Takaful

Dr. Muhammad Imran Usmani

SECP Takaful Conference

March 14, 2007

Presentation Outline
9 Conventional Insurance
9 How Qimar & Riba exist in Conventional Insurance
9 Definition of Takaful
9 Mudarabah Model
9 Wakalah Model
9 Wakalah based on Waqf Model
9 Application of Takaful

Conventional Insurance
Definition
A way to provide security / and compensation to what
is valuable in the event of its loss, damage or
destruction based on the principle of risk taking and
speculation

Conventional Insurance
Two Aspects of Insurance
According to Shariah rules there are two aspects of
Conventional Insurance, namely:
1. Conceptual Aspect
2. Practical Aspect
So far as the Concept of Insurance is concerned, it is to
cover the risk of loss, or fortunate many helping the
unfortunate few.
This concept is not only recognized, but also
appreciated and rewarded by Islam.

Conceptual Aspect
Why this Concept is rewardable?

Al-Maidah verse # 2:

"Help ye one another in righteousness and piety, but

help ye not one another in sin and rancor".
Principles of Muwalat, Maaqil, and Kafalah and
establishment of Islamic welfare state by the Holy
Prophet (SAW), Waqf and Tabrru are examples for
recognition of this concept.

Practical Aspect
Second Aspect of Insurance is practical Aspect, it is
forbidden due to two reasons:
1. Qimar or Maisir
2. Riba
Since these two things have been clearly prohibited by
Islam, they cannot be justified on the conceptual
aspect of helping victims of various accidents or
losses.

Practical Aspect
Quranic view on Gambling & Risk

O believers! Intoxicants and gambling and Al Ansab (Animals

sacrificed for idols) and Al Azlam (arrows for seeking luck or
decision) are an abomination of Satan's handiwork. So avoid
them in order that you may be successful. Satan wants only to
excite enmity and hatred between you with intoxicants and
gambling and hinder you from the remembrance of Allah and
from prayer. So, will you not then abstain? (Al Maidah 90 91)

Practical Aspect
How Qimar & Riba exists ?
QIMAR or MAISIR has been clearly prohibited by
Quran and Hadith of the Holy Prophet (SAW).
Maisir has two basic elements which cause to prohibit.
namely:
1. Gharar
2. Khatar

Khatar
Taleequl milki al alkhatr, wal mal fil janibain
To stipulate/conditionalize the
ownership/profitability on uncertain event,
whereas money is involved in the both sides.
However, if money is not involved from both sides
i.e. one party voluntarily (without any
compensation) declares We shall compensate you
on a particular event of loss, it would not be
Maisir.

Gharar
Gharar literally means Uncertainty
Forms of Gharar :
Any bilateral transaction in which the liability of the
party in the transaction is either uncertain or
contingent.
Consideration of either is not known.
Ultimate outcome of any one party is uncertain.
Delivery is not in the control of the obligor.
Payment form one side is certain, but from the other
side is contingent.

Gharar & Khatar

Presence of Gharar and Khatar makes Qimar,
Speculation, Gambling and Conventional Insurance
prohibited.

Qimar
Indication of Presence of Qimar in a transaction
If in any transaction one partys profit is
dependent on the loss of the other then this is an
indication that the transaction involves Qimar.
Qimar
In the permissible modes of business any profit or
loss is equally shared & is fair to every party. For
example, in partnership (Musharakah) both the
parties share profit & loss. Similarly in other trades
like sale, purchase, hiring or leasing each partys
considerations are certain.

Conventional Insurance
Problems
The participant contributes a small amount of
premium in a hope to gain a large sum - Khatar.
The participant loses the money paid for the
premium when the insured event does not occur Gharar.
The company will be in deficit if the claims are higher
than the amount contributed by the participants Gharar.

Riba
The element of Riba (Interest) exists in lending or
borrowing funds/investments at fixed interest, and
other related practices in the investment activities
of the conventional insurance companies

The Solution

Islamic Cooperative Insurance

( Takaful)

Takaful
Takaful is an Arabic word that means
Guaranteeing each other"
It is a system of Islamic Insurance based on the
principle of TAAWUN (mutual assistance) and
TABARRU (Gift, Give away, donation) where the
risk is shared collectively by the group
VOLUNTARILY.
This is a pact among a group of members or
participants who agree to jointly guarantee among
themselves against loss or damage to any of them
as defined in the pact.

Models of Takaful
1. Mudarabah Model
2. Wakalah Model (hybrid of Wakalah &
Mudarabah)
3. Wakalah based on Waqf Model

Mudarabah Model
The participant and the operator enter into a
Mudarabah contract from the beginning of the
relation, for indemnification and share of the
underwriting results.
The Surplus is shared between the participants and
the takaful operator in an agreed ratio.
This model allows the takaful operator to share in the
underwriting results from operations as well as the
favorable performance returns on invested
premiums.

Mudarabah Model
Shariah Concerns
The relation between the participants is that of
tabarru and not Mudarabah, Profit Sharing cant be
applied here. Donation cannot be Mudarabah capital
at the same time.
In a Mudarabah contract, a profit is to be generated
to be distributed. Profit is not the same as Surplus
(excess pf premiums over claims, reserves and
expenses) and in the insurance context no definition
can be generated by definition.

Mudarabah Model
Shariah Concerns
The sharing in underwriting surplus itself is
something which is similar to making this into a
commercial business venture and not a mutual
contract for assistance and protection.
The requirement to provide Qard Hasanah (in case of
a deficit) in a Mudarabah contract by definition is
against the concept of Mudarabah which is a profit
sharing contract and a Mudarib cannot be a
guarantor.

Wakalah Model
Cooperative risk sharing occurs among the
participants whereas the takaful operator earns a fee
for services (as a Wakeel or Agent).
The operator earns an upfront deductible fee and
shares the profit of investments, it does not share
the results of underwriting.

Waqf Model
In order to eliminate the element of Mayser, the
concept of Waqf and Tabarru is incorporated. In
relation to this participants shall agree to relinquish
as donation certain amount of money.
The Takaful Fund, consisting of the contributions paid
as Tabarru, will be further invested by the Company
based on the principle of Islamic modes of Trades,
through which the element of interest (riba) will be
replaced.

Waqf Model
TAKAFUL OPERATOR
FEES FOR
ADMINISTRATION
EXPENSES
25% TO 30%

COMPANY

SHARE OF
PROFIT FOR THE
COMPANY

MANAGEMENT
EXPENSES OF
COMPANY

PROFIT / LOSS
ATTRIBUTABLE TO
SHAREHOLDERS

40%

INITIAL
DONATION BY
SHAREHOLDERS
TO CREATE WAQF
FUND

PROFIT SHARING ON
MUDARABHA BASES

WAQF

INVESTMENT
BY FUND

PROFITS FROM
INVESTMENT
60%

PARTICIPANT

DONATION
PAID BY
PARTICIPANT

WAQF
FUND
75%
TO
70%

WAQF
FUND

OPERATIONAL
COST OF
TAKAFUL
/RETAKAFUL

SURPLUS

SHARE OF
SURPLUS FOR
THE PARTICIPANT
100%

Waqf Model
Basic Features
A Waqf Fund is established by the shareholders of
Takaful Company through the contribution of Ceding
amount (part of the Capital) to compensate the
beneficiaries or participant of Takaful scheme. The
Ceding amount of the Waqf will remain invested.
Any person by signing the proposal form,
contributing to the Waqf and subscribing to the policy
documents shall become the member of the Waqf
fund.

Waqf Model
Basic Features
The Waqf fund shall work to achieve the following
objectives:
a. To extend financial assistance to its
members in the event of losses.
b. To extend benefits to its members strictly in
accordance with the Waqf Deed.
c.

To donate to Charities approved by the

Shariah Supervisory Board

Waqf Model
Basic Features
The

Waqf

Fund

will

lay

down

the

rules

for

distribution of its funds to the beneficiaries and will

decide how much compensation should be given to
a subscriber/member .
The Waqf will become owner of all contributions and
has the right to act as a legal entity as per its terms
for investment, compensations and dealing with the
surplus amounts.

Waqf Model
Basic Features
The Takaful Company may distribute the surplus
amounts on the following three basis:
a. A portion of surplus should be kept as
reserve to mitigate the future losses.
b. A portion of surplus should be distributed
among the participants to differentiate it
from the conventional insurance procedures.
c.

A portion of surplus should be utilized for

the charitable purposes every year.

Waqf Model
Basic Features

As per the rules of the Waqf, if the fund is

liquidated, the outstanding balance, after paying all
dues and payables, will be utilized to charitable
purposes.

The Takaful company, while managing the Waqf

Fund, will play two different roles simultaneously:
a. Operator/Manager
b. Mudarib

Waqf Model
Basic Features

As Operator/Manager, the Takaful Company will

perform all functions necessary for the operations
of the Waqf against a Wakala fee to be deducted
from the Contributions of the Participants.

As Mudarib of the fund, the Takaful Company will

manage the investment of the excess funds of the
Waqf into Shariah compliant investments and will
participate in the profit of the funds investments
at a fixed ratio of profit.

Application
Takaful can be used to cover :
Property e.g. house, factory, mosque, offices
Vehicles (car, motorcycle etc..)
Goods ( For Import or Export )
Valuables
Health, accidents and Life