Comparison BetweenLife Insurance and Family Takaful Azman Ismail email@example.com www.iifin.net
Relevant Infrastructure • Takaful Act 1984 • Guidelines • OIC Fiqh Academy • Islamic Financial Services Board (IFSB) • Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) • International Association of Insurance Supervisors (IAIS) in 1994. It was mirrored along the lines of the Basel Committee on Banking Supervision (BCBS), which issued the Basel Capital Accord and Basel II
BNM GUIDELINES • Guidelines on Directorship for Takaful Operators • Guidelines on Prohibitions Against Unfair Practices in Takaful Business • Guidelines on Claims Settlement Practices • Guidelines on Proper Advice Practice for Family Takaful Business • Guidelines on Operating Costs of Family Takaful Business • Guidelines on Financial Statements for Takaful Operators • Guidelines on Related Party Transactions for Takaful Operators • Guidelines on Outsourcing For Takaful Operators • Guidelines on the Governance of Shariah Committee
Differences in Legal Framework • Takaful Act 1984 • defines “takaful business” as a “business of takaful whose aims and operations do not involve any element which is not approved by the Syariah;” whilst takaful is defined as “a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose.”
Cont… • It contains 4 Parts with 68 Sections. The first part deals with definitions and classification of takaful business as well as construction of references to matters connected with takaful. The second part deals with the conduct of takaful business. The third part deals with returns, investigations, winding up and transfer of business whilst the fourth part deals with miscellaneous and general provisions.
Cont… • aims and operations of the takaful business which it is desired to carry on will not involve any element which is not approved by the Shariah; • and that there is in the Articles of Association of the takaful operator concerned provision for the establishment of a Shariah advisory body, as may be approved by the Director General, to advise an operator on the operations of its takaful business in order to ensure that it does not involve in any element which is not approved by the Shariah.
Section 5 • Where any person holds himself out to be a registered takaful operator in respect of family solidarity business or general business or both where he is not registered under this Act in respect of that business, that person shall be guilty of an offence and shall, on conviction, be liable to a fine of twenty thousand ringgit or to imprisonment for a term of twelve months or to both, and to a daily fine of not exceeding four thousand ringgit.”
Section 6 • “No person other than an operator registered under this Act shall, without the written consent of the Director General, use the word “takaful” or any of its derivatives in any language, or any other word indicating that such person carries on takaful business in the name, description or title under which it carries on business in Malaysia or make any representation to such effect in any bill head, letter paper, notice or advertisement or in any other manner”
Section 8(5) • “The Director General shall also refuse to register an applicant unless he is satisfied— • (a) that the aims and operations of the takaful business which it is desired to carry on will not involve any element which is not approved by the Syariah; and • (b) that there is in the Articles of Association of the takaful operator concerned provision for the establishment of a Syariah advisory body, as may be approved by the Director General, to advise an operator on the operations of its takaful business in order to ensure that it does not involve in any element which is not approved by the Syariah.”
Section 11(1) • “The Director General may by order cancel the registration of an operator either wholly or in respect of a class of business, as the case may be, if he is satisfied that— • (a) the operator is pursuing aims or carrying on operations involving any element which is not approved by the Syariah;”
Regulation and Supervision The regulation and supervision of takaful in Malaysia is provided for by the Takaful Act 1984 where Section 54 confers powers, duties and functions to the Director General. The Director General of Takaful is the Governor of the Central Bank where the Act defines “Central Bank” to mean the Central Bank of Malaysia established by the Central Bank of Malaysia Act 1958. (It has now been replaced with the Central Bank of Malaysia Act 2009) Azman Ismail www.iifin.net
Central Bank (1) The Central Bank shall be responsible for administering, enforcing, carrying out and giving effect to, the provisions of this Act and the Governor of the Central Bank shall be the Director General of Takaful and shall exercise, discharge and perform on behalf of the Central Bank, the powers, duties and functions conferred on the Director General under this Act. (2) In the exercise of his functions the Director General shall act in accordance with any general directions of the Minister. (3) In the exercise of his functions under sections 18, 30, 34, subsection 37(3), subsection 38(3) and section 47 the Director General shall first consult the Minister and shall act in accordance with any directions given by the Minister. Azman Ismail www.iifin.net
Cont… (4) If the Director General (or the acting Director General for the time being during a vacancy or during the absence or incapacity of the Director General) is not a qualified actuary, the Minister shall arrange for the services of a qualified actuary to be available at all times for the purposes of advising in relation to matters arising under this Act. (5) Without prejudice to the provisions of subsection (6), the Director General may appoint any officer of the Central Bank to exercise or perform all or any of the powers, duties or functions of the Director General under this Act. (6) The Director General may authorize or appoint any person to assist him in the exercise of his powers or performance of his duties or functions under this Act either generally or in any particular case. Azman Ismail www.iifin.net
Shari’ah Advisory Council The Shari’ah Advisory Council is not to be confused with the Shari’ah Committee of a takaful company. The Shari’ah Committee is a supervisory body provided for by Section 8 of the Takaful Act 1984 whereas the Shari’ah Advisory Council was established under subsection 16B(1) of the Central Bank of Malaysia Act 1958. Azman Ismail www.iifin.net
Cont… Section 51 (1) of the Central Bank of Malaysia Act 2009, which superseded the Central Bank of Malaysia Act 1958, provides for the establishment a Shariah Advisory Council on which shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business, including takaful. In addition, its purpose, provided for under Section 52 of the Act, is to advise the Central Bank on any Shariah issue relating to Islamic financial business, the activities or transactions of the Bank Azman Ismail www.iifin.net
Function of the Shariah Advisory Council (a) to ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it in accordance with this Part; (b) to advise the Bank on any Shariah issue relating to Islamic financial business, the activities or transactions of the Bank; (c) to provide advice to any Islamic financial institution or any other person as may be provided under any written law; and (d) such other functions as may be determined by the Bank. Azman Ismail www.iifin.net
Cont… Central Bank is required to consult the Shariah Advisory Council on any matter (a) relating to Islamic financial business; and (b) for the purpose of carrying out its functions or conducting its business or affairs under this Act or any other written law in accordance with the Shariah, which requires the ascertainment of Islamic law by the Shariah Advisory Council. Azman Ismail www.iifin.net
What about takaful operators? Own Shariah Committee that will advise them May seek the advice of the Shariah Advisory Council must comply with the advice of the Shariah Advisory Council in the event that the ruling of a Shariah Committee of any takaful operator is different from the ruling given by the Shariah Advisory Council, the ruling of the Shariah Advisory Council shall prevail Azman Ismail www.iifin.net
Others • Separation of funds • Age – 18 years old • Section 21(7) – investment • Insurable Interest • Nomination Will be discussed under issues
Differences in Governance • “Sharī`ah Governance System” • set of institutional and organisational arrangements through which an IIFS ensures that there is effective independent oversight of Sharī`ah compliance over each of the following structures and processes:
Cont… • (a) issuance of relevant Sharī`ah pronouncements/ resolutions that govern the whole of its operation • (b) dissemination of information on such Sharī`ah pronouncements/resolutions to the operative personnel of the IIFS who monitor the day-to-day compliance with the Sharī`ah pronouncements/resolutions vis-à-vis every level of operations and each transaction • (c) an internal Sharī`ah compliance review/audit for verifying that Sharī`ah compliance has been satisfied, during which any incident of non-compliance will be recorded and reported, and as far as possible, addressed and rectified • (d) an annual Sharī`ah compliance review/audit for verifying that the internal Sharī`ah compliance review/audit has been appropriately carried out and its findings have been duly noted by the Sharī`ah board.
Roles of Shariah Committee Ensuring that both the shareholders’ and takaful funds are managed and administered in accordance with the Shariah principles; Providing expertise and guidance for the company in all matters relating to the Shariah principles, its structure and investment process, and other operational and administrative matters; Consulting the authorities who may consult their Shariah Advisory Council where there is any ambiguity or uncertainty as to an investment, instrument, system, procedure and/or process; Scrutinising the company’s compliance report as provided by the compliance officer, transaction report provided by or duly approved by the trustee and any other report deemed necessary for the purpose of ensuring that the investments are in line with the Shariah principles; Azman Ismail www.iifin.net
Cont… Preparing a report to be included in the company’s annual report certifying whether the takaful business has managed and administered in accordance with the Shariah principles; Ensuring that the company comply with any guideline, ruling or decision issued by the authorities with regard to Shariah matters; Vetting and advising on the promotional materials of the company; Assisting and attending to any ad-hoc meeting called by the authorities and/or any other relevant authority. Azman Ismail www.iifin.net
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Differences in Contractual Relationships • According to AAOIFI • The musharaka (partnership) among the participants, which leads to the establishment of a company that has articles of association and all other documents. The relationship between the participants may be confined to a musharaka contract if a company manages the fund (see Shari’a Standard No. (12), on Sharika (Musharaka) and modern Corporations).
Cont The relationship between the company and the policyholders’ fund which is a wakala relationship in regard to management, and a mudaraba or investment agency relationship in regard to the investment of the fund’s assets.
Cont The relationship between the policyholders and the fund which takes the form of donation commitment at the stage of making contributions, and indemnification commitment at the stage of providing compensation for injury as per regulations and underlying constituent documents.
Takaful operator The Company should assume the various tasks of managing the insurance (takaful) operations including including; preparation of insurance (takaful) policies, collection of contributions, payment of indemnities, and all other technical tasks. The Company performs such tasks against a specific fee, which should be stated in the agreement in order to obtain the participant’s approval thereon by signing the contract.
Preparing contracts While the shariah does not require that insurance (takaful) contracts be in writing, the Quran encourages us to formulate a written one as it facilitates the operation and decreases the chance of disputes. The Quran has also stressed the importance of recording to ensure that every item must be recorded. The Quran says, “Be not averse to writing down (the contract) whether it be small or great, with (record of) the term thereof.”
Marketing In order for the takaful fund to be economically viable, there must be enough participation. The more participants there are, the lower the costs and the lower the risks as there are more spread. Therefore the takaful operator needs to ensure that there is enough participation thus requiring them to market the takaful products and services. This can either through intermediaries such as agents, brokers, banks, cooperatives and other individuals and organizations. The takaful operator may also augment these with direct marketing or marketing support.
Takaful contribution (premium) rating In order to get as many participants as possible to participate in the takaful plans or schemes, the “pricing” component of a marketing mix is also important. If the takaful contribution is too high, it may not attract as many customers; on the other hand if it is too low, it may not be economically feasible. Thus a takaful operator needs to determine an appropriate takaful contribution for each risk. Hence, the determination of takaful contribution is an important function of a takaful operator.
Equity • Apart from ensuring the rates of the takaful contributions are adequate, they also need to be equitable. • In the Quran, the word “equity” is mentioned twenty two times. (will be discussed further under surplus)
Underwriting The viability of takaful does not only depend on the number of participation but on the ability of the takaful operator to manage the risks as well. In this respect the takaful operator needs to determine which risks are aceeptable and under what conditions and what are the appropriate takaful contribution (premium) to charge. Although the takaful contribution is given by participants on the basis of tabarru’, it cannot be managed properly if it isleft to their discretion as such a practice would inevitably lead to inadequate funds.
Claims management The claims management function is a significant element of takaful operations. Claims management is not just about paying claims. It is about paying the right amount of claims to the right people at the right time. Although the primary function of the takaful operator is to make good all claims, it also has the duty of ensuring that fraudulent claims are rejected.
Retakaful Usually takaful operators need to accept large risks in order to be competitive. However, it may not have the capacity on its own to accept the risk. In order to increase its capacity without additional financial commitments, it shares the risks with other takaful operators or retakaful operators. In takaful terminology the is known as retakaful and the amount that it “shares” with others is known as ceding out.
Investments Investments also play an important part in takaful operations as it will increase the takaful fund and thus takaful contributions can be lower. The larger the return from investments, the lower the takaful contribution can be charged to participants. However, the return alone is not the criteria for investment; it must also commensurate with the risk and complies with shariah.
Shariah-compliant stocks 1983 -> Bank Islam Malaysia Bhd 1997 -> Securities Commission of Malaysia. 1st Islamic equity index in Malaysia ->RHB Unit Trust Management Bhd in 1996. Dow Jones Islamic Market Index (DJIM) -> February 1999 Kuala Lumpur Shariah Index (KLSI) by Bursa Malaysia -> April 1999 FTSE Global Islamic Index Series by FTSE Group -> October 1999.
Prohibited business activities include: a) Alcohol b) Gambling c) Pork-related products d) Pornography e) Conventional financial services f) Conventional insurance. Source : Securities Commission
Financial ratios as additional criteria in classifying Shariah stocks. debt-to-equity ratio cash and interest bearing securities-to-equity ratio cash-to-asset ratio. Source : Securities Commission
Cleansing mechanism Earlier – 2.5% of profits Now - all Sold 1.30 Dropped 1.25 Bought 1.00 Source : Securities Commission
SAC Benchmarks A new feature in this latest list is the outline of the benchmarks used in determining the tolerable level of mixed contributions from permissible and non-permissible activities towards turnover and profit before tax of a company. The benchmarks, established by the SAC based on ijtihad (reasoning from the source of Syariah by qualified Syariah scholars)
The five-percent benchmark This benchmark is used to assess the level of mixed contributions from the activities that are clearly prohibited such as riba (interest-based companies like conventional banks), gambling, liquor and pork. Source : Securities Commission
The 10-percent benchmark This benchmark is used to assess the level of mixed contributions from the activities that involve the element of “umum balwa” which is a prohibited element affecting most people and difficult to avoid. An example of such a contribution is the interest income from fixed deposits in conventional banks. This benchmark is also used for tobacco-related activities. Source : Securities Commission
The 25-percent benchmark This benchmark is used to assess the level of mixed contributions from the activities that are generally permissible according to Syariah and have an element of maslahah to the public, but there are other elements that may affect the Syariah status of these activities. Among the activities that belong to this benchmark are hotel and resort operations, share trading, stockbroking and others, as these activities may also involve other activities that are deemed non-permissible according to Syariah. Source : Securities Commission
Additional Criteria Financial-ratio screens Companies are removed from the selection pool if their total debt divided by their trailing 12-month average market capitalization is greater than or equal to 33%; if the sum of their cash and interest bearing securities divided by their trailing 12-month average market capitalization is greater than or equal to 33%; or if their accounts receivables divided by their total assets is greater than or equal to 45%. (DJII)
Syariah Equities – Malaysian Regulations As stipulated by the SAC of SC, Malaysia, besides the main criteria above it also includes additional criteria for companies which may comprises both permissible and non-permissible : Haram element must be very small Public perception of the co must be good Core activities of the co. have importance or maslahah (benefit) to the Muslim Ummah. Maximum Level of contribution of interest income received from conventional fixed deposits.
Before that let’s take a look at… Conventional Bonds Face Value Coupon Coupon Coupon Coupon Coupon Coupon Discounted Value
Example Conventional Bonds 1,000 30 30 30 30 30 30 900
Mudharabah Bond Investor buys machine 30 = proportion of mudharabah May be > or < 30 Buys “capital” 1,000 30 30 30 30 30 30 900
Munif Investor buys at 900 Sells to issuer at 1,180 1,000 30 30 30 30 30 30 900