This topic is about the Takaful in the Islamic perspective. This paper identifies the concept and the principles of Takaful. Takaful Act 1984 also consists in the paper in order to give a clear picture of the Takaful regulations. Besides, this paper classified the main two types of Takaful model which is Mudahraba and Wakala. The different types of Takaful products also included in the paper such as family products and general products. In addition, the factors that contributed to the opportunities of Takaful will be clearly defined. Takaful social responsibilities will increase the well-being of the society. Lastly, this paper will summarize the differences between Takaful companies and conventional insurance companies.
Key terms of the research
Takaful, Principles, Insurance, Model, Act
Objectives of the research:
To be able to understand the Takaful product in the Islamic view and increase the knowledge of Takaful products by achieving the following:
Highlight the concept and principles of Takaful.
Identify the model of Takaful products.
Distinguish the different types of Takaful product.
Classified the opportunities and social responsibilities of Takaful.
Determine the different between Takaful insurance and conventional insurance.
Introduction
This report is explained about the Takaful product in the Islamic perspective. The first title is an introduction of Islamic Finance. Islamic financial system composition consisted of four parts. Besides, the introduction will talk about the history and the future growth of Islamic finance. The Islamic finance is based on the principles of Qur'anic. Therefore, it must comply with Shariah principles. Most of the Islamic bank is based on murabahah in the business transaction.
On the other hand, this report identifies the concept of Takaful. Takaful concept is based on principles of mutual cooperation and it must prohibit of interest (riba), gambling (al-maysir) and uncertainty (al-gharar). In addition, Takaful Act 1984 was adapted from the Insurance Act 1963 and consists of four parts. Each part deals with different matters. Then, this report will focus on the Shariah principles of Takaful. The Shariah principle is based on the Qur'an and the Sunnah. Besides, a principle of Islamic finance is emphasized on the profit-sharing. Takaful is based on the principles of "Tabarru" (Donation) in order to eliminate the uncertainty in the contract.
Apart from that, this report classifies the model of Takaful. There are two types of model which are Mudahraba and Wakala. The Mudahraba model is essentially a basis for sharing profit and loss between Takaful operator and policy holders while the Wakala model is contract of agency, which replaces profit sharing with a performance fee. These will be explaining in detail in the report. Besides, report comprise with the types of Takaful products. There are two main types of products which is Family Takaful and General Takaful.
Lastly, report shows the opportunities of Takaful and the social responsibilities of Takaful. There are several factors contributed to the future of Takaful in this report as stated at the following report. Next, corporate social responsibilities can be focus in the four core areas included workplace, marketplace, community and environment. In the summary, this report will differentiate the Takaful companies and the conventional insurance companies.
Introduction to Islamic Finance
Islamic finance is rising around the world as an option financing concept to the conventional belief of paying interest on borrowings and deposits. Islamic finance is based on Shariah or Islamic law. Researches prove that Islamic finance is concentrated in Muslim countries worldwide included Middle East, North Africa, and Southeast Asia.
Islamic financial system composition comprises with four parts. The first part is the regulatory framework such as ministry of finance, central bank, securities commission, court and Deposit Insurance Corporation. The second part is industrial and market segment which is the banking industry, Takaful industrial and capital market industrial. The third part is financial system such as banking system, Islamic insurance system (Takaful) and capital market system. The last part is legal framework which is BAFIA 1989 and IBA 1983.
Islamic finance was started as a small cottage industry in some Arab countries. Modern Islamic financing methods were developed in Muslim countries in the Asia especially in Malaysia. However, the boom in the mid-1990s has come from the large oil incomes flowing into the Gulf area. Now, the concept of Islamic finance is attracting the conventional investors seeking to hit into new investment opportunities.
A number of Islamic finance product involve the acquisition of assets such as real estate and small corporation in the west countries in " Islamically structured" financing deals. Although no certain data are until now available a reality reflective of the industry's youth-many spectators guesstimate the global industry has up to $500 billion in deal with assets and a growth rate of 15 percent to 20 percent per annum.
Islamic financial institutions are based on their objectives and operations on Qur'anic principles. They are separated from conventional institutions. This is because the Islamic banks provide commercial services which comply with the religious injunctions of Islam. Besides, 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 basically from a conventional banking system. Usually, Islamic banking system prohibits trading in financial risk and collection of payment of interest.
Most of the Islamic banks and financial institutions are via murabahah as an Islamic form of financing. Murabahah is the sale of a commodity for the price at which the seller has purchased with the additional stated profit known to the buyer. The price and the profit margin must be obviously stated up front. If the seller did not state the actual profit that he had earn, this is not a murabahah.
In concluded, financial system exists to organize the settlement of payment in order to raise and allocate finance and manage the risks related with financing and exchange.
Concept of Takaful
Takaful is an Arabic word meaning "joint venture" or "shared responsibility". The term is used in contemporary Islamic finance refer to any of several forms of cooperative insurance which is option to conventional premium insurance. It can be further explained as participants mutually contribute for the purpose of mutual remuneration to other participants in cases of harm and hardship.
The concept of Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool to help the unfortunate. The purpose of this system is not to generate incomes but to advocate the principle of voluntary contribution. Whenever one of the participants makes a lawful claim, they draw money from the common pool. For the moment, the money in the pool is invested in an Islamic manner and without exposing the policy holders to any extra significant risk. The remaining profits will distributed among the policy holders.
In other ways, the Takaful contract must be based on principles of mutual cooperation, protection and mutual responsibility. But it must avoid acts of interest (riba), gambling (al-maysir) and uncertainty (al-gharar).
Definition of Al-Gharar, Al-Maisir and Riba
Al -Gharar - Gharar is due to unclear subject matter as the following:
Uncertainty in the outcome - The contract is judge invalid when the insurer and the insured did not knows the outcome of the contract.
Uncertainty in the existence - The contract is judge invalid as the insured do not know if there will be reimbursement as the result of the contract is not known.
Uncertainty in the outcome of the exchange - The contract is judge invalid as the outcome of the exchange is uncertainty after the contract is made.
Uncertainty in agreement period - The contract is judge invalid as the time outline of the contract is unknown.
Al-Maysir - Maysir refer to "gambling" where the risk to the parties is built in the contract itself. This is same as the participants contributes a sum of money in premium in the hope to gain a profit or large returns.
Riba - Riba is a profits of investment used to claims is from the investments in interest based instruments.
A Takaful company conducts all its dealings in a way that meets the Islamic Shariah law. The main idea is no commutative financial contract that allows participants to interpret premium payments as prices and insurance charge fulfillments as an object of sale.
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 four 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 and to be given a non-conventional appearance.
Shariah Principles of Takaful
The principles of Shariah get from explanation of two sources which are Qur'an and the Sunnah. The objectives of Islamic finance are that wealth must be generated from legitimate deal and asset-based investment, and prohibited the use of funds in case of making money.
Based on the Islamic principles, investment must have a social and an ethical advantage to the society. However, speculative in the short-term is prohibited. Islamic finance also prohibits investment in segment consider as inappropriate on moral ground by shariah law. For example, drinking alcohol, gambling and taking drugs are forbidden. The principles of shariah is governed by its own shariah board which is a body has the responsibility of supervision all processes in the Islamic bank.
Besides, Islamic finance is emphasized in the profit-sharing principle between both parties. General terms applied in Islamic finance such as profit sharing (Mudharabah), joint venture (Musharakah), leasing (Ijarah), safekeeping (Wadiah) and cost plus (Murabahah).
Shariah prohibits as the following:
Riba - interest
Ai-Maysir and Qimar - gambling
Al-Gharar - uncertainty
Exploitation
Unfairness
Undertaking Haram activities
Shariah involve as the following:
Profit and loss sharing
Fairness
Takaful is based on the principles of "Tabarru" (Donation) whereby the participants agree to share the potential loss to any of them by making a donation, all of their contribution funds will be used to compensate the loss suffered by any participant of the Takaful system. It is unlike with the conventional insurance in which risk is shifted from the policyholder to the premium insurance.
Tabarru (donation)
The main idea of "Tabarru" is to eliminate the uncertainty of elements in the Takaful contract. The basic concept underlying such a scheme is the distribution of the damage impose by such a loss over a group o individuals and thereby the minimization of its effect on the single individual.
Tabarru would allow the participants to perform their manners sincerely in supporting fellow participants who might suffer a loss or harm. The sharing of profit that may come out from the operations of Takaful is made only after the obligation of supporting the fellow participants has been satisfied.
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.
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 and it is used mainly in the Far East. While 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 scheme. 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.
Under the Al-Mudarabah principles, the profit that in the case of general business is the shared according to a mutually agreed ration between the participants and operator. Management expenses of the operator with 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 the mudarib, in which case he/she shall invest the money in that particular business.
Al Mudaraba Al Mutlaqah(Unrestricted Mudaraba)
Rabb-ul-maalgives full freedom to Mudaribto undertake whatever business he deems fit. However, he is not endorsed to keep another Mudaribor a partner, and combine his own investment in that particular Mudaraba without the consent of Rabb-ul Maal.
Distribution of Profit & Loss
The parties must agree at the beginning, on a definite proportion of the actual profit to which each one of them is entitled.
However, if the parties 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, fee or remuneration for the work done by him for the Mudaraba.
Termination of Mudaraba
Mudaraba can be terminating by any time from either of the two parties by giving notice.
If Mudaraba was for a particular term, it will terminate at the end of the term.
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.
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 and the operating company does not have a claim on it under any circumstances.
If the Takaful operator generates 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 to the program be provided to the participants must at the lowest feasible cost level that can be negotiated by the operator on their behalf. The Wakala model can be view 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
There are two types of Takaful businesses which are family Takaful and general Takaful.
The product under family Takaful are:
Family Takaful
Investment linked Takaful
Child Education Takaful
Medical and Health Takaful
1. Family Takaful
Family Takaful provides us with both a protection policy and long-term savings. 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.
Basic types of family product:
Ordinary family
Individual family Takaful
The plans include education, mortgage, health and riders. Beneficiary will receive financial benefits arising from death or permanent disability, long-term savings, and investment profits that are distribute upon claim, maturity or early surrender.
Group family Takaful
This policy is for employers, clubs, associations and societies. The participants are required some qualify under these plans. We will receive protection in the form of financial benefits arising from death or permanent disability.
1 .Retirement Annuity
It is 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 fraction of our contribution is used to buy investment units, such as units in equity and fixed income securities. The Takaful protection covers death and permanent disability. A family Takaful rider is an extension of the basic family Takaful.
Investment-linked Takaful offers you these unique features:
Have the flexibility to choose own level of protection and investment
Can contrast 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 investment-linked units at any point in time
Child Education Takaful Plan
Child Education Takaful Plan (CETP) provides protection and long-term savings to finance the higher education expenses of our child. The plan provides 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.
Participating in a CETP is eligible for personal tax relief 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 our child and we is also available.
Basic types of plan:
Ordinary Child Education Takaful
Our child and we 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 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
1.Medical and Health Takaful
Medical and health Takaful cover the cost of private medical treatment, like hospitalization, surgery and treatment, if we are diagnose with certain illnesses and accident. The cover acts as a stand-alone policy or can be add to a basic family Takaful plan, providing better coverage and benefits from both policies.
Medical and health Takaful is offer through individual or group plans. However, an individual plan generally costs more than a group Takaful plan.
The products under general Takaful are:
Home Takaful
Motor Takaful
Personal accident Takaful
1. 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 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.
Takaful plan can 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, it is mean that if underinsure property to only 80% of its rebuilding worth, we will only be entitled to claim only 80% of the value of damage sustained.
2 .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). We 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 policyholders with a no claim discount (NCD). This allows policyholders to renew their cover at a discounted price if no claims have been made during the preceding period of the cover. Personal accident Takaful
3. 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.
Retakaful (Reinsurance)
Retakaful is known as reinsurance of Takaful business on Islamic. 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. As a return, the Retakaful operator will provides security for the risk reinsured. In conclusion, Retakaful is a "Takaful for Takaful operators". It is a best way for a primary insurer to protect against unexpected losses.
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 such as General Takaful products and Family Takaful products. They agreed to pay a premium to the Takaful operator to protect them from unexpected losses. After that, the Takaful operator will take a fraction of money from Takaful fund and pays premium to the Retakaful operator or Retakaful companies in order to get the reinsurance protection to spread its risks. The terms and condition in the Reinsurance contracts may include some particular risk.
The main purpose of this policy is to provide some matter security against unexpected loss resulting from unexpected risks on both life and material goods. In addition, Retakaful must comply with the Shariah principles.
Opportunities or future of Takaful
The main special of Takaful is to provide the spiritual needs to Muslim customers while conventional insurance unable to do. This provides priority for Takaful operators to fill the spiritual gap. This is a kind of competitive advantage in excess of conventional insurance.
At the same time, Takaful is open to all people but not just for Muslim.
Factors that create opportunities for Takaful are:
1) Shariah compliance
Takaful operators comply with Shariah law was the main value proposition for Takaful. However, conventional insurance did not comply with Shariah. Under the Takaful Act 1984, each Takaful operator must apply a licensed and will be supervised by a Shariah Committee consist of approved Shariah scholars. Muslims who are aware of their religious obligations gain comfort from such an assurance and believe Shariah compliance is an important factor when making buying decision.
2) Surplus sharing
All the Takaful operators in Malaysia will practice under the mudharaba or wakalah models. It means that they offer to share the net extra of income over liabilities in the Takaful funds according to a pre-agreed ratio such as 50:50, 40:60 or the like. This can be an attractive offer to their customers because conventional insurers do not offer this kind of services. This can be the special unique to Takaful because the participants can reduce the losses when disaster happened.
3) The intangibility of the Takaful product
The concept of Takaful is cooperation where the participants contributed a sum of money into pool to help the unfortunate participants. However, conventional insurance did not have this spirit of mutual help. This concept will derive customers satisfaction and appreciative because less losses be fallen them. Takaful has the possible to provide greater happiness to customers who care for the well being of society.
4) More unconventional ideas for innovation
The main intention for buying insurance is to provide security. In the slogan 'life insurance is for the living' means that only the living family members would benefit from the compensation of life insurance after the deceased passed. However, under Takaful, it not just the living that can benefit but the deceased. For example, the Muslim customers can leave a specific instruction on how the monetary proceeds after he passed. He can instruct Takaful to pay for
In conclusion, Takaful able to offer several value proposition for their customers in order to success in an open market and the worldwide. However, spiritual benefits should be considered instead of material benefits.
Takaful and Social Responsibilities
Nowadays many company made maximum use of the opportunity and stage to implement its corporate social responsibility. Company had undertaken diverse activities related to corporate social responsibility such as a free medical examination and play activities with elements of education, disseminating information on investments and financial planning to the community.
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 teamwork, and strive to promote work life balance to improve employee productivity
Evaluate and reward employees fairly
Marketplace
Ensure that business is conduct 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
Appealing 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 only on commercial transaction.
Takaful is free from interest (Riba), gambling, (Maysir), and uncertainty (Gharar).
Conventional insurance includes fundamentals of interest, gambling, and uncertainty.
The certain sum of money paid by the Participant is a donation to the Takaful Fund, which helps other Participants by given that 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 Shariah law as well as a Shariah Supervisory Board.
Conventional companies are only subject to the governing laws.
There is a separation between the Participants Takaful Fund account and the shareholders' accounts.
Premium paid by the Policyholder is considered as income to the company, belong 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 foundation of Mudarabah or Wakala models.
All surpluses and profits belong to the shareholders only.
Findings
The introduction of Takaful gives a great impact to the Islamic finance system. Under the principles of Islamic finance, there are prohibition of interest (riba), uncertainty (al-gharar) and gambling (al-maysir). The main different between Islamic finance system and conventional finance system is the operation is based on the Shariah law.
Takaful has the main concept of cooperation whereby the participants contributed a sum of money in the common pool and help the unfortunate participants in the events of unforeseen known as Tabarru (donation). This can be the feature unique for 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 while the Wakala model is a contract of agency, which replaces surplus sharing with a performance fee. Mudharaba practices are usually preferred for investment aspects of Takaful, while Wakala practices are favored for risk sharing or underwriting aspects of the operation.
There are two types of Takaful businesses, which are family Takaful, and general Takaful. The product under family Takaful family Takaful, investment linked Takaful, child education Takaful and medical and health Takaful. While the products under general Takaful are home Takaful, motor Takaful and personal accident Takaful.
Besides, the Retakaful services can give a double protection to the policyholders in term of risks and losses. In addition, Takaful has a brighter future due to the several value propositions for the customers while the conventional insurance are not able to offer this kind of services. Therefore, the values proposition is an importance factors to create customers satisfaction.
Corporate social responsibility activities can focus on four core areas which are the Workplace, Marketplace, Community and Environment. We can view CSR as an investment in a strategic asset in the long term and strive for a balanced approach.
Conclusion
Takaful play an important role in the Islamic financial system. Takaful is primarily based on cooperation and helping others against a defined risk. A Takaful policy is meant to protect the participants financially based on the Islamic principles of Tabarru.
The expansion of Takaful as an option to conventional insurance should be upheld in order to avoid the forbidden elements of maysir, gharar and gambling.
