TABLE OF CONTENTS

Introduction......................................................................................................................................4
Meaning of contract.........................................................................................................................4
Definition of contract.......................................................................................................................4
Classification of contracts................................................................................................................5
Different between contract and agreement......................................................................................5
Elements of valid contracts..............................................................................................................6
What is an offer?..............................................................................................................................6
Different between offer and invitation to treat................................................................................7
Proposal/offer must be communicated.............................................................................................8
Revocation of an offer.....................................................................................................................8
Acceptance.......................................................................................................................................9
Revocation of an acceptance..........................................................................................................10
Exceptions of acceptance...............................................................................................................11
Consideration.................................................................................................................................11
Definition of consideration............................................................................................................11
Types of consideration...................................................................................................................12
Exceptions of general rule.............................................................................................................12
Intention to create legal contract....................................................................................................12
Capacity of the contract.................................................................................................................12
Free consent...................................................................................................................................13
Other elements of contract.............................................................................................................13
Termination of contract..................................................................................................................14
Conclusion.....................................................................................................................................14
Part two........................................................................................................................................15
Takaful, meaning, concept, history and definitions.......................................................................15
History of takaful...........................................................................................................................15
Meaning and defination of Takaful ...............................................................................................15
Beginning of takaful in Malysia....................................................................................................16
Well known takaful operators in Malysia......................................................................................17
How does takaful works.................................................................................................................18

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Takaful modes or methods.............................................................................................................18
Conventional insurance..................................................................................................................19
Definition of insurance..................................................................................................................20
How conventional insurance works...............................................................................................20
Conventional insurance drawbacks................................................................................................20
Difference between conventional and takal insurance..................................................................21
Takaful contracts ...........................................................................................................................21
Comparison between Takaful & insurance companies..................................................................22
Conclusion & recommendations....................................................................................................23
Appendix: Takaful insurance frame work.....................................................................................24
References......................................................................................................................................25

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Introduction
Actually, in our everyday activities, the entire essence of business life is the creation of contracts,
people interact, make arrangements to do something special, make agreements or buy and sell
something to each other, contracts to carry out work; contracts to buy and sell; contracts to make
something; or to make use of someone; or to use something. These activities reflect contracts,
thus nearly all contracts take the form of simple contracts whereby there are no exact formalities
concerned in the contract creation. The contracts are made orally or through implied actions of
the parties involved.

However, this assignment attempts to highlight contracts, definition of contracts, types of

contracts, elements of valid contract, offer and acceptance and finally comparison between
insurance contracts and Takaful contracts.
Meaning of contract
Contract is an agreement between two or more parties; it can be a contract to sell equipments, a
contract to purchase a piece of land, a contract of leasing, contract of insurance or other.
Contract in agreement founded on joint promise between two or more competent parties to do or
refrain from doing some particular thing that is neither illegal nor impossible(Gordon W, 1993)
Definition of contract
Contract can be defined into different ways, most important defines are provided below
Contract is an agreement creating obligations enforceable by law; the contract is an agreement
having a lawful object entered into freely by two or more parties, each of whom intends to create
one or more legal obligations between them.
Part 2(h) of Malaysian Contracts Act defines contract as an agreement enforceable by law
In other words, a contract is an agreement that binds the parties who enter into it and it can be
enforced against one another.
Concise Oxford English Dictionary defines contract as written or spoken agreement intended
to be enforceable by law.
Cambridge advanced learner's dictionary defines contract as a legal document that states and
explains a formal agreement between two different people or groups, or the agreement itself.
According to Merriam Webster dictionary: Contract is a legal agreement between people and
companies

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According to Dr. El-Farag and Dr. El-Kalliou (2008), Contract is a lawfully binding agreement
between two or more parties for the performance of some particular acts
Classification of contracts
According to Dr. El-Farag and Dr. El-Kalliou (2008), Contracts can be categorized with the
regard of their formation stage as
1. Formal contracts and simple contracts
2. Nominative contracts and in nominative contracts
3. Bilateral contracts and unilateral contracts
4. Executed contracts and executory contracts
Formal contracts are the written contracts that take specific formalities while informal or
simple contracts don't need such formalities
What is the difference between agreement and contract?
An agreement is a situation in which people agree or share same idea.
An agreement creating obligations enforceable by law, the contract (or informally known as
an agreement in some jurisdictions) is an agreement having a lawful object entered into
voluntarily by two or more parties, each of whom intends to create one or more legal
obligations between them.
Contract can be a document on which the words of the contract are written, however all contracts
are agreements but all agreements are not contracts, all agreements are not contracts because the
term agreement is wider in scope then contracts
An agreement, to be enforceable by law, must possess the essential elements of a valid contract,
"All agreements are contract if they are made by the free consent of the parties, competent to
contract, for a lawful consideration and with a lawful object and are not expressly declared to be
void."
Contracts are always made by contracting parties, so the one who is making the promise is
known as Promisor, the one to whom the promise is made is called Promisee, other terms are
also applied as offeror and offeree when discussing contracting parties.
Legitimate and valid contract will come to existence between parties when all of the six elements
of contract are present, the elements are as follows: offer, acceptance, mutual assent, capacity,
consideration and legality

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Elements of valid contracts
In order for contract to be valid the following element should be considered, a contract that lacks
one of those elements becomes null and void, how the essential elements of contract are as
follows
 Proposal or Offer
 Acceptance;
 Consideration;
 Intention to create legal relations;
 Capacity to contract; and
 Free consent
What is an offer?

Proposer or an offer: is a suggestion made by one party to another demonstrating his readiness
to inter into a valid contract.
In other words an offer is something that one offers to another person, so the person who is
making the offer is called offeror and the one to whom the offer is to be made is called offeree.
In order to create a valid contract, there must be a 'lawful offer' by one party and 'lawful
acceptance' of the same by the other party.
An offer made to a specified person, either verbally or in writing. This is straightforward.
An offer made to the “world at large". This is where a person announces that he will do so and
so, if anyone who cares to accept will do what is required by the offer.
However the question is To Whom can a Proposal be Made? The answer is very clear, A
proposal can be made to a specific or particular person and the proposal can be accepted by that
person only. For instance if Ali proposes to Bile to sell his flat
at RM10,000. Ali's proposal can only be accepted by Bile and not by other persons.
Offer can also be made to the community. In such situation, the acceptance can be made by
anyone who knows about the offer and performs the obligations necessary by the proposer. as in
the case of Carlill v. Carbolic Smoke Ball Co Ltd (1893), the parties of the case were a lady
called Carlill (the victim) and the Carbolic Smoke Ball Co Ltd (the defidents).
The defendants of this case were proprietors of a medical preparation, they inserted
advertisements in various newspapers in which they offered to pay £100 to any person who
contracted influenza after using the ball three times a day for two weeks.

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The plaintiff, was a lady, who used the ball as advertised, and was attacked by influenza during
the course of treatment. She then sued for £100 as promised in the advertisements. The
defendants tried to avoid legal responsibility by saying that there was no offer made because the
offer was too vague and not sure to whom it was made.
Held: The Court rejected the argument and held that the advertisement was an offer to the whole
world. It was not an attempt to contract with the whole world but with the portion of the public
who came forward and performed the condition in the advertisement. Thus, it was possible to
make an offer of this kind and there was a binding contract made between Mrs Carlill and the
Defendants.
Difference between offer and invitation to treat
An offer is something that one offers to another person, so the person who is making the offer is
called offeror and the one who is to be made the offer is called offeree,
More often than not, before a offer is made, the parties will hold some negotiations. The
negotiation is an invitation to call for a proposal. There are many instance of invitation to treat,
for instance, auctions and display of goods on the shelves in shops.
The display of goods on the shelves in shops is also an invitation to treat and not a proposal by
the shopkeeper. The offer is made by the buyers when the buyers take the goods from the shelves
and bring it to the counter for payment. As in the case of Pharmaceutical Society of Great Britain
v. Boots Cash Chemist (Southern) Ltd (1953) .
The defendants of this case were charged under the Pharmacy and Poison Act 1933 (UK), the act
says it's unlawful to sell certain poison to customer unless such sale was supervised by
authorized pharmacist. apparently customer took the drug from the shelve and bring to the
counter, the question arises whether a sale had occurred in the self-service shop when the
customer selected articles which he desired to purchase and placed them in the wire basket
Held: The Court held that the display of goods did not constitute an offer but only an invitation
to treat,
A proposal to buy was made when the customer placed the articles in the basket. Hence, the
contract of sale would be made at the cash desk when the cashier accepted the customer Ês offer
to buy what the latter had chosen. By that principle, the defendants (shop owners) had not made
an unlawful sale.
An advertisement is also an invitation to treat by the advertiser. For example, advertisement for
jobs in the newspapers, this case affirms an advertisement is an invitation to treat, In the case of

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Coelho v. The Public Services Commission [1964] MLJ 12, the High Court ruled that the
newspaper advertisement was an invitation for qualified persons to apply and the applications
were treated as offers.
However, if the advertisement shows the willingness of the advertiser to do or to abstain from
doing something, such advertisement is not an invitation to treat but a proposal by the advertiser.
if you need further details you may refer to the above case of Carlill which affirms the rule that
the advertisement was an offer to the whole world and the company had the intention to contract
with the section of the public who came forward and performed the condition in the
advertisement.
Proposal must be clear and Communicated
According to Section 4(1) Malaysian contract Act 1950, provides that „the communication of a
offer is absolute when the proposal comes to the understanding of the person to Whom it is
made, In order to make the proposal effective, it must be clear and communicated. An offer
which is unclear and uncertain may not lead to a binding contract
In the case of Ahmad Meah & Anor v. Nacodah Merican (1890) an agreement to build „a
suitable house was held by the court as vague to constitute a binding contract. A proposal must
also be communicated to the acceptor. It can be communicated in any form, either orally or in
written or through the implied action of the party. Logically, a person cannot accept a proposal
which he does not know exists. The motive for accepting is not relevant but the offeree must be
aware of the offer.
In Williams v. Carwardine (1833), a reward was offered for information leading to the arrest of
a murderer. P knew about the reward but she gave the information “to ease her conscience”. It
was held that she was entitled to the reward
Revocation of offer
The offeror may revoke his offer at any time before acceptance. Under Section 5(1) of the
Malaysian Contracts Act 1950, „a proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer, but not afterwards
As the acceptance is made through immediate means of communication such as telephone, telex,
fax or oral, the acceptance is said to be communicated once it comes to the knowledge of the
person to whom it is made see the following example:

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Ali proposes, by a letter, sent by post, to sell his house to Bile. Ali may revoke his proposal at
any time before or at the moment when Bile posts his letter of acceptance, but not afterwards.
Bile accepts the proposal by a letter sent by post.
If It Is Rejected
This is quite obvious. A point to note is that the act of rejection destroys the offer, and the
offeree cannot change his mind, and later accept.
On the Death of Either Party before Acceptance
The death of the offeree always terminates an offer. His personal representative cannot accept on
his behalf. There is some doubt as to whether an offer can be accepted if the offeree is not aware
of the death of the offeror, One view states that the death of the offeror automatically
When the proposer communicated the revocation of the proposal to the other party before
its acceptance
If the revocation of proposal is made by post, the revocation is only effective when it comes to
the knowledge of the acceptor and not at the time when the letter of revocation is posted.
When the proposer communicated the revocation of the proposal to the other party before its
acceptance, as in the case of Byrne v. Tienhoven (1880)
On October 1st the defendant posted a letter of offer from Cardiff to the plaintiff in New York,
but October 8th, the defendant posted a letter revoking the offer he made on October 1st.
However, on 11th October, the Plaintiff received the letter of offer posted on October 1 and sent
acceptance letter by a telegram on the same day. On 15th of October: Plaintiff sent letter of
acceptance. But unfortunately the Plaintiff received defendant's letter of revocation on 20th of
October.
The court held that there was a contract between the parties because the revocation of the offer
posted on 8 October was only effective on 20 October
When the plaintiff received it, the plaintiff had accepted the offer on 11 October when he sent the
telegram accepting the offer.
2. Acceptance
What is an acceptance?
Acceptance is the act of accepting something (offer) or someone,
According to Merriam Webster dictionary: acceptance it's an agreeing either expressly or by
conduct to the act or offer of another so that contract is concluded and the parties' becomes

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legally bound, in other words , acceptance means When you agree to accept the offer or proposal
made by the other party who makes the proposal.
Based on the principles of Slamic Shariah, and even just like the conventional law, it is a
required that in order for a contract to be valid, there must be an offer and acceptance from the
contracting parties(Abubakar)
According to Dr. El-Farag and Dr. El-Kalliou (2008), an offer comes to accomplished when it
has been accepted by the offeree and a binding contract is formed.
According to part 2(b) of Malysian Contracts Act 1950, an acceptance is made when the one to
whom the offer is made indicates his assent thereto, a proposal is said to be accepted:
An acceptance is an agreement by the acceptor to the terms contained in the proposal made by
the proposer. With that acceptance, a binding contract is said to exist.
If a supposed acceptance alters or qualifies the offer in any way, it constitutes a rejection of the
offer, followed by a counter-offer. The counter-offer is then open to acceptance or rejection in
the same way as the original offer.
In order for contract to be valid acceptance must be complete and unqualified, if for instance one
party varies or modifies the terms made in the proposal, an acceptance does not exist but that act
will amount to a counter-proposal. The following case of Hyde and Wrench (1840) highlights,
the defendant of this case offered to sell his estate to the plaintiff for £1,000. In reply, the
plaintiff made a counter-proposal to purchase at £950 but the defendant refused to accept this
proposal. The plaintiff then wrote again to the defendant, agreeing to accept the original
proposal, but the defendant refused.
to sell.
The court ruled that t the counter-offer made by the plaintiff at the price of £950 constituted a
rejection to the original proposal Therefore, no acceptance had occurred and the defendant had

the right not to sell the estate to the plaintiff.

Revocation of acceptance
According to Section 5(2), Malysian Contracts Act 1950, „an acceptance may be revoked at any
time before the communication of the acceptance is complete as against the acceptor, but not
afterwards.

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The Offeror is permitted to withdraw the propose at every time before it is accepted, but he
should communicate the withdrawal to the offeree ether by himself or through an official third
party(El-Farag, 2008)
The principle provided in Section 7(b) means, if no method of acceptance is specified by the
proposer, then the acceptance must be communicated and made in a usual and reasonable
manner.
Exceptions
It is obvious that the general rule necessitates the communication of acceptance and this means
the acceptance must be brought to the notice of the proposer.
Acceptance through post (Postal Rule)
If the parties have agreed to use the post as a means of communication, then the acceptance is
complete or effective as soon as the acceptor posted his letter of acceptance, even though it never
reaches the proposer.
Section 4(2) (a), Malaysian Contracts Act 1950 provides that: „The communication of an
acceptance is complete:
(a) As against the proposer, when it is put in a course of transmission to him, so as to be out of
the power of the acceptor; and (b) as against the acceptor, when it comes to the knowledge of the
proposer
3. Consideration
Another essential element of valid contract is Consideration, and any agreement made without
consideration becomes a void agreement.
Part 26 of Malaysian Contracts Act 1950 offers that „an agreement made without consideration
is void; Somali contract act 1973 provides that an agreement made without consideration
becomes null and void
Definitions
Consideration has been defined in various ways. According to Blackstone, "Consideration is
recompense given by the party contracting to another." In other words of Pollock, "Consideration
is the price for which the promise of another is brought "consideration is known as quid pro-quo
or something in return
A definition given in Currie v. Misa (1875) was as follows.

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“A valuable consideration, in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility
given, suffered, or undertaken by the other''
Consideration can be categorized into
1. Executory
2. Executed
3. Past consideration
Executory: Consideration may be executory when one promise is made in return for another
promise.
For example, you agree to sell a fax machine to B for RM2,000. Here, BÊs promise to pay
RM2,000 is the consideration for your promise to sell the fax machine and your promise to sell
the fax machine is the consideration for BÊs promise to pay RM2,000.
Executed; consideration may be executed when one promise is made in return for the
performance of an act.
Past consideration: Apart from the executory and executed considerations, if a promise is made
in return for an act that has already been performed, that act is regarded as past consideration.
Exceptions to the general rule of Consideration
The general rule of consideration under Section 26 of the Contracts Act 1950 provides that an
agreement without consideration is void. However, there are exceptions to this general rule.
Exceptions are the following
1. Agreement made on account of Natural Love and Affection
2. Agreement to Compensate a Past Voluntary Act
3. Agreement to Pay a Statute-barred Debt
4. Intention to create legal relations
All agreement made between the parties (the proposer/offeror and the acceptor/offeree) will only
become a binding contract if both parties be determined to make the contract biding, H
In case, there is no such intention on the part of parties, there is no contract. Nonetheless
Agreements of social or domestic nature do not contemplate legal relations.
5. Capacity to contract
The capacity of the contracting party becomes another essential element of valid contract; the
parties to an agreement must be competent to form a contract. If either of the parties does not

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have the capacity to contract, the contract is not valid. According to the following persons they
are incompetent to contract.
a) Minor
b) Persons of unsound mind
c) persons disqualified by law to which they are subject
6. Free consent

According to Merriam Webster dictionary , Consent means to agree to do or allow something,

it's to give permission for something to happen or be done, Consent' means the parties must have
agreed upon the same thing in the same sense.

As provided by Section 10(1) of the Malaysian Contracts Act 1950 that provides„all agreements
are contracts if they are made by the free consent of parties competent to contract.
According to Section 14 Egyptian contract act, Consent is said to be free when it is not caused by
1) Coercion
2) Undue influence
3) Fraud
4) Mis-representation or
5) Mistake
Other elements of valid contract

6. Lawful Object: The object of an agreement must be valid. Object has nothing to do with
consideration. It means the purpose or design of the contract. Thus, when one hires a house for
use as a gambling house, the object of the contract is to run a gambling house.
The Object is said to be unlawful if-
(a) it is forbidden by law
(b) it is of such nature that if permitted it would defeat the provision of any law;
(c) it is fraudulent;
(d) it involves an injury to the person or property of any other;
(e) the court regards it as immoral or opposed to public policy.
7. Certainty of Meaning: Agreement the meaning of which is not certain or capable of being
made certain are void."

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8. Possibility of Performance. If the act is impossible in itself, physically or legally, if cannot be
enforced at law.
9. Not declared to be void or illegal. The agreement though satisfying all the conditions for a
valid contract must not have been expressly declared void by any law in force in the country.
Termination of contract
According to the article 29 Of the United Nation's convention on contracts for the international
sale of goods: contract may be modified or terminated by only agreement of the parties involved
Conclusion
So far we have discusses contracts, types of contracts and the essential elements of contract
referring the statue and the relevant case, as offer, acceptance, and intention to create legal
relations, consideration and capacity, we have also discusses other elements of contracts in
context of criminal law, including Certainty of Meaning, Lawful Object, Possibility of
Performance and Not declared to be void or illegal.

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TAKAFUL, MEANING, CONCEPTS, HISTORY AND DEFINITION
The essential principle of the Islamic economic system is a reasonable distribution of wealth.
Takaful is a scheme where people are encouraged to contribute funds for common help in times
of need (Swartz, 2010)
Islamic insurance or takaful is a concept of mutual cooperation to guarantee mutual protection of
the members (Mortuza Ali, 2006). The appearance of Takaful method is very a great deal in line
with Islamic values regarding socioeconomic philosophy for the benefit of individuals and
society as a total.
History Of Takaful
Muslim jurists acknowledged that the bases of shared responsibility in the system of ''aquila'' as
practiced between the Muslims of Mecca and Madina in era of prophet Moh'ed ( PPH) and laid
down the foundation of mutual insurance.
The concept of Takaful
The Takaful concept developed from individual common interest during the industrial age of the
early 1900’s. Only eighty million of the world’s 2.5 billion poor are presently covered by some
form of micro insurance(Coetzer N. P., 2010)
Takaful is the Islamic description of conventional insurance. It is foundation for the concept of
cooperation and mutual support, whereby a set of participants have the same opinion to support
one another jointly against a specified loss.
Islamic insurance or takaful is a concept of mutual cooperation to guarantee mutual protection of
the members (Mortuza Ali, 2006).
Essentially, the concept of takaful is based on solidarity, responsibility and brotherhood among
participants (Obaidullah, 2005).
The participants make voluntary contributions (Tabarru) to a finance (participants’ fund), which
in turn provides monetary aid to those that experienced a loss.(Chaibi H. M., 2014)
According to Abdul Rahim, Lewis & Kabir (2007) the acceptance of Takaful is based on co-
operation among policyholders for the common good. In fact, the key principle of Takaful
system is mutual Co-operation, taawun (brotherhood), and solidarity(Miniaoui, 2014)
Meaning of Takaful
Takaful is Arabic term meaning guaranteeing each other or joint grantee

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The Arabic word of Takaful has derived from the verb “kafal”, which means to take care of one
another’s needs or “guaranteeing each other” (Stagg-Macey, 2007)
The term Takaful is derived from Arabic verb„Kafala‟, which means to guarantee, taking care
of, to assist and to pay attention of one's requirements. Takaful is a scheme of Islamic cover
based on mutual assistant and voluntary contribution)(Mohd Shril Matsawali, 2012)
Definition of Takaful
Type of Islamic insurance where members contribute money into a pooling system in oder to
grantee each other against loss or damage.
Section 2 of the takaful act of Malaysia 1984: “a system based on brotherhood, unity and mutual
support which offers for mutual financial aid and assistance to the participants in case of need
whereby the participants mutually agree to contribute for that purpose”(Yura Carissa, 2010)
Takaful in in modern time
In contemporary contexts, the first takaful company came to existence late in the twenty century,
it was Islamic Insurance Company of Sudan, and the company was founded in Sudan by the
Faisal Islamic Bank in January, 1979 (Anwar, 2008)
In the modern theory of Takaful is derived from Pak KuwaitTakaful Company Limited as the
operator of Takaful fund.
Source: insurance and takaful.blogspot.com
The Beginning Of Takaful Insurance In Malaysia
According to Malysian Takaful Association, Takaful industry in Malysia comes to existent in
October 1982, when Malaysian government established special task force to explore the viability
of sitting up an Islamic insurance company.
The growth of takaful in present times was initially commenced in Sudan in 1979 and Malaysia
in 1984. As the result of the 1985 fiqh Academy ruling declaring that conventional insurance was
haram (forbidden), while insurance based on cooperative principles, sharia compliance, and
charitable donations are acceptable. The birth of takaful industry in Malaysia was shown by
takaful act 1984 in November 1984(Jacky Lim Y. C., 2010)
The takaful industry in Malaysia had experienced strong growth and revolution since its
beginning 25 years ago. The industry started with one Takaful operator known as Syarikat
Takaful Malaysia in 1984 and has currently increased to twelve after Bank Negara Malaysia
issued four new family takaful licenses(Chaibi H. M., 2014)

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Sources: www.Wikinvestment.com
The first Islamic insurance in Malaysia was established in 1984. Followed by the 1985 Fiqh
Academy ruling declared that conventional commercial insurance was forbidden while insurance
based on the application of cooperative principles, Shari’ah compliance and charitable donations,
was acceptable(Jacky Lim M. F., 2010)
The fact that takaful insurance is available to both Muslims and non-Muslims is of chief
significance, Takaful has an explicit ethical structure which can be marketed to both Muslims
and non-Muslims. The economic recession is fast becoming a worldwide
Economic tragedy(Coetzer N. P., 2010)
Well know Takaful operators for family Takaful business in Malaysia include
 AIA Public Takaful Bhd
 AmMetLifeTakafuln Berhad
 Great Eastern Takaful Berhad
However all insurance companies are regulated by Bank Nagara the central bank of Malaysia
Source: www.takafulMalysia.com
ACCORDRING TO RISCO CONSULTING SDN BHN, TOP TEN INSURANCE
COMPANIES IN MALYSIA ARE
Life insurance companies
1. Allianz life insurance malysia
2. American International Assurance
3. Great Eastern life insurance
4. Hong leong Assurance Berhad
5. Manulife Asurance Berhad
6. Prudential Assurance Malysia
7. Tokio Marine life insurance Malysia
8. Zurich Insurance Malysia Berhad
General Insurance Firms In Malysia
 Allianz General insurance company Malysia
 AMG Insurance Berhad
 AXA Affin Gerneral Insurance
 Etiqa Insurance Berhad
 Charts Malysian Insurance Berhad

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 Berjaya Sompo Insurance
 Uni Asia General Insurance Berhad
Source: Www.ToptenMalysia.com/hot/index/news and events
How does Takaful works

In Islam, the basic standard of investment is that reward must be accompanied by risk. Takaful
industry cannot therefore invest in goods which are debt-based, have a guaranteed or minimum
return on the investment, or are based on haram practices (casinos and gambling companies)
(Anwar, 2008).
Primarily, Takaful insurance is perceived as a non-profit oriented activity. It based on
solidarity, responsibility and brotherhood among participants

Takaful Methods

Tabarru (Donation) -Based Takaful

The most accepted model of takaful contract is tabarru. Tabarru means a donation, charity or gift
which cannot be taken back. In Takaful, a percentage of the participant's contribution will be
considered as tabarru ( donation) and therefore cannot be taken back.

Donation takaful is based on cohesion, responsibility and brotherhood among participants. In this
model, each participant is willing to make donation to the takaful fund with sincere intention to
extend financial assistant to other participants faced with difficulties.
Mudaraba-Based Takaful ( Profit sharing)

Mudaraba means profit-sharing in Arabic. Under this form, the takaful worker asks for no
returns from managing the takaful business. It requires returns from the business of investing the
policyholder funds in agreed ratio such as 50:50, 60:40, 70:30, and etc. hypothetically, the
policyholders pay an amount of money (premium) that is credited to a policyholders’ fund

As mudarib, The takaful operator, invest the policyholders’ fund to the shari’ah compliant
instruments. Profits make from the investment are shared between the policyholder and takaful
operator in agreed ratio. If Any losses arise are charged to the policyholders’ fund. Policy
holders 'fund as valid claims are made, takaful benefits are paid to beneficiaries depending upon

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occurrence of actual losses and damages. In case of surplus, the policyholders will receive full
refund and have to make additional payment of deficit if any.

Wakala-Based Takaful ( Agent)

Under wakala-based model, the takaful operator performs as the agent of the policyholders and
as a result entitled to a fee for the services offered. In theory, the policyholders pay premium that
is credited to a policyholders’ fund. As an agent, the shareholders of the takaful operator
company donate to a shareholders’ fund which is maintained separately from the policyholders’
fund.

Mixed Model

The mix model combines elements of the wakala and mudaraba models and is set so that the
takaful operator has two funds; one for the shareholders and the other for policyholders. In this
model, wakala contract is used for underwriting activities while mudaraba contract is used for
investment activities. With regard to underwriting activities, the takaful operator act as wakil or
agent on behalf of policyholders to manage their funds. In exchange for managing the funds, the
takaful operator received a fee known a wakala fee of agency fee which normally a percentage of
the contribution paid for the premium.

An incentive fee is entitled to the takaful company if there is a surplus in the

policyholders fund as a result of managing the fund effectively. Generally, any surplus
contributions will be invested in different Islamic instrument based on mudaraba contract, which
the takaful operator acts as mudarib on behalf of policyholders (capital provider). Like other
mudaraba contract, the ratio of profit is fixed and agreed upon between the two contracting
parties(Carissa, 2010)

Conventional Insurance, Concept, History And Definition

Insurance scheme has existed for ages. Some historians trace the origin of insurance to 215 CE,
when the Roman government was required by military supplies to accept all risks arising from
enemy attacks, storms, and other natural disaster for supplies carried on their ships. (Omar
Fisher, 2009).

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The Definition of Insurance
“A way to provide security / and compensation to what is valuable in the event of its loss,
damage or destruction based on the principle of risk taking and speculation”
Insurance is a risk-sharing arrangement between two parties. In this arrangement, one party (the
insurer) agrees to indemnify another party (the insured) against certain losses specified by a
contract (the policy). Insurance is an economic device by which individuals and organizations
can transfer pure risks (that is, uncertainty about financial losses) to others. (Obaidullah, 2005)
Conventional insurance can be defined as an agreement whereby an insurer agree to pay a
Policyholder an amount of money on the occurrence of a specified event(Coetzer N. P., 2010)
How insurance companies work?
Insurance Companies help consumers manage their risk in exchange for constant stream of
premium, insurance companies offer to pay consumers predetermined events such as natural
disasters as car crush.
More broadly , put insurance create value by pooling and redistribution various types of risk, it
does this by collecting liabilities from every one that is insured and then paying them out to the
few that actually need them.
How do insurance companies make money?
Insurance companies make the money into two different methods, first by charging enough
premiums to cover the expected payout that they will have to cover over the life of the policy,
and second by earning investment returns using the collected premiums.
Actually, most insurance companies pay out almost all of their premiums in order to attract large
customer volume and liabilities, chief earning focus is thus placed on investment returns
Conventional Insurance drawbacks
 Uncertainty (Gharrar)
 Gambling (Maisir)
 Interest (Riba)
Uncertainty: Conventional Insurance contract is basically a contract of exchange
(mu’awadat).Whether the insured will get the compensation promised? How much the insured
will get? When will the compensation be paid? Thus, it involves an element of uncertainty in the
subject matter of the insurance sales contract, which renders its void under the Islamic

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law.Gambling: The insured loses the money paid for the premium when the insured event does
not occur. The company will be in deficit if claims are higher than premium
Interest ( Riba)“Allah has permitted trading and forbidden Riba” (Al-Baqarah2:275).Insurance
funds are invested in financial instrument which contain the element of Riba.
Difference between Takaful and Conventional Insurance contracts
1) The basic principles of conventional insurance companies is that all the profits are belong to
the share holders
2) At the basics, Conventional insurance they usually transfer the risk
3) when it comes to value proposition, Conventional insurance firms always intend to
maximize profits and reduce risks
4) Conventional insurance bylaw they follow is secular or local regulations
5) The ownership of the firm remains to the share holders not other parties
6) The form of the contract in Conventional insurance is for sale
7) When it comes to investment, the Conventional insurance companies is based on interest and
the surplus is belong to share holder's accounts.
Takaful insurance contract
1) The basic principles of Takaful insurance companies is that all the profits are belong to
mutually for participants
2) At the basics, Takaful insurance companies cooperate by sharing of risks
3) When it comes to value proposition ,Takaful insurance firms always tend to affordability and
spiritual satisfaction among the parties
4) Takaful insurance by law, that they follow Slamic Sharia plus regulations
5) The ownership of the Takaful insurance firms remains the participants
6) The form of the contract in Takaful insurance is for cooperation, Islamic contract of Wakala
or Mudaraba with ''tabaru'' contribution
7) When it comes to investment, the Takaful insurance companies is Sharia compliant, Riba
free contract
Takaful contract
Takaful contract is an insurance contract base on islamic models of financing concepts where
participants pay contributions to takaful company. The takaful company to act as an operator to
manage risk and invest the contribution fund. Takaful is derived from an Arabic word that means

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joint guarantee, the group of participants agrees among themselves to support one another jointly
for the losses arising from specified risks.
The premiums (contributions) paid by the participants are credited into the pooling fund, which
is then invested and the profits generated are paid back to the participants. Takaful company may
have three pooling fund namely takaful funds, investment funds and corporate funds.
Takaful contracts always have significant insurance risk and takaful fund as an accumulation of
contribution will allocated to pay claims only. This will form the contract of insurance assets and
liabilities of the company. Asset consists of pooling funds is calculated based on the accumulated
fund and asset valuation based on existing accounting standards.
Comarision between Syarika Takaful company and Great Eastern life insurance
Syarika Takaful Malysia Bernad
Syarika Takaful Malysia Berhad was incorporated on 29th of November 1984, but it commenced
on its operations on 22nd july in 1985, prior before it's launching on the second of August 1985,
by then, Prime minster of Malysia Tun Dr. Mahather Mohamed.
Takaful in Malaysia was transformed into public limited company on the 30th of July 1996
followed with listing of its shares on the main board now known as Main Market.
Comarision between two companies
Issue AMG Insurance Berhad Syarika Takaful
Company principle Profit for share holders Profit for participants
Basics of contract Risk transfer Cooperate risk sharing
Valu proposition Profit maximization Affordability & spritual satisfaction
Laws to follow Secular and regulations Islamic sharia plus regulation
Company's ownership Shareholders Participants
Management Company management Operator
Form of contract Contract of sale Co-operation, islamic contract
Investment Interest based Sharia compliant, interest free
Surplus Share holders account Participant's account

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Conclusion and recommendations
So far we have discusses contracts, types of contracts and the essential elements of contract
referring the statue and the relevant case, as offer, acceptance, and intention to create legal
relations, consideration and capacity, we have also discusses other elements of contracts in
context of criminal law, including Certainty of Meaning, Lawful Object, Possibility of
Performance and Not declared to be void or illegal.
In this assignment, I also highlighted different insurance schemes that exist across the world
weather conventional and Islamic insurance, concepts, meaning, history and definitions are also
presented, how to form insurance and takaful insurance contracts are also discussed, comparison
between conventional insurance and takaful insurance have also highlighted in this assignment.
Finally, I would recommend the use of the Islamic takaful insurance as the conventional
insurance has many pitfalls that can not comply with the Islamic sharia as Uncertainty (Gharrar)
Gambling (Maisir) and Interest (Riba)

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 Appendix One: Takaful Insurance scheme frame work

Source: (Obaidullah, 2005)

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