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Islamic Insurance: Takaful: Takaful Involves Each Participant Giving Away As Donation or Tabarru' A Certain
Islamic Insurance: Takaful: Takaful Involves Each Participant Giving Away As Donation or Tabarru' A Certain
Tabarru’-Based Takaful
The first financial structure or model of takaful assumes a non-profit nature of takaful
business.
Originally used in Sudan, this is also called the tabarru’ model of takaful.
Under this model, there are no returns for the promoters, and for the policyholders.
The initial contribution to organize the venture may come from the promoters as qard-
hasan.
Participants make donation or tabarru’ to the takaful fund, which is used to extend
financial assistance to any member in the manner defined in the agreement.
Temporary shortfalls are also met through qard hasan loans from promoters.
In this arrangement, policyholders are the managers of the fund and the ones with
ultimate control.
It may be noted that such an arrangement is closer to the ideal as compared to profit-
oriented takaful business.
However, this also precludes large-scale expansion of takaful business. In practice, such
model can be seen in operation in social and government-owned enterprises and
programs operated on a non-profit basis. The programs utilize a contribution that is
100% tabarru’ or donation from participants who willingly give to the less fortunate
members of their community.
Mudharaba-Based Takaful
In this model, a clear distinction is made between the business of takaful or insurance
and the business of investing funds mobilized from policyholders and/or the
shareholders.
The takaful operator seeks no returns from managing the takaful business in line with
the spirit of takaful.
It seeks returns from the business of investing the takaful funds under a mudharaba
agreement with the policyholders for managing their funds.
The policyholders assume the role of fund provider or rabb-ul-mal.
As a mudharib the takaful company receives its share of profits generated on
investments
The major steps in this arrangement
1. Policyholders pay premium that is credited to a policyholders’ fund.
2. The takaful operator company’s shareholders contribute to a fund called
shareholder’s fund that is distinct from the policyholders’ fund. This activity is
the same as formation of a takaful company.
3. The takaful operator invests the policyholders’ fund in Shari’a compatible assets
and investments in its capacity as mudharib.
4. Profits generated from investing the policyholders’ fund are shared between the
policyholders (rabb-ul-mal) and the operator (mudharib) in an agreed ratio. The
policyholders’ fund and the shareholders’ fund are credited with their respective
profit shares from investments. Losses if any, are charged to the policyholders’
fund.
5. In line with the rules of mudharaba, operational expenses relating to the
investments are charged to the mudharib, the takaful operator company, and
hence to the shareholders’ fund. The expenses charged are the general and
administrative expenses of the investment department only, as distinct from
general and administrative expenses for the entire business.
6. General and administrative expenses in managing the operations other than
relating to investments are charged to the policyholders’ fund.
7. Takaful benefits are paid to beneficiaries as and when valid claims are made
depending upon occurrence of actual losses and damages.
8. At periodic intervals, the net insurance or takaful surplus, that is the difference
between premium received and claims paid is computed; policyholders receive
full refund of insurance surplus if any; and are required to make additional
payment of deficit if any.
Thus, the above arrangement ensures that the business of takaful remains a non-profit
one. The policyholders in a collective capacity receive what they pay for. There are no
profits to be made due to overpricing of the takaful product. Profits are made out of
investments only. Return for the takaful company comprises the profit share as
mudharib.
Wakala-Based Takaful
In the wakala-based model, the takaful operator acts as the wakil or agent of the
policyholders. As such, it is entitled to a known remuneration. It incurs all the
operational expenses on behalf of its principal.
The distinct features of this model are:
1. Policyholders pay premium that is credited to a policyholders’ fund.
2. The takaful operator company assumes the role of an agent or wakil of the
policyholders; its shareholders contribute to a fund called shareholder’s fund that
is maintained separately from the policyholders’ fund.
3. The takaful operator invests the policyholders’ fund in Shari’a compatible assets
and investments in its capacity as agent or wakil. Profits generated from investing
add to the policyholders’ fund.
4. All operational general and administrative expenses are charged to the
policyholders’ fund, since the takaful operator incurs the expenditure on behalf of
the policyholders in its capacity as agent or wakil;
5. The takaful operator receives a known remuneration that may be an absolute
amount or a percentage of the gross premium received.
6. Takaful benefits are paid to beneficiaries as and when valid claims are made
depending upon occurrence of actual losses and damages.
7. At periodic intervals, the insurance or takaful surplus, that is the difference
between premium received and claims paid is computed; policyholders receive
full refund of insurance surplus if any; and are required to make additional
payment of deficit if any.