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1- KESC: THE KARACHIITES CAN MAKE THE DIFFERENCE
2- TAKAFUL
3- SNAGS IN PRIVATIZATION
4- AUTO MARKET EXPANSION
5- STIMULATING PRIVATE SECTOR INVESTMENT

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TAKAFUL

 

An insurance system based on principles of shariah

 

By ABDUR RAHMAN KHANDIA
Sep 01 - 07, 2003
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ISLAM AND INSURANCE

HADITH 1

"The Prophet (S.A.W) told a Bedouin Arab who left his camel to the will of Allah:

TIE THE CAMEL AND THEN LEAVE IT TO THE WILL OF ALLAH"

HADITH 2

"Help one another in furthering Virtue and God Consciousness (taqwa) and do not help another in furthering evil and enmity"

From above quoted two Hadiths it is established and Muslim jurists also generally accept that concept of insurance does not contradict with Shariah.In view of the above as well as the real need for insurance cover, Muslim jurists look further into the Islamic system of insurance. Their conclusion was that Insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest and solidarity.

WHAT IS TAKAFUL

The word Takaful means Joint Guarantee.

The provision of insurance as a form of business in conformity with Shariah is based on the Islamic principles of AL-TAKAFUL and AL-MUDHARABAH.

Al-Takaful means the act of a group of people reciprocally guaranteeing each other, while Al-Mudharabah is the commercial sharing contract between the providers of fund for a business Venture and the entrepreneur.

DIFFERENCE BETWEEN TAKAFUL AND CONVENTIONAL INSURANCE:

The present of three elements that can be found in conventional insurances which do not confirm to the rules and requirement of Islamic syariah. The three elements are:-

1) AL-GHARAR

Al-Gharar means there are unknown or uncertain factors in operation of a contract in both life and general insurance policies.

 

 

2) AL-MAISIR

Al-Maisir or gambling arises as the consequences of the present of Al-Ghara, particularly in the case of life insurance.

3) AL-RIBA

Al-Riba or interest and other related practices in the investment activities of the conventional insurance companies which contravene the rules of the Syariah.

THE TAKAFUL CONTRACT: The conventional insurance contract is a contract of buying and selling.Where as the Takaful contract is based on the principles of Al-Takaful and Al-Mudharabah.Takaful unlike conventional insurance is based on the Islamic Transactions of PROFIT-(LOSS)-SHARING contract under the principle of Al-Mudharabah.

TYPES OF TAKAFUL BUSINESS:

There are two types of Takaful Business.

1) Family Takaful business in replacement of conventional Life Assurance Business.
2) General Takaful Business in replacement of conventional General (Non Life) Insurance.

DIFFERENT DERIVATIVES BEING USED IN TAKAFUL BUSINESS:

1) AL-TAKAFUL

Islamic Insurance based on the Islamic Transactions of Profit-(loss)-Sharing.

2) AL-MUDHARABA

Contract agreement between insured and insurer based on Takaful.

3) AL-MUDHARIB

The insurance company based on the principle of Al-Mudharabah i.e the Takaful operator.

4) SAHIB-UL-MAL

Provider of capital for Takaful Company.

5) RAS-UL-MAL

Gross Takaful installment / contribution (Premium)

6) TABARRU

Certain Portion of Premium (Takaful contribution) agree by the participants to pay for the losses.

7) AL-MUDHARABAH CAPITAL

Gross Takaful contribution provided by the participants.

8) AKAD

The Takaful agreement between Takaful operator and participant is called Akad.

9) TAKAFUL CERTIFICATE

Insurance Policy issued by Takaful operator (Al-Mudharib) to the participant.

The Operation Of General Takaful Company And Its Concept Of Profit Sharing:

The operation of Takaful can be summarised as a venture which embodies the virtues of cooperation, mutual help and shared responsibility among the participants against the occurrence of catastrophe or disaster to any of them.The basic objective of Takaful is to pay a defined loss from a defined fund.The transactional aspect of commercial activity of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with Shariah.

The operation of Takaful may thus be envisaged as a profit sharing business venture between Takaful operator and individual participants.Profit at the agreed ratio to be paid to participants provided they have not received or incurred claims during the period of participation.In general Takaful business profit is shared between Takaful operator and eligible participants on 50: 50/ 60: 40 basis.50% or 60% of the profit is distributed amongst eligible participants (Those who have not lodged any claim during the period) according to their portion of contribution.50% or 40% of the profit is attributed to Takaful operator company and is credited into its share holders fund together with share holder funds own investment profit making it company's total income.The Takaful certificate (insurance policy) contains in condition called "Share of net Surplus" which states that.

"If at the end of Takaful period any surplus in Takaful fund will be shared between participants and Takaful company in accordance with principle of Al-Mudharabah in proportion of 50:50 provided participants have not incurred any claim or not received any benefit under the certificate whilst it is in force".

Surplus in Takaful operation is defined as the participants pay tabarru to the Takaful fund which will be invested by Takaful operator according to the principles of Shariah and all profits from the investment shall be provided back to the fund. If after deducting all operational cost including claims there is surplus, that surplus will be shared between the participant and Takaful company on agreed ratio.The operating expenses/expenditure of Takaful company will be paid from its total income. Where as the management and administrative expenses are to be paid by Takaful Company from its own share of profit.

 

 

According to the theory and practice of Islamic Banking it is prohibited to deduct management and companies administrative expenses from the Al-Mudharabah capital or its realised profits.These expenses are therefore to be borne and paid by the Takaful company from its own share of profit from net surplus derived from Takaful fund.

Therefore it is imperative for the Takaful operator to maintain adequate Assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against under over exposure and safe guard its role as a trustee and custodian of Takaful Fund and also ensure profit at the end of the year. In Takaful System profit is shared on ACTUAL basis and therefore Takaful Accounting System is based on CASH AND ACTUAL basis.

GENERAL TAKAFUL SCHEME:

The General Takaful business provides Various General Takaful Schemes as a form of cover against material loss or damage such as:

1) Fire Takaful
2) Marine Takaful
3) Miscellaneous and Accident Takaful
4) Engineering Takaful
5) Motor Takaful

HOW TAKAFUL COMPANY WORKS:

1) There has to be a Takaful Act like in Malaysia there is a Takaful Act 1984.
2) The Takaful company has to be registered under Takaful Act.
3) The Memorandum and Article of Association of Takaful company prefaces that all business will be transacted in accordance with Islamic principles, rules and practice.
4) A Religious Supervisory Council comprising of Muslim religious Scholars is to be formed to ensure that the Takaful companies are not involved in any elements which are not approved by Islam and also to advise such companies on the operation of its Takaful business.

RE TAKAFUL

Re Takaful means Re insurance, the practice whereby the Takaful underwriter transfers a part of company's liability to another Takaful/Re Takaful operator, plays a very important role in the Takaful operation.

The Takaful underwriter must ensure that the Re Takaful program must

1) Protect the General Takaful Fund from heavy losses.
2) Provide capacity to the Takaful company.
3) Create Stability.

Re Takaful operators follow the principles and practice of conventional Reinsurance.

TAKAFUL COMPANIES:

The establishment of Takaful companies to provide cover for the Muslims which conforms to the rules and practices of the Shariah, is a new development in the Muslim World.At present the Venture is still at its initial stage of development.Major Work on Takaful has been done in Malaysia. Relentless efforts have been carried out by Syarikat Takaful Malaysia Berhard (STMB) in this respect.STMB, the pioneer Takaful company is presently the largest Takaful operator in Malaysia and is also a leading Takaful operator in the Asian Region. The Takaful companies in Malaysia operates under Takaful Act 1984.

So far in other countries following Takaful companies are working:

1) Islamic Insurance Company Ltd (Sudan)
2) Islamic Arab Insurance Company (Saudi Arabia)
3) Dar Al Maal Al-Islamia (Geneva)
4) Islamic Takaful Company (Luxembourg)
5) Islamic Takaful and Re Takaful Company (Bahamas)
6) Syarikat Al Takaful Al Islamiah (Bahrain)