TECHNICAL ASPECTS OF TAKAFUL BUSINESS OPERATIONS

MRS. N.K. HASAN,
F.C.I.I. (London), M.B.E,, L.L.B., A.I. Arb (UK), M. Inst AM. (UK)
Deputy Managing Director
Pak Kuwait Takaful Company Limited
Dec 11 - 17, 2006

WHAT IS TAKAFUL?

Takaful is an insurance system through which the participants pay their contributions towards the Takaful Fund, which are utilized to pay claims for damages and losses that may be suffered by some of the participants. The company's role is to manage the Takaful Operations and invest participants contributions in accordance with Islamic principles.

TECHNICAL DIFFERENCES BETWEEN TAKAFUL & CONVENTIONAL INSURANCE

CONVENTIONAL INSURERS

TAKAFUL OPERATORS

Company manages the affairs as owner.

Takaful Operator manages the Fund as Wakeel or Mudharib.

Accounting and Auditing consistent with GAAP and prevailing statutory rules.

Accounting and Auditing standards are consistent with GAAP, prevailing statutory rules and in conformity with Shariah Principles;

Coverage of risk is assumed by shareholders.

Coverage of Risk is the obligation of participants.

Benefits are paid from general insurance fund owned by insurer.

Benefits are paid from contributions (tabarru) made by participants

Insurer invests premiums consistent with profit-motive with no moral guidelines; hence co-existence of Riba etc.

Takaful Fund invested in accordance with Islamic values and Shariah guidelines.

Profit of the Insurance Company goes to Shareholders account

Surplus of Takaful Fund goes to Participants account

TAKAFUL MODELS

A. Non-profit model

It includes social-governmental owned enterprises and programs operated on a non-profit basis. Participants contribution is 100% Tabarru (Donation).

B. Mudaraba model

Mudaraba Model, whereby cooperative risk-sharing occurs among Participants and the Takaful Operator shares in any operating surplus as a reward for running the operations effectively.

C. Wakala waqf model

Wakala Waqf Model, is an extension of Wakala Model therein a Waqf is created which has a separate Legal status. Waqf fund would basically be a separate legal entity to which the Shareholders would initially make a donation to establish the Waqf Fund. The creation of cede amount can be of any reasonable amount. The objectives of the Waqf Fund would be to provide relief to participants against defined losses as per the rules of the Waqf Fund. After creation of the Waqf, this amount i.e. creation money no longer belongs to the share holders and cannot be utilized for payment of benefits to the participants.

SHARING OF SURPLUS

*At the end of each financial year the Takaful Operator is required to evaluate the assets and liabilities of the PTF and determine whether the operation for that particular period had produced a surplus or a deficit.

*Surplus of the Participant Fund is the property of Participant Fund and not owned by the Company. This is either retained in the Fund for the benefits of other participant or divided among the participants according to their net share of participation in the fund.

WAKALA & MODARIB FEES

Determination of rate of Wakala fee and Mudarib Share is the discretion of management of Takaful Company subject to approval of Shariah Supervisory Board. This fee/share to be charged shall be explicitly defined in each Takaful Contract.

QARD-E-HASANA

When the PTF including reserves are insufficient to meet their current payments less receipts, the deficit shall be funded by way of an interest-free loan (QARD-E-HASANA) from the SHF and is recoverable from the future surpluses.

PERMISSIBLE TAKAFUL RISK

The main business of the participant company must not violate shariah. Therefore, it is not permissible to cover the companies involved in business prohibited by shariah like alcohol production, gambling or night club activities, etc.

SHARIAH COMPLIANT INVESTMENT

Following are some of the various investment options and modes which may be available to the company in accordance with the injunctions of the Islamic shariah enabling it to achieve its prime objective and operate its business efficiently and effectively.

I) Real Estate Business;
II) Investments In Joint Stock Companies;
III) Investment In Mutual Funds;
IV) Investments In Redeemable Capital;
V) Placement Of Excess Funds With Islamic Banks & Institutions;
VI) Direct Financing Under Islamic Modes.