FACULTY OF ECONOMICS AND MUAMALAT SESSION 2006/2007 MGA 3023 FIQH MUAMALAT II

COMPARISON BETWEEN TAKAFUL AND INSURANCE

PREPARED BY: NURUL KHAIRUNISSA BT. ESMAN 1050743 PREPARED FOR: AL-FADHIL AL-USTAZ HISHAM B. SABRI

TABLE OF CONTENTS
NO TOPICS
Introduction Conceptual Framework of Takaful and Insurance

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1 2 3 4 5 6 7 8 9 10

3 4-5 5-6 7 8-10 10-11 12-15 16 17-18 19

Takaful and Dalaail The Origins of Takaful The Takaful Contract Elements in Conventional Insurance Contract Table of Comparison Between Takaful and Insurance Survey on Takaful Industry in Malaysia Conclusion References

COMPARISON BETWEEN TAKAFUL AND INSURANCE

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Introduction It is a natural phenomenon in any society that everybody is exposed to all sorts of unexpected risks in his daily life. These risks may occur to ones life, property or even business ventures. Often, these risks affect the lives of many individuals in a society in a way which is sometimes so devastation and shattering, that they may leave these unfortunate people vulnerable and helpless. The question is, how are we going to help such unfortunate people? One of the ways of doing so would be through the application of insurance. The primary objective of insurance is to uphold, among the parties involved, shared-responsibilities on the basis of mutual co-operation in protecting an individual against unexpected risks. For the purpose of providing social and economic security for the Muslim Ummah, it is necessary to come up with an alternative model to that of conventional insurance, which may be justified by the Quran and the Sunnah. An Islamic model of insurance may be operated based on, interalia, the principles of al-Mudharabah financing and it should be in line with the Islamic principles of inheritance and bequest. This may become the ultimate solution to this controversy/problem; as such a model of insurance is completely in harmony with the teachings of Islam as enshrined in the Quran and Sunnah.

Conceptual Framework of Takaful and Insurance

Conceptual Framework of Takaful An alternative to the concept of insurance is the Islamic doctrine of al-Takaful, as adopted by the Islamic insurance operators today. This is because insurance may have a place in Shariah, if it is approved by the Shariah practices based on shared responsibility, mutual co-operation and solidarity, to safeguard one against a defined risk. The term is a (infinitive noun), which is derived from the root word . ..The word

..means guarantee. The word whose chief characteristic is ,

means sharing. Thus, the word ( Takaful) means shared responsibility or shared guarantee, responsibility, assurance or surety. Technically, ( Takaful) from the economic point of view means mutual guarantee provided by a group of people living in the same society against a defined risk or catastrophe befalling ones life, property or any form of valuable things. Hence, Takaful is better known as cooperative insurance. In Takaful, there are usually four parties involved, namely: participant, operator, insured, and beneficiary. The nature of Takaful is that anybody who has the legal capacity may contribute a sum of money to a mutual cooperative fund, in view of ensuring material security for one against a defined risk encountered by anothers life or property. 1Thus, those who contribute to the mutual fund are known as participants, while those who among the participants face the risk and are assisted by the fund are known as insured. Those who actually benefit from the fund are known as the beneficiaries to the cooperative fund. The monetary contribution made by the participants to the fund is known as the mutual contribution. The fund is managed by a registered or licensed body or corporation known as Takaful operator who binds himself unilaterally to manage the fund according to Shariah principles, and also to provide reasonable financial security for those who genuinely deserve it for loss or damage suffered by them resulting from a defined risk. Furthermore, the contribution made by the participants is put into two funds; one is as an investment fund, according to the principles of al-Mudharabah (profit and loss sharing) while the other is treated as charity according to the principles of alTabarru.
1

Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers 2003, page: 19

Conceptual Framework of Insurance Under Common Law, insurance is a mutual financial transaction carried out against an unexpected risk on lives, property or business ventures. In such a transaction, the one who undertakes to provide reasonable financial security against the risk is called the insurer, who binds himself unilaterally. In practice, an insurer may be an individual or a cooperate body, which carries on an insurance business as an insurer. The person who is guaranteed against the risk in consideration of a determined premium is called the insured. Thus, insurance under Common Law is based on the principle of mutual contract, whereby protection against an unpredicted happening for the insured is guaranteed by the insurer.2

Takaful and Dalaail There are a lot of dalaails show the ibahah takaful in Islam. One of dalaail from AlQuran is:

ALLAH enshrines in Kitabihi al-Aziim:

{ }
5:2 and help you one another in righteousness and piety 3

Now, we look through one of dalaail from As-Sunnah:

2 3

The Prophet Muhammad s.a.w says in Hadithihi as-Syariif:

Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers 2003, page: 19-20 Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers 2003, page: 24

 : . . ( )
Narrated by Abu Hurairah (r), who said that: once two women from the tribe of Huzail clashed when one of them hit the other with a stone, which killed her and also the foetus in the victims womb. The heirs of the victim brought an action to the court of the Holy Prophet (s.a.w), who gave a verdict that the compensation for the infanticide is freeing of a male or female slave while the compensation for killing the woman is the blood money (diyat), which to be paid by the Aqilah (the paternal relatives) of the accused.4 Besides, there is hadith that mentions about the prohibition of gharar in buy and sale contract whereby Takaful is free from this characteristic:

. (5)

4 5

Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers 2003, page: 72 Al Imam Muslim, Terjemahan Shahih Muslim Jilid 1,2,3&4, Klang Book Centre, page: 147

The Origins of Takaful The origin of Takaful can be traced to several practices from ancient Arab tribal custom and the companions of the Prophet. For example, under the custom of alaqilah, it is mutually agreed among the tribes that if a person is killed unintentionally by a person of a different tribe, the accusers paternal relatives will take the responsibility to make a mutual contribution for the purpose of paying the blood money to the victims relatives. This practice of having a fund that pools contributions from a group of people to assist others in need was further encouraged in the early Islamic period. The first modern Islamic insurance was introduced in Sudan, and was based on a cooperative model not dissimilar from a conventional mutual insurer. More commercial models of Takaful were later implemented in countries such as Malaysia and Saudi Arabia. Takaful has evolved into a viable alternative to conventional insurance and is able to attract a wide range of customers, Muslim and non-Muslim alike. For example, in Sri Lanka, where less than 10 percent of the population is Muslim, some 15% of the policyholders of the sole Takaful undertaking there are non-Muslims. The development of Takaful is now seen as a key component of the development of Islamic finance in general, not least because of its ability to mobilize funds for investment in a similar way to conventional insurance. Takaful is now practiced by over 60 companies in 23 countries and has now evolved into a rapidly growing industry. More recently, retakaful, the equivalent of conventional reinsurance, has been developed, initially in Malaysia. At present, most Takaful operators reinsure to conventional reinsurers, and this is considered acceptable so long as there is no practicable Shariah compliant alternative. 6

http://www.iaisweb.org/061004_IFSB-IAIS_Takaful_Issues_Paper_Final_August_2006_.pdf-

The Takaful Contract Takaful is derived from an Arabic word which means solidarity, whereby a group of participants agree among themselves to support one another jointly against a defined loss. In a Takaful arrangement, the participants contribute a sum of money as wholly or partially tabarru (donation) into a common fund, which will be used mutually to assist the members against a defined loss or damage. 1 2Currently, Takaful is offered through the following business forms: 3

4 Non-profit, whereby regardless of the formal legal structure, the business is run on a
purely mutual or cooperative basis for the participants in the Takaful scheme. The board runs the business on behalf of all participants and there is no separate entity managing the business. 5

6 Commercial, whereby a commercial entity (Takaful operator) is entrusted with

managing the Takaful fund. Depending on the specific rules in each jurisdiction, the fund may be embedded within the operator (as life funds commonly are in conventional insurers), with a clear separation between shareholders and participants funds, or the fund may be set up as a company separate from the operator. In some countries a Takaful scheme may be offered through a window of a conventional insurer. In Family (Life) Takaful, the participants contribution is typically divided into two portions, one forming part of the Takaful pool to cover mortality risk, and the other in effect constituting a personal investment account (as a sub-account of the investment fund). There are several forms of contract that govern the relationship between the participants (policyholders) and the Takaful operator. The most widely used contracts are the mudarabah (profit-sharing) contract, wakala (agency) contract, kafalah (guaranty) contract, and hibah (gift).

Pure Mudarabah Model: In a mudarabah model, the Takaful operator acts as a mudarib (entrepreneur) and the participants as rabul mal (capital provider). The contract specifies how the investment profit and/or surplus from the Takaful operation are to be shared between the Takaful operator and participants. Losses are borne solely by the participants as the providers of capital on the condition that the operator is free from any misconduct and negligence actions, and in that case the mudarib is not entitled to receive any compensation for his efforts.

Pure Wakala Model: Under this model, the principal-agent relationship is used for both underwriting and investment activities. In underwriting, the Takaful operator acts as an agent on behalf of the participants to run the Takaful fund. All risks are borne by the fund and any operating surplus belongs exclusively to the participants. The Takaful operator does not share directly in either the risk borne by the fund or any surplus/deficit of the fund. Instead, the operator receives a set fee called a wakala fee for managing the operation on the participants behalf, which is usually a percentage of contributions paid. However, the operators remuneration may include a performance fee, charged against any surplus, as an incentive to manage the Takaful fund effectively. The investment of the Takaful fund is also based on a wakala contract whereby the operator charges the participants a fee in exchange for services rendered.

Combination of wakala and mudarabah contracts: In this model, the wakala contract is adopted for underwriting activities, while the mudarabah contract is employed for the investment activities of the Takaful fund. This approach appears to be favoured by some international organisations and is widely adopted by Takaful undertakings in practice. 7

Kafalah contract: In this model, each participant pays his contribution voluntarily to reduce the effects of losses incurred by other participants, regardless of the type of loss (e.g. fire, drowning, theft, car accident, work

IAIS_Takaful_Issues_Paper_Final_August_2006_.pdf-

accident, aimal death, etc.). Moreover, cooperative insurance (Takaful) distinguishes itself from commercial insurance by not seeking to make profits.8

Hibah: This model is applied if the minor is below the age of 15 and does not have an understanding of the policy, but the policy is bone fide believed to be beneficial for the minor, the guardian may buy a policy under the name of the aforementioned minor, in which the benefits should be in favour of the minor. But, the regular contributions paid by the guardian should either be taken out of the minors property or the guardian may pay out of his own property and give away as a gift (Hibah) in favour of the minor.9

In all models the Takaful operator will usually provide an interest-free loan to cover any deficiency in the Takaful fund. The loan has to be repaid from any future surpluses of the Takaful fund.10 Elements in Conventional Insurance Contract The element of gharar is clear in conventional insurance contract, in which the object of the contract may and may not exist. In this regard, it is well established that the Prophet Muhammad forbade the gharar sales. Moreover, all commutative financial contracts are judged by analogy to sales in matters of gharar, which thus renders them invalid. It is thus that legal scholars have classified insurance under the heading of gharar contract, since uncertainty is an integral part of the contract. Moreover, the amount of uncertainty in insurance companies is substantial, since it is the very cause for writing the contract, and the amount of uncertainty does not depend upon the actions of the contracting parties. At the inception of the insurance contract, neither party knows how much they will pay or receive. In this regard, even though the insurance company may be able to know with very high probability how much it will pay and receive from the large collection
8

Dr Wahbah Al-Zuhayli, Financial Transaction in Islamic Jurisprudence, Volume 2, Dar al-Fikr al-Mouaser, page: 44 9 Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers 2003, page: 308
10

http://www.iaisweb.org/061004_IFSB-IAIS_Takaful_Issues_Paper_Final_August_2006_.pdf-

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of underwritten contracts, the uncertainty remains substantial for each insured party. Furthermore, it is not valid to argue that what the insured party is getting is insurance or safety in return for the premium he pays, since safety is not the object of the contract, but rather its instigating factor. In fact, if we render insurance to be object to the contract, the insurance contract would be rendered invalid since total safety cannot be guaranteed. Apart from that, it is well known that all insurance companies invest their funds in riba, thus making all their funds suspect. In addition some insurance companies pay life insurance policy holders a portion of its interest income, which is definitely forbidden riba. On the other hand, it is clear that there is riba between the insured and the insurance company, since the premium paid by the insured may be more or less that what the insurance company pays him with deferment. Thus, if the deferred payment exceeds the paid premium, there would riba of increase (riba al-fadl) as well as deferment ( riba al-nasiah), and if it is equal, then there is deferment riba alone, but both are equally forbidden.11

11

Dr Wahbah Al-Zuhayli, Financial Transaction in Islamic Jurisprudence, Volume 2, Dar al-Fikr alMouaser, page: 43

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Table of Comparison between Takaful and Insurance ISSUES TAKAFUL Tabarru, Accounts which INSURANCE meansinsurance account and life insurance

The account is known as al-The account is known as general donation, the other one isaccount of fund treated in line with the principle of al-Mudharabah Specificies from the outset howMay offer bonus or profit in general the profits from Takafulterms only especially with profit there is no exact investments are to be sharedpolicies, participants Bonus

between the operator and thespecification with regard to the profitsharing in contract Based on principles of al-It may also decide to give or not to Mudharabah, the ratio could begive bonus for any particular year 5:5 or 6:4 or 7:3 as agreeddepending on the result of the between the participant and theinvestment operator returns. The rate of bonus can vary from year to year up to the discretion of the Board of Directors of the company Participants own the TakafulInsurance is a buy-sale contract. In funds and managed by thewhich policies are sold and the policy operator. Participants give upholders are the purchasers Contract individual collective rights rights to gain over

contribution and benefits

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Company is better known asRelationship between the company operator, which acts as trustee,and the policy-holders is on one to Company manager entrepreneur and alsoone basis

Capacity

The minimum age for a personThe minimum age for a person to to hold a Takaful certificate isbuy a poliy is 16 years, but an infant 15 years and infant below 15between the age of 10 and 16 may should also have the right to bealso have the right to have it under insured under the supervisionrespective guardian of respective guardian Takaful practices are free fromInsurance practices involve Riba the elements of Riba and other(interest) and some other elements, unIslamic elements, but iswhich may not be justified by the

Elements

evolved around the elements ofShariah principles al-Mudharabah, al-Tabarru and other elements A fetus may also have the rightSo far there is no provision providing to be insured on the name ofan insurance coverage for the fetus Syariah justified

Fetus

the respective mother for ones health protection

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The

paid-premiums

of

theThe paid-premiums of the policy-

participant can for no reasonholders may sometimes be forfeited, be forfeited, even for a breachespecially for the breach of utmost Forfeiture of utmost good faith or anygood faith other offence or wrong committed by the participant The funds shall be invested inThe funds may also be invested in any interest free from Shariahan interest-based scheme justified scheme The Investments entire procedure They can also be invested in any shallscheme or project, whish may not be

comply the guidelines of thesupported by the Shariah discipline Shariah Investment returns must not be driven by any unethical commercial activities The entire operation aims atThe operation aims a commercial paving the way of brotherhood,gain on the basis of the principles of

Nature

solidarity cooperation

and

mutualbusiness

Regulations affecting TakafulInsurance law is based on the are Regulations based on the Divinehuman thoughts and cultures sanction (Quran and Hadith)

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The nominee in a life TakafulThe nominee in a life policy is policy should not be treated astreated as an absolute beneficiary an absolute beneficiary, but aover the policy Nomination mere trustee or an executorNo other person shall have the right who is under a responsibility toto claim all or part of the benefits receive the benefits over thedisbursed to that nominee policy and distribute them among the right beneficiaries according to the principles of Faraid Fixed minimum premium,Premiums paid by the policy-holder when the policy-holder first takes out his policy. The older the policy-holder is, the higher the level of premium would be Under Takaful policy, the causeUnder a life insurance policy, if it is of death of the participant isproven that the policy-holder has Suicide immaterial right to claim from of the committed suicide within first two (2) legitimateof leaving benefits to his The beneficiary shall have theyears of the policy with an intention benefits operatorbeneficiaries, no right of claim shall thebe entertained

which is the same for allare various. It depends on the age participants of all ages Premiums

regardless

whether

death of the participant is caused by natural, suicide or being killed while committing a crime

Survey on Takaful Industry in Malaysia

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The Takaful (Islamic insurance) operation in Malaysia whose operation commenced in 1984 resulted from proclamation by the Fatwa committee of The National Religious Council in 1972 that conventional insurance as practiced (especially life policies) under the Insurance Act 1963 in Malaysia is unlawful in the sight of Shariah principles, as it evolves around the elements of riba, gharar, and maisir, which are not in line with the Divine teachings of Islam. A similar Fatwa on the same issue was issued by several states of Malaysia, for example in 1970, Negeri Sembilan in 1972, Perak in 1974, Terengganu in 1974, Kelantan in 1975 and Malacca in 1980. All these Fatwa committees, thereafter, called for an establishment of a fully alternative Islamic scheme the Takaful Islamic Insurance. Later in 1982, the government set up a committee to study the alternative possibility of implementation of Islamic insurance practices. Subsequently, a report was submitted by the committee and approved in 1984. As a result, Parliament enacted the first Takaful Act in 1984. Under the Takaful Act 1984 the first Islamic insurance company called Syarikat Takaful Malaysia Sdn. Bhd. was incorporated and registered under the Companies Act 1965 on 29 November 1984. Its operation was officially launched by the Tun Mahathir Mohammad on 2 August 1985. 12

Conclusion
12

Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers 2003, page: 293-294

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Malaysia may be regarded as the leading country in the contemporary world of Islamic economy, especially in comprehensive Takaful operations. Despite having such a reputed standing in Takaful operatuns, which may work as an alternative in the true sense to the insurance practices offered under the banner of conventional systems. Simultaneously, such a comprehensive operation of Takaful may not only meet the expectation of the Malaysian society, but also the global Muslim ummah of this century and the countries ahead. It is sincerely hoped that the possible suggestions can further the development of Takaful may contribute to the future standing of Takaful both in principles and practices, and may meet the Ummahs expectation of benefiting from the application of Islamic insurance in a wider range, without further depending on the insurance practices operated under the banner of conventional economy. In fact, Takaful would be ideally positioned to infiltrate far and wide and create awareness and demand for insurance products that not only are tailored to the specific needs of the businesses and personal lines segments but are also in full compliance with the shariah. A parallel in this matter can be drawn from the phenomenal success achieved by recently established Islamic banks in the country. Once peoples confidence was built up given the respective shariah boards, innovative riba-free Islamic products based on ijarah, musharakah, murabahah and the like, they lost no time in switching over their deposits and their financial transactions through these banks. Takaful likewise, can build up public confidence and once that is achieved, people will voluntarily opt for the various takaful options in their individual as well as collective interests. Society as a whole will benefit as huge funds currently blocked up to hedge against fortuitous losses, will be willingly released and utilized in the growth of various businesses. Needless to mention, takaful concept discourages spread of malpractices and does have a viable and unique alternative in the form of surplus sharing which, in

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Malaysia and Sri Lanka, has even attracted non-Muslims towards takaful products from conventional insurances. Furthermore, any institution or even a conventional insurance company can set up an entirely separate takaful company under the law with the requisite capital. Secondly, there is a fundamental, irreconcilable difference in concept between the two since conventional insurance, by its very definition, is a risk-transfer mechanism. Every bearer of burden shall bear his own burden. Takaful, on the other hand, is a risk-sharing mechanism that allows for a transparent arrangement of cooperative sharing of risks by pooling individual contributions for the benefit of all and hence eliminates the basic ingredients that are prevalent in conventional insurance rendering it un-Islamic. These are gharrar meaning uncertainty, maiser meaning gambling and riba meaning usury. Such basic conceptual difference is not there in the case of banks.
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REFERENCES

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http://jang.com.pk/thenews/feb2007-weekly/busrev-12-02-2007/p6.htm

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1. Mohd Masum Billah, Islamic and Modern Insurance, Ilmiah Publishers, 2003
2. Al Imam Muslim, Terjemahan Shahih Muslim Jilid 1,2,3&4, Klang Book Centre

3. http://www.iaisweb.org/061004_IFSB_IAIS_Takaful_Issues_Paper_Final_August
_2006_.pdf-

4. Dr Wahbah Al-Zuhayli, Financial Transaction in Islamic Jurisprudence, Volume 2,

Dar al-Fikr al-Mouaser, 2003 5. http://jang.com.pk/thenews/feb2007-weekly/busrev-12-02-2007/p6.htm

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