Summary

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This project is submitted on the topic of Takaful (Islamic insurance). The basic aim of this project is to find the importance of Islamic insurance in modern world, and importance the difference between conventional and Islamic insurance. Takaful is an Islamic way of guarantee for securing incase of loss or death or any other kind of protection. This system contain interest based system and works on complete way of Islamic gaudiness. This report consist of introduction/history of Takaful, ways of Islamic insurance, base of Takaful, difference between Takaful and gambling, basic principle of Takaful and how Takaful works. The importance of Takaful can be seen through this that more of the commercial banks also forced to introduce Islamic insurance packages due to its increasing demand. Because peoples know realize the importance of Islamic insurance. This report helps to identify that Islamic ways of business and securities are best as an alternative of conventional system.

Introduction to TAKAFUL:
This concept has been adept in different forms for over 1400 years. The Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". The concept is in line with the principles of compensation and shared responsibilities among the community. Takaful originated within the ancient Arab tribes as joint liabilities that oblige those who committed offences against members of a different tribe to pay compensation to the losses or their heirs. This principle later extended too many walks of life, including sea trade, in which participants contributed to a fund to cover anyone in a group who suffered mishaps on sea voyages. In modern-day conventional insurance, the insurance vendor (the insurance company) sells policies and invests the proceeds for the profit of its shareholders, who are not necessarily policyholders. There is therefore a clear disjunction between policyholders and shareholders. Payouts to policyholders may vary depending on financial performance, but a minimum positive return is always contractually guaranteed. However, takaful is founded on the cooperative principle and on the principle of separation between the funds and operations of shareholders, thus passing the ownership of the Takaful (Insurance) fund and operations to the policyholders. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity. However, takaful complies with the Shari¶ah (which outlines the principles of compensation and shared responsibilities among the community) and has been approved by Muslim scholars. There is now general, health and family (life) takaful plans available for the Muslim communities.
In takaful, the policyholders are joint investors with the insurance vendor (the takaful operator), who acts as a mudarib a manager or an entrepreneurial agent for the policyholders. The policyholders share in the investment pool's profits as well as its losses. A positive return on policies is not legally guaranteed, as any fixed profit guarantee would be akin to receiving interest and offend the prohibition against riba.

However, the Takaful was 1985 Fiqh Academy ruling that traditional insurance was Haram, forbidden, but insurance based collective security and cooperative principles was Halal, permissible. Now, over 20 years later, the combination of a regulatory overhaul and the exponential growth of Islamic banking and finance means that the industry is finally coming of age and Muslim countries are ripe for a Takaful revolution. For some time conventional insurance was considered to be incompatible with the Shari¶ah that prohibit excessive uncertainty in dealings and investment in interest-bearing assets; both are inherent factors in conventional insurance business.

Commencement of TAKAFUL:

Present Takaful first emerged in two very different forms. In the 1970s, Sudan embarked on an Islamisation program, and developed a Takaful system based on the Waqala model. Here the Takaful operator works as an agent of the policy holder, called 'participant' in Takaful, and merely takes a fee for his services in managing the company. In the 1980s, Takaful emerged as part of Malaysia's pioneering of Islamic finance, and was based on the Mudarabah model. However, the watershed moment for Takaful was the 1985 Fiqh Academy ruling that traditional insurance was Haram, forbidden, but insurance based collective and Muslim security and cooperative principles was Halal, permissible. Now, over 20 years later, the combination of a regulatory overhaul and the exponential growth of Islamic banking and finance means that the industry is finally coming of age countries are ripe for a Takaful revolution

Takaful products are based on two main business models:
1. The Mudaraba model: is essentially a basis for sharing profit and loss between the takaful operator and the policyholders. The takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment. This is commonly used in Malaysia. 2. The Wakala model: is a contract of agency, which replaces surplus sharing with a performance fee. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund in return for a defined fee. This model is used more in the Middle East region.

How Does Takaful Work:
All participants (policyholders) agree to guarantee each other and, instead of paying premiums, they make contributions to a mutual fund, or pool. The pool of collected contributions creates the Takaful fund. The amount of contribution that each participant makes is based on the type of cover they require, and on their personal circumstances. As in conventional insurance, the policy (Takaful Contract) specifies the nature of the risk and period of cover. The Takaful fund is managed and administered on behalf of the participants by a Takaful Operator who charges an agreed fee to cover costs. These costs include the costs of sales and marketing, underwriting, and claims management. Any claims made by participants are paid out of the Takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the participants in the fund, and not the Takaful Operator, and may be distributed to the

participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.

Basis of Takaful
The basis of the Takaful System is not to profit but to uphold the principle of "bear ye one another's burden." Therefore, the characteristic feature of Islamic insurance is that it is not based on profit making motive self-help through cooperation. Mutual assistance amongst members of a tribe was not originally a commercial transaction and contained no profit or gain at the expense of others. Rather, it evolved as a social institution: to mitigate the burden of an individual by dividing it among his fellow members (group persons) or tribe. In contrast, most modern insurance (even mutual stock insurance entities, but not mutual associations) is a capitalist-based commercial enterprise, where losses are projected in advance and funds (premiums) allocated to risks to cover them. Premiums are paid in line with such projections of risk. Notwithstanding the belief in God and Qadha-o-Qadr (the Divine Decree and the Will of God), The Holy Qur¶an exhorts the individual to assist one another and to take precautions in order to minimise potential misfortune, losses or injury from unfortunate events. Although takaful has very old origins, the word takaful is a modern day usage. There references to sharing of risk and mutuality in The Holy Qur¶an and the Hadith (record of the teachings and sayings of Prophet Muhammad pbuh) however, takaful, the way it is transacted today, is based on the secondary source of Islamic jurisprudence ± Ijtihad (the process of making a decision by independent interpretation of the legal sources, The Holy Qur'an and the Sunnah the traditions and practices of Prophet Muhammad). ³Indeed, the basic difference between the Islamic and conventional conceptions of insurance is one of perspective, not economics. From a conventional perspective, insurance appears as set of bilateral contracts that transfer risk for the benefit of the individuals who choose to make that contract. From an Islamic perspective, however, insurance appears as an institution that reduces or eliminates risk for the benefit of social group. Importantly, the institutions that result from either the conventional or Islamic conception can also be described within the framework of the other: an Islamic insurance company is an institution that individuals use to shed risk, just as an conventional company is a way that a group shares risk´. Some examples of the basis that are mentioned in The Holy Qur¶an and the Hadithare:

Principles of Takaful:
Islamic insurance requires each participant to contribute into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. And the prohibition as to dealing with enterprises engaging in

prohibited activities such as gambling and pornography. The impact of this Shari¶ah Principle on the syndicate is followed. It is necessary to ensure that
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Policyholders co-operate among themselves for their common good. Every policyholder pays a part of the contribution as a donation to help those that need assistance. Losses are divided and liabilities spread according to the community pooling system. The syndicate will not be able to provide insurance to businesses that engage in prohibited activities. Uncertainty is eliminated in respect of subscription and compensation. All investments made by or on behalf of the Corporate Member which comprise the premium Trust Fund are invested ³properly´ by the acceptable institutions that in turn will not reinvest in businesses or institutions engaging in prohibited activities. It does not seek to derive advantage at the cost of others.

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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."

Islamic way of insurance:
The first Islamic insurance company was set up in Sudan in 1979. Today there are many Islamic insurance operators in Muslim as well as non-Muslim countries. The main concept of Islamic insurance is that it is an alternative to conventional insurance, with characteristics and features that comply with shariah requirements. This is done by eliminating the objections against conventional insurance. ³The term takaful is an infinitive noun which is derived from the Arabic root verb kafal¶ or kafala, meaning to guarantee or bear responsibility. The main features of Islamic insurance are
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Cooperative risk sharing by using charitable donations to eliminate gharar and riba; Clear financial segregation between the participant (insured) and the operator (insurance company); Shariah-compliant underwriting policies and investment strategies.

There are still obstacles to surmount. As Dr. Malaikah says, "there has been no insurance culture in the Islamic world, so there is a huge need to educate people about the benefits of Takaful. This not only applies to potential customers but also to regulators". Takaful-friendly regulation also needs to be developed. Compared to the huge strides in Islamic banking, the Takaful industry lags behind, and regulatory bodies need to be astute and swift to catch up with the demand for Takaful products.

Why Not to Conventional Insurance:
In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The concept of insurance where

resources are pooled to help the needy does not necessarily contradict Islamic principles. Three important differences distinguish conventional insurance from Takaful: 1. Conventional insurance involves the elements of excessive uncertainty (gharar) in the contract of insurance; 2. Gambling (maysir) as the consequences of the presence of excessive uncertainty that rely on future outcomes 3. Interest (riba) in the investment activities of the conventional insurance companies; 4. Conventional insurance companies are motivated by the desire for profit for the shareholders; 5. Conventional system of insurance can be subject to exploitation. For example, it is possible to charge high premium (especially in monopolistic situations) with the full benefit of such over-pricing going to the company. The key difference between Takaful and conventional insurance rests in the way the risk is assessed and handled, as well as how the Takaful fund is managed. Further differences are also present in the relationship between the operator (under conventional insurance using the term: insurer) and the participants (under conventional it is the insured or the assured). Takaful business is also different from the conventional insurance in which the policyholders, rather than the shareholders, solely benefit from the profits generated from the Takaful and Investment assets.

Difference Between Conventional and Takaful Insurance.
Under conventional insurance, insurance is a risk transfer mechanism by which an organization can exchange its uncertainty for certainty. The uncertainty experiences would include whether loss will occur, when it will take place, how severe it will be and how many there might be in a year. Insurance offer the opportunity to exchange this uncertain loss with certain loss. The organization agrees to pay fixed premium and in return, the insurance company agree to meet any loss which fail within the terms of the policy. Exchange of uncertain loss with certain loss as it is done in conventional insurance is exactly fall into Gharar meaning and it is not allowable in Islam. In Takaful concept therefore, there is no transfer of risk from participants to the Takaful operator. Risks are shared among participants under a mutual guarantee scheme or Takaful scheme works. It is part of the merely as agent to make the scheme works. It is part of the operator role to ensure that each participant pay equitable contribution, as well to ensure that the unfortunate one who suffers a loss will get proper compensation.

Difference between Gambling and Insurance:

Gambling
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Insurance
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Gambling is speculative in its risk assessment In gambling, one may win or lose by creating that risk gambling promotes dissension, ruin and hatred, insurance based on cooperative principles, enables the insured to lessen the financial impact without which it could drive the individual and his dependents to poverty, thereby weakening their place in the society There is nothing in Islam that prevents individuals from making a provision for their dependents. Seen collectively for large groups of insured population

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insurance is a pure risk and is nonspeculative In insurance, the risk is already there and one is trying to minimize the financial effects of that risk Insurance shifts the impact of that risk to someone else and relieves the person of risk. The risk nevertheless still remains insurance strengthens the financial base of the society

Takaful concept for risk financing:
In Takaful, risk from individuals or organizations is spread or shared with other individuals or organizations that have a relatively homogenous pattern. Depending on which model the Takaful operator adopts, individuals or organizations pay a contribution (Mushahamah) or in the form of donation (Tabarru) with a condition that in the event a risk materializes, they will receive proceeds of Takaful funds in order to recover from their loss To avoid Gharar, Maisir, and Riba, the Takaful concept has a protection wall which is the contract itself. Instead of sales contract, Takaful utilizes a Mudharabah (Profit Sharing) contract or a Wakalah (Agency Contract), or other suitable contracts that would fit a Inside the protection wall or the contract, the following Takaful best practice tasks must be carried. 1. Proper risk identification and risk analysis 2. Proper underwriting practice to ensure an adequacy of funds to pay losses but at the same time should not be of an excessive level that would in turn become a burden to the participants 3. Proper risk sharing and the risk spreading. Operators must ensure proper and healthy risk sharing between participants; furthermore by anticipating potential losses above their capacity, operators could further spread the risk to other operators in the Takaful or Retakaful market

Elements of Gharar, Maysir and Riba in Insurance Contracts
As a single contract, insurance violates riba and gharar rules. One party pays cash premiums in return for the promise of the other party to pay a cash sum on the occurrence of a contingent future event. So viewed, it also resembles a bet (maysir). Moreover, most insurance companies invest their premiums in interest-bearing investments forbidden by the Shari¶ah.

Gharar Maysir Riba

Gharar:
An insurance contract contains gharar because, when a claim is not made, one party (insurance company) may acquire all the profits (premium) gained whereas the other party (participant) may not obtain any profit whatsoever. Ibn Taimiyah, a leading Muslim scholar, further reasoned "Gharar found in the contract exists because one party acquired profit while the other party did not". The prohibition on gharar would require all investment gains and losses to eventually be apportioned in order to avoid excessive uncertainty with respect to a return on the policyholder's investment.

Maysir:
Islamic scholars have stated that maysir (gambling) and gharar are inter-related. Where there are elements of gharar, elements of maysir is usually present. Maysir exists in an insurance contract when; the policy holder contributes a small amount of premium in the hope to gain a larger sum; the policy holder loses the money paid for the premium when the event that has been insured for does not occur; the company will be in deficit if the claims are higher than the amount contributed by the policy holders.

Riba:
Conventional donation insurance policies promising a contractually -guaranteed payment, hence offends the riba prohibition. The element of riba also exists in the profit of investments used for the payment of policyholders¶ claims by the conventional insurance companies. This is because most of the insurance funds are invested by them in financial instruments such as bonds and stacks which may contain elements of Riba.

Pricing Transactions linked to Interest-rate Benchmark:
There are continuing debates on whether the spirit of Shari`ah is being violated by the practice of "benchmarking" linked interest rate benchmark such as London Interbank Offered rate (LIBOR) plus an agreed mark-up in also pricing returns on Islamic finance transactions . At a very fundamental level, the reason for the debates is the lack of understanding to clearly discern the difference between the use of LIBOR as a benchmark for pricing and the use of non -Shari¶ah compliant assets as a determinant for returns. However, benchmarking touches upon the integrity of Islamic Finance as a whole, and the concept of Shari¶ah-compliance vs Shari¶ah-based approach in particular. There are practical challenges delaying a switch to participation-based structures, such as Musharakah and Mudarabah that require financiers to participate in the underlying asset in a financing transaction.

FAMILY TAKAFUL
The terms "Family Takaful", "Takaful Ta'awani" or just "Takaful" are generally used for family solidarity in place of conventional life insurances. Other products available in various countries are General Takaful, Education/Medical Takaful, etc. Based on the nature of relationship there are various models like Wakalah (agency) Model. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the company. The Shariah committee approves the sharing ratio for each year in advance. Most of the expenses are charged to the shareholders.

Retakaful or Reinsurance:
Frequently, the scale of insurance risks underwritten is too great for one insurer to carry safely. In these circumstances, companies use reinsurance to mitigate their own risk exposure. When insurers insure a risk again with another company, it is called reinsurance which allows the insurance industry to spread its losses, lessening the impact of claims on any one company. There is currently a shortage of retakaful capacity and the lack of companies in the market presents a challenge as well as an opportunity. The challenge is to have a large enough Takaful market to justify ReTakaful business. There is also a global need for strong and credible retakaful operators to assist the growth and expansion of takaful business. Shari¶ah scholars have allowed takaful operators to reinsure conventionally when no retakaful alternative is available, although retakaful is strongly preferred.

Conclusion:
After studying the whole procedure and the working of Islamic insurance it is realize that Islamic way of financing are more safer and best due to its working style and as it doesn't fall burden on any other. It restricts interest based system. And as the money collected from the payment of the clients is invested in the business through Islamic principle which are based on profit and loss terms not on the interest system. This is HILAL in ISLAM! As Islamic finance continues to develop, there is likely to be a vast takeoff of other products such as pensions, education, marriage and health Takaful plans. There is also a huge scope for mortgage Takaful. Islamic principles strong emphasis in Takaful on the economic, ethical, moral and social dimensions, to enhance equality and fairness for the good of society.

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