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XIENIUMS SULTAN RANA AQEEL BUTT IRFAN KHAN ARSLAN MEHDI BCH- 8317 BCH-8338 BCH-8342 BCH-8344
SUPERIOR UNIVERSITY LAHORE
Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law. This concept has been practiced in various forms for over 1400 years. Muslim jurists acknowledge that the basis of shared responsibility in the system of Aquila as practiced between Muslims of Makkah and Medina laid the foundation of mutual insurance. 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 Shariah (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 Shariah that prohibit excessive uncertainty in dealings and investment in interestbearing 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
Islamic references to Takaful
These fundamentals are based on the sayings of the Islamic Prophet Muhammad. Based on the hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some of the examples are:
Basis of Co-operation Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2) Allah will always help His servant for as long as he helps others. (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud) Basis of Responsibility The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim) One true Muslim (Mu¶min) and another true Muslim (Mu¶min) is just like a building whereby every part in it strengthens the other part. (Narrated by Imam al-Bukhari and Imam Muslim) Basis of Mutual Protection By my life, which is in Allah¶s Power, nobody will enter Paradise if he does not protect his neighbour who is in distress. (Narrated by Imam Ahmad bin Hanbal) The basic fundamentals underlying the Takaful concept are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic Law. Some Muslims believe insurance is unnecessary, as society should help its victims. Others believe that Muslims should not ignore the fact that they live, trade and communicate with open global systems, and the need for banking and insurance. They believe in creating Muslim-friendly banking systems and a workable insurance framework by which Muslims can compete with non-Muslims in business and have cover in daily life.
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/ re-Takaful 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 Quran exhorts the individual to assist one another and to take precautions in order to minimize 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 Quran 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). Indeed, the basic difference between the Islamic and conventional conceptions of insurance is one of perspective, not economics. From a conventional perspective, insurance appears asset 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 Quran and the Hadith are: 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 Shariah Principle on the syndicate is followed. It is necessary to ensure that:
y Policyholders co-operate among themselves for their common good. y Every policyholder pays a part of the contribution as a donation to help those that need assistance. y Losses are divided and liabilities spread according to the community pooling system. y The syndicate will not be able to provide insurance to businesses that engage in prohibited activities. y Uncertainty is eliminated in respect of subscription and compensation. y 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. y It does not seek to derive advantage at the cost of others. 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. The term Takaful is an infinitive noun which is derived from the Arabic root verb kafalor kafala, meaning to guarantee or bear responsibility. The main features of Islamic insurance are: y Cooperative risk sharing by using charitable donations to eliminate gharar and riba;
y Clear financial segregation between the participant (insured) and the operator (Insurance company); y 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 r i sk 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 Risks are operator. Takaful therefore, there is no transfer of risk from participants to the
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.
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