Insurance and Takaful

Imran Yasin (Chartered Insurer)-FCII (UK), ARM (USA), M.B.Econ (PU), MS Banking & Financial
Economics (GCU), CITIP (UK), PGDAE (PU), DIS (PU), Senior Vice President (Head of agri) – EFU
General Insurance Ltd.

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What is Insurance?
Insurance is a Risk transfer mechanism. It is a contract,
represented by a policy, in which an individual or entity receives
financial protection or reimbursement against losses from an
insurer by paying premium.
❖Contract
• Enforceable by law
• Compensatory in nature
• Based on loss which is uncertain

❖Compensation
• Financial Protection
• Premium

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What is Insurance?

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Riba in Insurance
• Paid less premium and gets more benefit. (Life Insurance)
• Paid more premium and receives no losses. (General
Insurance)

▪ Uncertainty in the Existence of Risk

▪ Uncertainty in Obtaining Compensation
▪ Amount of Compensation is also uncertain
▪ Payment time of compensation is unknown and uncertain

“The contract of insurance contains the element of gambling

and betting” in other words, win/loss condition.

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Definitions
• Interest (‫)ربا‬
exchange of gold with gold, silver with silver, wheat with wheat,
barley with barley, dates with dates and salt with salt should be
of equal quantities and spot. Anyone who varies the quantities
or allows one side of the exchange to be deferred, indulges in
Riba for which both buyer and seller are equally responsible
(Bukhari)
• Uncertainty (‫)غرر‬
Transactions with unknown consequences, where participants
are unsure whether a point will, or will not be achieved (Al-
Zailaa’I, 1313 H)
• Gambling (‫)قمار‬
In respect of gambling, Al Sanhoury (1964) refers that “gambling
is an agreement” between two or more parties with the
consent to pay, to the other gambler if they losses and they
undertake this clause. 5
Risk Mitigation in Islam
Islamic history is replete with examples featuring
risk mitigation activities:

Daman
Hadith Aqila
Khatar al Tareeq

Tie the A risk sharing undertake another

Camel mechanism in person’s risks
and then which without any
Submit community consideration/fee
to the Will of members in return
Allah pooled
their share of
Diyat
(blood money)

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What is Takaful?
The term “Kafalah” is an Arabic terminology, which means "guaranteeing
each other" or “Joint Guarantee”, Term Kafalah becomes “Takaful" when it
comes to the practical risk mitigation tool (Ismatullah, 2010).
In Takaful, initially, Waqf fund created to spread or share the risks of all
policyholders and portion of premium invested in a sharia-compliant
portfolio (Al Zuhaili, 1997).

❖Contract
• Not enforceable by law
• Non-Compensatory in nature
• Based on Donation

❖Compensation
• Financial Protection (in form of Donation)
• Premium (in form of Donation)
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Takaful (Features)
• The system of Takaful is based on the principles of
brotherhood, mutual co-operation and Taburru, which is
encouraged by the Shari’ah. In our society, we have this
arrangement in different forms, for example: the joint-family
system and co-operative societies etc, in which risks and
financial losses are distributed amongst the participants and
help, is mutually extended to each other in times of need on
the principle of Ta’awun. Exactly the same concept is found in
Takaful, where participants of the pool share their risk, so that
they might be able to help each other in the time of need.
• The shareholders firstly would create a Waqf Pool by
execution waqaf of some money this called ceding amount.
Whereas the ownership of the Waqf is transferred to Allah
Almighty. And the shareholders are waqif. After the
establishment of waqf pool people are invited to become the
members of the Pool by giving some donation to this pool, the
donation or contribution become property of the pool.
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Takaful (Features)
• Waqif formulizes a condition at the time of execution of waqf that
the benefit of this pool will go to such members as per defined
rules. This condition called the condition of waqif (Shart e waqif).
Based on the Fiqh ruling
• This condition is judged to be as effective and valid as if it would has
been laid out by the Shariah itself.
• Due to this ruling financial benefits may only be provided to those
who contribute to the Waqf Pool.
• So the benefit got by participant based on this ruling and therefore
it is treated as atai mustaqal based on the condition put by waqif
not against of given contribution.
• The funds available in the Waqf Pool are invested in Shari'ah
Compliant modes of finance. Any profit generated from this
investment is returned to the Waqf thereafter.
• This discussion proves that there is no any exchange of price and
subject matter, because the contribution became property of the
Pool and the benefit got on the baisis of shart e waqif as a separate
gift, and waqf is a kind of aqd tabarru.
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Takaful (Features)
• The company or the operator works as the Wakeel or the
Manager of the Waqf Fund and charges a ‘Wakala fee’ for it.
This fee is paid from the Waqf Fund. As the Wakeel, the
Operator must invest the funds available in the Waqf Pool in
Shari’ah-compliant businesses for profits. Since the Operator is
the Mudarib (working partner) and the Waqf Fund is the
Rabul-ul-Maal (sleeping partner), any profits made from the
investments are shared between the two on pre-defined
percentages.

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Takaful (Models)
• There are three operational models available in the market

Wakalah (Fee based) Model

• Operator acts as an agent, administers funds on behalf of participants
• Receives a fee for operating expenses

Mudharabah (Profit share) Model

• Operator acts as Mudarib (entrepreneur) with participants as the capital providers
• Losses paid by participants with a pre-agreed profit sharing agreement

Wakalah/Mudharabah (Fee based/Profit share) Hybrid

• Wakalah for insurance activities and Mudharabah for investment profits

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 Management
PARTICIPANTS Expenses

Contribution Wakalah Fee (eg 30%)

Shareholders’
Fund
Claims

Takaful Reinsurance/
Shariah compliant Retakaful
Fund
Investments
Reserves

Qard
Investment Profits Underwriting Profit Hassan

Surplus/(Deficit)

100% surplus
Charitable Donation

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 Management
PARTICIPANTS Expenses

Contribution
Shareholders’
Fund
Claims

Takaful Reinsurance/
Shariah compliant Retakaful Qard
Fund
Investments Hassan
Reserves (interest
free loan)
In case of a
Investment Profits Underwriting Profit deficit in
the fund to
be repaid
Surplus/(Deficit) from
surpluses
in future
years
X% of Surplus 100% - X% of Surplus
Charitable donation

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 Management
PARTICIPANTS Expenses

Contribution Wakalah Fee (eg 30%)

Shareholders’
Fund
Claims

Takaful Reinsurance/
Shariah compliant Retakaful
Fund
Investments
Reserves

Qard
Investment Profits Underwriting Profit X% of Investment Profits Hassan

Surplus/(Deficit)
100% - X% of
Investment Profits

Charitable donation 100% of Surplus

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The Difference between Conventional
Insurance and Takaful
Takaful
• Takaful is a Tabarru’ based contract
• In Takaful, the participants can have a share in the surplus
• The Taburru’at paid to the Waqf belongs to the Waqf; the
Operator is not the owner of this amount.

Conventional Insurance
• Whereas, Conventional Insurance is a contract of muawaza.
• Whereas, surplus in conventional insurance belongs entirely
to the insurance company
• Whereas, the premiums paid by the insured belongs to the
insurance company.

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The Difference between Conventional
Insurance and Takaful
Takaful
• Since the owner of the Waqf Pool is the Waqf itself, all
investment profits also return to the Pool and not to the
Operator.
• In Takaful, the company (Operator) serves in the capacity of a
Wakeel.

Conventional Insurance
• Whereas, in conventional insurance, all investment profits
belong to the insurance company.
• Whereas, in conventional insurance, the companies serve as
the owners of the business.

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The Difference between Conventional
Insurance and Takaful
Takaful
• A Shari’ah Board is an integral part of any Takaful setup which
supervises the investment activities of the company. As per
the Takaful Rules 2005, a Shari’ah Board comprising of at least
3 scholars is compulsory.

Conventional Insurance
• Whereas, in conventional insurance, no such kind of
supervision takes place nor is there any law concerning it. The
insurance company simply invests their funds in any business
they deem fit, irrespective whether the business is Shari’ah-
compliant and Halal or not.

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 Comparative analysis
Basis Conventional Insurance Takaful-Islamic Insurance

Base of the contract Sale (‫)معاوضه‬ Donation (‫)تبرع‬

Security & Co-Operation (help one

Purpose Security and Profit
another)

Activity Buying and Selling a Product Co-Operation

Premium (Cost of buying
Payment Donation and investment
insurance/security)
Ownership of Fund With Insurance Company With the Members/ Participants

Role of Insurer Seller of Insurance Products Manage participants fund

Investment Any financial product Only Shariah-compliant products

No sharing with insured/ Surplus money is shared among the

Sharing of surplus
policyholders members/participants

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Takaful Issues

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1. Is the participant entitled to avail any Takaful benefits from the Participants Takaful Fund (PTF) during the period of
correspondence/application processing while he is not a member of PTF till the acceptance made by the TO?
2. Policies are issued to individuals or corporations whose incomes are considered as non-Shariah compliant.
3. Takaful operator manages the Participant Investment Account (PIA) on Wakala / Modaraba basis and invests in joint investment
for all the participants. All the participants and TO become partners in that joint investment while, no contractual relationship
established – no documentation.
4. Can a person be a Wakeel for both the seller and the buyer? Can a person be Wakeel for one party and deal with himself?
5. For allocation, Takaful operator charges a fee, for a purpose for which he has been appointed Wakeel by Participants Takaful
Fund (PTF) and Participant Investment Account (PIA) both?
6. Is it permissible to charge a Wakala fee to a third person against services for which we are already appointed as Wakeel and are
charging Wakala fee?
7. If something is paid in Waqf, can it be taken back? If it cannot be taken back then what will be the solution at the time of
shutdown or liquidation of the company?
8. During free-look period, who has the amount? Does it remain in the collection account or it is transferred to the funds?
9. As the entry is passed in the system at the time of commencement of policy, what happens when the policy is canceled within
the FLP?
10. At times Takaful operator does not settle the claims due to non–payment of contribution. Is it permissible for the TO to stop the
claims due to non-payment of next contribution?
11. In whose name investment should be kept? Can TO be allowed to keep investments as Wakeel in its name?
12. The re-takaful agreement is executed between the TO and the Re-Takaful Company i.e. the participant to the Re-Takaful
agreement is the TO and not the PTF. Is Takaful operator allowed to make Re-Takaful arrangement while he is just a Wakeel of
the participant?
13. Is it allowable to create Waqf on money, instead of immovable property?
14. What reserves may be allowed before surplus sharing?
15. Is it allowed for the re-Takaful operator to keep an incentive Wakala fee?
16. Should Wakalah fee be recognized as income or unearned premiums over time?
17. Qard-e-Hasana may not be treated as the amount outstanding as a liability of the Takaful fund and an asset of the TO. 20
Crypto-Currency
Forex Trading
Bitcoin

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Currency
• Definition of currency - a system of money in general use in a
particular country, the fact or quality of being generally
accepted or in use. (Oxford Dictionary)

Real Fiat Currency

Digital Virtual Crypto

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Currency
• Digital currency (digital money or electronic money or
electronic currency)
• Available only in digital form, not in physical.
• Redeemed for physical goods and services all the time. You
can order products via PayPal, for example.

• Virtual currencies, are used primarily for online entertainment

in virtual worlds.
• “Virtual” can be defined as “not based in physical reality,”
• Virtual currencies are those which are not intended for use in
“real life,” or expenditure on real assets.
• They are, in another word, toys.

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Currency
A Crypto-currencies (used by encryptions) like BTC, Eth
• New, but revolutionize mode of settlement without any
clearing house
• No extra cost of intermediate party
• Fast
• Easy to use
• Dealing between 2 parties
• Value of the Crypto-currencies is moved depend on supply
and demand
• Cryptography is about constructing and analyzing
protocols that prevent third parties or the public from reading
private messages

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Advantages
• Decentralize
• Privacy (Identity)
• Transaction detail is locked in blocks
• Low Fee / No Fee (up to 21 Millions)
• No Documents required

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Disadvantages
• Highly volatile
• Speculation
• Hacking
• Unauthorized and non registered
• No Regulatory system
• No underlying asset
• No arbitrators in Disputes
• Limited up to 21 million bitcoins, miners are paid for finding a
hash in new coin.
• After 21 million, miners will charge transaction fees for
creating a new block.
• The amount paid per hash goes down by half, about every 4
years
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Disadvantages
• Creation of a virtual coin/note
• How is it created in the first place?
• How do you prevent inflation? (What prevents anyone from creating lots of
coins?)
• Validation
• Is the coin legit? (proof-of-work)
• How do you prevent a coin from double-spending?
• Buyer and Seller protection in online transactions
• Buyer pays, but the seller doesn’t deliver
• Seller delivers, buyer pays, but the buyer makes a claim.

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 Difference between actual currency and
virtual currency
▪ Actual Currency ▪ Virtual currency

• Intrinsic value • No intrinsic value

• Zero Cost
• Regulatory body • Decentralized
• Asset backing • Free from underlying
assets
• Legal and authorized • Unauthorized
• Secure • Insecure
• Low Volatile • Highly volatile

• Store of value

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 Other Crypto-currencies
• Ethereum (ETH) • AdEx (ADX)
• Monero (XMR) • Synereo (AMP)
• Zcash (ZEC) • Aragon (ANT)
• Basic Attention (BAT)
• Dash (DASH)
• Bircoin Cash (BCH)
• Ripple (XRP)
• Bytecoin (BCN)
• Steem (STEEM)
• Bancor Network (BNT)
• Ether Classic
(ETC) • Bitcoin Gold (BTG)

• Dogecoin
(DOGE)

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 Other Crypto-currencies
▪ Ripple(XRP)
• Growth of over 36000%.
• Ripple was valued $.0065
per coin.
• $2.47 by the end of 2017.
• second largest market
capitalization after Bitcoin,
which has an overall value
of $251 billion.
▪ Litecoin(LTC)
• Stands at over $13 billion.
• Litecoin has exhibited a
growth of over 6000% over
the past 12 months.
Ethereum(ETH)
• Ethereum’s market cap of over $128
billion makes it the third largest
cryptocurrency
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Islamic Ruling on Trade

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Cont..

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Cont..

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Conclusion

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Stock / Shares
Trading

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Shriah Rulings
Allowed with some restrictions:
• Shariah Compliant business
• More than 50% liquid assets
• Retain till the transfer (24H)
• Actual trade (Spot) / Avoid Future Contracts

• Raise your voice against Riba/Interest

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