Islamic Finance

M.COM 4TH SEMESTER

BY: ABDUL MOUEED
DATED: MAY 9, 2020
ISLAMIC MODES OF FINANCING
a) Partnership based modes of financing
1. Musharakah
2. Mudarabah
b) Trade based modes of financing
1. Murabahah
2. Salam
c) Rental based modes of financing
1. Ijarah
2. Diminishing Musharakah
Takaful
(Islamic Insurance )

An Ideal Alternative to Conventional

Insurance.
Outline of Presentation

 Introduction to Takaful ( Islamic Insurance )

 Difference b/w Conventional Insurance & Takaful
 Takaful Through Time
 General & Faimly Takaful Types
 Takaful Models Worldwide.
 Takaful - Target Market
 Challenges to Takaful
 Prospects of Takaful.
Takaful

 Takaful is an Arabic term derived from the root word “kafala’t” or

takafala, which means to guarantee or to mutually protection (assistance).
 Literally, it means mutual help and assistance. It is based on the system
of ta’awun (mutual assistance) and tabarru’ (gift, donate) whereby the
associated is shared among a group of people voluntarily. The legitimacy
of Takaful is derived from the primary sources, i.e., the Quran and the
Sunnah
Takaful
 In the Quran Allah says:
 “And of them there are some who say: “Our Lord! Give us in this
world that which is good and in the Hereafter that which is good,
and save us from the torment of the Fire!” (Al Quran 2:201).
 Here are a few Hadiths for reference: “Anas bin Malik r.a. narrated that
the Holy Prophet (S.A.W.S) told a Bedouin Arab who left his camel
untied trusting to the will of ALLAH (s.w.t) to tie the camel first then
leave it to ALLAH (s.w.t).”
Takaful
 Narrated by Abu Huraira (r.a) “the Holy Prophet (S.A.W.S) said: whosoever
removes a worldly hardship from a believer, ALLAH (s.w.t) will remove from
him/her one of the hardships of the Day of Judgment. Whosoever alleviates (reduce)
form one, ALLAH (s.w.t) will alleviate his/her lot in this world and the next.”
 Abi Waqqas said: “In the year of the Holy Prophet’s final pilgrimage (hajj) I was
taken seriously ill and the Holy Prophet (S.A.W.S) used to visit me to enquire after
my health. I told Him: ‘I am best with illness and I am wealthy but have no
inheritors except one daughter. Should I give two-thirds of my property to charity?’
He replied ‘No’. I asked: ‘Half then?’ He said, ‘No’. Then he added: ‘one-third, and
one-third is a great deal. It is better to leave your inheritors wealthy rather than to
leave them in poverty and obliged to beg from others.’”
CONVENTIONAL INSURANCE
 Before proceeding to the introduction of Takaful, it is worth taking a brief
look at the business and mechanism of conventional insurance. At the
outset, it is to be noted that conventional insurance mechanism is based on
the elements of
 uncertainty,
 gambling,
 contract of indemnity and
 the involvement of interest based investments.
UNCERTAINTY (GHARAR):

 Gharar or uncertainty can be defined as “that whose consequences

are hidden” or “that whose nature and consequences are hidden”, or
“that whose consequences are unknown”. Gharar, for instance,
means that it is not acceptable in contract arrangements to make
payments conditional upon the outcome of an uncertain event.
GAMBLING (MAYSIR):

 Maysir or gambling is a form of Gharar and a zero sum game where

no additional value is created. Conventional insurance is regarded as
a form of gambling as the insured makes a bet on loss occurrence
and the same applies in reverse to the insurer. It is also regarded as
acquiring wealth through luck or by chance and at the cost of others.
CONTRACT OF INDEMNITY:

 The underlying contract between the insurance company and the client,
under conventional insurance, is a contract of indemnity. The insurance
company, under this contract, promises to pay losses in the event of an
insured peril in consideration of a premium. This contract is a bilateral
contract and similar to sale. The premium in this business is considered as
the income, whereas the claims are considered as the expenditure to the
insurance company. The difference between the total premium received
and the total claims paid is considered to be the surplus, which is retained
by the insurance company as its profit.
Takaful
 Takaful means mutual protection and joint guarantee.

 Operationally, takaful refers to participants mutually contributing to a

common fund with the purpose of having mutual indemnity in the case
of peril or loss.
 Mutuality and cooperation.
 Takaful contract pertains to Tabarru’at
 Eliminates the elements of Gharrar, Maisir and Riba.
 Wakalah/Mudarabah basis of operations.
 Joint Guarantee / Indemnity amongst participants – shared responsibility.
Main drivers of Takaful

 Piety (individual purification)

 Brotherhood (mutual assistance)

 Charity (Tabarru or contribution)

 Mutual Guarantee

 Community well-being as opposed to profit maximization.

Comparing Takaful to Conventional Insurance
Issue Conventional Insurance Takaful
Organization Principle Profit for shareholders Mutual Benefit for Participants
Basis Risk Transfer Risk sharing
Value Proposition Profits maximization Affordability and spiritual
satisfaction
Laws Regulations Sharia plus regulations
Ownership Shareholders are Owners Participants
Management status Managed by Company Management Operator
Form of Contract Contract of Sale Islamic contracts of Wakala or
Mudarbah with Tabar’ru
(contributions)
Investments Interest based Sharia compliant, Riba-free

Surplus Profit of Insurance Company. Distribution to Participants on pro

rata basis.
Mudaraba Model

 The surplus is shared between the participants with a takaful operator.

The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as
mutually agreed between the contracting parties. Generally, these risk
sharing arrangements allow the takaful operator to share in the
underwriting results from operations as well as the favorable
performance returns on invested premiums.
 Profits
attributable to
Mudaraba Model Shareholders

Company’s
Admin. &
Company Mangt. Expenses

Investment Profit
By From
Company Investments

Company’s
Share from
Surplus
Takaful
General General Operational
Contribution Surplus
Participant Takaful Takaful Cost of
paid by Takaful (Profit)
Fund Fund
Participant

Participant’s
Share
from Surplus
Mudaraba Model
 The mudaraba model is designed on the basis of Mudaraba contract.
Mudaraba is a partnership in profit whereby one party provides capital
(rab-al-maal) and the other party provides management skill or labour
(mudarib).
 In a Mudaraba model, the Takaful operator acts as a mudarib (fund
manager) and the Tabarru Fund / Takaful Fund as Rab al Mal (capital
provider). The surplus or profit derived from the operations of the Takaful
fund investments are shared between the operator and the Tabarru Fund /
Takaful Fund in the pre-agreed ratio. Any losses or deficits if incurred are
borne solely by the Tabarru Fund / Takaful Fund (as rab-al-maal).
2. Wakala Model
 This model is designed on the basis of wakala contract. Wakala can be defined as the
delegation of one person (the principal) for another (the agent) to take the person’s place
in a known and permissible dealing.
 In this type of model, the Takaful operator acts as the agent on behalf of the participants
to establish the Takaful / Tabarru Fund which is also the case in the Mudarba model.
However, for the investment of the fund, the operator acts as an Agent (Wakil) of
Tabarru / Takaful Fund.
 The operator is paid a pre-agreed management fee for the services rendered. The profit
and the losses derived from the operations of Takaful fund and the investments belong
to Tabarru / Takaful Fund only. The Takaful operator being the agent (Wakil) of the
Participants has the responsibility to allocate or distribute the profits to the participants
of the fund on the basis of their contributions.
 Wakala Model
Mudarib's’
Wakala Profit Share Management Profit/Loss
Company Fee From of PTF’s
Expense attributable to
Investments Investment
(Capital) (30% to 35%) of the Company Shareholders
Income

Takaful
Contribution Investment by Investment Income Sharing
paid the Company on Mudaraba Basis
by Participant

General Operational Surplus

Participants’ Investment Cost of Surplus Distribution
Takaful Income Takaful/
Reserves
(Profit) to
Takaful Fund Fund ReTakaful Participants
MECHANISM OF WAKALA
TAKAFUL MODEL
 1. The Participants enter into a Wakala contract with the Takaful
Operator. As per the contract, the Participants are the Principal and
the Takaful Operator is the Agent.
 2. The Participants entrusts their monies (funds) to the Takaful
Operator as contribution into the Takaful fund under the contract of
Tabarru (gift / charity).
 3.The Takaful Operator is entitled to a predetermined Wakala fee,
which is deducted from the contributions paid by the Participants.
MECHANISM OF WAKALA
TAKAFUL MODEL
 4. The Takaful Operator manages the money contributed by the Participants in
Takaful Fund and maintains two separate accounts, namely Participant’s
Account (PA) and Participant’s Special Account (PSA). The amount from the
PA is invested in a Shariah-compliant business. Whereas the insured losses, if
any, can be claimed by the Participants from the amount in PSA.
 5. The Net Reserves (i.e. Total Donation - Claims - Operation Expenses), and
the Net Realisation (i.e. Total Investment + Profit- Operation Expenses) from
PSA from PA are transferred to Surplus.
 6. The surplus or loss is completely transferred only to the Participants.
WAQF MODEL
 This model is designed on the basis of waqaf. Waqaf means ‘as if it were owned
by God’. In its application, the Takaful waqaf fund is owned by God and the
participants have no ownership on the amount contributed to the waqaf fund.

 The beneficiaries or participants become members of the Takaful Waqaf fund by

subscribing and paying the donations as Tabarru. An operator is appointed as a
Wakil or mudarib to manage the fund and paid a Wakala fee or profit share as
per predetermined ratio. The participants can only claim the damages of loss
from the fund and are not entitled to any surplus. The surplus or profits arising
from the operations of the fund or from the investment would remain in the
fund itself.
MECHANISM OF WAQF TAKAFUL
MODEL:
 1. The Participants enter into a Wakala contract with the Takaful Operator. As
per the contract, the Participants are the Principal and the Takaful Operator is
the Agent.
 2. The Participants entrust their monies to the Takaful Operator as the
contribution into Takaful fund under the contract of Tabarru.
 3. The Takaful Operator is entitled to a predetermined Wakala fee which is
deducted from the contributions paid by the Participants.
MECHANISM OF WAQF TAKAFUL
MODEL:
 4. The Takaful Operator manages the money contributed by the Participants in Takaful
Fund and maintains two separate accounts, namely Participant’s Account (PA) and
Participant’s Special Account (PSA). The amount from the PA is invested in a
Shariah-compliant business. Whereas the insured losses, if any, can be claimed by the
Participants from the amount in PSA.
 5. The Net Reserves (i.e. Total Donation - Claims - Operational Expenses), and the
Net Realisation (i.e. Total Investment + Profit- Operational Expenses) from PSA from
PA are transferred to Surplus.
 6. It is to be noted that the surplus is not transferred to the Participants but retained in
the Takaful fund by the Takaful Operator.
HYBRID MODEL
 Hybrid model is the combination of both Wakala and Mudaraba models. In this
model, the participants and the fund operator sign two contracts, i.e. wakala and
mudaraba. The fund operator as per the Wakala contract is entitled to a wakala
fee from the contribution paid by the participants and is also entitled to the
predetermined percentage share of profit realised from the part of contribution
amounts that is invested in any Shariah-compliant business.
 It is to be noted that the fund operator does not share the reserve amounts of the
part of the contributions that remain after paying the claims.
MECHANISM OF HYBRID
TAKAFUL MODEL:
 1. The Participants enter into Wakala and Muadaraba contracts with the Takaful
Operator. As per the first contract, the Participants are the Principal and the
Takaful Operator is the Agent. And as per the second contract, the Participants
are the Rab-al-Maal and the Takaful Operator is the Mudarib.
 2. The Participants entrust their monies to the Takaful Operator as contribution
into Takaful fund under the contract of tabarru.
 3. Under Wakala contract, the Takaful Operator is entitled to a predetermined
Wakala fee which is deducted from the contribution paid by the Participants.
Whereas, under the Mudaraba contract, the Takaful Operator is entitled to a
share of profit realised from the PA, normally a mutually agreed ratio.
MECHANISM OF HYBRID
TAKAFUL MODEL:
 4. The Takaful Operator manages the money contributed by the
Participants in Takaful Fund and maintains two separate accounts, namely
Participant’s Account (PA) and Participant’s Special Account (PSA). The
amount from the PA is invested in a Shariah-compliant business. The
insured losses, if any, can be claimed by the Participants from the amount
in PSA.
 5. The profit or loss realized from the amount invested in Shariah-
compliant business is transferred to P&L account. And the amount
remaining in PSA after paying the claims made by the participants is
transferred to Reserves account.
MECHANISM OF HYBRID
TAKAFUL MODEL:
 6.The Net Profit from PA (i.e. Profit- Operational Expenses) is shared
between the Participants and the Takaful Operator in agreed ratio.
 7. The Net Reserves from PSA (i.e. Reserves- Operational Expenses)
are completely transferred to the Participants.
 8. It is to be noted that loss, if any, is completely borne by the
Participants. Further, it is the responsibility of the Takaful Operator to
distribute the Net Reserves to the Participants as per their
contributions.
Takaful products

General Takaful
Family takaful
General Takaful Types

General Takaful – offers all kinds of non-life risk coverage. It is normally divided
into following classes:

 Property Takaful

 Marine Takaful

 Motor Takaful

 Miscellaneous Takaful
Types of Family Takaful

 Term Life Takaful

 Whole Life Takaful

 Endowment Takaful

 Marriage Plan

 Education Plan
Takaful Prospects in Pakistan

 97% Muslim population.

 Demand for insurance increasing with increase in per capita

income.

 Personal lines insurance business (leasing, health, Medicare)

growing at a higher rate than other conventional classes.

 Islamic banking on sound footing with support of the Govt.

THANK YOU