Takaful - Mutual Assistance Under Islam
Saturday, July 11, 2009
Saima Batool & Jafar Razi Khan
Meaning of Takaful
Takaful comes from the Arabic root-word 'kafala'- guarantee. Takaful means mutual protection and joint guarantee. Operationally, Takaful refers to participants mutually contributing to the same fund with the purpose of having mutual indemnity in the case of peril or loss.
Reference
Al Quran: ’Help (ta awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity" al maidah: verse 2 (5:2).
Takaful is a form of mutual help (ta'awun) in furthering good/virtue by helping others who are in need/in hardship. Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to large numbers of participants. This mitigates the otherwise very damaging losses, if borne individually.
Basic Elements of Takaful
o Mutuality and cooperation.
o Tabarru (contribution)
o Eliminates the elements of Gharrar,Maisir and Riba.
o Wakalah/Modarabah basis of operations.
o Constitution of separate "Participants' Takaful Fund".
o Constitution of "Shariah Advisory Board".
o Investments as per Shariah.
Main drivers of Takaful
o Piety (individual purification)
o Brotherhood (mutual assistance)
o Charity (Tabarru or contribution)
o Mutual Guarantee
o Community well-being as opposed to profit maximization.
Objections to Conventional Insurance are based on the Elements of:
o Uncertainty - Gharar
o Gambling - Maisir
o Interest - Riba
o Under Writing + Investment Profit belongs to the Company
Uncertainty - Gharar:
Conventional insurance contract is basically a contract of exchange (mu'awadat) i.e. buying and selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration. The consideration must be certain for an exchange contract. The amount to be paid is not known. The time it will occur is not known. Thus, it involves an element of uncertainty in the subject matter of the insurance sales contract, which renders it void under the Islamic law.
Gambling - Maisir:
The insured loses the money paid for the premium when the insured event does not occur. The company will be in deficit if claims are higher than premium.
Interest - Riba
"Allah has permitted trading and forbidden riba" (Al Baqarah 2 : 275) Insurance funds invested in financial instruments which contain element of Riba.
Comparing Takaful to Conventional Insurance
Takaful Models
Mudaraba Model
The surplus is shared between the participants with a takaful operator. The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as mutually agreed between the contracting parties. Generally, these risk sharing arrangements allow the takaful operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums.
Wakala Model
Cooperative risk sharing occurs among participants where a takaful operator earns a fee for services (as a Wakeel or Agent) and does not participate or share in any underwriting results as these belong to participants as surplus or deficit. Under the Al-Wakala model the operator may also charge a fund management fee and performance incentive fee.
Takaful Products
General Takaful - offers all kinds of non-life risk coverages products like motor takaful, marine takaful, fire takaful, home takaful, shop takaful, etc.
Family Takaful - offers life coverage.
Banca-Takaful - tailored coverages for banks.
Takaful Worldwide
The first ever Takaful company was established in 1979 - the Islamic Insurance Company of Sudan. There are now more than seventy Takaful Companies in over 20 countries. Takaful premium is 0.1% (USD3 billion in 2004) of the global insurance premium and is expected to increase to USD12.5 billion by 2015. It is claimed by certain quarters that the average growth rate is higher than conventional insurance companies. Non - Muslims are also increasingly opting for Takaful products for commercial benefits.
Foundations of Takaful in Pakistan
1949 - Declaration made in the Objectives Resolution adopted by the Constituent Assembly of Pakistan "Sovereign state of Pakistan is established to enable Muslims individually and collectively to order their lives in accordance with the injunctions of the Holy Qur'an and Sunnah".
1973 - The Constitution of Pakistan declares Pakistan as "Islamic Republic of Pakistan and Islam as the official religion of the state".
1985 - Objectives Resolution was made 'substantive' part of the constitution.
1983 to 1989 - The Council of Islamic Ideology held its sessions in order to survey the Islamic Insurance System.
1992 - The Council of Islamic Ideology submitted its report on Islamic Insurance System.
2000 - The Insurance Ordinance defines the term "Takaful" in Section 2 and provides for establishment of Takaful companies in the country.
September 2005 - Takaful Rules notified.
Takaful Prospects in Pakistan
In a country like Pakistan where 97% population is Muslim, the demand for insurance is increasing with the increase in per capita income. The personal lines insurance business (leasing, health, medicare) is also growing at a higher rate than other conventional classes. The government is also encouraging Islamic banking on sound footing and hence there are great prospects for Takaful in Pakistan.
Saima Batool teaches at the International University of Chabahar, Iran. Jafar Razi Khan is a doctoral student in Divinity at the Imam Sadiq University in Tehran. Readers are welcome to discuss aspects of this article with the authors at saimarida87@hotmail.com
Source: The Pakistan Accountant, January-March 2009
Meaning of Takaful
Takaful comes from the Arabic root-word 'kafala'- guarantee. Takaful means mutual protection and joint guarantee. Operationally, Takaful refers to participants mutually contributing to the same fund with the purpose of having mutual indemnity in the case of peril or loss.
Reference
Al Quran: ’Help (ta awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity" al maidah: verse 2 (5:2).
Takaful is a form of mutual help (ta'awun) in furthering good/virtue by helping others who are in need/in hardship. Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to large numbers of participants. This mitigates the otherwise very damaging losses, if borne individually.
Basic Elements of Takaful
o Mutuality and cooperation.
o Tabarru (contribution)
o Eliminates the elements of Gharrar,Maisir and Riba.
o Wakalah/Modarabah basis of operations.
o Constitution of separate "Participants' Takaful Fund".
o Constitution of "Shariah Advisory Board".
o Investments as per Shariah.
Main drivers of Takaful
o Piety (individual purification)
o Brotherhood (mutual assistance)
o Charity (Tabarru or contribution)
o Mutual Guarantee
o Community well-being as opposed to profit maximization.
Objections to Conventional Insurance are based on the Elements of:
o Uncertainty - Gharar
o Gambling - Maisir
o Interest - Riba
o Under Writing + Investment Profit belongs to the Company
Uncertainty - Gharar:
Conventional insurance contract is basically a contract of exchange (mu'awadat) i.e. buying and selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration. The consideration must be certain for an exchange contract. The amount to be paid is not known. The time it will occur is not known. Thus, it involves an element of uncertainty in the subject matter of the insurance sales contract, which renders it void under the Islamic law.
Gambling - Maisir:
The insured loses the money paid for the premium when the insured event does not occur. The company will be in deficit if claims are higher than premium.
Interest - Riba
"Allah has permitted trading and forbidden riba" (Al Baqarah 2 : 275) Insurance funds invested in financial instruments which contain element of Riba.
Comparing Takaful to Conventional Insurance
Takaful Models
Mudaraba Model
The surplus is shared between the participants with a takaful operator. The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as mutually agreed between the contracting parties. Generally, these risk sharing arrangements allow the takaful operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums.
Wakala Model
Cooperative risk sharing occurs among participants where a takaful operator earns a fee for services (as a Wakeel or Agent) and does not participate or share in any underwriting results as these belong to participants as surplus or deficit. Under the Al-Wakala model the operator may also charge a fund management fee and performance incentive fee.
Takaful Products
General Takaful - offers all kinds of non-life risk coverages products like motor takaful, marine takaful, fire takaful, home takaful, shop takaful, etc.
Family Takaful - offers life coverage.
Banca-Takaful - tailored coverages for banks.
Takaful Worldwide
The first ever Takaful company was established in 1979 - the Islamic Insurance Company of Sudan. There are now more than seventy Takaful Companies in over 20 countries. Takaful premium is 0.1% (USD3 billion in 2004) of the global insurance premium and is expected to increase to USD12.5 billion by 2015. It is claimed by certain quarters that the average growth rate is higher than conventional insurance companies. Non - Muslims are also increasingly opting for Takaful products for commercial benefits.
Foundations of Takaful in Pakistan
1949 - Declaration made in the Objectives Resolution adopted by the Constituent Assembly of Pakistan "Sovereign state of Pakistan is established to enable Muslims individually and collectively to order their lives in accordance with the injunctions of the Holy Qur'an and Sunnah".
1973 - The Constitution of Pakistan declares Pakistan as "Islamic Republic of Pakistan and Islam as the official religion of the state".
1985 - Objectives Resolution was made 'substantive' part of the constitution.
1983 to 1989 - The Council of Islamic Ideology held its sessions in order to survey the Islamic Insurance System.
1992 - The Council of Islamic Ideology submitted its report on Islamic Insurance System.
2000 - The Insurance Ordinance defines the term "Takaful" in Section 2 and provides for establishment of Takaful companies in the country.
September 2005 - Takaful Rules notified.
Takaful Prospects in Pakistan
In a country like Pakistan where 97% population is Muslim, the demand for insurance is increasing with the increase in per capita income. The personal lines insurance business (leasing, health, medicare) is also growing at a higher rate than other conventional classes. The government is also encouraging Islamic banking on sound footing and hence there are great prospects for Takaful in Pakistan.
Saima Batool teaches at the International University of Chabahar, Iran. Jafar Razi Khan is a doctoral student in Divinity at the Imam Sadiq University in Tehran. Readers are welcome to discuss aspects of this article with the authors at saimarida87@hotmail.com
Source: The Pakistan Accountant, January-March 2009
posted @ 12:13 PM,
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