1. TakafulTakaful An emerging niche market By: Capt. M. Jamil
Akhtar Khan ACII, MCIT, Master Mariner Chief Executive Officer
TAKAFUL PAKISTAN LIMITED 2 Days Specialized Training Workshop 10th
& 11th August 2007. Al-HUDA CIBE
2. Outline of PresentationOutline of Presentation Introduction
to TakafulIntroduction to Takaful Objections to Conventional
InsuranceObjections to Conventional Insurance Difference b/w
Conventional Insurance & TakafulDifference b/w Conventional
Insurance & Takaful Takaful Through TimeTakaful Through Time
Takaful ModelsTakaful Models Takaful TypesTakaful Types
BancaTakafulBancaTakaful ReTakafulReTakaful Foundations of Takaful
in PakistanFoundations of Takaful in Pakistan Takaful Prospects in
PakistanTakaful Prospects in Pakistan Challenges to
TakafulChallenges to Takaful Introduction toIntroduction to TAKAFUL
PAKISTAN LIMITEDTAKAFUL PAKISTAN LIMITED
3. Introduction toIntroduction to TakafulTakaful
4. Takaful comes from the Arabic root-wordTakaful comes from
the Arabic root-word kafalakafala guarantee. guarantee. Takaful
means mutual protection and jointTakaful means mutual protection
and joint guarantee.guarantee. Operationally, takaful refers to
participantsOperationally, takaful refers to participants mutually
contributing to a common fund withmutually contributing to a common
fund with the purpose of having mutual indemnity inthe purpose of
having mutual indemnity in the case of peril or loss.the case of
peril or loss. Meaning of TakafulMeaning of Takaful
5. Reference Al Quran:Reference Al Quran: Help (taawan) one
another in furtheringHelp (taawan) one another in furthering virtue
(birr) and Allah consciousnessvirtue (birr) and Allah consciousness
(taqwa) and do not help one another in(taqwa) and do not help one
another in furthering evil and enmity. Al Maidah:furthering evil
and enmity. Al Maidah: verse 2 (5:2).verse 2 (5:2). Takaful is a
form of mutual help (taawun)Takaful is a form of mutual help
(taawun) in furthering good/virtue by helping othersin furthering
good/virtue by helping others who are in need / in hardship .who
are in need / in hardship .
6. Reference Hadith:Reference Hadith: tie the camel first, then
submittie the camel first, then submit (tawakkal) to the will of
Allah(tawakkal) to the will of Allah The hadith implied a strategy
toThe hadith implied a strategy to mitigate/reduce
risk.mitigate/reduce risk. Takaful provides a strategy of
riskTakaful provides a strategy of risk mitigation/reduction by
virtue ofmitigation/reduction by virtue of collective risk taking
that distributes riskscollective risk taking that distributes risks
and losses to a large number ofand losses to a large number of
participants. This mitigates the otherwiseparticipants. This
mitigates the otherwise very damaging losses, if bornevery damaging
losses, if borne individually.individually.
7. Declaration by Shariah scholarsDeclaration by Shariah
scholars rendering conventional insurance un-rendering conventional
insurance un- IslamicIslamic Fatwa issued in Judicial Conference
held inFatwa issued in Judicial Conference held in Makkah in Shaban
1398 AH.Makkah in Shaban 1398 AH. Verdict of Supreme Court of Egypt
on Dec.Verdict of Supreme Court of Egypt on Dec. 27, 1926.27, 1926.
Unanimous resolutions and fatwa by UlamaUnanimous resolutions and
fatwa by Ulama in the Muslim League Conference in Cairoin the
Muslim League Conference in Cairo in 1965.in 1965. Unanimous
decision by Muslim Scholars inUnanimous decision by Muslim Scholars
in seminar held in Morocco on May 6, 1972.seminar held in Morocco
on May 6, 1972.
8. Judicial Opinions and FatwasJudicial Opinions and Fatwas
confirming validity of Takafulconfirming validity of Takaful Fatwa
issued by Higher Council of SaudiFatwa issued by Higher Council of
Saudi Arabia in 1397 A.H.Arabia in 1397 A.H. Fatwa Issued by the
Fiqh Council of MuslimFatwa Issued by the Fiqh Council of Muslim
World League in 1398 A.H.World League in 1398 A.H. Fatwa issued by
the Fiqh Council of theFatwa issued by the Fiqh Council of the OIC
in 1405 A.H.OIC in 1405 A.H. (1985)(1985)..
9. Fiqh Academy Resolution 1985Fiqh Academy Resolution 1985
IslamicIslamic Fiqh (science of Shariah) AcademyFiqh (science of
Shariah) Academy, emanating, emanating from the Organization of
Islamic Conference, meeting infrom the Organization of Islamic
Conference, meeting in its Second Session in Jeddah, KSA, from 10
to 16 Rabi-ul-its Second Session in Jeddah, KSA, from 10 to 16
Rabi-ul- Thani, 1405 A.H. (Dec 1985) issued a Resolution which
inThani, 1405 A.H. (Dec 1985) issued a Resolution which in summary
stated the following:summary stated the following: TheThe
commercial Insurancecommercial Insurance contractcontract is
prohibitedis prohibited (Haraam)(Haraam) according to theaccording
to the Shariah.Shariah. The alternativeThe alternative
TakafulTakaful contract which conforms to thecontract which
conforms to the principles of Islamic dealingsprinciples of Islamic
dealings is Halaalis Halaal, being the contract, being the contract
ofof cooperative insurancecooperative insurance, which is founded
on the basis of, which is founded on the basis of charitable
donationcharitable donation andand Shariah compliant
dealingsShariah compliant dealings..
10. Basic Elements of TakafulBasic Elements of Takaful
Mutuality and cooperation.Mutuality and cooperation. Takaful
contract pertains toTakaful contract pertains to TabarruatTabarruat
as againstas against muawadatmuawadat in case of conventional
insurance.in case of conventional insurance. Payments made with the
intention of TabarruPayments made with the intention of Tabarru
(contribution)(contribution) Eliminates the elements of Gharrar,
Maisir andEliminates the elements of Gharrar, Maisir and Riba.Riba.
Wakalah/Modarabah basis of operations.Wakalah/Modarabah basis of
operations. Joint Guarantee / Indemnity amongst participantsJoint
Guarantee / Indemnity amongst participants shared responsibility.
shared responsibility. Constitution of separate Participants
TakafulConstitution of separate Participants Takaful Fund.Fund.
Constitution of Shariah Supervisory Board.Constitution of Shariah
Supervisory Board. Investments as per Shariah.Investments as per
Shariah.
11. Main drivers of TakafulMain drivers of Takaful Piety
(individual purification)Piety (individual purification)
Brotherhood (mutual assistance)Brotherhood (mutual assistance)
Charity (Tabarru or contribution)Charity (Tabarru or contribution)
Mutual GuaranteeMutual Guarantee Community well-being as opposed to
profitCommunity well-being as opposed to profit
maximization.maximization.
12. Objections toObjections to ConventionalConventional
InsuranceInsurance
13. Insurance DefinedInsurance Defined Definition of an
Insurance ContractDefinition of an Insurance Contract AnAn
agreementagreement whereby one party,whereby one party, the
insurerthe insurer, in, in return for a consideration,return for a
consideration, the premiumthe premium, undertakes, undertakes to
pay to the other party,to pay to the other party, the insuredthe
insured, a sum of, a sum of money or its equivalent in kind on the
happening ofmoney or its equivalent in kind on the happening of a
specified event, which is contrary to the insuredsa specified
event, which is contrary to the insureds financial
interestfinancial interest Subject-matter of an Insurance
ContractSubject-matter of an Insurance Contract what is it that is
insured in a fire policy? Not thewhat is it that is insured in a
fire policy? Not the bricks and materials used in building the
house, butbricks and materials used in building the house, but
thethe financial interestfinancial interest (i.e. money) of the
insured in(i.e. money) of the insured in the subject-matter of
insurance the subject-matter of insurance (Lord Justice Brett in
Castellian v. Preston 1883)(Lord Justice Brett in Castellian v.
Preston 1883)
14. Objections to ConventionalObjections to Conventional
InsuranceInsurance Scholars view the insurance contract as
anScholars view the insurance contract as an exchange contract
money is being exchanged forexchange contract money is being
exchanged for money over time.money over time. This brings about
the problem ofThis brings about the problem of gharrargharrar
(which(which leads toleads to maisirmaisir) and in investments
aspect,) and in investments aspect, ribariba.. Elements of:Elements
of: Uncertainty Uncertainty GharrarGharrar Gambling Gambling
MaisirMaisir Interest Interest RibaRiba UW + Investment Profit
belongs to theUW + Investment Profit belongs to the CompanyCompany
Note that the Scholars do not object to insuranceNote that the
Scholars do not object to insurance per seper se but only to
certain weaknesses in thebut only to certain weaknesses in the
insurance contract.insurance contract.
15. Uncertainty GharrarUncertainty Gharrar Conventional
insurance contract is basically aConventional insurance contract is
basically a contract of exchange (muawadat) i.e. buying andcontract
of exchange (muawadat) i.e. buying and selling whereby policy
(indemnity) is sold as goods,selling whereby policy (indemnity) is
sold as goods, with the premium as the price or consideration.with
the premium as the price or consideration. The consideration must
be certain for exchangeThe consideration must be certain for
exchange contract.contract. GharrarGharrar in insurance contracts
pertains toin insurance contracts pertains to deliverability of
subject matter, i.e. uncertainty asdeliverability of subject
matter, i.e. uncertainty as to:to: Whether the insured will get the
compensationWhether the insured will get the compensation
promised?promised? How much the insured will get?How much the
insured will get? When will the compensation be paid?When will the
compensation be paid? Thus, it involves an element of uncertainty
in theThus, it involves an element of uncertainty in the subject
matter of the insurance sales contract, whichsubject matter of the
insurance sales contract, which renders it void under the Islamic
law.renders it void under the Islamic law.
16. Gambling MaisirGambling Maisir Insurance is a contract upon
speculation. GoodInsurance is a contract upon speculation. Good
faith forbids either party from concealing what hefaith forbids
either party from concealing what he privately knows, to draw the
other into a bargain,privately knows, to draw the other into a
bargain, from his ignorance of that fact, and his believing tofrom
his ignorance of that fact, and his believing to the contrarythe
contrary (Lord Mansfield in Carter v. Boehm(Lord Mansfield in
Carter v. Boehm 1766). 1766). The insured loses the money paid for
the premiumThe insured loses the money paid for the premium when
the insured event does not occur.when the insured event does not
occur. The company will be in deficit if claims are higherThe
company will be in deficit if claims are higher than premium.than
premium.
17. Interest RibaInterest Riba . Allah has permitted trading
and. Allah has permitted trading and forbidden riba (Al Baqarah 2 :
275).forbidden riba (Al Baqarah 2 : 275). Insurance funds are
invested in financialInsurance funds are invested in financial
instruments which contain the element ofinstruments which contain
the element of Riba.Riba.
18. Comparing Takaful to Conventional InsuranceComparing
Takaful to Conventional Insurance IssueIssue Conventional
InsuranceConventional Insurance TakafulTakaful Organization
PrincipleOrganization Principle Profit for shareholdersProfit for
shareholders Mutual for participantsMutual for participants
BasisBasis Risk TransferRisk Transfer Co-operative risk
sharingCo-operative risk sharing Value PropositionValue Proposition
Profits maximizationProfits maximization Affordability and
spiritualAffordability and spiritual satisfactionsatisfaction
LawsLaws Secular/RegulationsSecular/Regulations Sharia plus
regulationsSharia plus regulations OwnershipOwnership
ShareholdersShareholders ParticipantsParticipants Management
statusManagement status Company ManagementCompany Management
OperatorOperator Form of ContractForm of Contract Contract of
SaleContract of Sale Cooperative,Cooperative, Islamic contracts of
Wakala orIslamic contracts of Wakala or Mudarbah with
TabarruMudarbah with Tabarru (contributions)(contributions)
InvestmentsInvestments Interest basedInterest based Sharia
compliant, Riba-freeSharia compliant, Riba-free SurplusSurplus
Shareholders accountShareholders account Participants
accountParticipants account
19. TakafulTakaful Through TimeThrough Time
20. Takaful through TimeTakaful through Time Origins in the
First Constitution of Madina.Origins in the First Constitution of
Madina. It evolved and continued in one form or the otherIt evolved
and continued in one form or the other throughout the Abbaside
period and even later during thethroughout the Abbaside period and
even later during the Ottoman empire.Ottoman empire. Serious
efforts were made in modern times, in 1970s toSerious efforts were
made in modern times, in 1970s to come up with an Islamic
alternative to the conventionalcome up with an Islamic alternative
to the conventional insurance.insurance. The first Takaful company
was set up in Sudan in 1979,The first Takaful company was set up in
Sudan in 1979, almost simultaneously followed by another one set up
inalmost simultaneously followed by another one set up in
Bahrain.Bahrain.
21. Takaful through TimeTakaful through Time (Contd.)(Contd.)
There are nowThere are now 85+85+ Takaful companies in over
25Takaful companies in over 25 countries.countries. The total
insurance premium of OIC countries for 2004The total insurance
premium of OIC countries for 2004 was USD 50 Billion; of this,
Takaful contributionwas USD 50 Billion; of this, Takaful
contribution accounts for 5% (i.e. USD 2.5 Billion). This is
expected toaccounts for 5% (i.e. USD 2.5 Billion). This is expected
to increase to USD 15 Billion by 2015.increase to USD 15 Billion by
2015. Poor Insurance penetration in the Muslim countries (