6-1 Process Selection and Facility Layout

OperationsISLAMIC
Management
INSURANCE

TAKAFUL

William J. Stevenson

MOHAMMAD FAROOQ
YOUSAF (MB06129)
MOHAMMAD YUSUF
USMAN (MB06107) 8th edition
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Introduction to Takaful

• Takaful originates from Arabic word Kafalah, which means

“guaranteeing each other or joint guarantee”.

• The Takaful system is based on mutual co-operation, responsibility,

assurance, protection and assistance between groups of participants.

• It is a Shariah compliant alternative to conventional insurance.

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Introduction to Takaful (cont’)

• For example, individuals can make charitable donations to a common fund from
which they may each draw in the event that they suffer loss to their houses or
livelihoods.
• It was first established in the early second century of the Islamic era with the
purpose of promoting mutual solidarity and co-operation among the Muslim
community.
•As mentioned in the Qur'an:

"And help one another in righteousness and piety and do not help one another in
evil deeds and enmity"
(Al Maidah verse 2)
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Introduction to Takaful (cont’)

The main characteristic of Takaful is al-Musharakah which means sharing.

Thus, the word Takaful means shared responsibility, shared-guarantee, collective

assurance and mutual undertakings.

Islamic insurance embraces the concepts of mutual protection and shared

responsibility which was seen in the practice of paying blood money (diyah)
under the Arab tribal custom.

This was accepted into Islamic practice on the verdict of the Prophet (peace be
upon him).
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Introduction to Takaful (cont’)

It therefore potrays the sincerity and willingness of the group to help and assist
anyone among them in times of need. "Takaful" bears many similarities to co-
operative or mutual insurance.

Allah will always help His servant for as long as he helps others. (Narrated by
Imam Ahmad bin Hanbal and Imam Abu Daud)

Takaful is based on shared aims and co-operation, with each individual benefiting
from any surpluses gained.

In takaful there are no policyholders; there are contributors who participate

jointly in a fund for their mutual benefit.
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Introduction to Takaful (cont’)

The contributors are owners of the fund and the takaful

company manages the fund on their behalf. Thus, if the
company makes a profit this is shared between the
contributors, and if any of the contributors were to suffer
financial loss they are paid from the takaful fund.
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Fairness of Takaful System

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Principles of Takaful

• Policyholders co-operate among themselves for their common good.

• Every policyholder pays his subscription to help those that need assistance.

• Losses are divided and liabilities spread according to the community pooling
system.

• Uncertainty is eliminated in respect of subscription and compensation.

• It does not derive advantage at the cost of others.

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Basic Models of Takaful

Mudharaba Model
Wakala Model
Waqf Model
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Mudharaba Model

Mudharaba is defined as the contract between one party, known as the

ra’sul mal (capital provider), with another party known as the mudharib
(entrepre­neur) where the ra’sul mal provides the capital, and the
mudharib provides the skills in a business venture. When there is profit, it
is shared between the ra’sul mal and the mudharib in a pre-agreed
manner. In this case, the taka­ful operator is the mudharib, and the
participants are the capital providers. The pure mudharaba model
conforms to this definition. and is practiced mainly in the Asia-Pa­cific
region.
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Features of Mudharaba Model

• It is practiced mainly in the Asia-Pa­cific region.

• Shariah committee gener­ally approves the sharing ratio for each year in
advance.

• The sharing of such profit (surplus) may be in a ratio of 5:5, 6:4, 7:3, etc.

• This model allows the takaful operator to share in the underwriting

results from operations as well as the favorable performance returns on
invested premiums.
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Pure Modharaba Model

• In a pure mudharaba model, the takaful opera­tor and the participant share direct
investment income only, and the participant is entitled to a 100% share of the
surplus. This model is ap­plicable to family takaful as the fund is entirely
distributed to the participants.

• Under a pure mudharaba model, if there is a loss, the ra’sul mal loses (some of)
his capital and the mudharib loses in terms of effort. Therefore, the modified
mudharaba model is not really mudharaba, and that is why some schol­ars,
especially in the Middle East do not condone it.
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Modified Modharaba Model

• In a modified mudharaba model, the invest­ment income is

ploughed back into the takaful fund, and the takaful company
shares with the participant the surplus from the takaful fund.

• It is important to note that under mudharaba, the taka­ful

fund belongs to the participants and not the takaful operator.
The takaful operator therefore has no right to a share of the
surplus.
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Wakala Model
• The wakala model, commonly used in the Middle East.

• Cooperative risk sharing occurs among the participants

whereas the takaful operator earns a fee for services (as a
Wakeel or Agent).

• The operator earns an upfront deductible fee and shares the

profit of investments, it does not share the results of
underwriting.
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Wakala Model (Cont’)

•The surplus of the takaful fund belongs to the members, the
operating company does not have a claim on it under any
circumstances.

• If the takaful operator is to generate a profit from its efforts,

it must manage the operations including salaries, overhead,
selling commissions, sales and marketing ex­penses, etc.
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Wakala Model (Cont’)

Since there is no other benefit to the takaful operator other than the
declared wakala fees, the wakala model “demands” that all other
charges/costs to the program be provided to the participants at the
lowest possible cost level that can be negotiated by the operator on their
behalf.

Mudharaba practices are usually preferred for investment aspects of

takaful, while wakala practices are favoured for risk sharing/under­writing
aspects of the operation.
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Waqf Model

This non-profit model includes social-governmental owned

enterprises and programmes operated on a non-profit basis
which utilises a contribution that is 100% tabarru (donation)
from participants who willingly give to the less fortunate
members of their community.
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Waqf Model (CONT’)

The Takaful Fund, consisting of the contributions paid as

Tabarru, will be further invested by the Company based on
the principle of Islamic modes of Trades, through which the
element of interest (riba) will be replaced.
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How Waqf Model is Different from other Models

• Waqf, in contrast to wakala and mudharaba, operates as a public

foundation.

• The takaful fund is owned by members in the first two models, in waqf, it
belongs to nobody in particular.

• Any surplus can theoretically be distributed between members in the

first two models, such distribution is not possible in the waqf model,
similar to the build-up of unallocated surplus commonly seen in some
Western European life insurance models.
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Comments of Justice Muhammad Taqi Usmani

• He feels that waqf is more compatible with the co-operative concept of

takaful as it is created for the very purpose of co-operation.

• He said that if one establishes a fund for takaful, then the fund should
have a legal entity. So whenever one contributes to this fund, the
contribution is regarded as a contribution for the common good.

• When the waqf fund distributes the funds between the members
according to its own rules, the fund needs to have its own legal entity,
and according Islamic jurisprudence, waqf is an independent entity,
hence he prefers this model.