Islamic finance is emerging in many parts of the world as an alternative financing concept to the conventional belief of paying interest on borrowings and deposits. An investing approach based on "Shariah" or Islamic law, Islamic finance is concentrated in Muslim parts of the world: the Middle East, North Africa, and Southeast Asia.
Modern Islamic financing techniques were developed in Muslim parts of Asia, notably Malaysia, but the boom since the mid-1990s has come from the large oil revenues flowing into the Gulf region. Now, the ideas and concepts of Islamic finance are attracting conventional issuers and investors seeking to tap into new investment opportunities.
One must first understand that the rules of trade and finance are part and parcel of the religion by which Muslims conduct their lives and other finances and businesses. Although no conclusive data are yet available-a fact reflective of the industry's youth-many observers estimate the global industry has up to $500 billion in managed assets and a growth rate of 15 percent to 20 percent per annum. Some also counted that between 200 and 300 institutions currently contribute to the industry worldwide.
Islamic financial institutions are those that are based, in their objectives and operations, on Qur'anic principles. They are thus set apart from 'conventional' institutions, which have no such religious preoccupations. Islamic banks provide commercial services which comply with the religious injunctions of Islam. Islamic banks provide services to their customers free from interest (riba), and the giving and taking of interest is prohibited in all transactions. This prohibition makes an Islamic banking system differ fundamentally from a conventional banking system. Generally, it also prohibits trading in financial risk (seen as a form of gambling). It also prohibits the collection of payment of interest. It also prohibits investing in businesses considered haram (prohibited, forbidden) such, as those selling alcohol or pork.
Most of the Islamic banks and financial institutions are using murabahah as an Islamic mode of financing, and most of their financing operations are based on murabahah(cost plus). "Murabahah refers to the sale if goods at a price and includes a mutually acceptable profit margin. The price, other costs, and the profit margin must be clearly stated up front As applied to lending, murabahaha is a fixed-income loan for the purchase of a real asset (such as real estate or a car), with a profit margin instead of a fixed rate of interest. The bank is not compensated for the time value of money outside of the contracted term (and thus cannot charge additional interest on late payments), however the asset belongs to the bank until the loan is paid in full.
Concept of Takaful
Takaful is a form of mutual assistance (Ta'awun) in furthering good virtues by helping others who are in need or in hardship. It can also be further explained as participants mutually contribute, as a donation, for the purpose of mutual indemnity to other participants in cases of peril or harm.
The concept of Takaful is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years.[1] Muslim jurists acknowledge that the basis of shared responsibility in the system of aquila as practised between Muslims of Mecca and Medina laid the foundation of mutual insurance.
Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden." Whenever one of the members makes a legitimate claim, they draw money out of the pool. In the meantime, the funds in the pool are invested in an Islamic manner and without exposing the policy holders to any extra significant risk. Unclaimed profits are then distributed among the policy holders.
A Takaful contract must be based on principles of co-operation, protection and mutual responsibility and must avoid acts of interest (riba), gambling (al-maisir) and uncertainty (al-gharar).
Definition of Al-Gharar, Al-Maisir and Riba
Al -Gharar - Gharar is defined as "uncertainty" where the results are hidden or not known, and in an insurance contract, the uncertainty are as follows:
Uncertainty in the outcome - The contract is deemed invalid as neither the insurer nor the insured knows the outcome of the contract
Uncertainty in the existence - The contract is deemed as invalid as the insured do not know if there will be compensation as the outcome of the contract is not known
Uncertainty in the Results of the exchange - The contract is deemed invalid as at the point the contract is made, the result of the exchange is still uncertain.
Uncertainty in Contract Period - The contract is deemed invalid as the time frame of the contract is not known, especially in instances of life insurance.
Al-Maisir - Maisir is defined as "gambling" where in the context of insurance, the benefit is derived on luck. If the mishap happened to the insured, the insurer loses while if no mishap occurs, it is the insured that loses.
Riba - Riba is explicitly prohibited in Islam. Generally, riba is defined as "interest" or "late payment" which is above the agreed payable sum of two similar products such as gold against gold, silver against silver or, more appropriately in modern times, money against money.
In upholding the principles of cooperation, participation in a Takaful system is deemed to be on a voluntary basis. By signing a Takaful contract, each contributor agrees to uphold this spirit of co-operation and mutual solidarity and help each other through the Takaful system. Each participant's contribution is therefore part of a collective donation without prior expectation of individual fixed returns. This is essential to rid the system of doubt or give any semblance of gambling.
A Takaful company conducts all its affairs in a manner that meets the Islamic Shariah tradition whether it is to do with investing its funds, in carrying out its business in all classes of insurance or in any other related financial field. The company's Memorandum and Articles of Association underlines this approach.
The company normally has a committee of prominent Shariah scholars. Their direct guidance and advice is essential at all stages of Takaful operations, from the point of sale activities to payment of benefits, from accounting to investing the funds, from public dealing to serving the community through insurance and non-insurance activities such as supporting charitable work, etc. All operations and contracts are set-up to ensure that any element of speculation, uncertainty and gambling is eliminated or minimized from them. This is essential for maintaining the Caring and Co-operative principles of Takaful.
Takaful Act 1984
The Takaful Act 1984 was passed by the Malaysia Parliament to "provide for the regulation of Takaful business in Malaysia and other purposes relating to or connected with Takaful". The act contains 4 parts with 68 Sections.
The first part deals with definitions and classification of Takaful business as well as construction of references to matters connected with Takaful.
The second part deals with the conduct of Takaful business. It contains general restriction on Takaful operators.
The third part deals with returns, investigations, winding up and transfer of business.
The fourth part deals with miscellaneous and general provisions.
The Takaful Act 1984 was based on and adapted from the Insurance Act 1963 and huge sections of the Insurance Act 1963 that were deemed non shariah -compliance were deleted. Others were modified to comply with shariah requirement or to be given a non conventional appearance.
Shariah Principles of Takaful
The principles of Shariah derive from interpretations of two sources: the Qur'an and the Sunnah. The central pillars of Islamic finance are that wealth must be generated from legitimate trade and asset-based investment, while the use of money for the purposes of making money is expressly forbidden.
Under Islamic principles, investment must also have a social and an ethical benefit to wider society, with short-term speculative investments (known as masir) strictly forbidden. Islamic finance also prohibits investment in sectors classified as inappropriate on moral grounds by shariah law. These include industries involving alcohol, gambling, or drugs, but can extend well beyond these narrow boundaries. Each Islamic bank's adherence to the principles of shariah law is governed by its own shariah board, a body charged with the responsibility of overseeing all processes of the bank.
Another fundamental principle of Islamic finance is highlighted in the sharing of profit and loss between parties in a business transaction. Common terms used in Islamic finance include profit sharing (Mudharabah), joint venture (Musharakah), leasing (Ijarah), safekeeping (Wadiah) and cost plus (Murabahah).
Shariah prohibits the following:
'Riba - interest/usury
'Maysir or 'Qimar - gambling/speculation
'Gharar - uncertainty
Exploitation
Unfairness
Undertaking Haram activities (alcohol, pork, pornography)
Shariah requires:
Risk sharing
Reward sharing
Fairness
Transparency
Sanctity of contracts
Takaful is based on the principles of "Ta'awun" (mutual cooperation) and "Tabarru" (Donation) whereby a group of people (Takaful participants or policyholders) agree between themselves to share the risk of a potential loss to any of them by making a donation, of all or part of their contribution, which is used to compensate the loss suffered by any participant of the Takaful scheme. Unlike conventional insurance in which risk is shifted from the policyholder to the insurance company, Takaful is a structure in which risk is shared between all the policyholders.
The general Takaful concept is you contribute a sum of money to a Takaful fund in the form of participative contribution (Tabarru). You will undertake a contract (aqad) for you to become one of the participants by agreeing to mutually help each other, should any of participants suffer any form of misfortune, either arising from death, permanent disability, loss, damage or any other such misfortune as covered under the Takaful you personally undertake.
Tabarru (donation)
In order to eliminate the element of uncertainty in the Takaful contract, the concept of "Tabarru" is incorporated in it. In relation to this, a participant agrees to relinquish as Tabarru certain proportion of his Takaful installments or contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee, should any of his fellow participants suffer a defined loss.
In essence, Tabarru would enable the participants to perform their deeds sincerely in assisting fellow participants who might suffer a loss or damage 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.
The principles of Takaful are as follows:
Policyholders cooperate among themselves for their common good.
Every Policy holder pays subscription to help those that need assistance.
Divide losses and liabilities among the community by a pooling system.
Eliminate uncertainty in respect of subscription and compensation.
Not derive advantage at the cost of others.
Invest funds in Shariah complaint instrument.
Advantages and disadvantages of the principles of Shariah
Advantages
Islamic finance provides a basis for commercial transactions for followers of Islam to enter into, which would be impossible on conventional banking terms.
The adoption of Islamic finance principles gives banks access to a substantial new customer base.
The partnership basis on which some Islamic businesses are established with banks ensures that the bank has a direct stake in the success of the venture.
The rejection of deals involving short-term, speculative activity encourages businesses to invest for the longer term.
Islamic finance contracts offer flexibility in terms of the applicable legal jurisdiction.
Disadvantages
Some financial aspects of shariah law can be open to interpretation, with the result that some Islamic banks may agree transactions that would be rejected by other banks.
These "grey" areas, resulting from inconsistencies in interpretation, can create more uncertainty for clients than under conventional banking arrangements.
Some leasing arrangements can become appreciably more complicated when trying to ensure conformity to Islamic principles.
Given that the banks are the legal owners of assets under rental or leasing agreements with clients, issues such as liability for insurance and risk can be complications
Model of Takaful
Takaful products are based on two main business models. There are Mudharaba and wakala. The Mudahraba model is essentially a basis for sharing profit and loss between the takaful operator and the policyholders. It is used mainly in the Far East. The Wakala model is a contract of agency, which replaces surplus sharing with a performance fee.
Mudharaba is defined as the contract between one party, known as the ra'sul mal that mean capital provider and with another party known as the mudharib that mean entrepreneur. The ra'sul mal provides the capital, and the mudharib provides the skills in a business venture. When there is profit, it is shared between the ra'sul mal and the mudharib in a pre-agreed manner. In this case, the Takaful operator is the mudharib, and the participants are the capital providers. The Takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment. This commonly used in Malaysia.
Under the Al-Mudarabah principles, the profit which in the case of general business is taken to mean returns on investment plus underwriting surplus, is the shared according to a mutually agreed ration between the participants and operator. Management expenses of the operator including remuneration, if any, shall be borne by the shareholders' fund and not from the Takaful funds. There is a distinct separation between Takaful funds and shareholders' fund.
Types of MudarabaAl Mudaraba
Al Muqayyadah(Restricted Mudaraba)
Rabb-ul-Maalmay specify a particular business or a particular place for themudarib, in which case he/she shall invest the money in that particular business or place. This is called AlMudaraba Al Muqayyadah that mean restricted Mudaraba.
Al Mudaraba Al Mutlaqah(Unrestricted Mudaraba)
Rabb-ul-maalgives full freedom to Mudaribto undertake whatever business he deems fit, this is called Al Mudaraba Al Mutlaqah(unrestricted Mudaraba).
However, he is not authorized to keep another Mudaribor a partner, and mix his own investment in that particular Mudarabawithout the consent of Rabb-ul Maal.
Distribution of Profit & Loss
The parties must agree on right at the beginning, on a definite proportion of the actual profit to which each one of them is entitled.
However, in case the parties have entered into Mudaraba without mentioning the exact proportions of the profit, it will be presumed that they will share the profit in equal ratios.
Mudarib may have be provided with incentives.
Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudaraba.
Termination of Mudaraba
Mudaraba can be terminated any time by either of the two parties by giving notice.
If Mudaraba was for a particular term, it will terminate at the end of the term.
Termination of Mudaraba means that the Mudarib cannot purchase new goods for the Mudaraba. However, he may sell the existing goods that were purchased before termination if that was part of his mandate.
The wakala model distinguishes between the operating company (wakeel) and the Takaful fund. The Takaful operator in this case acts as an agent (wakeel) for participation and manages the Takaful or retakaful fund in return for a defined fee. This model is used more in the Middle East region.
Under the Al-Wakalah principles, the paid-up capital is contributed as donation by the shareholders. Therefore, the shareholders do not expect and probably do not mind for not receiving any returns on the capital donated. It is understood that the standpoint has changes in view of opinion expressed by certain scholars that the shareholders (operator) in their capacity as managers should also be entitled to share the profit arising from the Takaful product.
The fee rate is fixed annually in advance in consultation with the Shariah committee of the company. In order to give incentive for good governance, the management fee is related to the level of performance. The surplus of the Takaful fund belongs to the members; the operating company does not have a claim on it under any circumstances.
If the Takaful operator is to generate a profit from its efforts, it must manage the operations including salaries, overhead, selling commissions, sales and marketing expenses entirely within the disclosed wakala fees. Since there is no other benefit to the Takaful operator other than the declared wakala fees, the wakala model "demands" that all other charges or costs to the program be provided to the participants at the lowest possible cost level that can be negotiated by the operator on their behalf. The wakala model can be viewed as transparent as fees are clearly related to the operator's operational costs.
Mudharaba practices are usually preferred for investment aspects of Takaful, while wakala practices are favored for risk sharing or underwriting aspects of the operation.
Types of Takaful product
The Takaful protection plan is based on Shariah principles and offers many unique features to policy owners. There are two types of Takaful businesses. There are family Takaful and general Takaful.
The product under family Takaful are:
Family Takaful
Investment linked Takaful
Child Education Takaful
Medical and Health Takaful
Family Takaful
Family Takaful provides us with both a protection policy and long-term savings for your peace of mind. Our beneficiary will be provided with financial benefits if suffer a tragedy. At the same time, we will enjoy an investment return because part of our contribution will be deposited in an account for the purpose of savings. We have a choice of maturity periods and there is no forfeiture in the event of cancellation. We are also entitled to personal tax relief when you participate in family Takaful.
Basic types of family product:
Ordinary family
Individual family Takaful
The plans include education, mortgage, health and riders. You and your beneficiary will receive financial benefits arising from death or permanent disability, as well as long-term savings (investment), and investment profits that are distributed upon claim, maturity or early surrender.
Group family Takaful
This policy is for employers, clubs, associations and societies. The plans include group education, group medical, health and riders. A minimum number of participants are required to qualify under these plans. You will receive protection in the form of financial benefits arising from death or permanent disability.
Retirement Annuity
A plan that provides us regular income upon our retirement.
Investment-linked Takaful
An investment-linked Takaful is a family Takaful plan that combines investment and Takaful cover. A portion of our contribution is used to buy investment units, such as units in equity or fixed income securities. The Takaful protection covers death and permanent disability. A family Takaful rider is an extension of the basic family Takaful. Our contribution gives us a Takaful cover, which includes death and disability benefits, and an investment in a variety of Shariah-approved investment funds of your choice
Investment-linked Takaful offers you these unique features:
Have the flexibility to choose own level of protection and investment
Can vary the amount of our contribution according to our changing financial circumstances
Can switch the current investment fund to other types of investment funds.
Can claim part of your investment-linked units at any point in time
Can choose from a variety of investment-linked funds like equities, bonds and other financial instruments to invest in.
Child Education Takaful Plan
Child Education Takaful Plan (CETP) provides us with protection and long-term savings to finance the higher education expenses of our child. The plan will provide our child with financial benefits if we suffer any set back covered under the plan. The plan also gives our child long-term savings or education fund that your child can use to continue his /her studies.
Participating in a CETP also makes us eligible for personal tax relief of up to a maximum of RM3, 000 per year for the combination of both medical and education plans. A family Takaful rider or an extension of basic coverage for both we and our child is also available. The rider provides coverage against personal accident and disability, hospitalization benefits, funeral expenses and critical illnesses.
Basic types of plan:
Ordinary Child Education Takaful
You and your child will receive financial benefits arising from death or permanent disability, as well as long-term savings (education fund), and investment profits that are distributed upon claim, maturity or early surrender.
Investment-linked Child Education Takaful
A portion of your contribution is used to buy investment units, such as units in equity or fixed income securities. In addition to the ordinary Takaful protection, which covers death and permanent disability, the investment units will be sold upon claim, maturity or early surrender
Medical and Health Takaful
Medical and health Takaful gives us cover for the cost of private medical treatment, like hospitalization, surgery and treatment, if we are diagnosed with certain illnesses or are involved in an accident. The cover acts as a stand-alone policy or can be added to a basic family Takaful plan, providing better coverage and benefits from both policies.
Medical and health Takaful is offered through individual or group plans. However, an individual plan generally costs more than a group Takaful plan. Therefore, we need to be very careful when choosing a cover that best suits our needs by understanding the product features, conditions, benefits, limitations and exclusions of the Takaful plan. Don't be pressured into buying more than you need.
The products under general Takaful are:
Home Takaful
Motor Takaful
Personal accident Takaful
Home Takaful
There are two types of home Takaful, the house owners Takaful and householders Takaful.
Houseowners Takaful covers your home against loss or damage caused by floods, fires and other such perils. It not only protects our house, but also the garage, outbuildings, walls, gates and fences around the property as well as permanent fixtures and fittings. Householders Takaful covers the loss or damage to the contents of residential property. We may participate in a house owners Takaful or a householders Takaful, or both for complete coverage.
Make sure that the amount covered in your house owner. Takaful plan reflects the rebuilding cost of our house and other damages on property. If the amount covered is less than the rebuilding cost, an average condition will be calculated, meaning that if you underinsure your property to only 80% of its rebuilding worth, you will only be entitled to claim only 80% of the
value of damage sustained.
Motor Takaful
Motor Takaful covers us against loss or damage to your vehicle due to accidental fire, theft or accident. It also covers bodily injury or death of a third party as well as loss or damage of a third party's property. Similar to general motor insurance, there are two types of cover for a motor Takaful plan. There are namely:
Third Party Cover
This protects us against the third party's death, bodily injury and/or property damage.
Comprehensive Cover
This protects us against third party's death, injury and property damage as well as loss and or damage to our vehicle due to accidental fire, theft or an accident.
If we take on a motor Takaful policy, we will contribute a sum of money to a general Takaful fund in the form of participative contribution (tabarru) and undertake a contract (aqad). You will be entitled to a share of the surplus in the fund if you did not make any claims during the period of Takaful.
A motor Takaful policy also provides policy holders with a no claim discount (NCD). This allows policy holders to renew their cover at a discounted price if no claims have been made during the preceding period of the cover. However, it's always advisable to understand your policy thoroughly, especially when it comes to exclusions and extensions to your policy.
Personal accident Takaful
Personal accident Takaful gives us worldwide protection 24 hours a day. So be it travelling overseas or seeking long-term protection against accidental injuries, make sure that us and our loved ones are taken care of in an emergency
Retakaful (Reinsurance)
Reinsurance of Takaful business on Islamic principles is known as Retakaful. Re-takaful has a close relationship with Takaful operations where Retakaful is a form of Takaful and the competitiveness of Retakaful market is depend on the competitiveness of the direct Takaful market. Actually Retakaful is a form of insurance whereby the Takaful operator pays an agreed upon premium from the Takaful fund to the reinsurance company or Retakaful operator, and in return, the Reinsurance company or the Retakaful operator will provides security for the risk reinsured. Reinsurance is best thought of as "insurances for insurance companies". Or we also can say that Retakaful is a "Takaful for Takaful operators". It is a way for a primary insurer to protect against unforeseen or extraordinary losses.
This is the essence of the concept of social solidarity, cooperation and mutual indemnification of losses of members whereby there is joint indemnification of the loss or damage that may occur, out of the fund that is collectively contributed to.
Diagram of Retakaful
General Takaful Product
Pays Premium
Takaful Holders Operator
----->
Takaful Operator
----->
Retakaful
Family Takaful Product
from Takaful Fund
From the above diagram, Takaful holders are individuals or companies that buy the Takaful products either General Takaful products or Family Takaful products and pay an agreed upon premium to the Takaful operator to protect them from unforeseen risk and also extraordinary losses. Then, the Takaful operator will take a portion of money from Takaful fund and pays premium to the Retakaful operator to get reinsurance protection to spread its risks. Reinsurance contracts may cover a specific risk or a broad class of business.
Retakaful or Islamic reinsurance is essentially about handling risk. It is a risk aversion method in which the Takaful ceding company resorts to either a conventional reinsurer or a Retakaful operator to reinsure original insured risks against an undesirable future situation if the risk insured were above the normal underwriting or claim. Thus, a Takaful ceding company may, based on limited financial resources, hedge against possible incapability to meet all Takaful reinsurance protection from a financially capable reinsurer, which will take over the coverage of the large proportion of the risk.
Fathi Lashin, a member of the Shariah Supervisory Board of the Dubai Islamic Bank stated that Retakaful does not, in principle, differ from Takaful operations. The Shariah principles applying to Takaful apply to Retakaful operations as well. The difference, if any, is that in the Retakaful operations, the participants are Takaful operators instead of individual participants. It is argued that the current practice of insurance business has shown that a Takaful ceding company cannot do without Retakaful facility. Therefore, there is a need for Takaful operators to split risks by way of establishing Retakaful operators. By doing so, they share their risks with Retakaful companies. The Retakaful operator, on the other hand, assumes the responsibility of managing and investing the premiums of Takaful operators on the basis of Profit Loss Sharing.
However, the main problem worldwide is the lack of Retakaful companies that are capitalised to the levels required by insurers and more particularly the lack of "A" rated Retakaful companies. This has resulted in Takaful companies having to reinsure on a conventional basis, contrary to the preferred option of seeking cover on Islamic principles.
The Shariah scholars have allowed dispensation to Takaful companies to reinsure on conventional basis so long as there are no Retakaful alternatives available. Takaful companies therefore actively promote co-insurance. A number of large conventional reinsurance companies from Muslim countries take on retrocession. Therefore a large proportion of risk is placed with international reinsurance companies that operate on conventional basis.
Retakaful companies need to ensure that they are capitalized sufficiently to enable them to:
protect the financial stability of Takaful companies from adverse underwriting results
stabilize claims ratios from one year to the next
minimize claims accumulation from losses within and between different classes
geographically spread risk
increase capacity
increase the profitability of insurers through permitting greater flexibility in the size and type of risks accepted
secure technical support and help
Retakaful Contract
Even though a typical reinsurance transaction is generally based on the principles of al-'Aqd (contract), the nature of this transaction is quite different from other forms of commercial contracts in conventional reinsurance. Whilst the contract must ensure that the policy is for the purpose of sharing responsibility to provide some material security against unpredicted loss or damage resulting from unexpected risks on both life and property it must also comply with
Shariah principles.
In conclusion, reinsurance contracts must essentially be financial transactions that bind both the reinsurance company and the insurance company on the general principles of al-'Aqad.
Opportunities or future of Takaful
The demand for Takaful is a clear indication that conventional insurance is not able to serve the spiritual needs of Muslim customers. This provides opportunities for Takaful operators to fill the spiritual gap and have competitive advantage over their conventional counterparts.
Having said that, it must be clarified at the outset that this does not mean Takaful is exclusively for Muslims. People of all faiths are eligible to join.
Factors that create opportunities for Takaful are:
1) Shariah compliance
Shariah compliance was the main value proposition that Takaful operators relied upon from the very beginning. Whilst conventional insurance and Takaful may have a number of practices that are similar, the Shariah law also contains fundament principles which need to be observed. To ensure this is correctly applied, the Takaful Act 1984 makes it mandatory for each licensed Takaful operator in Malaysia to be supervised by a Shariah Committee comprising approved Shariah scholars. Muslims who are conscious of their religious obligations derive comfort from such an assurance and consider this as an important factor in their buying decision.
2) Surplus sharing
Another value proposition upon which Takaful operators in Malaysia leverage is the practice of surplus sharing. At time of writing, all Takaful operators in Malaysia, irrespective of whether they practice under the mudharaba or wakalah models, offer to share the net surplus of income over liabilities in the Takaful funds according to a pre-agreed ratio such as 50:50, 40:60 or the like. The prospect of receiving a refund is an attractive value proposition to many customers, irrespective of faith. Since conventional insurers in Malaysia do not offer this, many Malaysians assume that surplus sharing is a feature unique to Takaful.
3) The intangibility of the Takaful product
The concept of insurance is sometimes described as a social device where the fortunate many help the unfortunate few, as does Takaful. However, unlike Takaful, this spirit of mutual help is no longer apparent in the commercial insurance contract. The commercial insurance transaction today is based on a contract of exchange whereby customers pay the premium in exchange for a promise by the insurer to pay financial compensation should a loss as defined in the policy occur.
Takaful on the other hand is not a contract of exchange. Instead of buying a promise based on an event that may or may not happen, Takaful customers make a contribution to a common pool on the basis of tabarru (donation), with the intention (niah) to participate in a mutual aid scheme. The feeling of 'getting nothing' even if no claim occurs is less likely to arise. Instead, participants who understand the concept of Takaful would derive satisfaction from having helped fellow members and at the same time feel grateful that no loss had befallen them. Takaful has the potential to provide greater satisfaction to customers who care for the well being of fellow human beings.
4) Good deeds as a value proposition
Tabarru or donation can be an attractive value proposition to people, provided the concept is properly explained at the outset. If this is done properly, participants can appreciate the fact that their contribution would be used to help other participants who have suffered a loss as defined in the Takaful contract. We can see this from the example of how people of different faiths generously responded to calls for donations following an earthquake, hurricane, tsunami and the like. The difference is that in those incidences, the donations were only collected after the tragedy had occurred. Under the Takaful concept however, contributions are collected in an orderly fashion before the occurrence of the tragedy. The challenge to Takaful practitioners is to make participants relate doing good deeds to the worldly act of buying Takaful. Selling Takaful on the basis of doing good deeds can be attractive to people of all faiths, as people would by nature derive satisfaction knowing that their contributions would be used to help fellow participants who are less fortunate.
5) More unconventional ideas for innovation
We sometimes hear the slogan that 'life insurance is for the living', meaning that it is the living family members who would benefit from the life insurance cover taken out by the deceased. However, for Takaful versions of life insurance, it is not just the living that can benefit but also the deceased.
This can be explained by the following.
Muslim customers can derive spiritual benefits by leaving specific instructions on how the monetary proceeds from the Takaful cover should be used in the event of his or her 'untimely' death. The following are some examples:
To pay outstanding zakat (tithes), which are obligatory for Muslims with certain level of wealth.
To pay someone else to perform the Haaj on behalf of the deceased. Performing the haaj is another obligation on Muslims who are able both physically as well as financially.
To purchase property such as mosques, hospitals or schools for the purpose of waqaf (benevolence) or to do other good deeds such as helping orphans, feeding the poor and the like. Although not obligatory these acts are highly commendable from the perspective of not only Muslims, but all non-Muslims as well.
The above examples demonstrate that with some unconventional creativity, Takaful products can be designed to provide additional utility (value) to faithful Muslims. This is because of the belief that the deceased can derive benefits in the form of rewards in the hereafter. Thus, if conventional insurance can offer products from 'the cradle to the grave', then Takaful operators can go beyond that by offering benefits, literally, from 'the cradle to the hereafter'. There are therefore many opportunities to foster deeper relationships not only between the Takaful operators and participants but more importantly between the participants themselves.
In conclusion, achieving success in an open market like Malaysia depends very much on the ability to innovate and provide enhanced value proposition for consumers. However, innovation need not be limited to material benefits only. There are customers who would perceive spiritual benefits to be of value too. The key is to understand what the targeted customers consider to be of value from their perspective.
Takaful and Social Responsibilities
Nowadays many company made maximum use of the opportunity and platform to implement its corporate social responsibility. Company had undertaken various activities related to corporate social responsibility such as a free medical examination and play activities with elements of education, apart from disseminating information on investments and financial planning to the community.
Company should awake of its commitment to all stakeholders and take actions to operate ethically, financially and in a socially responsible manner. They shall pursue opportunities at the same time as taking into consideration the social obligations. We can view CSR as an investment in a strategic asset in the long term and strive for a balanced approach. Try to giving back to society and at the same time achieving business objectives.
Corporate social responsibility activities can focus on four core areas which are the Workplace, Marketplace, Community and Environment, with the mainly point being human capital development.
Workplace
Provide a healthy and safe working environment to employees.
Develop employees to reach their maximum potential through on-going human capital development initiatives.
Foster open communication and team-work, and strive to promote work life balance to improve employee productivity.
Evaluate and reward employees fairly.
Marketplace
Ensure that business is conducted according to the highest ethical, professional and legal standards.
Strive to achieve our business goals and objectives and meet the expectations of our stakeholders through good Corporate Governance.
Strive to meet customers' needs with outstanding service quality and integrity.
Work with partners and suppliers that share the same standards of business ethics for our mutual benefit.
Strive to maintain long-term relationships with our partners and suppliers.
Try to support the aspirations of the Government, Regulator and the Takaful industry associations.
Community
Develop mutually beneficial working relationships with community and voluntary organizations.
Support employees in volunteering and participating in charitable programs.
Support individuals and community especially in the area of education, employment, health and quality of life especially for those that are disadvantaged.
Environment
Strive to minimize the impact of business activities to the environment by promoting awareness.
Engaging in recycling and practices that minimize consumption of natural resources and wastage of materials as far as economically practicable.
Summary:
The differences between Takaful Companies and Conventional Insurance Companies
Takaful Companies
Conventional Insurance Companies
Takaful is based on mutual cooperation.
Conventional insurance is based solely on commercial factors.
Takaful is free from interest (Riba), gambling, (Maisir), and uncertainty (Gharar).
Conventional insurance includes elements of interest, gambling, and uncertainty.
All or part of the contribution paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing protection against potential risks.
The premium is paid to conventional insurance companies and is owned by them in exchange for bearing all expected risks.
Takaful companies are subject to the governing law as well as a Shariah Supervisory Board.
Conventional companies are only subject to the governing laws.
There is a full segregation between the Participants Takaful Fund account and the shareholders' accounts.
Premium paid by the Policyholder is considered as income to the company, belonging to the shareholders.
Any surplus in the Takaful Fund is shared among Participants only, and the investment profits are distributed among Participants and shareholders on the basis of Mudarabah or Wakala models.
All surpluses and profits belong to the shareholders only.
In case of the deficit of a Participants' Takaful Fund, the Takaful operator (Wakeel) provides free interest loan (Qard Hasan) to the Participants.
In case of deficit, the conventional insurance company covers the risks.
