others in furthering good/virtue by helping others who are in need / in hardship .who are in need / in hardship .

Reference – Hadith:Reference – Hadith:

““tie the camel first, then submit tie the camel first, then submit (tawakkal) to the will of Allah”(tawakkal) to the will of Allah”

The hadith implied a strategy to mitigate/The hadith implied a strategy to mitigate/reduce risk.reduce risk.

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

Declaration by Shariah scholars Declaration by Shariah scholars rendering conventional insurance un-rendering conventional insurance un-

IslamicIslamic Fatwa issued in Judicial Conference held in Fatwa issued in Judicial Conference held in

Makkah in Shaban 1398 AH.Makkah in Shaban 1398 AH. Verdict of Supreme Court of Egypt on Dec. Verdict of Supreme Court of Egypt on Dec.

27, 1926.27, 1926. Unanimous resolutions and fatwa by Ulama Unanimous resolutions and fatwa by Ulama

in the Muslim League Conference in Cairo in the Muslim League Conference in Cairo in 1965.in 1965.

Unanimous decision by Muslim Scholars in Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972.seminar held in Morocco on May 6, 1972.

Judicial Opinions and Fatwas Judicial Opinions and Fatwas confirming validity of Takafulconfirming validity of Takaful

Fatwa issued by Higher Council of Saudi Fatwa issued by Higher Council of Saudi Arabia in 1397 A.H. Arabia in 1397 A.H.

Fatwa Issued by the Fiqh Council of Muslim Fatwa Issued by the Fiqh Council of Muslim World League in 1398 A.H. World League in 1398 A.H.

Fatwa issued by the Fiqh Council of the Fatwa issued by the Fiqh Council of the OIC in 1405 A.H. OIC in 1405 A.H. (1985)(1985). .

Fiqh Academy Resolution 1985Fiqh Academy Resolution 1985• Islamic Islamic Fiqh (science of Shariah) AcademyFiqh (science of Shariah) Academy, emanating , emanating

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

• The The commercial Insurancecommercial Insurance contract… contract… is prohibitedis prohibited(Haraam)(Haraam) according to the according to the Shariah.Shariah.

• The alternative The alternative Takaful Takaful contract which conforms to the contract which conforms to the principles of Islamic dealings principles of Islamic dealings is Halaalis Halaal, being the contract , being the contract of of cooperative insurancecooperative insurance, which is founded on the basis of , which is founded on the basis of charitable donationcharitable donation and and Shariah compliant dealingsShariah compliant dealings..

Basic Elements of TakafulBasic Elements of Takaful Mutuality and cooperation. Mutuality and cooperation. Takaful contract pertains to Takaful contract pertains to Tabarru’atTabarru’at as against as against

mu’awadat mu’awadat in case of conventional insurance.in case of conventional insurance. Payments made with the intention of Tabarru Payments made with the intention of Tabarru

(contribution)(contribution) Eliminates the elements of Gharrar, Maisir and Eliminates the elements of Gharrar, Maisir and

Riba.Riba. Wakalah/Modarabah basis of operations.Wakalah/Modarabah basis of operations. Joint Guarantee / Indemnity amongst participants Joint Guarantee / Indemnity amongst participants

– shared responsibility.– shared responsibility. Constitution of separate “Participants’ Takaful Constitution of separate “Participants’ Takaful

Fund”.Fund”. Constitution of “Shariah Supervisory Board.” Constitution of “Shariah Supervisory Board.” Investments as per Shariah.Investments as per Shariah.

Main drivers of TakafulMain drivers of Takaful

Piety (individual purification)Piety (individual purification)

Brotherhood (mutual assistance)Brotherhood (mutual assistance)

Charity (Tabarru or contribution)Charity (Tabarru or contribution)

Mutual Guarantee Mutual Guarantee

Community well-being as opposed to profit Community well-being as opposed to profit maximization.maximization.

Objections to Objections to Conventional Conventional

InsuranceInsurance

Insurance DefinedInsurance Defined Definition of an Insurance ContractDefinition of an Insurance Contract

““An An agreementagreement whereby one party, whereby one party, the insurerthe insurer, in , in return for a consideration, return for a consideration, the premiumthe premium, undertakes , undertakes to pay to the other party, to pay to the other party, the insuredthe insured, a sum of , a sum of money or its equivalent in kind on the happening of money or its equivalent in kind on the happening of a specified event, which is contrary to the insured’s a specified event, which is contrary to the insured’s financial interest”financial interest”

Subject-matter of an Insurance ContractSubject-matter of an Insurance Contract “… “… what is it that is insured in a fire policy? Not the what is it that is insured in a fire policy? Not the

bricks and materials used in building the house, but bricks and materials used in building the house, but the the financial interestfinancial interest (i.e. money) of the insured in (i.e. money) of the insured in the subject-matter of insurance …” the subject-matter of insurance …” (Lord Justice Brett in Castellian v. Preston – 1883) (Lord Justice Brett in Castellian v. Preston – 1883)

Objections to Conventional Objections to Conventional InsuranceInsurance

Scholars view the insurance contract as an Scholars view the insurance contract as an exchange contract – money is being exchanged for exchange contract – money is being exchanged for money over time.money over time.

This brings about the problem of This brings about the problem of gharrargharrar (which (which leads to leads to maisirmaisir) and in investments aspect, ) and in investments aspect, ribariba..

Elements of:Elements of:• Uncertainty – Uncertainty – GharrarGharrar • Gambling – Gambling – MaisirMaisir• Interest – Interest – RibaRiba• UW + Investment Profit belongs to the UW + Investment Profit belongs to the

CompanyCompany Note that the Scholars do not object to insurance Note that the Scholars do not object to insurance

per se per se but only to certain weaknesses in the but only to certain weaknesses in the insurance contract.insurance contract.

Uncertainty – GharrarUncertainty – Gharrar Conventional insurance contract is basically a Conventional insurance contract is basically a

contract of exchange (mu’awadaat) i.e. buying and contract of exchange (mu’awadaat) i.e. buying and selling whereby policy (indemnity) is sold as goods, selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration.with the premium as the price or consideration.

The consideration must be certain for exchange The consideration must be certain for exchange contract.contract.

GharrarGharrar in insurance contracts pertains to in insurance contracts pertains to “deliverability” of subject matter, i.e. uncertainty as “deliverability” of subject matter, i.e. uncertainty as to:to: Whether the insured will get the compensation Whether the insured will get the compensation

promised?promised? How much the insured will get?How much the insured will get? When will the compensation be paid?When will the compensation be paid?

Thus, it involves an element of uncertainty in the Thus, it involves an element of uncertainty in the subject matter of the insurance sales contract, which subject matter of the insurance sales contract, which renders it void under the Islamic law.renders it void under the Islamic law.

Gambling – MaisirGambling – Maisir ““Insurance is a contract upon speculation. Good Insurance is a contract upon speculation. Good

faith forbids either party from concealing what he faith forbids either party from concealing what he privately knows, to draw the other into a bargain, privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing to from his ignorance of that fact, and his believing to the contrary” the contrary” (Lord Mansfield in Carter v. Boehm (Lord Mansfield in Carter v. Boehm – 1766).– 1766).

The insured loses the money paid for the premium The insured loses the money paid for the premium when the insured event does not occur. when the insured event does not occur.

The company will be in deficit if claims are higher The company will be in deficit if claims are higher than premium.than premium.

Interest – RibaInterest – Riba

“ …“ …. Allah has permitted trading and . Allah has permitted trading and forbidden riba” (Al Baqarah 2 : 275).forbidden riba” (Al Baqarah 2 : 275).

Insurance funds are invested in financial Insurance funds are invested in financial instruments which contain the element of instruments which contain the element of Riba. Riba.

Comparing Takaful to Conventional InsuranceComparing Takaful to Conventional Insurance

IssueIssue Conventional InsuranceConventional Insurance TakafulTakaful

Organization PrincipleOrganization Principle Profit for shareholdersProfit for shareholders Mutual for participantsMutual for participants

BasisBasis Risk TransferRisk Transfer Co-operative risk sharingCo-operative risk sharing

Value PropositionValue Proposition Profits maximizationProfits maximization Affordability and spiritualAffordability and spiritual

satisfactionsatisfaction

LawsLaws Secular/RegulationsSecular/Regulations Sharia plus regulationsSharia plus regulations

OwnershipOwnership ShareholdersShareholders ParticipantsParticipants

Management statusManagement status Company ManagementCompany Management OperatorOperator

Form of ContractForm of Contract Contract of Sale Contract of Sale Cooperative,Cooperative,

Islamic contracts of Wakala orIslamic contracts of Wakala or

Mudarbah with Tabar’ruMudarbah with Tabar’ru

(contributions)(contributions)

InvestmentsInvestments Interest basedInterest based Sharia compliant, Riba-freeSharia compliant, Riba-free

SurplusSurplus Shareholders’ accountShareholders’ account Participants’ accountParticipants’ account

TakafulTakaful Through Time Through Time

Takaful through TimeTakaful through Time Origins in the First Constitution of Madina.Origins in the First Constitution of Madina.

It evolved and continued in one form or the other It evolved and continued in one form or the other throughout the Abbaside period and even later during the throughout the Abbaside period and even later during the Ottoman empire.Ottoman empire.

Serious efforts were made in modern times, in 1970s to Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional come up with an Islamic alternative to the conventional insurance.insurance.

The first Takaful company was set up in Sudan in 1979, The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up in almost simultaneously followed by another one set up in Bahrain.Bahrain.

Takaful through Time… Takaful through Time… (Cont’d.)(Cont’d.) There are now around There are now around 150150 Takaful companies in over 40 Takaful companies in over 40

countries. countries. The total insurance premium of OIC countries for 2004 The total insurance premium of OIC countries for 2004

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

Poor Insurance penetration in the Muslim countries (<1% Poor Insurance penetration in the Muslim countries (<1% of GDP).of GDP).

Average growth rate higher than conventional insurance Average growth rate higher than conventional insurance companies (around 25%).companies (around 25%).

Non–Muslims increasingly opting for Takaful products for Non–Muslims increasingly opting for Takaful products for commercial benefits.commercial benefits.

Takaful ModelsTakaful Models

MudarabaMudaraba Model Model

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

Profits attributable

to Shareholders

Company’s Admin. & Mangt.

Expenses

Takaful Contribution

paid by Participant

General TakafulFund

General TakafulFund

Operational Cost ofTakaful

Surplus(Profit)

Participant’sShare

from Surplus

Company’s Share from

Surplus

Investment By

Company

Profit From

Investments

Company

Participant

Mudaraba Model

Wakala ModelWakala Model

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

General TakafulFund

OperationalCost ofTakaful/

ReTakaful

Surplus(Profit)

SurplusDistribution

toParticipants

Participants’

Takaful Fund

Wakala Model

Takaful

Contribution

paid

by Participant

Company

(Capital)

Mudarib's’Share

of PTF’s Investment

Income

ManagementExpense

of the Company

Profit/Lossattributable toShareholders

WakalaFee

(30% to 35%)

ProfitFrom

Investments

InvestmentIncome

Reserves

Investment bythe Company

Investment Income Sharingon Mudaraba Basis

Wakala -Waqf ModelIt is a WAKALAH model with a separate legal entity of WAQF in-It is a WAKALAH model with a separate legal entity of WAQF in-

between.between.

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

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

Losses to the participant are paid by the company from the same Losses to the participant are paid by the company from the same fund.fund.

Operational expenses that are incurred for providing Takaful services Operational expenses that are incurred for providing Takaful services are also met from the same fund.are also met from the same fund.

InvestmentIncome

Operational Cost of Takaful / ReTakaful

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.)

Mudarib’s Share of PTF’s

Investment Income

Wakalah Fee

InvestmentIncome

Management Expense of

the CompanyProfit/Loss

S H A R E H O L D E R S’ F U N D (S.H.F.)

Participant

WAQF

Takaful Operator

Share Holder

Wakala-Waqf Model

Investment by the Company

Models – The beauty of Islam lies Models – The beauty of Islam lies in itsin its

plurality … !plurality … !

ISLAM

AQIDAHFaith & Belief

SHARIAHPractices & Activities

AKHLAQMoralities & Ethics

IBADAHMan-to-God Worship

MUAMALATMan-to-Man Activities

SocialActivities

EconomicActivities

PoliticalActivities

Risk ManagementTakaful

General Takaful TypesGeneral Takaful Types

General Takaful –General Takaful – offers all kinds of non- offers all kinds of non-life risk coverage. It is normally divided into life risk coverage. It is normally divided into following classes:following classes:

Property Takaful Property Takaful Marine Takaful Marine Takaful Motor TakafulMotor Takaful Miscellaneous Takaful Miscellaneous Takaful

Types of Family TakafulTypes of Family Takaful

Term Life TakafulTerm Life Takaful

Whole Life TakafulWhole Life Takaful

Endowment Takaful Endowment Takaful

Universal TakafulUniversal Takaful

Marriage Plan Marriage Plan Education PlanEducation Plan

BANCATAKAFULBANCATAKAFUL BackgroundBackground Range of ProductsRange of Products

Savings Savings → → Personal Accident, Personal Accident, Homeowners’ Comprehensive, Credit Homeowners’ Comprehensive, Credit Cards, etc. Cards, etc.

Financing, Individuals Financing, Individuals Car Ijarah, → Car Ijarah, →Housing Musharika, Mortgage Takaful.Housing Musharika, Mortgage Takaful.

Financing, SMEs Financing, SMEs Trade Credit Takaful, → Trade Credit Takaful, →Business, Office, Equipment, Assets.Business, Office, Equipment, Assets.

E-CommerceE-Commerce

BANCATAKAFUL (…Cont’d.)BANCATAKAFUL (…Cont’d.)Advantages of BancaTakaful:Advantages of BancaTakaful:

Facilitation Desk / Equipment. Facilitation Desk / Equipment. Fast Turnaround Time.Fast Turnaround Time. One-Stop shop for Clients.One-Stop shop for Clients. Concept of Islamic Financial Supermarket.Concept of Islamic Financial Supermarket. Value Added Services.Value Added Services. Law of Large Numbers.Law of Large Numbers.

Lower Contribution Rates.Lower Contribution Rates. Attraction for Depositors.Attraction for Depositors.

Synergy.Synergy.

ReTakafulReTakaful Currently few ReTakaful companies worldwide offering a Currently few ReTakaful companies worldwide offering a

relatively small capacity:relatively small capacity: Sudan (1979) National Reinsurance. Sudan (1979) National Reinsurance. Sudan (1983) Sheikhan Takaful Company. Sudan (1983) Sheikhan Takaful Company. Bahamas (1983) Saudi Islamic Takaful and ReTakaful Bahamas (1983) Saudi Islamic Takaful and ReTakaful

Company.Company. Bahrain/Saudi Arabia (1985) Islamic Insurance and Bahrain/Saudi Arabia (1985) Islamic Insurance and

Reinsurance Company. Reinsurance Company. Tunisia (1985) Tunisia (1985) B.E.S.T. ReB.E.S.T. Re Malaysia (1997) Malaysia (1997) ASEAN ReTakafulASEAN ReTakaful International. International. Dubai (2005) Dubai (2005) TakafulRe TakafulRe by ARIG. by ARIG. Lloyds of London to have a ReTakaful Syndicate in 2007.Lloyds of London to have a ReTakaful Syndicate in 2007. SwissRe has formed a separate ReTakaful PoolSwissRe has formed a separate ReTakaful Pool MunichRe to form a separate ReTakaful PoolMunichRe to form a separate ReTakaful Pool Provision in Takaful Rules – 2005.Provision in Takaful Rules – 2005.

Objectives Resolution

1949 1992

1983

Review by Council of Islamic

Ideology

Report by the Council

2000

Insurance Ordinance

2005

Takaful Rules

T I M E L I N E – T A K A F U L I N P A K I S T A N

2006

TAKAFUL PAKISTANLIMITED

Takaful Prospects in PakistanTakaful Prospects in Pakistan

97% Muslim population.97% Muslim population.

Demand for insurance increasing with increase in Demand for insurance increasing with increase in per capita income.per capita income.

Personal lines insurance business (leasing, health, Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other Medicare) growing at a higher rate than other conventional classes.conventional classes.

Islamic banking on sound footing with support of Islamic banking on sound footing with support of the Govt.the Govt.

People who do not insure due to People who do not insure due to religious reasons.religious reasons.

People who insure and are insensitive to People who insure and are insensitive to religious reasons. religious reasons.

People who currently do not insure at all.People who currently do not insure at all.

TAKAFUL - TARGET MARKETTAKAFUL - TARGET MARKET

Challenges to TakafulChallenges to Takaful Skepticism. Skepticism.

Lack of uniformity in Shariah decisions. Lack of uniformity in Shariah decisions.

‘‘Windows’ issue. Windows’ issue.

Regulatory issues.Regulatory issues.

Capacity constraints due to inadequate Capacity constraints due to inadequate ReTakaful.ReTakaful.

Limited Investment avenues.Limited Investment avenues.

H.R. issues.H.R. issues.

TAKAFUL PAKISTAN LIMITEDTAKAFUL PAKISTAN LIMITED Takaful Pakistan is a joint venture of prestigious local Takaful Pakistan is a joint venture of prestigious local

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

Large initial paid-up Capital.Large initial paid-up Capital.

TAKAFUL PAKISTAN LIMITED … (Cont’d.)TAKAFUL PAKISTAN LIMITED … (Cont’d.)

Managed by dedicated professionals, committed to the Managed by dedicated professionals, committed to the cause.cause.

ReTakaful arrangements with a consortium of ReTakaful arrangements with a consortium of internationally reputed ReTakaful operators.internationally reputed ReTakaful operators.

Shariah Board comprises of eminent scholars. Shariah Board comprises of eminent scholars. BancaTakaful and MicroTakaful products.BancaTakaful and MicroTakaful products. We intend to be the trend-setter for excellent Clients’ We intend to be the trend-setter for excellent Clients’

Servicing, Operational bench marks and prudent Servicing, Operational bench marks and prudent Underwriting practices.Underwriting practices.

ConclusionConclusion

Takaful defined. Takaful defined.

Comparison with conventional insurance.Comparison with conventional insurance.

Takaful Models Takaful Models

Takaful TypesTakaful Types

BancaTakafulBancaTakaful

ReTakaful ReTakaful

Takaful Pakistan LimitedTakaful Pakistan Limited

More infoMore info?? Visit: Visit: www.takaful.com.pkwww.takaful.com.pk

Thankyou for your attentionThankyou for your attentioncaptain.jamil@takaful.com.pkcaptain.jamil@takaful.com.pk