TAKAFUL THE ISLAMIC INSURANCE

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TAKAFUL THE ISLAMIC INSURANCE

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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.

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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 partys profit. E.g. One
  partys (such as policy holders) 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

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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.

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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.

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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

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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

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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)

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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)

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Existence of Al-Maisir in Insurance

• In Al-Quran
• O Believers! Intoxicants and gambling and
  divining arrows are an abomination of Satans
  handiwork. Leave it side in order that you may
  prosper.
• (Al-Maidah 590)

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• 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.

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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.

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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.

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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.

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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).

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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

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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.

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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.

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• 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.

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• 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.

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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)

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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.

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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

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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.

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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 (taawun)
  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

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• 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.

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The differences between takaful and conventional
insurance.

• The operations of Takaful must be in line with
  the Shariah principles. A Takaful operation may
  be held void if any aspects of its operation is
  proven to be contrary to the Shariah 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.

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The differences between takaful and conventional
insurance.

• The operation of Takaful practices is generally
  supervised by an independent body called the
  Shariah 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 Shariah principles. In
  other words, the establishment of a Shariah
  Supervisory Council for every individual Takaful
  operator is a prerequisite prior to the
  commencement of the Takaful operation.

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The Solution Islamic Cooperative Insurance(
Takaful)
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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.

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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.

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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

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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.

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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.

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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.

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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