Wan Mohd Ashraf Adlin

wan_ashraf@msu.edu.my
ISLAMIC FINANCIAL
MARKETS
TAKAFUL
 CONTENT
2

 Introduction to Takaful
 Difference Between Conventional Insurance &
Takaful
 Takaful Through Time
 Takaful Models
 Takaful Types of Products
 Re-Takaful
 Malaysia: A Success Story
 Takaful Act
 Governance of Takaful
 Shariah Governance of Takaful
 INTRODUCTION TO TAKAFUL
3

 Definition of Takaful:
 Takaful comes from the Arabic root-word ‘kafala’ —
guarantee.
 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.
 Takaful is an Islamic insurance concept which is
grounded in Islamic muamalat, observing the rules
and regulations of Islamic law.
4

 Theoretically, Takaful is perceived as cooperative

insurance, whereby through the tabarru’ principle,
participant in a takaful scheme agrees to relinquish,
as a donation, a certain portion of the contribution
into a takaful fund to assist other participants faced
with difficulties.
 Tabarru' means donation, gift or contribution and it
embraces the elements of shared responsibility, joint
indemnity and mutual protection. 
 Tabarru' is the core of the takaful system that makes
the uncertainty element allowable under the takaful
contract. 
 PRINCIPLES OF TAKAFUL
5

1. Policyholders co-operate among themselves for

their common good.
2. Every policyholder pays his subscription
(contribution) to help those that need assistance.
3. Losses are divided and liabilities spread
according to the community pooling system.
4. Uncertainty is eliminated in respect of
subscription and compensation. 
5. It does not derive advantage at the cost of others.
 CONCEPT OF TAKAFUL
6

 The main reason insurance being forbidden in Islam by the

National Fatwa Council in 1972:
 Life insurance is an unislamic (fasid) because it contains uncertainty
(gharar), gambling and usury (riba).
 Takaful is a protection scheme which provides mutual
protection among its participants.
 Takaful is based on the concept of social solidarity: mutual
assistance, trusteeship (Mudharabah) and co-operation, inspired
by the teachings of Islam.
 Indeed the meaning of Takaful is “guaranteeing each other”.
 The co-operation element in Takaful stems from the fact that
the participants are both the insured and insurers themselves.
 There is no transfer of risk, as all the losses are shared by the
members themselves.
 EVIDENCE
7

 Al-Quran:
 “Help (ta’awan) one another in furthering virtue
(birr) and Allah consciousness (taqwa) and do not
help one another in furthering evil and enmity”.
Al Maidah: verse 2 (5:2).

 Takaful is a form of mutual help (ta’awun) in

furthering good/virtue by helping others who are in
need / in hardship .
 EVIDENCE
8

 As-Sunnah:
“Tie the camel first, then submit (tawakkal) to the
will of Allah”
The hadith implied a strategy to mitigate/reduce risk.

 Takaful provides a strategy of risk

mitigation/reduction by virtue of collective risk
taking that distributes risks and losses to a large
number of participants. This mitigates the otherwise
very damaging losses, if borne individually.
 BASIC ELEMENTS OF TAKAFUL
9

 Mutuality and cooperation.

 Takaful contract pertains to Tabarru’at as against mu’awadat
(contracts of exchange) in case of conventional insurance.
 Payments made with the intention of Tabarru’ (contribution).
 Eliminates the elements of Gharar, Maisir and Riba.
 Wakalah/Mudharabah basis of operations.
 Joint Guarantee / Indemnity amongst participants – shared
responsibility.
 Constitution of separate “Participants’ Takaful Fund”.
 Constitution of “Shariah Supervisory Board.”
 Investments as per Shariah.
 MAIN DRIVERS OF TAKAFUL
10

 Piety (individual purification)

 Brotherhood (mutual assistance)

 Charity (Tabarru’ or contribution)

 Mutual Guarantee

 Community well-being as opposed to profit

maximization.
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
11

 Insurance defined as:

 Definition of an Insurance Contract
o “An agreement whereby one party, the insurer, in return

for a consideration, the premium, undertakes to pay to

the other party, the insured, a sum of money or its
equivalent in kind on the happening of a specified event,
which is contrary to the insured’s financial interest”
 Subject-matter of an Insurance Contract
o “… what is it that is insured in a fire policy? Not the

bricks and materials used in building the house, but the

financial interest (i.e. money) of the insured in the
subject-matter of insurance…”
(Lord Justice Brett in Castellian v. Preston – 1883)
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
12

 Objections to Conventional Insurance:

 Scholars view the insurance contract as an exchange
contract – money is being exchanged for money over
time.
 This brings about the problem of gharar (which leads to
maisir) and in investments aspect, riba.
 Elements of:
o Uncertainty – Gharar
o Gambling – Maisir
o Interest – Riba
o UW + Investment Profit belongs to the Company
 Note that the Scholars do not object to insurance per set
but only to certain weaknesses in the insurance contract.
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
13

 Uncertainty (Gharar):
 Conventional insurance contract is basically a contract of
exchange (mu’awadaat) i.e. buying and selling whereby
policy (indemnity) is sold as goods, with the premium as the
price or consideration.
 The consideration must be certain for exchange contract.
 Gharar in insurance contracts pertains to “deliverability” of
subject matter, i.e. uncertainty as to:
o Whether the insured will get the compensation promised?
o How much the insured will get?
o When will the compensation be paid?
 Thus, it involves an element of uncertainty in the subject
matter of the insurance sales contract, which renders it void
under the Islamic law.
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
14

 Gambling (Maysir):
 “Insurance is a contract upon speculation. Good faith
forbids either party from concealing what he privately
knows, to draw the other into a bargain, from his ignorance
of that fact, and his believing to the contrary”
(Lord Mansfield in Carter v. Boehm – 1766).
 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.
 In the case of life insurance, when policy-holder dies before

the maturity date and only paid part of the premiums, his
beneficiaries will receive a certain portion of money which
is unsure of its origins and source.
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
15

 Riba
 Insurance is essentially an interest-based products.
 In life insurance, the insured receives an amount far greater than the
premiums he paid. In general insurance, the amount paid to the insured on
the occurrence of incidence more than the premiums paid.
 The money collected by the insurance companies from insured persons is
also invested in interest-bearing accounts and other un-Islamic dealings.
 Other differences
 In Takaful, the agreement specifies how the profits (surplus) from the
Takaful operations to be shared according mudarabah contract.
 The concept of Tabarru’ (to donate or contribute), where the participants
agree to relinquish certain portion of their Takaful instalments as a
contribution to a common pool, which the compensation is paid as agreed
upon.
 In the case of surrender or lapse of the policy, conventional insurers will
forfeit the insurer’s premium, whereas under the principles of Takaful there
is no such forfeiture.
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
16

Issue Conventional Takaful

Insurance
Organization Principle Profit for shareholders Mutual for participants
Basis Risk Transfer Co-operative risk sharing
Value Proposition Profits maximization Affordability and spiritual
satisfaction
Laws Secular/Regulations Shariah plus regulations

Ownership Shareholders Participants

Management status Company Management Operator

Form of Contract Contract of Sale Cooperative,

Islamic contracts of Wakala or
Mudarbah with Tabar’ru
(contributions)

Investments Interest based Shariah compliant, Riba-free

Surplus Shareholders’ account Participants’ account

 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
17

TAKAFUL CONVENTIONAL INSURANCE

Takaful is based on mutual cooperation.
Takaful is free from interest (Riba),
gambling, (Maysir), and uncertainty
(Gharar).
All or part of the contribution paid by the
Participant is a donation to
the Takaful Fund, which helps other
Participants by providing protection
against potential risks.
Conventional insurance is based solely on
commercial factors.
Conventional insurance includes elements
of interest, gambling, and uncertainty.
The premium is paid
to conventional insurance companies and is
owned by them in exchange for bearing all
expected risks.

Takaful companies are subject to the Conventional companies are only subject to

governing law as well as a Shari’a the governing laws.
Supervisory Board.
There is a full segregation between the premium paid by the Policyholder is
ParticipantsTakaful Fund account and the considered as income to the company,
shareholders' accounts. belonging to the shareholders.
 DIFFERENCE BETWEEN INSURANCE AND TAKAFUL
18

TAKAFUL CONVENTIONAL INSURANCE

Any surplus in the Takaful Fund is shared All surpluses and profits belong to the
among Participants only, and the shareholders only
investment profits are distributed among
Participants and shareholders on the basis
of Mudaraba or Wakala models.
In case of the deficit of a In case of deficit,
Participants’ Takaful Fund, the the conventional insurance company
Takaful operator (Wakeel) provides free covers the risks.
interest loan (QardHasan) to the
Participants.
The Plan Owners’ and shareholders’ capital The capital of the premium is invested in
is invested in investment funds that are funds and investment channels that are
Shari’a compliant. not necessarily Shari’a compliant.
Takaful companies have re-insurance with Conventional insurance companies do
Re-Takaful companies or not necessarily have re-insurance with re-
with conventional re-insurance companies insurance companies that abide by
that adhere to certain conditions of Shari’a. Shari’a principles.
 TAKAFUL THROUGH TIME
19

 Origins in the First Constitution of Madina.

 It evolved and continued in one form or the other
throughout the Abbaside period and even later
during the Othman empire.
 Serious efforts were made in modern times, in
1970s to come up with an Islamic alternative to
the conventional insurance.
 The first Takaful company was set up in Sudan in
1979, almost simultaneously followed by another
one set up in Bahrain.
 TAKAFUL THROUGH TIME
20

 There are now around 180 Takaful companies in over 40

countries.
 The total insurance premium of OIC countries for 2006 was
USD 75 Billion; of this, Takaful contribution accounts for
5% (i.e. USD 3.5 Billion). This is expected to increase to
USD 12 Billion by 2015.
 Poor Insurance penetration in the Muslim countries (<1% of
GDP).
 Average growth rate higher than conventional insurance
companies (around 25%).
 Non–Muslims increasingly opting for Takaful products for
commercial benefits.
21
 BASIC OPERATIONAL MODEL
22

Takaful Participants
Contracts
•Mudarabah
Donation •Wakalah
•Ji’alah
•Wadi’ah yad
Takaful Funds damanah

Manage

Takaful Operator

Investment Pay Claims

 TAKAFUL MODELS
23

 The takaful operator is the administrator of the fund and

manages the fund in trust on behalf of the participants, and
the contract between the participants and the operator is
governed under the contract of mudharabah or wakalah.
 Mudharabah gives the right to the contracting parties to share
the profit, while liability for losses is borne by the
participants.
 Under the wakalah model, the takaful operator earns a fee for
services rendered while liability for losses is borne by the
participants.
 The fee may be varied based on the performance of the
takaful operator. It can be a fixed amount or based on an
agreed ratio of investment profit or surplus of the takaful
funds.
 TAKAFUL OPERATIONAL MODELS
24

Mudharabah
(profit-
Wakalah sharing)
(agency) Model
Model
Combination
Model
 TAKAFUL MODELS
25

 Mudharabah Model:
 Under the mudharabah contract, the takaful operator
acts as a mudharib (entrepreneur) and the participants
as rabbul mal (Capital providers).
 The contract specifies how the surplus from the takaful
operations is to be shared between the takaful operator
and the participants. Losses are borne by the
participants as the capital providers.
 However, to protect the interest of the participants, the
takaful operator is required to observe prudential rules
including provision of interest-free loans by the
operator to the takaful risk funds in the event that there
is a deficiency in the takaful risk funds.
 TAKAFUL MODELS
26

 Mudharabah Model:
 TAKAFUL MODELS
27

 Mudharabah Model:
 TAKAFUL MODELS
28

 Wakalah Model:
 The wakalah concept is essentially an agent- principal
relationship, where the takaful operator acts as an agent
on behalf of the participants and earns a fee for services
rendered. The fee can be a fixed amount or based on an
agreed ratio of investment profit or surplus of the takaful
funds.
 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.
 TAKAFUL MODELS
29

 Wakalah Model:
 TAKAFUL MODELS
30

 Wakalah Model:
 TAKAFUL MODELS
31
 TAKAFUL MODELS
32

 Wakalah+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.
 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.
 TAKAFUL MODELS
33

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

Holder

Mudarib’s Share Management

Wakalah Investment of PTF’s Expense of Profit/Loss
Fee Income Investment the Company
Income

Takaful
Operator

Investment by
the Company Wakala-Waqf Model

WAQF Operational Cost Claims &

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
 TYPES OF TAKAFUL PRODUCTS
34

Know Your Takaful Products:

 Takaful is a Shariah-compliant alternative to an insurance

scheme. It provides a protection plan based on Shariah

principles. The general takaful concept is that you contribute
a sum of money to a takaful fund in the form of participative
contribution (tabarru’). You will undertake a contract (aqad)
for you to become one of the participants by agreeing to
mutually help each other, should any of the participants
suffer any form of misfortune, either arising from death,
permanent disability, loss, damage or any other such
misfortunes as covered under the takaful you personally
undertake.

General Family
Takaful Takaful
 TYPES OF TAKAFUL PRODUCTS
35

 General Takaful:
 Offers all kinds of non-life risk coverage. It

is normally divided into following classes:

o Home Takaful
o Motor Takaful
o Personal Accident Takaful
o Marine Takaful

*http://www.islamicfinanceinfo.com.my/
discover-takaful/know-your-takaful-products
 TYPES OF TAKAFUL PRODUCTS
36

 Family Takaful:
 Family Takaful
 Investment-Linked Takaful
 Child Education Takaful
 Medical and Health Takaful

*http://www.islamicfinanceinfo.com.my/
discover-takaful/know-your-takaful-products
 RE-TAKAFUL
37

 The may be defined as:

 “Takaful for takaful operators.”
 It is a way for a primary insurer to protect against
unforeseen or extraodinary losses.
 Reinsurance is a form of insurance whereby an
insurance company or a Lloyd’s syndicate can
transfer to another insurer (the reinsurer) all or part of
its liabilities in respect of claims arising under the
contracts of insurance that it writes.
 This enables the an insurance company (reinsured or
direct insurer) to protect itself against the risk that its
total claims costs in any one year maybe so large
wiping out its profits, or even cause it to be insolvent.
 RE-TAKAFUL
38

 Serves:
i. To limit liability on specific risk,
ii. To increase individual insurer’ capasity
iii. To share liability when losses overwhelm the
primary insurer’s resources,
iv. To help insurers stabilize their business in the face
of the wide swings in profit and loss margin
inherent in the insurance business.
 RE-TAKAFUL
39

Takaful
Holders

• General
Takaful Takaful
Product
Operator
• Family
Takaful
Product • Pays
Premiun
Re-
Takaful
• From
Takaful Operator
Fund
 RE-TAKAFUL
40

Currently few ReTakaful companies worldwide offering a relatively small

capacity:
 Sudan (1979) National Reinsurance.

 Sudan (1983) Sheikhan Takaful Company.

 Bahamas (1983) Saudi Islamic Takaful and ReTakaful Company.

 Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance Company.

 Tunisia (1985) B.E.S.T. Re

 Malaysia (1997) ASEAN ReTakaful International. Currently: ACR

Retakaful Berhad, MNRB Retakaful Berhad, Munchener Ruckversicherungs-
Gesellschaft (Munich Re Retakaful), Swiss Reinsurance Company Ltd.
(Swiss Re Retakaful).
 Dubai (2005) TakafulRe by ARIG.

 Lloyds of London to have a ReTakaful Syndicate in 2007.

 SwissRe has formed a separate ReTakaful Pool

 MunichRe to form a separate ReTakaful Pool

 Provision in Takaful Rules – 2005.

41

Q&A
 MALAYSIA
42

 A Takaful Success Story

 MALAYSIA: Takaful Development
43

 1984 – 1992
 Enactment of Takaful Act
 Establishment of Syarikat Takaful Malaysia
 1993 – 2000
 Introduction of competition with establishment of Takaful Nasional
 Formation of ASEAN Takaful Group and ASEAN Retakaful
International Ltd.
 Takaful Malaysia & Takaful Nasional (now known as Etiqa Takaful)
jointly developed a Code of Ethics for Takaful Industry (2000).
 2001 – 2010
 Introduction of Financial Sector Master Plan which include
enhancing Takaful operators capacity and strengthen the legal,
shariah and regulatory framework.
 Malaysian Takaful Association was established in 2002.
 New licenses issued.
 MALAYSIA: List of Takaful Operators
44

Etiqa Takaful
CIMB Aviva (formerly Takaful
Nasional)

HSBC Amanah
Hong Leong Tokio
Takaful (Malaysia)
Marine Takaful Bhd
Sdn Bhd

Prudential BSN
MAA Takaful Berhad
Takaful Berhad

Syarikat Takaful
Takaful Ikhlas Berhad
Malaysia Berhad
 MALAYSIA: List of New Takaful
45
Operators
New Takaful licenses to joint-ventures
between Foreign Insurance entities and
local entities
AMMB Holdings
AIA (70%) (70%)
Alliance Bank(30%) Friends Providence
Group plc, UK (30%)

ING Management Great Eastern

Holdings (M) Sdn Insurance (70%)
Bhd (70%) Koperasi Tentera
Public Bank (30%) (30%)
 MALAYSIA: Takaful Regulatory
46
Framework

Regulatory Bank Negara

Authority Malaysia

Takaful Law Takaful Act 1984

Shariah
Shariah Advisory
Takaful Industry Supervision
Council
(Regulatory)

Shariah
Shariah
Supervision
Committee
(Operational)

Product
Product General
Notification
Guidelines
(Launch and File)
 MALAYSIA: Takaful Performance
47

 Takaful Assets expanded to reach USD3.9 billion

between 2005 – 2009.
 Takaful Industry contributed 1.9% of the Malaysia’s
GNI.
 Family Takaful constituted 84.7% of total Takaful
assets in 2009.
 Net contribution increase to USD1.1 billion between
2005 – 2009.
 Family Takaful contributions rose from USD11.70 in
2005 to USD30.60 in 2009.
 General Takaful contributions rose from USD4.30 to
9.00 in the same period.
 MALAYSIA: Takaful Performance
48

Othe Others Medical & Health En-

r 3% 9% dow
Tem ment
po- In- (Ed-
rary vest uca-
12% ment tion)
Link 2%
ed
17%

Mortgage Othe
47% r
En-
dow
ment
New Business
11%
 MALAYSIA: Takaful Outlook
49

Malaysia’s Takaful industry is expected to continue to

show strong growth underpinned by the following
factors:
trong economics and financial fundamentals

High government and BNM involvement in developing the Islamic Finance

industry

Large young population (63% between 15 – 64 years; 31.8% below 15)

Muslim majority (60.4%)

Economic Transformation Program

Growing awareness for Islamic financial products.

 TAKAFUL ACT OF 1984
50

 Takaful Act, 1984 is the Act for the regulation of Takaful

business.
 It was enacted following the establishment of Bank Islam in
1984;
 Due to the fact that Islamic bank needs insurance cover for its
own assets and interests arising from the financing and credit
facilities.
 Section 2 : defines Takaful as a scheme based on
brotherhood, solidarity and mutual assistance which
provides for mutual financial aid to the participants in case
of need, whereby the participants mutually undertake to
contribute solely for that purpose.
 It gives clear description that the participants of Takaful
scheme are joint contributors to receive mutual protection.
 GOVERNANCE OF TAKAFUL
51

 Section 54(l) : the Governor of the BNM shall be the

Director General of Takaful.
 Section 8 : the Director General shall be responsible for the
registration and may or may not be made with conditions.
 Section 10 : the Director General may impose conditions of
registration on an operator who is already registered under
the Act.
 Section 8(5) : Before registration, the Director General
must be satisfied that:
 the aims and operations of the Takaful will not involve any
element which is not approved by the Shariah;
 a provision for the establishment of a Shariah advisory body to
advise on the operations of its Takaful business.
 SHARIAH GOVERNANCE OF
52
TAKAFUL
 Section 53A : a Takaful operator, agent, broker or
adjuster may seek the advice of the SAC of BNM
on Shariah matters relating takaful business and
they shall comply with the advice of the SAC.
 Section 11 : Registration may be cancelled if the
operator is pursuing aims or carrying on
operations involving any element which is not
approved by Shariah.
 CONCLUSION
53

 Takaful is a venture which epitomizes the virtues of co-operation,

mutual help and shared responsibility among the participants.
 The business is conducted on the basis of profit-sharing
(Mudharabah) and the Takaful mechanism mutually guarantee the
well-being of all the participants.
 No business participation is undertaken directly or indirectly in
matters prohibited by the Shariah.
 The Takaful contract attempts to determine the terms of the
contract with clarity to minimise any uncertainty.
 The philosophies of brotherhood, mutual assistance and solidarity
enjoined and encouraged by Islam in all aspects of life can be
gleaned especially from the bases which font the operation of
Islamic insurance itself.
54

 Instead of being TAKAFOOL, we need to

put our efforts to make it TAKAFULL, in
which is full of attractions and justice to
people.
55

Q&A
56 END OF CHAPTER