IBF 8601: Insurance and

Takaful Management

Dr. Abdalla Ussi Hamad

Zanzibar University
 Course Outline
1. Introduction to the concepts of risk and insurance
2. The Sharia Perspective of Insurance
3. General and Family takaful
4. Takaful Business Models/Product
• Tabarru-based Takaful
• Mudaraba-based Takaful
• Wakala-based Takaful
5. Takaful Regulations (Legal and Regulatory Framework of Takaful
Institutions)
6. An Introduction to Re-Takafuf
7. Re-Takaful Operations
8. Distribution Channels
 Introduction to the concepts of risk and
insurance
Key questions
• What is risk?
• What are the different types of risk?
• What are the sources and consequences of risk?
• How is risk managed?
• Why do we need insurance?
• How does insurance work?
 What is risk?
• Risk is an uncertain event which leads to some monetary loss
• Risk is not uncertainty; we know the possible outcomes but not which one
will take place
• E.g. Khuzaima and Abuu Bakar are two friends, who could be either sick
or healthy. Thus, there are four possibilities:

Khuzaima Abuu Bakar

 
 X
X 
X X

• Each outcome has a 25% possibility of occurrence

 What is risk?
You do not know: Sickness Maternity Death

Will it happen? 

When will it happen?  

What will be the financial

Consequences?  
 Types of risks
• Covariant risks: affect large numbers of people at the same time, e.g. epidemics
• Idiosyncratic risks: affect a small segment of the population

• Minor and major risks:

Probability Unit cost Possible

consequences
Minor risk +++ + Consultation
Major risk + +++ Hospitalization

• Catastrophic risks: affect a large segment of the population and have high unit
costs
 Sources of risk
Natural: flood, drought
Health: illness, epidemic
Life-cycle: birth, old age, death
Social: crime, war
Economic: unemployment, financial crisis
Political: riot, coup d’état
Environment: pollution, nuclear disaster

Social security covers health and life-cycle risks, and some economic risks like
unemployment
 Consequences of risk
• Risks have various consequences which could affect the
person and the family members
• Thus, risk management is important
• E.g. possible consequences of accidents include financial
losses, temporary or permanent disability, death
 Risk management strategies

Prevention Mitigation
Occurrence
of the risk
Precaution Risk Coping

Ex ante Ex post
strategy: strategy:
protection repair
 Risk management strategies
Prevention Precaution Mitigation Coping

• aim to reduce the • aim to limit • aim to reduce the • aim to relieve the
chances of the exposure to risk potential impact impact of the risk
risk occurring, in • are introduced of the risk, in after it occurs
advance before the risk advance • are introduced
• are introduced occurs • are introduced after the risk
before the risk before the risk occurs
occurs occurs
e.g. immunization e.g. settling in e.g. building up e.g. visiting
areas less prone to assets and savings traditional healers
floods to save money,
working longer to
earn money
 Need for insurance
Risk management can be done at:
individual level
family level
community
level

But not always!

For some risks, individuals, families, communities cannot cope by
themselves

There is need for a broad database

 How does insurance work?
A contract!
1. Insured pays a premium

and transfers his financial risk

2. Insurer pays the financial

losses suffered by the insured
(indemnity) in case of
unforeseen events
 How does insurance work?
• Illness is unpredictable and need for treatment is uncertain, so individuals
cannot predict their future health care expenditure
• Based on historical information, insurance providers can predict the
probability of a risk for a large group of insured people and estimate the
average cost of the risk
 How does insurance work?
• Insurance takes all the risks in a group and puts them into a
pool

• Not all insured persons claim their benefits at the same time
• Contributions paid by all insured members are used to
compensate for the financial consequences of the few persons
who experience the risk
 Question

Is there a need of Islamic Insurance?

 Yes, there definitely is a need for Islamic
insurance
• One of the ways to reduce the risk of loss in business due to misfortunes is
through insurance. The concept of insurance, where resources are pooled to help
the needy, does not contradict Sharia.

• This is not a new concept; in fact, it had been practiced by the emigrants of
Makah and the Ansari of Medina following the migration of the Prophet (sa) over
1400 years ago

• Conventional insurance involves elements of uncertainty (Al-Gharar), gambling

(Al-Maisir)
3/3/2014 and interest (Al-Riba). 16
 Cont.
• Muslim countries only account for 10.5% of the global insurance market
although they represent 25% of the world’s population
• Most Muslim countries are on earthquake zones
• Improved education among Muslims – awareness of Insurance needs
• Enhancement of Islamic finance and banking
• Global economic growth
• Insurance penetration among Muslim countries as a % of GDP is relatively
low: between 0.5% and 1.5%

3/3/2014 17
Takaful in the light of Shariah
Concept & Practical Aspects
 Definition of Takaful

• The word “Takaful” originates from the Arabic

language.

• Its root word is “kafala” which means “to look after”.

• Through inflection it changed to “takafala” which

means “to help each other”.
 The Concept of Takaful

• It is based on the concept of brotherhood and mutual solidarity.

• Takaful is a community-pooling system in which participants

contribute their savings into the common fund to help those who
need it most in times of financial difficulty.

• Examples: The concept of Takaful is manifested in the system of

Bait-ul-Maal, cooperative societies and joint family set-ups etc…
 Basis for Islamic Insurance
• Islamic insurance embraces the concepts of mutual protection and shared
responsibility as seen in the practice of blood money or diyah under the
Arab tribal custom, and which were accepted into Islamic practice on the
verdict of the Prophet.

• The system, therefore, evolves a programmed by a group of people co-

operating amount themselves to establish common resources for
solidarity and mutuality.
 Risk Mitigation in Islam

Risk mitigation is not only permissible in Islam but is in fact encouraged

• Islamic history is replete with examples featuring activities involving risk mitigation:
– Dhaman Khatr al-Tareeq: A person would undertake another person’s risks without any
consideration/fee in return
– Dhaman Al-d’ark: A person would influence a sale by promising to compensate for the
loss if the subject-matter proved faulty
– Aqila: A risk sharing mechanism in which community members pooled their share of
Diyat (blood money)
– Aqd-e-Muwalat etc. A person accepts Islam at the hand of another and then pact an
agreement with him that he will be the inheritor of his wealth after his death, an all
liabilities for his wrongs will upon him
• The theme in all these examples is the concept of brotherhood and mutual solidarity
 Risk Management and its Process

Generally, there are five ways of dealing with a risk:

1. Risk Avoidance
2. Risk Control
3. Risk Retention
4. Risk Transfer
5. Risk Sharing
‫‪Risk Management in Quran & Hadith‬‬

‫َّهلُ َك ِة ‪] ---‬البقرۃ‪]۱۹۵ ،‬‬

‫• َواَل ُت ْل ُقوا بَِأيْ ِدي ُك ْم ِإلَى الت ْ‬

‫استَطَ ْعتُ ْم ِم ْن ُق َّوٍة ۔۔۔ [االنفال‪]٦۰ ،‬‬ ‫ا‬ ‫م‬

‫ُْ َ ْ‬ ‫م‬ ‫ه‬‫ل‬
‫َ‬ ‫وا‬ ‫ُّ‬
‫د‬ ‫•وِ‬
‫َأع‬ ‫َ‬

‫ْجن َِّة‬‫ل‬ ‫ا‬ ‫ي‬‫ف‬‫ك ُقرَآنًا َعربِيًّا لُِت ْن ِذر َُّأم الْ ُقرى ومن حولَها وُت ْن ِذر يوم الْجم ِع اَل ريب فِ ِيه فَ ِري ٌق ِ‬
‫َ‬ ‫ي‬ ‫ل‬
‫َ‬ ‫ِإ‬ ‫ا‬‫َ‬‫ن‬ ‫ي‬ ‫ح‬‫َأو‬ ‫ك‬‫َ‬ ‫• وَك َذلِ‬
‫َ‬ ‫ْ‬
‫َ َ‬ ‫َ‬
‫َ ََ ْ َ ْ َ َ َْ َ ْ‬ ‫َ‬ ‫َ‬ ‫ْ َ‬ ‫ْ‬ ‫ْ‬ ‫َْ‬ ‫َ‬
‫السعير‪[...‬شوری‪]۷-‬‬ ‫ِ‬ ‫ِ‬
‫َوفَ ِري ٌق في َّ‬
‫خ‬ ‫جن‬ ‫خ‬ ‫ق ق‬
‫ن‬
‫عذاب ب ر‪ ،‬ی امت کی ہ ول ت اکی کا ب ی ان‪ ،‬ہ م کے عذاب کی ب رسب ای ک طرہ کا اعالن ہ‬
‫ے‪ ،‬جس سے •‬
‫ے۔‬ ‫ے اسالم کی دعوت دی ج ارہ ی ہ‬
‫دارک کے یل‬
 ‫‪Risk Management in Quran & Hadith‬‬

‫اء‬‫د‬ ‫ع‬ ‫ض‬

‫َ‬ ‫ي‬ ‫م‬‫َ‬‫ل‬ ‫ه‬ ‫َّ‬
‫ل‬ ‫ال‬ ‫َّ‬
‫ن‬ ‫ِإ‬‫َ‬‫ف‬ ‫ا؛‬‫و‬ ‫او‬‫د‬‫َ‬ ‫ت‬
‫َ‬ ‫!‬ ‫اد اللَّ ِ‬
‫ه‬ ‫ب‬‫ع‬‫ال‪َ :‬نعم‪ ،‬يا ِ‬
‫َ‬ ‫ق‬
‫َ‬ ‫ى؟‬ ‫او‬ ‫د‬
‫َ‬ ‫ت‬‫ن‬‫َ‬ ‫اَل‬‫َأ‬ ‫!‬ ‫ول اللَّ ِ‬
‫ه‬ ‫َ‬ ‫س‬ ‫ر‬ ‫ا‬ ‫ي‬ ‫‪:‬‬ ‫اب‬‫ر‬ ‫ع‬
‫ْ‬ ‫َأْل‬ ‫ا‬ ‫ت‬
‫ْ‬ ‫ل‬
‫َ‬ ‫ا‬‫َ‬‫ق‬ ‫‪:‬‬ ‫ال‬
‫َ‬ ‫َ‬‫ق‬ ‫• َعن ُأسامةَ بْ ِن َش ِر ٍ‬
‫يك‬
‫ً‬ ‫َ‬ ‫ْ‬ ‫َْ‬ ‫َ‬ ‫ْ‬ ‫َ‬ ‫َ‬ ‫َ‬ ‫ْ َ‬ ‫َ‬ ‫َِ‬ ‫َ‬ ‫َ ِ َ َُ‬ ‫ُ‬ ‫ْ ََ‬
‫ول اللَّه! َوَما ُه َو؟ قَ َ‬ ‫ِ‬
‫ال‪ :‬ال َْه َرُم‪[ .‬السسن للترمذی]‬ ‫اء ِإاَّل َد ً‬
‫اء َواح ًدا‪ ،‬قَالُوا‪ :‬يَا َر ُس َ‬ ‫ال َد َو ً‬
‫اء َْأو قَ َ‬ ‫ِإاَّل َو َ‬
‫ض َع لَهُ ش َف ً‬

‫ُأوصي بِ َمالِي ُكلِّ ِه؟‬ ‫ال ِ‬ ‫ْت‪ :‬لِي َم ٌ‬ ‫صلَّى اللَّهُ َعلَْي ِه َو َسلَّ َم َيعُ ُ‬
‫ودنِي َوَأنَا َم ِر ٌ‬
‫يض بِ َم َّكةَ‪َ ،‬ف ُقل ُ‬ ‫ال‪َ :‬كا َن النَّبِ ُّي َ‬
‫• َعن س ْع ٍد ر ِ‬
‫ض َي اللَّهُ َع ْنهُ قَ َ‬ ‫ْ َ َ‬
‫ِ‬
‫اء َخ ْي ٌر م ْن َأ ْن تَ َد َع ُه ْم َعالَةً‬ ‫ِ‬ ‫ِ‬ ‫ث َو ُّ‬ ‫ال‪ُّ :‬‬ ‫ِ‬ ‫ْت‪ :‬فَ ُّ‬ ‫ْت‪ :‬فَ َّ‬
‫ك َأ ْغنيَ َ‬ ‫ث َكث ٌير‪َ ،‬أ ْن تَ َد َ‬
‫ع َوَرَثتَ َ‬ ‫الثلُ ُ‬ ‫الثلُ ُ‬ ‫الثلُث؟ قَ َ‬ ‫ال‪ :‬اَل ‪ُ ،‬قل ُ‬ ‫الشطْر؟ قَ َ‬ ‫ال‪ :‬اَل ‪ُ ،‬قل ُ‬ ‫قَ َ‬
‫َّاس فِي َأيْ ِدي ِه ْم‪[ ...‬الصحيح للبخاری]‬ ‫َيتَ َك َّف ُفو َن الن َ‬

‫ول اللَّ ِه !َأ ْع ِقلُ َها َوَأَت َوَّك ُل َْأو ُأطْلِ ُق َها َوَأَت َوَّك ُل؟ قَ َ‬
‫ال‪ :‬ا ْع ِقل َْها َوَت َوَّك ْل‪[.‬السسن للترمذی]‬ ‫• قَ َ‬
‫ال َر ُج ٌل‪ :‬يَا َر ُس َ‬
 TAKAFUL

CONVENTIONAL INSURANCE

Conventional Insurance vs.

Takaful
 Shariah’s Stance on Conventional Insurance

concept of
Insurance?
? practice of
Insurance?

Shariah has no objections as to the concept or

objectives of insurance ; it has reservations only
with the way it is being practiced…
 ‫‪References regarding Concept of Insurance‬‬

‫الت ْقوى واَل َتعاونُوا َعلَى اِإْل ثْ ِم والْع ْدو ِ‬ ‫ِ‬

‫ان}[المائدة‪]2 :‬‬ ‫َ ُ َ‬ ‫{وَت َع َاونُوا َعلَى الْب ِّر َو َّ َ َ َ َ‬ ‫• َ‬
‫• {ِإنَّ َما ال ُْمْؤ ِمنُو َن ِإ ْخ َوةٌ} [الحجرات‪]10 :‬‬
‫• عن عامر‪ ،‬قال‪ :‬سمعته يقول‪ :‬سمعت النعمان بن بشير‪ ،‬يقول‪ :‬قال رسول اهلل صلى اهلل عليه وسلم‪« :‬ترى‬
‫المؤمنين في تراحمهم وتوادهم وتعاطفهم‪ ،‬كمثل الجسد‪ ،‬إذا اشتكى عضوا تداعى له سائر جسده بالسهر‬
‫والحمى»‬
‫• عن أبيه أبي موسى‪ ،‬عن النبي صلى اهلل عليه وسلم قال‪« :‬المؤمن للمؤمن كالبنيان‪ ،‬يشد بعضه بعضا» ثم شبك‬
‫بين أصابعه‪...‬‬
‫• عن ابن شهاب أن سالما‪ ،‬أخبره‪ :‬أن عبد اهلل بن عمر رضي اهلل عنهما‪ ،‬أخبره‪ :‬أن رسول اهلل صلى اهلل عليه وسلم‬
‫قال‪« :‬المسلم أخو المسلم‪ ،‬ال يظلمه وال يسلمه‪ ،‬ومن كان في حاجة أخيه كان اهلل في حاجته»(صحيح‬
‫البخاري)‬
 Insurer’s Business Model

Premiums

Claim Payment (upon Risk actualization)

Policyholders Insurance Company

--Insured-- --Insurer--

Premium Sum Insured

(Consideration) (Subject-Matter)
 ‫‪Types of Contracts‬‬

‫ض‬ ‫ق‬
‫ع د معاو ہ‬ ‫عقود المعاوضات‪ :‬وهي ما كان التمليك فيها (عين المال‪ ،‬او •‬
‫‪.‬منفعته) بمقابل سواء كان المقابل ماال او نحوه‬
‫‪• Example: Selling Purchasing, Leasing‬‬
‫‪Commutative‬‬ ‫‪(Ijarah), Nikhah, Rahan etc.‬‬

‫‪Contract‬‬

‫ق ت‬
‫ع د ب رع‬ ‫• عقود التبرعات‪ :‬وهي ماكان التمليك فيها من غير مقابل مثل‬
‫الهبة والصدقة‪ ،‬والوصية والوقف واالعارة‪.‬‬
‫‪Taburru‬‬ ‫‪• Example: Hibah (Gift), Sadqah, Loan,‬‬
‫‪Ariah, Wasiyyah, Waqf etc.‬‬
‫‪Contract‬‬
Shariah’s perspective/stance on Insurers’ Business Model

• Insurer: The insurance company is selling “Sum Insured”

• Insured: The policyholder is buying Sum Insured by paying fixed “Premiums”
• Nature of Contract:
• It is a sales
Shariah’s purchase contract,
perspective/stance bi-lateral,
on Insurers’ Business Model commutative i.e. Aqd-e-Muawaza
• Subject Matter: “Sum Insured” ; Consideration: “Premium”
• It is a Risk-Transfer Mechanism
• The insured (financially weaker party) is transferring its risk to the insurer
(financially stronger party)
• The insurer is charging a fee called “Premium” for accepting the risk and
promising to pay “Sum Insured” if a covered event takes place
Riba, Qimar, Gharar

• The sales - purchase contract is Aqd Muawaza and

due to this some ills involves:

RIBA Qimar/Maysir Gharar

Riba, Qimar and Gharar are prohibited in Shariah.

 Fatwas Against Conventional Insurance

• The majority of scholars is of the opinion that the conventional insurance practiced today is
not Shariah compliant
• A fatwa issued by a committee comprising of leading scholars for the Saudi Arabia
Government
• “Our observation that the modern form of insurance companies and their current
practices are objectionable Islamically does not mean that Islam is against the concept of
Insurance itself ; not in the least – it only opposes the means and methods. If other
insurance practices are employed which do not conflict with Islamic forms of business
transaction ; Islam would welcome them” “The Lawful & the Prohibited in Islam” (pg.
276)
• The National Fatwa Committee Malaysia deliberated on the question of life insurance (15th.
June 1972) and below is a translation of an extract from the minutes recorded
• “Life insurance as presently practiced by insurance companies is a fasid transaction as it
is contrary to the Shariah principles of contract because it contains the following
elements : Riba, Gharar, Maisir. As such from the Shariah point of view, insurance is
haram”.
Definition of Takaful

Takaful is a community-pooling system,

based on the principles of brotherhood and mutual help,

wherein participants contribute in a fund,

to help those who need it most in times of financial difficulties.

EXAMPLES: The concept of Takaful exists in cooperative societies and joint-family systems etc

In practice, Takaful can serve as a risk-mitigation tool and an alternative to conventional insurance.
 Three Operational Models

Pure Practiced in earlier eras, this model

Mudarbah is not in vogue anymore.

Pure Wakalah This model in not widely practiced.

Hybrid –
Wakalah + This is the most prevalent model.
Mudarbah

Hybrid –
Wakalah+ This model was suggested by
Mudarbah+ Shariah Scholars in Pakistan.
Waqf
 Key Points on Takaful Process

• Contributions are paid on the basis of

Taburru. In Shariah such a contract is called
Aqd Taburru
• Contributions are credited to the Waqf
Fund; Operator acts as Wakeel
WAQF
• The Waqf Fund pays the claims
• Contributions are invested only in Shari’ah
Compliant investment avenues
• An independent Shariah Board supervises
business activities for Shariah compliance
 Takaful from Customer’s Perspective

• Takaful resonates with the beliefs and value system of

people from different cultures:

Shariah and
Shariah Transparent Surplus
Socially
Compliant Ethical and Full
Disclosure
Responsible Sharing
Investments
 Conclusion
• Takaful contract is strongly Islamic, but the operators have to make sure that
the investment of the investors money is doing accordingly to the principles of
shari’ah.
• Despite the progress made in this area, there is room for development both in
principles and practices of Takaful operations, which may act as an alternative
in the true sense to the insurance practices offered under the banner of
conventional systems.
• Simultaneously, such a comprehensive operation of Takaful may meet the
expectations of the global Muslim Ummah of this century and the centuries
ahead.
Jazaak Allah
Khairan