TAKAFUL (Islamic Insurance) Paradigm

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

There was a lot of potential for Islamic Insurance or well known as Al-Takaful to be part of the global system with this style of insurance aggressively taking shape in the rest of the world. For example, Takaful or Islamic insurance was fast gaining ground in Malaysia. The concept of tabarru’ has brought to the insurance transaction. Tabarru’ has shifted the focus of buying cover from ‘me’ (individualistic) to ‘us’ (mutual help) that leads to the success of Takaful in Malaysia.

The question of what makes the tabarru’ concept appealing to Muslims is the double benefits they get when participating in a Takaful scheme. Firstly, they get insurance cover that is halal (permissible) and, secondly, the benefit of doing a good deed at the same time.

Tabarru’ is derived from Arabic noun that means "donation, gift, and contribution". This one word apparently actually islamises the insurance contract by removing most of the objectivity element. This is actually the fundamental difference between insurance that is shariah compliant insurance (takaful) and conventional insurance.

Islamic insurance is based on cooperation, charity, mutual help and shared responsibility. Under the Takaful insurance structure there are two types of insurance, which are family insurance and general insurance.

Another positive benefit is the feeling of ownership in the Takaful fund that the participants have contributed to.

Being part as the owners, the participants' attitude when making a claim would be different from that of their counterparts in conventional insurance. The sharing of responsibility with the sincere intention of seeking the pleasure of Allah is deemed an act of piety in Islam.

This factor can be a strong motivation for Muslims to participate in the Takaful scheme because if the contribution is made with sincerity, it would not only entitle him to insurance coverage but also reward from the All-Mighty as a good deed. Tabarru’ has the potential to bring about a positive mindset towards insurance not only in Muslims but all Malaysians. This is because Malaysians are generally charitable.

For example, Malaysians generously respond to calls for a donation is it for locals or people in faraway lands such as Bosnia, Albania, and Afghanistan and recently for the victims of earthquake in Taiwan.

CENTRAL IDEAS

Global models of Takaful

All the ASEAN countries adopt the mudharabah or modified mudharabah models. Currently there are three different types of models being adopted.

The first model is the pure mudharabah model where the takaful company and the participant share direct investment income only and the participant is entitled to a hundred percent of the surplus. No deduction for operational expenses is made prior to the distribution of the investment income. This model was chosen for family takaful because it is basically life insurance coverage provided to the participants. The concept is that the fund is solely attributable to the participants.

The second model is a modified mudharabah model where the investment income is ploughed back into the takaful fund and the takaful company share with the participant the surplus from the takaful fund. One company deducts operational expenses and the other does not prior to the distribution of the surplus.

The third model is a modified mudharabah where the both the company and the participant share in both the investment income and the surplus. Deduction for operational expenses is made prior to the distribution of the surplus.

For general takaful business, the second model is recommended with deduction of expenses. The reason is that the it is normally a short- term contract and the risks are inherent.

For family takaful business, the second or third model with deduction of operational expenses prior to distribution of surplus is used. The second reason, the mudharabah model that was in the minds of our scholars who prohibit deduction of expenses is not the same as the current mudharabah model. Thirdly, by deducting operational expenses, the takaful contribution will be more competitive.

With regard to the eligibility of participants in the share of the surplus, there are two different approaches taken by the takaful companies. For some companies, the takaful participants will be eligible to participate in the distributable surplus provided they have not made any claims or received any takaful benefits from the takaful companies or if the participant has terminated or surrendered his or her takaful certificates before expiry.

For others, the participant is still eligible to the share of surplus if the claim is less than the contribution. Either method can be used depending on the circumstances and the strategies undertaken by the different takaful companies. The takaful companies choose both the methods for strategic reasons as well as shariah considerations.

Theoretical Model

As some scholars feel that insurance is haram, what can be done? Can the insurance system be replaced or modified to conform to Islamic law? It is easy to declare something to be haram but that does not solve our predicament. However, from the point of view of most Muslim jurists, "cooperative insurance is not onlypermissible by the Shariah but also encouraged especially when looked at from theaspect of co-operation towards welfare.

As such it is permissible for a bank to set up a co-operative insurance company to function for the benefit of many activities but there is a need to state as clearly as possible in the contract of insurance that the amount of money to be paid by the participant is on the basis of tabarru' to the said company which can be used for the purpose of assisting fellow participants who require assistance according to the terms agreed as long as these terms are not in conflict with the Shariah". Cooperative or mutual insurance companies cater for the social needs of their members based upon the golden principle of ‘bear you one another’s burden’.

SHARI’AH RULINGS

Al-Mudharabah (Profit Sharing)

By this principle, the entrepreneur or al-Mudharib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra's-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the takaful operator is to be shared, in accordance with the principle of al-Mudharabah, between the participants as the providers of capital and the takaful operator as the entrepreneur. The sharing of such profit (surplus) may be in a ratio 5:5, 6:4, 7:3, etc. as mutually agreed between the contracting parties.

According to scholars, gharar is defined as a contract where the results are not known or hidden or one of two possibilities where the frequent occurrence is the one that is more feared. The insurance contract is a contract of exchange whereby the insured pays the price (premium) and the insurer provides compensation. In a contract of exchange, the gharar element that can nullify the validity of the sale is consent.

The Qur’an (4:29) says:

"O who you believe, do not eat property among in a false way, except through trade by mutual consent."

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 tabarru', certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

In essence, tabarru' would enable the participants to perform their deeds in sincerely 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 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 simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure.

Therefore the provision of insurance cover as a form of business in conformity with Shariah is based on the Islamic principles of al-Takaful and al-Mudharabah. Al-Takaful is the pact among a group of people, called participants, means guaranteeing each other. 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 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.

PRACTICAL SCENARIO/APPLICATION

Present Scenario

The idea to set up a takaful system stems from Muslims' wish to conduct their affairs according to Islamic law. This in turn is a consequence of the efforts of Mujaddids in the nineteenth and twentieth centuries who propounded that Islam is not only restricted to a set rules and regulations concerning ibadah and munakahat but a complete way of life (nizamul hayah) including the spheres of business transactions. One of these is regarding insurance. Islamic scholars are not in agreement whether insurance is permissible (halal) or prohibited (haram). Since insurance as it is being practiced now did not exist during the Prophet's time, ijtihad is used to determine whether it is permissible or otherwise.

The scholars who are of the opinion that insurance is permissible said that insurance is a modem contract and them is no injunction (nass) regarding it. If there is no injunction, then it is allowed (mubah). They based their argument on the established legal maxim that "The original legal position on any matter ispermissibility until there is evidence prohibiting it." This legal maxim is based on the Quran of which some of the related verses are as follows: -

“We have subjugated to you all that is in the heavens and the earth” (45:13)

According to the scholars this implies that in principle we are permitted to use the resources of the universe. This implies that all acts that are necessary to facilitate this usage, including transactions, are permissible. To reinforce this, the Quran lays down the principle that Allah S.W.T has clearly explained His prohibitions. Allah s.w.t. says in the Quran (6:119):

"He has explained to you that which is forbidden to you, unless you are compelled thereto."

Furthermore, the universe is described as an adornment of Allah. This is stated in the Quran (7:32)

"Who has forbidden the adornment of Allah which He has brought forth for His bondsmen, and the good things of His providing?"

Therefore a mere presumption is not enough to declare something unlawful. Muslim scholars have held that any injunction that overrules this principle of permissibility must be decisive in meaning and transmission (nass qat'i al thubut wal-dalalah). They further claimed that insurance is a contract that brings maslahah to the insured. Without insurance for example, one's next of kin will suffer a huge burden after his death. Thirdly, the scholars said that custom ('uruf) establishes insurance to protect public and individual interest and custom is accepted as a source of Islamic law.

According to them, the insurance contract is not a contract of exchange but falls under the concept of tabarru' and as assistance and guarantee by the insurer to the insured. In this respect the insurer's position is that of a middleman that collects money from the insured and collectively arranges a form of assistance to them in facing collective losses. Other scholars claimed that the premium the insured pays to the insurer is a fee for looking after his (the insured's) property.

On the other hand many scholars deemed insurance to be prohibited (haram). They could not unanimously agree on the reasons for its prohibition. However in 1972, the Malaysian National Fatwa Council decreed, "insurance, especially life insurance is a fasid practice because it contains the elements of gharar, maisir and riba. Therefore it is haram."

However, knowing the subject matter in a contract is required in determining consent because it is not logical to say that one gives consent to something that he does not know. The scholars further said that in the insurance contract there are four types of gharar present.

Thus it is necessary to emphasize at the outset that the takaful business as practiced in Malaysia is of the kind of cooperative takaful (al-takaful al-taawuni) participated by a group of members of the public for their own cause within the domain of the private sector.

RECOMMENDATIONS

Although theoretically, the scholars suggest cooperative insurance can be the basis of Islamic insurance, not all companies strictly follow the recommendation. Companies in Sudan for example, follow the cooperative insurance model. However, companies in the ASEAN region are primarily commercial in nature. These companies therefore do not follow the model originally envisaged by the scholars.

The model that was envisaged by the scholars is that the "management and control are in the hands of the members who are also the policyholders. The insured and the insurers are therefore, the same people. Its main purpose is mutual security and not profit-making:" Clearly this is not the case for takaful companies in the ASEAN region. Takaful companies in the ASEAN region are formed along commercial lines where profit making is one of the objectives.

Should takaful companies be based on the cooperative or commercial model? The opinion is, at least at this moment in time and under current circumstances, that it is better for us to adopt the commercial model. By strictly following the cooperative model, funds for initial capital is difficult to obtain as most people with money in this 20th century do not just want to "lend" money and not get any financial reward, either through trade or profit sharing.

From the Sudanese experience, which is based on the cooperative insurance model, where the shareholders "lend" money as initial capital can experience a faster growth if it is based on the commercial model as practiced by the ASEAN countries as more parties will be willing to provide capital. (The Sudanese brothers may not agree and may feel that the situation in Sudan warrants a different approach as compared to the ASEAN approach).

Takaful practitioners must also upgrade their technical knowledge and skills, which is lacking especially in the general takaful business. I would like to stress again that training must be integrated and encompass the spiritual and mental dimensions. In this respect we are glad to inform that The Malaysian Insurance Institute, a leading educational institution on insurance has started the Certificate in Takaful Practice program for both insurance and takaful practitioners.

By having good knowledge of shariah, the takaful practitioners would be able to develop new products that are compatible with it. In the insurance business, many new products have been and are being developed to cater to the different needs of the different sectors of society.

On the other hand, takaful products are few and far between. We are not suggesting all the insurance products available are necessary or can be modified to conform to shariah. The purpose here is to be spiritually and intellectually prepared for product development.

There are still many products that are not available. Even those products that are available are not given a lot of promotion, as many takaful underwriters are lack knowledge about these products.

CONCLUSION

What is Islamic insurance when there no interest is levied and profits are shared by the participants and the operator (insurance firm)? This was one of the questions raised when Islamic insurance was introduced in Britain many years ago. The concept of Islamic insurance and its benefits since then has caught up and advanced in Britain. This is the proof that Islamic insurance practices is growing and had been accepted all around the world.

Under the Islamic insurance concept, no interest is levied or paid by the insurance company but profits are shared between and insurance company and participants. The insurance company collect premium and give it to another firm or investor to invest and make a profit, which then shared. There was a lot of potential for Takaful to be part of the global system with its style of insurance aggressively taking shape in the rest of the world. Takaful or Islamic insurance was fast gaining ground. The present systems of buy and sell in insurance was not in conformity with Islamic principles. Islamic insurance is based on cooperation, charity, and mutual help and shared responsibility. For example, Islamic insurance had advanced rapidly in Malaysia; it served all communities and not Muslims alone.

Takaful has a various operators in different countries. So, by knowing how various operators in different countries conduct their Takaful procedures may not only help prospective insurers in setting up their own successful operation but would be guideline for regulators in countries aspiring to have successful Takaful operations.