Takaful

Takaful (Arabic: التكافل‎) is a co-operative system of reimbursement or repayment in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on behalf by a takaful operator.^[1] It is defined as an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law. This concept has been practised in various forms since 622 AD.^[2] Muslim jurists acknowledge that the basis of shared responsibility (in the system of aquila as practised between Muslims of Mecca and Medina) laid the foundation of mutual insurance.

Islamic references

These fundamentals are based on the sayings of the Islamic prophet Muhammad. Based on the hadith and Qur'anic verses mentioned below, Islamic scholars have decided that there should be a concerted effort to implement the concept of takaful as the best way to resolve these needs. Some examples are:

• Basis of Co-operation: Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety), but do not help one another in sin and transgression. (Sūrat al-Māʼidah, Verse 2)^[Quran 5:2]
• God will always help his servant for as long as he helps others.^[3]
• Basis of Responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected.^[4]
• One true Muslim (Mu’min) and another true Muslim are like a building, whereby every part in it strengthens the other part.^[4]
• Basis of Mutual Protection: By my life (which is in God’s power), nobody will enter Paradise if he does not protect his neighbour who is in distress.^[5] The fundamentals underlying takaful are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic law.
• Some Muslims believe insurance is unnecessary, as society should help its victims. Others believe that Muslims should not ignore the fact that they live, trade and communicate with open global systems, and the need for banking and insurance. They believe in creating Muslim-friendly banking systems and a workable insurance framework by which Muslims can compete with non-Muslims in business and have coverage in daily life.

Principles

The principles of takaful are as follows:

• Policyholders cooperate among themselves for their common good.
• Policyholders contributions are considered as donations to the fund (pool)
• Every policyholder pays his subscription to help those who need assistance.
• Losses are divided and liabilities spread according to the community pooling system.
• Uncertainty is eliminated concerning subscription and compensation.
• It does not derive advantage at the cost of others.

Theoretically, takaful is perceived as cooperative or mutual insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of "bear ye one another's burden". Commercial insurance is strictly disallowed for Muslims (as agreed upon by most contemporary scholars) because it contains the following elements:

• Al-Gharar (uncertainty)
• Al-Maisir (gambling)
• Riba (usury)

There are four models (and several variations) of how takaful can be implemented:

• Mudharabah model (profit-sharing): the manager (shareholders) are sharing Profit and Losses with the policyhoders; used initially in Far East
• Wakala model: agency fee, received up front from the contributions and transferred to shareholders fund;
• A combination of both: Bahrain, UAE and Middle East countries;
• Al Waqf model: mainly used in Pakistan and South Africa; part of the contributed capital is irredeemable.

Takaful companies

The growth in demand for Islamic insurance over recent years (particularly within the GCC countries and other areas of the Middle East), has seen a proliferation of new companies offering Islamic insurance products in these markets. The majority of these firms are full-fledged takaful operators, but conventional insurance companies have also entered the market offering takaful "window" operations. As with the traditional forms of insurance, reinsurance of a takaful operation may be used, known as "retakaful".^[6]

The Mudharabah model (profit-sharing)

According to this principle the al-Mudharib (takaful operator) accepts payment of the takaful installments or takaful contributions (premiums, known as ra's-ul-mal) from investors or providers of capital or funds (takaful participants), acting as sahib-ul-mal. The contract specifies how the profits (or surplus) from the operations of the takaful is to be shared in accordance with the principle of al-mudharabah – between the participants (as providers of capital) and the takaful operator. The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30 and so forth, as mutually agreed between the contracting parties.

In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru ("to donate, contribute, or give away") is incorporated. Relating to this concept, a participant agrees to relinquish (as tabarru) a certain proportion of his takaful installments (or contributions) that he agrees or undertakes to pay, should any of his fellow participants suffer a defined loss. This agreement enables him to fulfill his obligation of mutual help and joint guarantee.

In essence, tabarru enables participants to perform their deeds in assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit (or surplus) that may emerge from the operations of a takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care, whilst striving prudently to ensure the funds are sufficiently protected against over-exposure. Therefore, the provision of insurance coverage in conformity with Shariah is based on the Islamic principles of al-takaful and al-mudharabah.

Al-mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of a takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.

Criticism

One of the practical differences between conventional insurance and Takaful is that: “In case of the deficit of a Participants’ Takaful Fund, the Takaful operator (Wakeel) provides free interest [interest-free] loan (QardHasan) to the Participants.”^[7]

This will likely lead to enmity and dispute between Takaful participants. As is illustrated in the following example: Let’s say Adam and Kareem are making the same contributions to a Takaful fund meant to cover damages from car accidents. Later, both Adam and Kareem get in an accident. Adam files his claim one day before Kareem does. When Adam files his claim there is money left in the Takaful fund to cover his damages and he gets cash, no strings attached. When Kareem files his claim, there is nothing left in the Takaful fund and he is either given nothing or given a loan (as some Takaful operators do). How is this going to make Kareem feel about Adam who took the last of the money in the fund? It seems reasonable to expect that this arrangement will create enmity and ill-will between Kareem and Adam and between Kareem and the Takaful operator.^[8]

Additionally, there has been doubt cast on the legitimacy of claiming that Takaful participants are making "donations". This is because the word "donations" implies giving with no expectation of worldly return. This is clearly not the case with Takaful participants who are seeking insurance.^[9]

References

1. Ajmal Bhatty, President & Chief Executive Officer, Tokio Marine Middle East, Takaful Summit 2011.
2. Omar Fisher and Dawood Y.Taylor (April 2000). "Prospects for Evolution of Takaful in the 21st Century: Origins of Takaful". President and Fellows of Harvard College.
3. Narratives by Imam Ahmad bin Hanbal and Imam Abu Daud.
4. Narratives by Imam al-Bukhari and Imam Muslim.
5. Narrative of Imam Ahmad bin Hanbal.
6. "Concept Paper – Guidelines on Takaful Operational Framework" (PDF). Bank Negara Malaysia. 2009-12-01.
7. "Tazur Takaful". Tazur.
8. Kayali, Rakaan. "The True Difference Between Takaful and Insurance". Practical Islamic Finance. wordpress.
9. Kayali, Rakaan. "The True Difference Between Takaful and Insurance". Practical Islamic Finance. wordpress.

Sources

Chakib Abouzaid: Presentation of the World Islamic Insurance Directory at the World Takaful Conference (2006/07/08/09/10/11/12) www.takaful-re.ae