takaful by capt. m. jamil akhtar

8/10/2019 Takaful by Capt. M. Jamil Akhtar

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Takaful An emerging niche market

By:Capt. M. Jamil Akhtar Khan

ACII, MCIT, Master Mariner

Chief Executive Officer

TAKAFUL PAKISTAN LIMITED

Hailey Collage o f Banking Finance

Punjab University- Lahore.

13th

August, 07


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Outline of Presentation

Introduction to TakafulObjections to Conventional InsuranceDifference b/w Conventional Insurance & Takaful

Takaful Through Time Takaful Models Takaful TypesBancaTakafulReTakafulFoundations of Takaful in Pakistan

Takaful Prospects in PakistanChallenges to TakafulIntroduction to TAKAFUL PAKISTAN LIMITED


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Introduction to Takaful


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Takaful comes from the Arabic root-wordkafala guarantee.

Takaful means mutual protection and jointguarantee.

Operationally, takaful refers to participantsmutually contributing to a common fund withthe purpose of having mutual indemnity inthe case of peril or loss.

Meaning of Takaful


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Reference Al Quran:

Help (taawan) one another in furtheringvirtue (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 .


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Reference Hadith:

tie the camel first, then submit(tawakkal) to the will of Allah The hadith implied a strategy to

mitigate/reduce risk. Takaful provides a strategy of riskmitigation/reduction by virtue of

collective risk taking that distributes risksand losses to a large number of participants. This mitigates the otherwise very damaging losses, if borneindividually.


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Declaration by Shariah scholarsrendering conventional insurance un-

IslamicFatwa issued in Judicial Conference held inMakkah in Shaban 1398 AH.

Verdict of Supreme Court of Egypt on Dec.27, 1926.Unanimous resolutions and fatwa by Ulamain the Muslim League Conference in Cairoin 1965.Unanimous decision by Muslim Scholars inseminar held in Morocco on May 6, 1972.


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Judicial Opinions and Fatwasconfirming 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 OICin 1405 A.H. (1985) .


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Fiqh Academy Resolution 1985

Islamic Fiqh (science of Shariah) Academy , emanatingfrom the Organization of Islamic Conference, meeting inits Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul-

Thani, 1405 A.H. (Dec 1985) issued a Resolution which insummary 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 contractof cooperative insurance , which is founded on the basis ofcharitable donation and Shariah compliant dealings .


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Basic Elements of TakafulMutuality and cooperation.

Takaful contract pertains to Tabarruat as againstmuawadat in case of conventional insurance. Payments made with the intention of Tabarru(contribution)Eliminates the elements of Gharrar, Maisir andRiba.

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

shared responsibility.Constitution of separate Participants TakafulFund .Constitution of Shariah Supervisory Board.

Investments as per Shariah.


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Main drivers of Takaful

Piety (individual purification)

Brotherhood (mutual assistance)

Charity (Tabarru or contribution)

Mutual Guarantee

Community well-being as opposed to profitmaximization.


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Objections to

ConventionalInsurance


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Insurance DefinedDefinition of an Insurance Contract

An agreement whereby one party, the insurer , inreturn for a consideration, the premium , undertakesto pay to the other party, the insured , a sum ofmoney or its equivalent in kind on the happening ofa 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 thebricks and materials used in building the house, butthe financial interest (i.e. money) of the insured inthe subject-matter of insurance (Lord Justice Brett in Castellian v. Preston 1883)


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Objections to ConventionalInsurance

Scholars view the insurance contract as anexchange contract money is being exchanged formoney over time.

This brings about the problem of gharrar (whichleads to maisir ) and in investments aspect, riba .Elements of:

Uncertainty Gharrar Gambling Maisir

Interest Riba UW + Investment Profit belongs to the

CompanyNote that the Scholars do not object to insurance

per se but only to certain weaknesses in theinsurance contract.


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Uncertainty GharrarConventional insurance contract is basically acontract 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 exchangecontract.Gharrar in insurance contracts pertains todeliverability of subject matter, i.e. uncertainty asto:

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 thesubject matter of the insurance sales contract, whichrenders it void under the Islamic law.


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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 tothe 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 higherthan premium.


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Interest Riba

. Allah has permitted trading andforbidden riba (Al Baqarah 2 : 275).

Insurance funds are invested in financialinstruments which contain the element ofRiba.


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Comparing Takaful to Conventional InsuranceIssue Conventional Insurance Takaful

Organization Principle Profit for shareholders Mutual for participants

Basis Risk Transfer Co-operative risk sharing

Value Proposition Profits maximization Affordability and spiritualsatisfaction

Laws Secular/Regulations Sharia plus regulations

Ownership Shareholders ParticipantsManagement status Company Management Operator

Form of Contract Contract of Sale Cooperative,

Islamic contracts of Wakala orMudarbah with Tabarru

(contributions)

Investments Interest based Sharia compliant, Riba-free

Surplus Shareholders account Participants account


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Takaful Through Time


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Takaful through Time

Origins in the First Constitution of Madina.

It evolved and continued in one form or the otherthroughout the Abbaside period and even later during theOttoman empire.

Serious efforts were made in modern times, in 1970s tocome up with an Islamic alternative to the conventionalinsurance.

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


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Takaful through Time (Contd.)

There are now 85+ Takaful companies in over 25countries.The total insurance premium of OIC countries for 2004was USD 50 Billion; of this, Takaful contributionaccounts 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 (


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Takaful Models


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Mudaraba Model

The surplus is shared between the participants with a takaful operator. Thesharing of such profit (surplus) may be in a

ratio 5:5 , 6:4 etc. as mutually agreedbetween the contracting parties. Generally,these risk sharing arrangements allow thetakaful operator to share in the underwritingresults from operations as well as thefavourable performance returns on invested

premiums.

f


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Profitsattributable

toShareholders

Companys Admin. &

Mangt.Expenses

TakafulContribution

paid byParticipant

GeneralTakafulFund

GeneralTakafulFund

OperationalCost ofTakaful

Surplus(Profit)

Participants Share

from Surplus

CompanysShare from

Surplus

InvestmentBy

Company

ProfitFrom

Investments

Company

Participant

Mudaraba Model


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Wakala Model

Cooperative risk sharing occurs among participants where a takaful operator earns afee for services (as a Wakeel or Agent) anddoes not participate or share in anyunderwriting results as these belong to

participants as surplus or deficit. Under the

Al- Wakala model, the operator may alsocharge a fund management fee and

performance incentive fee.


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GeneralTakafulFund

OperationalCost ofTakaful/

ReTakaful

Surplus(Profit)

SurplusDistribution

toParticipants

Participants

Takaful Fund

Wakala Model

Takaful

Contribution

paid

by Participant

Company

(Capital)

Mudarib's Share

of PTFs Investment

Income

ManagementExpenseof the Company

Profit/Lossattributable toShareholders

WakalaFee(30% to 35%)

ProfitFrom

Investments

InvestmentIncome Reserves

Investment by

the CompanyInvestment Income Sharing

on Mudaraba Basis

W k l W f M d l


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

between.

The relationship of the participants and the operator is directly with the WAQF fund. The operator is the Wakeel of the fundand the participants pay contribution to the WAQF fund by wayof Tabarru.

The contributions received would also be a part of this fundand 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 thesame fund.

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


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Investment

Income

OperationalCost 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.)

MudaribsShare of PTFs

InvestmentIncome

WakalahFee

Investment

Income

ManagementExpense of

theCompany

Profit/Loss

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

Participant

WAQF

TakafulOperator

ShareHolder

Wakala-Waqf Model

Investment bythe Company


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Models The beauty of Islam liesin its

plurality !


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ISLAM

AQIDAHFaith & Belief

SHARIAHPractices & Activities

AKHLAQMoralities & Ethics

IBADAHMan-to-God Worship

MUAMALATMan-to-Man Activities

SocialActivities

EconomicActivities

PoliticalActivities

Risk Management

Takaful


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General Takaful Types

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

following classes:Property TakafulMarine Takaful

Motor TakafulMiscellaneous Takaful


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Types of Family Takaful

Term Life Takaful

Whole Life Takaful

Endowment Takaful

Universal Takaful

Marriage PlanEducation Plan


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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 abeneficiary under the attached Indemnity Policy of the Fund, and of thebenefits declared by the Fund from time to time under this policy, inaccordance with the Waqf rules governing the Fund.

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


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Duration:Normally policies are issued for the duration oftwelve months.Extended coverage on project policies.MARINE POLICY : The membership under thisdocument shall be for the period of _________months. However, the benefits under thisdocument, except Surplus if any, shall cease on thearrival of goods at destination.


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Cancellation Clause: This Policy may at any time be terminated at theoption of the Company, on 14 days' notice to thateffect being given to the Participant at his last knownaddress. In that case, the Participant shall be GIVENan amount equivalent to a ratable proportion of thecontribution for the unexpired Period of Policy fromthe date of such cancellation. This Policy my also beterminated at any time at the request of the

Participant, in which case the Participant will bePAID an amount equivalent to the actual contributionmade 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:


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TAKAFUL OPERATOR'S FEE The Company shall deduct Takaful Operator's fee outof the Contribution received under this Policy. Such

fee shall be based on the Wakala principle since theCompany hereby acts as a Wakeel on behalf of theFund.INVESTMENT MANAGEMENT SHARE

The Company shall act as a Mudarib for the purposeof managing the investment of the Participant'sContribution. As such, the Company stands entitled toa share in the investment income thereof as Mudarib.


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SURPLUS DISTRIBUTIONIf, at the end of the period of Policy stated inthe Schedule, there is a surplus in the General

Takaful Fund, the same shall be distributedamong the Participants. Provided that, in casethe Participant has made any claim orreceived any benefits under this Policy, thatclaimed amount shall be deducted from thenet amount worked out as due to theParticipant.


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BANCATAKAFUL

BackgroundRange of Products

Savings

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

E-Commerce


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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.


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ReTakafulCurrently few ReTakaful companies worldwide offering arelatively 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 andReinsurance Company.

Tunisia (1985) B.E.S.T. ReMalaysia (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 PoolMunichRe to form a separate ReTakaful Pool

Provision in Takaful Rules 2005.


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ObjectivesResolution

1949 1992

1983

Review by Councilof Islamic Ideology

Report by theCouncil

2000

InsuranceOrdinance

2005

TakafulRules

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

TAKAFULPAKISTANLIMITED


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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 otherconventional classes.

Islamic banking on sound footing with support ofthe Govt.


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People who do not insure due toreligious reasons.

People who insure and are insensitive toreligious reasons.

People who currently do not insure at all.

TAKAFUL - TARGET MARKET


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Challenges to Takaful Skepticism.

Lack of uniformity in Shariah decisions.

Windows issue.

Regulatory issues.

Capacity constraints due to inadequateReTakaful.

Limited Investment avenues.

H.R. issues.


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Introduction to

TAKAFUL PAKISTANLIMITED


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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.


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TAKAFUL PAKISTAN LIMITED (Contd.)

Managed by dedicated professionals, committed to thecause.

ReTakaful arrangements with a consortium ofinternationally 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 prudentUnderwriting practices.


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Conclusion

Takaful defined.

Comparison with conventional insurance.

Takaful Models Takaful Types

BancaTakaful

ReTakaful

Takaful Pakistan Limited


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takaful by capt. m. jamil akhtar

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