THE CONCEPT OF TAKAFUL
MOHAMMED FADZLI YUSOF
As the essence of insurance may be seen as a system of mutual help in relation to the custom of blood money under the Arab tribal system, Muslim jurists generally accept that the concept of insurance does not contradict the Sharia.
In fact, the principle of compensation and group responsibility was accepted by Islam and the Holy Prophet. Muslim jurists acknowledged that the basis of shared responsibility in the system of ‘Aqila’, as practised between the Muslims of Makkah (muhajirin) and Medinah (Ansar), laid the foundation of mutual insurance.
In view of this, as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and co-operation. On the basis of these principles, the Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists, this concept of insurance is acceptable in Islam because:
• Th e policyholders
• co-operate among themselves for their common good;
• Every policyholder pays his subscription in order to assist those of them who need assistance;
• It falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;
• The element of uncertainty is eliminated as far as subscription and compensation are concerned. It does not aim at deriving advantage at the cost of other individuals.
Thus, in consonance with the above basic characteristics, the jurists resolved that the system of insurance which falls within the confines of the Islamic framework should be founded on the concept of al-Takaful.
Takaful, in Arabic, means joint guarantee. Thus, it can be visualised as a pact among a group of members or participants who agree to jointly guarantee each among themselves, against loss or damage that may be inflicted upon any of them as defined in the pact.
Should any member or participant suffer a catastrophe or disaster, he would receive a certain sum of money or financial benefit from a fund to help him meet the loss or damage. In other words, the basic objective of Takaful is to pay for a defined loss from a defined fund. Each member of the group pools effort to support the needy. It means mutual help among the group.
As an insurance system, we are to confine the operation of Takaful within the Tijari (commercial) sector. Thus, the transactional aspect of the commercial activity of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with the Sharia. Within this fundamental framework, the contract of Tijari Takaful is therefore based on the Islamic commercial profitsharing principle of Mudaraba.
By this principle, the entrepreneur or Mudarib (Takaful operator) will accept payment of the Takaful instalments or Takaful contributions (premiums) termed as Ra’s-ul-Mal from investors or providers of capital or funds (Takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of Takaful managed by the Takaful operator is to be shared, in accordance with the principle of Mudaraba, between the participants as the providers of capital and the Takaful operator as the entrepreneur. The sharing of such profit (surplus) may be in a ratio 5:5, 6:4, 7:3, etc. as mutually agreed between the contracting parties.
In order to eliminate the element of uncertainty in the Takaful contract, the concept of Tabarru (to donate, to contribute, to give away) is incorporated in it. In relation to this, a participant agrees to relinquish, as Tabarru, a certain proportion of his Takaful instalments or Takaful contributions that he agrees or undertakes to pay, thus enabling him to fulfil his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.
In essence, Tabarru enables the participants to perform their obligations in sincerely assisting fellow participants who might suffer a loss due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of Takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a Takaful operator to maintain adequate assets of the defined funds under its care, whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure.
In essence, therefore, the provision of insurance cover as a form of business in conformity with the Sharia is based on the Islamic principles of Takaful and Mudaraba.
Takaful is the pact among a group of participants, reciprocally guaranteeing each other; whilst Mudaraba is the commercial profit-sharing contract between the provider(s) of funds for a business venture and the entrepreneur who actually conducts the business.
The operation of Takaful may thus be envisaged as the profit-sharing venture between the Takaful operator and the individual members of a group of participants, who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.
Thus, it is necessary to emphasise at the outset that the Takaful business as practised in Malaysia is of the kind of co-operative Takaful (al-Takaful al-taawuni) participated in by a group of members of the public for their own cause within the domain of the private sector.
The commercial activity of Takaful is reflected in two basic types of business that it undertakes. Depending on the legal structure and statutory provision, both types of business may either be transacted under a common entity (composite basis) or one entity for each type of business.
As a composite company, Sharia Takaful Malaysia, for example, as prescribed in the Takaful Act 1984, transacts both types of Takaful business.
The types of business are as follows:
1. Family Takaful business (Islamic life insurance)
2. General Takaful business (Islamic general insurance)
The fundamental objectives and basic working operations differ between these two types of business.
Under the Family Takaful business, Sharia Malaysia provides various types of Family Takaful Plan which, generally, are long-term Murabaha contracts. Basically, a Family Plan provides cover of mutual aid among its members or participants expressed in the form of financial benefits paid from a defined fund should any of its members be inflicted by a tragedy.
For the General Takaful business, Sharia Takaful Malaysia manages various types of General Takaful schemes, usually on a short-term basis. The schemes provide protection in the form of mutual financial help to compensate its members or participants for any material loss, damage or destruction that any of them might suffer, arising from a catastrophe, disaster or misfortune that might be inflicted upon his properties or belongings.
Family Takaful Plans are designed to sei-ve the requirements of both individual and corporate sectors. A Family Takaful Plan for the individual sector is a long-term saving and investment programme. Apart from the chance of enjoying investment profit, the Plan also provides mutual financial assistance among its participants. Thus, the Family Takaful Plans would enable any individual to participate in a Takaful business with the following objectives:
• To save regularly for a fixed period with a view to creating a kind of retirement or long-term contingency fund;
• To invest with a view of earning profits in a manner acceptable to the Sharia;
• To avail of cover in the form of mutual financial aid from payment of Takaful benefits to heir(s) should a participant die before the maturity of his Takaful Plan.
Any individual between the ages of 18 and 55 years who wishes to participate in the Family Takaful business may choose any one of the types of Family Plan designed by Sharia Takaful Malaysia. These Plans have a defined period of maturity.
A supplementary contract based on the Islamic principle of Hiba (gift) can be endorsed to these fixed-period Family Takaful Plans as a way to create a kind of endowment or scholarship fund which can be used to support the financing of a participant’s children’s future higher education.
Additional subcontracts can be attached to a Family Takaful Plan to provide mutual benefits among participants covering a wide range of events of tragedy and misfortune. Thus, by incorporating a supplementary agreement these additional mutual benefits can be provided by the Plan in cases of hospitalisation, accident or disablement.
The arrangement demonstrates that the Family Takaful Plan is a financial programme that pools efforts to help the needy in times of need, not only in the event of untimely death but also other mishaps resulting in personal injury or disablement.
In consideration for participation in the various Takaful Plans, participants are required to pay Sharia Takaful Malaysia regularly the Takaful instalments which are then credited into a defined fund known as the Family Takaful under the Family Business.
The amount of Takaful instalments to be paid during the term of the Plan is determined by the participants themselves. Such an amount, however, should be within the financial means of the participant. It should also be subject to the minimum sum as may be fixed by Sharia Takaful Malaysia.
Each Takaful instalment paid by the participant, and credited into the Family Takaful Fund is in turn divided and credited into two separate accounts namely, the Participant’s Account (PA) and the Participant’s Special Account (PSA). A substantial proportion of the instalments are credited into the PA solely for the purpose of savings and investment.
The balance of the instalments is credited into the PSA as Tabarru for Sharia Takaful Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before the maturity of his Family Takaful Plan. Within this context it is not too difficult to see that PA serves to accumulate savings, whilst the PSA creates a form of mutual fund payable on death. What proportions of the Takaful instalment are to be relinquished as Tabarru and in turn allocated into the PSA is computed with the guidance of the actual principle.
In the event that a participant should die before the maturity of his Takaful Plan, Sharia Takaful Malaysia will arrange the payment of Takaful benefits to the participant’s heir(s) as follows:
From his/her PA; the total amount of the Takaful instalments paid by the deceased participant from the date of inception of his Takaful Plan to the due date of payment of the instalment prior to his death, and his share of profits from the investment of instalments which have been credited into his PA.
From his/her PSA; the outstanding Takaful instalments which would have been paid by the deceased participant should have survived the period of the Plan, calculated from the date of death to the date of maturity of his Takaful Plan.
If a participant should live until the date of maturity of his Takaful Plan, the Takaful benefits shall be paid to him in the following manner:
From his/her PA; the total amount of Takaful instalments paid by the participant during the tenure of his participation and his share of the profits from the investment of Takaful instalments credited into his PA.
From his/her PSA; the net surplus allocated to the participant as shown from the last valuation of the PSA.
In case a participant is compelled to surrender or cancel his participation before the maturity date of his Family Takaful Plan, he is entitled to receive the surrender benefits. The surrender benefits are the amount of balance shown in his PA. The proportion of his instalments which had been credited into the PSA as Tabarru will not be refunded to him.
Other forms of cover for the individual sector are introduced from time to time. However, this must be done without resulting in undue strain to the Family Takaful Fund. For example, by the experience of Sharia Takaful Malaysia, Family Takaful Mortgage Plan was launched to complement the ‘house-financing facility’ provided by Bank Islam Malaysia Berhad based on the principle of al-Bai Bithamin Ajil.
The Takaful Mortgage, with features like the reducing term cover in conventional insurance, may be participated in by any individual to cover the outstanding amount of his house-financing facility, in case he does not survive the term of the facility.
The participant of this Plan will pay the Takaful contribution as Tabarru which will then be credited into the PSA of the Family Takaful Fund. In the event of his untimely death, the Takaful benefits payable will be used as proceeds to settle the outstanding amount of his financing facility. Should he survive the term of the facility and the Plan matures, he is entitled to the share of surplus, if any, out of the valuation on the PSA.
As for the corporate sector, Sharia Takaful Malaysia offers a Group Family Plan and Group Family Takaful Hospitalisation and Surgical Plan. These plans are agreements of co-operation and mutuality based on the Mudaraba principle among a group of participants to jointly provide cover among themselves, usually on an annual basis, under a single master Takaful contract.
As in other plans, mutual financial benefits under the Group Plans would be payable in the event of death, bodily injury or hospitalisation of any of the persons covered.
The various types of Family Takaful Plan for both individual and corporate sectors are as follows:
• Takaful Plans with a maturity period of ten years, 15 years, 20 years, 25 years, 30 years, 35 years and 40 years.
• Supplementary contracts in the form of hospitalisation, accident and permanent total disability, which may be incorporated into the aforementioned Family Takaful Plans.
• Supplementary contract in the form of a “family rider” which may also be attached to the Family Takaful Plan.
• Takaful Mortgage Plans.
• Takaful Plans for Education.
• Group Takaful Plan.
General Takaful Business
General Takaful Schemes are basically contracts of joint guarantee, on a short-term basis, based on the principle of Mudaraba, between a group of participants to provide mutual compensation in the event of a defined loss. The schemes are designed to meet the needs of both individuals and corporate bodies in relation to material loss or damage consequent upon a catastrophe or disaster inflicted upon the properties, assets or other belongings of its participants.
In consideration for participating in the various schemes, participants agree or undertake to pay Takaful contributions as Tabarru for the purpose of creating a defined asset as illustrated in the General Takaful Fund. It is from this Fund that mutual compensation would be paid to any participant who suffered a defined loss or damage arising from a catastrophe or disaster affecting his property or belongings.
As the Mudarib, Sharia Takaful Malaysia will invest the Fund. All returns on the investment will be pooled back into the Fund. In line with the virtues of mutual help, shared responsibility and joint guarantee as embodied in the concept of Takaful, compensation or indemnity will be paid to any participant who suffers a defined loss or damage consequent upon the occurrence of a catastrophe or disaster.
Other operational costs for managing the General Takaful Business, such as the cost of arranging a Re-Takaful programme and the setting-up of a reserve, shall also be deducted from the Fund.
A participant who wishes to participate in a General Takaful Scheme, such as Motor Takaful to cover his motor vehicle, Fire Takaful to cover his house from loss or damage against fire or Public Liability Takaful to cover his third-party liability will pay a certain sum of money called Takaful contributions. The amount of Takaful contributions will vary according to the value of the property or asset to be covered under the Scheme.
If no claims are made or incurred and after deducting all the operational costs as outlined above, the Fund registers a surplus to be shared between the participants and Sharia Takaful Malaysia, the sharing of such surplus will be at an agreed ratio as expressed in the principle of Mudaraba, such as 6:4, 5:5, etc.
Profits attributable to the participants are paid on expiry of their respective General Takaful Schemes, provided they have not received or incurred claims during the period of participation.
The various types of General Takaful Scheme for both individual and corporate sectors provided by Sharia Takaful Malaysia are shown as follows:
i) Fire Takaful Scheme
– Basic Fire
– House owners
– Householders
– Industrial all risks
ii) Motor Takaful Scheme
– Motor car
– Motorcycle
iii) Accident/Miscellaneous Takaful Scheme
– Personal accident/group personal accident
– Personal accident for pilgrims
– All risks
– Workmen’s compensation
– Public liability
– Money
– Equipment all risks
– Employers’ liability
– Plate glass
– Fidelity Takaful
– Sprinkler leakage
iv) Marine Takaful Scheme
– Cargo
v) Engineering Takaful Scheme
– Machinery breakdown
– Erection all risks
– Boiler
– Pressure vessel
– Contractors all risks
– Bonds
Underwriting
When one is operating an insurance business, it is crucial to be able to underwrite any risks proposed, so that the risks may be evenly spread. In this respect, underwriting is a management process to ensure that the principle of equity is being applied and upheld. As the concept of Takaful also embodies the principle of partnership, it is therefore essential for the participants to be seen as “equal” at the point of entry.
Towards this end, underwriting as a management tool is applicable under the Takaful Business. Among others, its application is for the purpose of ascertaining and safeguarding the equity of Tabarru. On the contrary, it might be viewed as ‘un-Islamic’ practice, if in a partnership undertaking, one of the parties to the contract has to be burdened unfavourably with the risks of the other party without a fair and just contribution by the latter.
In view of the above, underwriting helps to determine a fair system of Tabarru or contribution by the participants. If it is revealed from the underwriting that a participant poses an undue strain on the Takaful fund owing to his poor health, or his property is relatively more hazardous than his fellow participants, then he may have to agree to increasing his Tabarru to the level assumed to be fair and adequate compared with the risk exposure covered by the Takaful Fund.
Certainly, the process of underwriting is not to discriminate, or outrightly reject, the proposal of any participant. Above all, it is crucial for all participants to protect the Takaful Fund for their mutual and common benefit. In the same manner, as manager and trustee Sharia Malaysia must, at all times, safeguard the Fund from any undue strain.
Marketing
The system of agency, as a form of marketing outlet, universally practised by conventional insurers, cannot in its present structure be applied to Takaful. This is based on the fact that such practice would not be in line with the contract of Takaful. As outlined earlier, Takaful is based on the Islamic commercial transaction of profit-and-loss-sharing under the principle of Mudaraba.
Under the conventional agency system, a certain proportion will be deducted from the Takaful contributions (premiums) as remuneration to the agent. On the contrary, under the contract of Takaful, the gross Takaful contribution paid by the Participant is the amount stated in the agreement (Takaful Certificate), which is the basis of the profit-sharing contract.
Therefore, should this system be adopted for Takaful, the actual amount of Takaful contributions received by the Takaful company or operator would in fact be less than the figure stated in the agreement, as a certain sum from the gross amount would have been deducted to remunerate the agent.
According to the Encyclopaedia on The Theory and Practice of Islamic Banking (al-Mausu’ah al-Ilmiyah Wal-Amaliyah Lil-Bunuk al-Islamiyah) published by the International Association of Islamic Banks, it is prohibited to deduct management expenses from Mudaraba capital or its realised profit.
The Shafaites hold that covering such expenses from the Mudaraba capital or its realised profit leads to the element of Gharar (uncertainty) and the presence of Gharar makes the contract void.
Under the Takaful contract, the Takaful contribution is the Mudaraba capital provided by the Participant. This capital or its investment profit cannot therefore be used to pay for financing the agency system in view of the fact that agency cost is a component of the management expenses which should be borne by the operator.
Sources of Income to the Company
If profit of the Takaful business has to be shared with participants, how would the company or Takaful operator make money? After all, in business, a company is expected to make a profit. What are the sources of income to the company under Takaful? The principal activities of Sharia Takaful Malaysia are the provision and management of Family Takaful Business and General Takaful Business.
As Takaful is a commercial activity, the company must be able to generate income from these businesses. If not, it cannot pay its operating expenses. More importantly, these businesses must be viable and profitable. Without profit the company cannot grow and thus efforts to expand Takaful services to all people, in particular the Muslims, in all parts of the country, would be hampered.
As already explained, there are two Takaful funds administered by Sharia Takaful Malaysia. The funds are: the Family Takaful Fund under the Family Business and the General Takaful Fund under the General Business.
In addition, the company has its own fund, as reflected in the Shareholders’ Fund, which was originally funded wholly by the paid-up capital.
The income of Sharia Takaful Malaysia is derived from the following sources:
1 Profits from the investment of its Shareholders’ Fund
2 Its share of profits from the management of both the Family Takaful Business in accordance with the profit-sharing agreement of Mudaraba.
At present, the profit-sharing is based on the ratio 70:30 and 50:50 between the participants and the company for the Family Business and the General Business respectively. These respective shares of profit attributable to the company are credited into the Shareholders’ Fund and, together with the Fund’s own investment profits are the company’s total income. The operating expenditures of the company are paid from its income. Profit or loss is determined from this transaction.
Sharia Takaful Malaysia Sendirian Berhad
In Malaysia the operation of Takaful is licensed and regulated by the Takaful Act 1984. The Act was specially promulgated and passed by the Malaysian Parliament with a view to ensuring that Takaful as a sector within the Islamic financial system would grow in an orderly manner.
Although the insurance industry in Malaysia is regulated by the Insurance Act 1963, it, however, cannot be applied or enacted on Takaful as it contains provisions that are not in line with the requirements of the Sharia. At present, the supervisory authority vested under the Act is the Central Bank of Malaysia (Bank Negara Malaysia), whereby the Governor of the Bank is also the Director General of Takaful.
Sharia Takaful Malaysia Sendirian Berhad, the first Takaful operator to be established in Malaysia, and in the region, was incorporated on 29 November 1984, with an authorised capital of RMIOO million and a paid-up capital of RMIO million.
It officially commenced business operations on 1st August 1985. Sharia Takaful Malaysia is a subsidiary of Bank Islam Malaysia Berhad, with, 87.15% of its equity held by the Bank. Other shareholders are the states’ Islamic Councils and the Bait-ul-Mals of various states in Malaysia.
Underlining the importance of complying with the religion of Islam, the Memorandum and Articles of Association of Sharia Takaful Malaysia prefaces that “all businesses of the Company will be transacted in accordance with Islamic principles, rules and practices”. In this respect, Section 8, Takaful Act 1984 states that:
“…The Director General shall also refuse to register an applicant unless he is satisfied that there is in the Articles of Association of the Takaful operator concerned provision for the establishment of a Sharia Supervisory Council to advise an operator on the operations of its Takaful business in order to ensure that it does not involve any element which is not approved by the Sharia…”
Accordingly, in the Articles of Association of the Memorandum, there is a proviso which specifies that:
A Religious Supervisory Council, whose members would be made up of Muslim religious scholars in the country, shall be established to advise the Company on the operations of its Takaful business in order to ensure that they do not involve any element which is not approved by the Religion of Islam…”
Since its inception, Sharia Takaful Malaysia has attained a satisfactory performance, with a growth rate continuously increasing all round.
The gross Takaful contribution collected increased fairly significantly, averaging 26 per cent during the period. The pre-Zakat and tax profit also posted a satisfactory gain, with an average rate of 43 per cent. Similarly, the total Mudaraba profits payable to Participants showed an upward trend, recording an average growth of 29 per cent during the last five years.
With the Malaysian economy expected to sustain its growth momentum, in line with Vision 2020, demand for Takaful products is projected to improve favourably. The demand will be further boosted arising from greater awareness of the importance of insurance cover and affluence in the society. Should this be attained, Takaful would have its own strength, and one day would rise to be a key player within the financial sector.
In view of the positive outlook and the emergence of more Takaful players, particularly within the region, containment of Takaful business within these companies through greater Re Takaful transactions will now be possible. In line with its development, perhaps soon, a specialist Re-Takaful company will be established in the region, and towards this end, Sharia Takaful Malaysia looks forward to playing a meaningful role towards realizing this venture in co-operation with other Takaful operators.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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