Conventional Insurance • It means a way to provide security / and compensation of what is valuable in the event of its loss, damage or destruction based on the principle of risk taking and speculation.
Problems withConventional Insurance 1. Gharar ( uncertainty ) Literally Gharar means: Uncertainty; cheating; (Jahalah) ambiguity. There are two types of Gharar: • Jahalah which causes to dispute. E.g. un specified or un quantified subject matter in sale. • Uncertainty of one party’s profit. E.g. One party’s (such as policy holder’s) profit in Insurance. 2. Khatar: ( Risk) Taleequl milki al alkhatr, wal mal fil janibain: To stipulate ownership (of any amount) on a risk, where both consideration is money or commodity
Problems withConventional Insurance 2. Mayser ( Qimar or Gambling ) Mayser means Qimar in Arabic language. Mayser has two basic elements which cause to prohibit Mayser namely: 1. Gharar (2) Khatar Having the above two elements speculation, gambling and insurance is prohibited.
Problems withConventional Insurance The participant contributes a small amount of premium in a hop/risk to gain a large sum is Khatar. • The participant loses the money paid for the premium when the insured event does not occur is Gharar. • The company will be in deficit if the claims are higher than the amount contributed by the participants is Gharar.
Problems withConventional Insurance 3. Riba • The element of Riba (Interest) exists in lending or borrowing funds/investments at fixed interest, and other related practices in the investment activities of the conventional insurance companies
CONTENT • Introduction • The opinion of Islamic scholar about insurance concepts • The development of takaful • Theoretical and conceptual aspects of takaful • The differences between takaful and insurance • Conclusion
Why is traditional insurance unacceptable? • The Council of Islamic Fiqh Scholars (1975) ruled that traditional insurance is ‘haram’ due to the presence of three main elements. • Gharar (uncertainty) • Maisir (gambling) • Riba’ (interest or usury)
Existence of Al-Gharar in Insurance • Gharar may originate from: • Ignorance and lack of information over nature and attributes of subject matters • Doubt over its availability and existence • Doubt over its quantity • Lack of information concerning the price and terms of payment (including currency to be paid) • Prospect of delivery (including vendors ability to make delivery according to contract)
Existence of Al-Maisir in Insurance • In Al-Quran • “O Believers! Intoxicants and gambling and divining arrows are an abomination of Satan’s handiwork. Leave it side in order that you may prosper.” (Al-Maidah 5:90)
If left unchecked, gambling closely resembles to ‘risk-taking’ in an insurance contract whereby, • Insurer could receive a huge amount of money, without equivalent input. • Paying premium without getting any amount in return. • Insurer loses if there are too many claimants. • When premiums collected exceeds the claims, insurers could make huge profits. • Insurer calculates the possibilities of a certain event occurring and will indicate a certain.
Existence of Al-Riba in Insurance • The premium of the insurance fund is placed in interested-bearing instruments such as bonds and treasury, which are not permissible in Islam.
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 • The system, therefore, evolves a programmed by a group of people co-operating amount themselves to establish common resources for solidarity and mutuality.
The Takaful Concept • Al-Takaful (social guarantee) refers to the act of a group of people reciprocally guaranteeing one another by providing mutual financial assistance should anyone amongst them be inflicted with a pre-defined mishap. Participants shall contribute an agreed sum regularly into a Tabarru’ (donation) fund.
The Takaful Concept • The Takaful operator (insurance company) agrees to manage the Tabarru’ fund based on a set of guidelines and on the Al-Mudharabah (profit sharing) concept. Participants are the “sahibul-mal” (capital providers) while the Takaful operators is the Mudharib (entrepreneur).
The Development of Takaful The development of takaful in the Asia-Pacific region have thus far evolved a three phase cycle: • the evolutionary phase • the nurturing phase • the consolidation phase
The evolutionary phase • In most of these countries the evolutionary phase went back to the 60s and 70s which saw a surge of Islamic fervour and calls for the establishment of the Islamic Financial System. • Scholars and Muslim jurists discussed, debated and put forth the idea of introducing a financial system which is interest-free, uncertainty-free or in other words acceptable and in accordance to Syariah.
The nurturing phase • Then came the second or the nurturing phase which took place during the 80s in the case of Malaysia and the 90s in the case of Indonesia, Brunei and Singapore. • As in the case of Malaysia, it was during this phase that some of the fundamental infrastructure namely, the Islamic Banking Act of 1983 and Takaful Act of 1984 were laid. Subsequently then came the first prototype model of Bank Islam in 1983 and Syarikat Takaful Malaysia in 1984.
Their existence remained unperturbed for many years perhaps due to the fact that the government of Malaysia wants to ensure that the Islamic System rudiments were given a fairly even chance to grow and be on a sound footing. • In the case of Brunei the nurturing phase came only in the 90s with the formation of Takaful Taib Sdn Berhad and Takaful IBB Berhad, both in 1993.
Indonesia followed suit with the establishment of PT Asuransi Takaful Keluarga in 1994 and PT Asuransi Takaful Umum in 1995. In the same year, Singapore also launched Syarikat Takaful Singapore Pte. Ltd.
The consolidation phase • As far as Malaysia is concerned, the 90s witnessed another stage in the development of financial institutions. • In this so-called consolidation phase say the emergence of competitive elements within both the banking and insurance sector. • Conventional banks were allowed to introduce "interest-free" banking facilities and the regulatory body (Central Bank in Malaysia) also issued the second takaful licence to MNI Takaful Sdn Berhad (MNIT)
The consolidation phase • The presence of these new players had somewhat introduced competitive forces in the respective marketing environment which in turn had influenced both marketers and customers decision and activities. The competition spurred more rigorous marketing activities in the form of more varied products, more promotions and better prices.
List of Licensed Takaful Operators in Malaysia • Takaful Operators in Malaysia • Commerce Takaful Berhad • HSBC Amanah Takaful (Malaysia) Sdn Bhd • Etiqa Insurance and Takaful Bhd - Mayban Takaful Berhad - • Prudential BSN Takaful Berhad • Syarikat Takaful Malaysia Berhad • Takaful Ikhlas Sdn. Bhd. • Takaful Nasional Sdn. Bhd. • Hong Leong Takaful
Theoretical and conceptual aspects of Takaful • Islamic jurists resolved that the system of insurance, which falls within the confines of Islamic framework, should be founded on the concept of al-Takaful. • An Islamic insurance transacting is a policy of mutual co-operation, solidarity and brotherhood against unpredicted risk or catastrophes, in which the parties involved are expected to contribute genuinely. • The nature of the principles of Takaful is fundamentally different from the principles of conventional insurance.
Theoretical and conceptual aspects of Takaful • The concept of insurance (Takaful), according to the jurists, is acceptable in Islam for the following reasons: • the policyholders would co-operate (ta’awun) among themselves for their common good; • every policyholder would pay his subscription in order to assist those of them who need assistance; • it falls under the donation contract (al-tabarru’) which is intended to divide losses and spread liability according to the community pooling system;
the element of uncertainty is eliminated insofar as subscription and compensation are concerned; • it does not aim at deriving advantage at the cost of other individuals. • Under Islamic law, generally, any transaction that has the following elements: unjustified enrichment, uncertainty, risks, riba would vitiate a contract. • Clearly, the contract of insurance under Islamic law would not be valid unless it were free from these elements.
The differences between takaful and conventional insurance. • The operations of Takaful must be in line with the Shari’ah principles. A Takaful operation may be held void if any aspects of its operation is proven to be contrary to the Shari’ah principles. • The operation of Takaful is generally based on the governing principles of al-Mudharaba, profits and loss sharing financing technique, which is an alternative to the interest (riba), based financing technique as adopted by the conventional insurance practices.
The differences between takaful and conventional insurance. • The operation of Takaful practices is generally supervised by an independent body called the Shari’ah Supervisory Council. It is the duty of the council to advise the Takaful operator(s) in any given organization on their operations for the purpose of ensuring that no aspect of the company(s) operations involves any element which is not approved by the Shari’ah principles. In other words, the establishment of a Shari’ah Supervisory Council for every individual Takaful operator is a prerequisite prior to the commencement of the Takaful operation.
Definition for Takaful • Takaful is an Arabic word that means "guaranteeing each other". • It is a system of Islamic insurance based on the principle of TA-AWUN (mutual assistance) and Tabarru (Voluntarily) where the risk is shared collectively by the group Voluntarily. • This is a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage to any of them as defined in the pact.
Basic Principle behind Takaful 1.The principle of “fortunate many helping the unfortunate few" is a concept recognized by Islam. 2.The Quran states in Surah Al-Maidah verse # 2: "Help ye one another in righteousness and piety, but help ye not one another in sin and rancor". 3. Principles of Muwalat, Maaqil, and Kafalah are examples for its permissibility.
Features • Firstly, the participation into a Takaful fund must be performed with utmost sincerity in order to help those faced with difficulties. • Every policy holder would pay his subscription in order to assist those who need assistance • Any member or participant suffering a catastrophe or disaster would receive a certain sum of money or financial benefit from a fund, as also defined in the pact, to help him meet the loss or damage
Operation of Takaful Fund • The transactional aspect of the commercial activity of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with the Shariah . • The Company involved in takaful business, as the operator, will accept payment of the takaful installments or takaful contributions (premium) from the participants (clients) for the takaful plan or takaful scheme they wish to participate.
Operation of Takaful Fund • In order to eliminate the element of “uncertainty” in the Takaful contract, the concept of tabarru (to donate, to contribute, to give away) is incorporated in it. In relation to this a participant shall agree to relinquish as “gift” certain portion of his Takaful installments . • For the service rendered as manager of the Takaful Operations the company will charge a management fee.
Operation of Takaful Fund • The Takaful Fund, consisting of the contributions paid as Tabarru, will be further invested by the Company based on the principle of Al –Mudarabah, through which the element of interest (riba) will be replaced. • All premium holders will participate in pofit and loss. • Profit will be shared on agreed ratio.
Uses of Takaful Takaful can be used to cover • Property like house, factory, mosque, offices • Vehicles (car, motorcycle etc..) • Goods ( like during import or export ) • Valuables • Health, accidents and Life