TAKAFUL

THE ISLAMIC INSURANCE

AYSHA KHAN
172010
 Conventional Insurance

• It means a way to provide security / and

compensation of what is valuable in the
event of its loss, damage or destruction
based on the principle of risk taking and
speculation.
 Aspects of Conventional
Insurance
• According to Sariah, there are two aspects of conventional
Insurance, namely
1. Conceptual Aspect
2. Practical Aspect
Conceptual Aspect
 So far as the concept of insurance is concerned, it is to
cover the risk of loss, “fortunate many helping the
unfortunate few”
 This concept is not only recognized , but also encouraged
and rewarded by Islam.
Surah Al-Maida (verse 2)

“Help one another in righteousness and

piety, but do not help one another in sin
and transgression.”
• The principle of Muwalat, Maaqil, Kafalah
(Gurantee), Dhaman (indemnity) and the
establishment of Islamic welfare state by the Holy
Prophet, Waqf and Tabarru support this concept.
• The practical aspect of insurance, however, is
forbidden due to the following elements:
1. Qimar or Maysir (Gambling)
2. Riba (Interest)
• Since both are clearly prohibited in the Holy
Quran and Hadith.
• They cannot be permitted on the pretext of the
conceptual aspect.
• For example, helping victims of accidents and
other losses, just as major sin like theft, robbery,
gambling, dealing in riba cannot not be permitted
with the pretext of helping the poor.
Problems with
Conventional Insurance
1. Gharar ( uncertainty )
Literally Gharar means: Uncertainty; cheating; (Jahalah) ambiguity.
There are two types of Gharar:
1. Jahalah which causes to dispute. E.g. un specified or
un quantified subject matter in sale.
2. Uncertainty of one party’s profit. E.g. One party’s
(such as policy holder’s) profit in Insurance.
2. Khatar: ( Risk)
Taleequl milki al alkhatr, wal mal fil janibain:
“To stipulate ownership for an uncertain event, whereas money is
involved on both sides.”
Problems with
Conventional Insurance
2. Mayser ( Qimar or Gambling )
Mayser means Qimar in Arabic language.
Mayser has two basic elements which cause to prohibit
Mayser namely:
1. Gharar (2) Khatar
Having the above two elements speculation, gambling and
insurance is prohibited.
Problems with
Conventional Insurance
The participant contributes a small amount of
premium in a hop/risk to gain a large sum is
Khatar.
• The participant loses the money paid for the
premium when the insured event does not
occur is Gharar.
• The company will be in deficit if the claims
are higher than the amount contributed by
the participants is Gharar.
Problems with
Conventional Insurance
3. Riba
• The element of Riba (Interest) exists in lending or
borrowing funds/investments at fixed interest, and
other related practices in the investment activities
of the conventional insurance companies
 The Solution
Islamic Cooperative Insurance
( Takaful)
 Definition for Takaful
• Takaful is an Arabic word that means
"guaranteeing each other".
• It is a system of Islamic insurance based on the
principle of TA-AWUN (mutual assistance) and
Tabarru (Voluntarily) where the risk is shared
collectively by the group Voluntarily.
• This is a pact among a group of members or
participants who agree to jointly guarantee among
themselves against loss or damage to any of them
as defined in the pact.
 Basic Principle behind Takaful
1.The principle of “fortunate many helping the
unfortunate few" is a concept recognized by
Islam.
2.The Quran states in Surah Al-Maidah verse # 2:
"Help ye one another in righteousness and
piety, but help ye not one another in sin and
rancor".
3. Principles of Muwalat, Maaqil, and Kafalah
are examples for its permissibility.
Features

• Firstly, the participation into a Takaful fund must be

performed with utmost sincerity in order to help
those faced with difficulties.
• Every policy holder would pay his subscription in
order to assist those who need assistance
• Any member or participant suffering a catastrophe
or disaster would receive a certain sum of money or
financial benefit from a fund, as also defined in the
pact, to help him meet the loss or damage
Operation of Takaful Fund
• The transactional aspect of the commercial
activity of Takaful must be subject to the Islamic
contractual laws in order to ensure its compliance
with the Shariah .
• The Company involved in takaful business, as the
operator, will accept payment of the takaful
installments or takaful contributions (premium)
from the participants (clients) for the takaful plan
or takaful scheme they wish to participate.
Operation of Takaful Fund
• In order to eliminate the element of “uncertainty”
in the Takaful contract, the concept of tabarru (to
donate, to contribute, to give away) is
incorporated in it. In relation to this a participant
shall agree to relinquish as “gift” certain portion
of his Takaful installments .
• For the service rendered as manager of the Takaful
Operations the company will charge a
management fee.
 Operation of Takaful Fund

• The Takaful Fund, consisting of the contributions

paid as Tabarru, will be further invested by the
Company based on the principle of Al –Mudarabah,
through which the element of interest (riba) will be
replaced.
• All premium holders will participate in pofit and loss.
• Profit will be shared on agreed ratio.
Basic Elements of Takaful
• Mutuality and cooperation.
• Takaful contract pertains to Tabarru’at as
against mu’awadat in case of conventional
insurance.
• Payments made with the intention of Tabarru
(contribution)
• Eliminates the elements of Gharrar, Maisir and
Riba.
• Wakalah/Modarabah basis of operations.
Basic Elements of Takaful
• Constitution of separate “Participants’ Takaful
Fund”.
• Constitution of “Shariah Supervisory Board.”
• Investments as per Shariah.
• Joint Guarantee / Indemnity amongst
participants – shared responsibility.
 Comparing Takaful to Conventional
Insurance
Issue Conventional
Insurance
Organization Principle Profit for shareholders
Basic Risk Transfer
Value Preposition Profit maximization
Laws Secular/regulations
Ownership Shareholders
Management Status Company management
Forms of Contract Contract of Sale
Takaful
Mutual for participants
Co-operative risk taking
Affordability and
spiritual satisfaction
Shariah plus regulations
Participants
Operator
Cooperative, Islamic
contractors of Wakala, or
Mudaraba with Tabar’ur

Investments Interest based Shariah compliant, Riba

free
Surplus Shareholder ‘s account Participant ‘s account
Takaful Models
 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 favourable
performance returns on invested premiums.
 Profits
attributable to
Mudaraba Model Shareholders

Company’s
Company Admin. &
Mangt.
Expenses

Investment Profit
By From
Company Investments

Company’s
Share from
Surplus
Takaful General General Operational
Surplus
Participant Contributio Takaful Takaful Cost of
(Profit)
n paid by Fund Fund Takaful
Participant
Participant’s
Share
from Surplus
 Wakala Model
• Cooperative risk sharing occurs among
participants where a takaful operator earns a
fee for services (as a Wakeel or Agent) and does
not participate or share in any underwriting
results as these belong to participants as
surplus or deficit. Under the Al- Wakala model,
the operator may also charge a fund
management fee and performance incentive fee.
 Wakala Model
Mudarib's’
Wakala Profit Share Management Profit/Loss
Company From of PTF’s
Fee 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
 Wakala – Waqf Model
It is a WAKALAH model with a separate legal
entity of WAQF in-between.

 The relationship of the participants and the

operator is directly with the WAQF fund. The
operator is the ‘Wakeel’ of the fund and the
participants pay contribution to the WAQF
fund by way of Tabarru.
 Wakala – Waqf Model
• The contributions received would also be a part
of this fund and the combined amount will be
used for investment and the profits earned
would again be deposited into the same fund
which also eliminates the issue of Gharar.
• Losses to the participant are paid by the
company from the same fund.
• Operational expenses that are incurred for
providing Takaful services are also met from
the same fund.
 Wakala-Waqf Model

Share SHARE H O L D E R S’ F U N D (S.H.F.)

Holder
Mudarib’s Management
Wakalah Investment Share of PTF’s Expense of
Fee Income Investment the Profit/Loss
Income Company

Takaful
Operator

Investment by
the Company

WAQF Operational Claims &

Cost of Takaful Investment Reserves Surplus
/ ReTakaful Income (Balance)

P A R T I C I P A N T S’ T A K A F U L F U N D
(P.T.F.)
Participant
 Takaful Policy Documents/
Participants’ Membership Documents
– Preamble:
– This is to acknowledge that the applicant
(hereinafter called the 'Participant'), as
more fully described in the schedule hereto:

– i. Is accepted as a member of the

Participants' Takaful Fund (hereinafter
called the 'Fund') operated by Takaful
Pakistan Limited (hereinafter called the
'Company').
Takaful Policy Documents/Participants’
Membership Documents
– ii. Being a member of the Fund, he/she is
acknowledged as a beneficiary under the attached
Indemnity Policy of the Fund, and of the benefits
declared by the Fund from time to time under this
policy, in accordance with the Waqf rules
governing the Fund.

– iii. Subject to the participant continuing as a

member of the Fund and complying with his/her
undertaking under his/her declaration made in
the proposal form, he/she is indemnified by the
Fund as one of its beneficiaries against the
perils/events described, in the manner and to the
extent as stated hereunder.
Takaful Policy Documents/Participants’
Membership Documents

Duration:
• Normally policies are issued for the duration of twelve
months.
• Extended coverage on project policies.
• MARINE POLICY : The membership under this
document shall be for the period of _________ months.
However, the benefits under this document, except
Surplus if any, shall cease on the arrival of goods at
destination.
Takaful Policy Documents/Participants’
Membership Documents

Cancellation Clause:
– This Policy may at any time be terminated at the option
of the Company, on 14 days' notice to that effect being
given to the Participant at his last known address. In
that case, the Participant shall be GIVEN an amount
equivalent to a ratable proportion of the contribution for
the unexpired Period of Policy from the date of such
cancellation.
 Takaful Policy Documents/Participants’
Membership Documents

• This Policy my also be terminated at any time at the

request of the Participant, in which case the Participant
will be PAID an amount equivalent to the actual
contribution made initially by him/her, less the amount
worked as per the following scale applicable to the period
during which the policy has been in force:
Takaful Policy Documents/Participants’
Membership Documents

• Takaful operator's fee

– The Company shall deduct Takaful Operator's fee out of
the Contribution received under this Policy. Such fee shall
be based on the Wakala principle since the Company
hereby acts as a Wakeel on behalf of the Fund.
• Investment management share
– The Company shall act as a Mudarib for the purpose of
managing the investment of the Participant's
Contribution. As such, the Company stands entitled to a
share in the investment income thereof as Mudarib.
 Takaful Policy Documents/Participants’
Membership Documents

Surplus distribution
–If, at the end of the period of Policy stated in the Schedule, there is a
surplus in the General Takaful Fund, the same shall be distributed
among the Participants. Provided that, in case the Participant has
made any claim or received any benefits under this Policy, that
claimed amount shall be deducted from the net amount worked out as
due to the Participant.
 Uses of Takaful

Takaful can be used to cover

• Property like house, factory, mosque,
offices
• Vehicles (car, motorcycle etc..)
• Goods ( like during import or export )
• Valuables
• Health, accidents and Life
THANK YOU