Takaful Prepared by: Dr. Asmadi Mohamed Naim FWB
Content • Introduction • The opinion of Islamic scholar about insurance concepts • The development of takaful • Theoretical and conceptual aspects of takaful • The defferences 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 bulb, which are not permissible in Islam.
In Al-Quran • “O you who believe, devour not usury, doubling and quadrupling, the sum lent. Fear allah and observe your duty to Him, that you may really prosper.”
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.
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 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 namely, • the evolutionary phase, • the nurturing phase and • 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 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.
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 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.
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 ofal-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.
Conceptual Framework 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.
Thus in consonance with the above characteristics the 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 transaction 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.
Analysis on Principles of Takaful Some of the points “lacking” in both the principles and practices of Takaful. i. An insurance policy is a financial transaction which binds both the operator and participant based on the general principles of al-‘Aqad (contract). The minimum age of the contracting parties in a contract under Islamic law has been set by the Islamic jurists and they have unanimously agreed that the minimum age of the contracting parties should be the age of rushd (puberty or majority). However, there are diversifications of views amongst Islamic jurists in setting the exact year of the age of rushd. • Comment: The diversifications of view in this matter is not the lacking point in Takaful concept but it proved that some rules in Islamic law was under the influenced of the custom of ummah in certain area. Hence, it is our responsibility to choose and to decide a suitable age of our people who reach the age of rusyd.
ii. Al-Tabarru’ (donation or charity). In practice, the Takaful operator and participant in the general Takaful, mutually agree that in consideration of the paid contributions, the Takaful operator would undertake the responsibility of providing a pecuniary coverage for the participant should the risk over run the subject matter within the policy period. • According to Islamic principles of al-Tabarru’, which has a synonymous idea to and similar legal consequences with al-Sadaqah (charity), al-Hiba (gift), and al-Khairat (donation), wherein anything once given away as donation in favour of something or someone, the donated property cannot generally be retracted. The donor automatically loses title over the donated property soon after it is made as al-Tabarru’ or al-Sadaqah or al-Hiba or al-Khairat. • The comment here, relying on the aforementioned analysis, is that, if the paid contributions in the general Takaful are regarded as al-Tabarru’, according to Islamic law the contributions cannot be reclaimed as it has been given away as Tabarru’.
In practice, however the participant continues to hold a right of claim in consideration of the paid contribution against the risk on the subject matters. Therefore, it is not clearly understood what provision can justify paid contributions being regarded as al-Tabarru’ in a general Takaful. • Possible Suggestions: It is therefore suggested here that the paid contribution in the general Takaful may be regarded as al-Musahamah (contribution) instead of al-Tabarru’ (donation). • This is because if the paid contribution in the general Takaful is regarded as al-Musahamah (contribution) the participant has no restriction in Islamic law to make a claim against the risk on the subject matter of the policy. • It is again strongly believed that there is no provision in the Shari’ah which may prohibit the contributor from making a claim or seeking for a benefit over his own contributed fund. The establishment of such a contributed fund can also be justified by the Qur’anic sanction of mutual co-operation:
Comment: • i. There is no contract in Islamic Law named Musahamah contract. Musahamah in this sense, bring the same meaning as tabarru’. • ii. The concept of Takaful is a new contract which is govern under the maxim of Islamic law which stated: The basis of contracts is permissible except those who declared by syara’ as prohibited (haram). • iii. It is allowed in Islamic law to consider general takaful as a fee-based limited society, or as a limited mutual co-operation among specific group by giving certain amount of money in order to help each other to face unpredicted risks. • iv. General Takaful contract can be considered as mudarabah plus tabarru’ contract between operator and participants. Participants agreed to invest their capital , then donate their capital and profit to whosoever among the participant faces the insurable interest. This is why, this contract called tabarru’ contract. • In some cases, the operator will return the balance of the capital and profit if exceeded the expenses and claims, or the balance will be brought forward to the next consecutive year .
The difference between the principles of Takaful and conventional insurance. • First of all, 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 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.
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.