Summary takaful

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TAKAFULIslamic Insurance

XIENIUMS SULTAN RANA BCH- 8317

AQEEL BUTT BCH-8338

IRFAN KHAN BCH-8342

ARSLAN MEHDI BCH-8344

12/29/2010

SUPERIOR UNIVERSITY LAHORE



Takaful

Takaful is an Islamic insurance concept which is grounded in Islamic muamalat

(Islamic banking), observing the rules and regulations of Islamic law. This concept

has been practiced in various forms for over 1400 years. Muslim jurists

acknowledge that the basis of shared responsibility in the system of Aquila as

practiced between Muslims of Makkah and Medina laid the foundation of mutual

insurance.

Introduction to TAKAFUL:

This concept has been adept in different forms for over 1400 years. The Arabic

word Kafalah, which means "guaranteeing each other" or "joint guarantee". Theconcept is in line with the principles of compensation and shared responsibilities

among the community.

Takaful originated within the ancient Arab tribes as joint liabilities that oblige those

who committed offences against members of a different tribe to pay compensation to

the losses or their heirs. This principle later extended too many walks of life,

including sea trade, in which participants contributed to a fund to cover anyone in a

group who suffered mishaps on sea voyages.

In modern-day conventional insurance, the insurance vendor (the insurance

company) sells policies and invests the proceeds for the profit of its shareholders,

who are not necessarily policyholders. There is therefore a clear disjunction

between policyholders and shareholders. Payouts to policyholders may vary

depending on financial performance, but a minimum positive return is always

contractually guaranteed.

However, Takaful is founded on the cooperative principle and on the principle of

separation between the funds and operations of shareholders, thus passing theownership of the Takaful (Insurance) fund and operations to the policyholders.

Muslim jurists conclude that insurance in Islam should be based on principles of

mutuality and co-operation, encompassing the elements of shared responsibility,

joint indemnity, common interest and solidarity.



However, Takaful complies with the Shariah (which outlines the principles of

compensation and shared responsibilities among the community) and has been

approved by Muslim scholars. There is now general, health and family (life)

Takaful plans available for the Muslim communities.

In Takaful, the policyholders are joint investors with the insurance vendor (the

Takaful operator), who acts as a mudarib, a manager or an entrepreneurial agent for

the policyholders. The policyholders share in the investment pool's profits as well as

its losses. A positive return on policies is not legally guaranteed, as any fixed profit

guarantee would be akin to receiving interest and offend the prohibition against riba.

However, the Takaful was 1985 Fiqh Academy ruling that traditional insurance

was Haram, forbidden, but insurance based collective security and cooperative

principles was Halal, permissible. Now, over 20 years later, the combination of a

regulatory overhaul and the exponential growth of Islamic banking and financemeans that the industry is finally coming of age and Muslim countries are ripe for a

Takaful revolution.

For some time conventional insurance was considered to be incompatible with the

Shariah that prohibit excessive uncertainty in dealings and investment in interest-

bearing assets; both are inherent factors in conventional insurance business.

Commencement of TAKAFUL:

Present Takaful first emerged in two very different forms. In the 1970s, Sudan

embarked on an Islamisation program, and developed a Takaful system based on

the Waqala model. Here the Takaful operator works as an agent of the policy

holder, called 'participant' in Takaful, and merely takes a fee for his services in

managing the company. In the 1980s, Takaful emerged as part of Malaysia's

pioneering of Islamic finance, and was based on the Mudarabah model.

However, the watershed moment for Takaful was the 1985 Fiqh Academy ruling

that traditional insurance was Haram, forbidden, but insurance based collective and

Muslim security and cooperative principles was Halal, permissible. Now, over 20years later, the combination of a regulatory overhaul and the exponential growth of

Islamic banking and finance means that the industry is finally coming of age

countries are ripe for a Takaful revolution



Islamic references to Takaful

These fundamentals are based on the sayings of the Islamic Prophet Muhammad.

Based on the hadith and Quranic verses mentioned below, Islamic scholars had

decided that there should be a concerted effort to implement the Takaful concept asthe best way to resolve these needs. Some of the examples are:

y 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. (Surah Al-Maidah, Verse 2)[2]

y Allah will always help His servant for as long as he helps others. (Narrated

by Imam Ahmad bin Hanbal and Imam Abu Daud)

y Basis of Responsibility The place of relationships and feelings of peoplewith 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. (Narrated by

Imam al-Bukhari and Imam Muslim)

y One true Muslim (Mu¶min) and another true Muslim (Mu¶min) is just like a

building whereby every part in it strengthens the other part. (Narrated by

Imam al-Bukhari and Imam Muslim)

y Basis of Mutual Protection By my life, which is in Allah¶s Power, nobody

will enter Paradise if he does not protect his neighbour who is in distress.(Narrated by Imam Ahmad bin Hanbal) The basic fundamentals underlying

the Takaful concept 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.

y 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 cover in daily life.



Takaful products are based on two main business models:

1. The Mudaraba model: is essentially a basis for sharing profit and loss between

the Takaful operator and the policyholders. The Takaful operator manages the

operation in return for a share of the surplus on underwriting and a share of profit

from investment. This is commonly used in Malaysia.

2. The Wakala model: is a contract of agency, which replaces surplus sharing with

a performance fee. The Takaful operator in this case acts as an agent (Wakeel) for

participants and manages the Takaful/ re-Takaful fund in return for a defined fee.

This model is used more in the Middle East region.

How Does Takaful Work:

All participants (policyholders) agree to guarantee each other and, instead of paying premiums, they make contributions to a mutual fund, or pool. The pool of

collected contributions creates the Takaful fund.

The amount of contribution that each participant makes is based on the type of

cover they require, and on their personal circumstances. As in conventional

insurance, the policy (Takaful Contract) specifies the nature of the risk and period

of cover.

The Takaful fund is managed and administered on behalf of the participants by a

Takaful O perator who charges an agreed fee to cover costs. These costs include the

costs of sales and marketing, underwriting, and claims management.

Any claims made by participants are paid out of the Takaful fund and any

remaining surpluses, after making provisions for likely cost of future claims and

other reserves, belong to the participants in the fund, and not the Takaful O perator,

and may be distributed to the participants in the form of cash dividends or

distributions, alternatively in reduction in future contributions.

Basis of Takaful:

The basis of the Takaful System is not to profit but to uphold the principle of "bear

ye one another's burden." Therefore, the characteristic feature of Islamic insurance

is that it is not based on profit making motive self-help through cooperation.



Mutual assistance amongst members of a tribe was not originally a commercial

transaction and contained no profit or gain at the expense of others. Rather, it

evolved as a social institution:

to mitigate the burden of an individual by dividing it among his fellow members

(group persons) or tribe. In contrast, most modern insurance (even mutual stock

insurance entities, but not mutual associations) is a capitalist-based commercial

enterprise, where losses are projected in advance and funds (premiums) allocated

to risks to cover them. Premiums are paid in line with such projections of risk.

Notwithstanding the belief in God and Qadha-o-Qadr (the Divine Decree and the

Will of God), The Holy Quran exhorts the individual to assist one another and to

take precautions in order to minimize potential misfortune, losses or injury from

unfortunate events. Although Takaful has very old origins, the word Takaful is a

modern day usage. There references to sharing of risk and mutuality in The Holy

Quran and the Hadith (record of the teachings and sayings of Prophet Muhammad pbuh) however, Takaful, the way it is transacted today, is based on the secondary

source of Islamic jurisprudence ± Ijtihad (the process of making a decision by

independent interpretation of the legal sources, The Holy Qur'an and the Sunnah -

the traditions and practices of Prophet Muhammad).

Indeed, the basic difference between the Islamic and conventional conceptions of

insurance is one of perspective, not economics. From a conventional perspective,

insurance appears asset of bilateral contracts that transfer risk for the benefit of the

individuals who choose to make that contract. From an Islamic perspective,

however, insurance appears as an institution that reduces or eliminates risk for the

benefit of social group. Importantly, the institutions that result from either the

conventional or Islamic conception can also be described within the framework of

the other: an Islamic insurance company is an institution that individuals use to

shed risk, just as an conventional company is a way that a group shares risk´. Some

examples of the basis that are mentioned in The Holy Quran and the Hadith are:

Principles of Takaful:

Islamic insurance requires each participant to contribute into a fund that is used to

support one another with each participant contributing sufficient amounts to cover

expected claims. And the prohibition as to dealing with enterprises engaging in

prohibited activities such as gambling and pornography. The impact of this Shariah

Principle on the syndicate is followed. It is necessary to ensure that:



y Policyholders co-operate among themselves for their common good.

y Every policyholder pays a part of the contribution as a donation to help those

that need assistance.

y Losses are divided and liabilities spread according to the community pooling

system.

y The syndicate will not be able to provide insurance to businesses that engage

in prohibited activities.

y Uncertainty is eliminated in respect of subscription and compensation.

y All investments made by or on behalf of the Corporate Member whichcomprise the premium Trust Fund are invested ³properly´ by the acceptable

institutions that in turn will not reinvest in businesses or institutions

engaging in prohibited activities.

y It does not seek to derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative 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."

Islamic way of insurance:

The first Islamic insurance company was set up in Sudan in 1979. Today there are

many Islamic insurance operators in Muslim as well as non-Muslim countries. The

main concept of Islamic insurance is that it is an alternative to conventional

insurance, with characteristics and features that comply with shariah requirements.

This is done by eliminating the objections against conventional insurance. The

term Takaful is an infinitive noun which is derived from the Arabic root verb

kafalor kafala, meaning to guarantee or bear responsibility. The main features of Islamic insurance are:

y Cooperative risk sharing by using charitable donations to eliminate gharar

and riba;



y Clear financial segregation between the participant (insured) and the

operator (Insurance company);

y Shariah-compliant underwriting policies and investment strategies.

There are still obstacles to surmount. As Dr. Malaikah says, "there has been no

insurance culture in the Islamic world, so there is a huge need to educate people

about the benefits of Takaful. This not only applies to potential customers but also

to regulators".

Takaful-friendly regulation also needs to be developed. Compared to the huge

strides in Islamic banking, the Takaful industry lags behind, and regulatory bodies

need to be astute and swift to catch up with the demand for Takaful products.

Why Not toConventional Insurance:

In modern business, one of the ways to reduce the risk of loss due to misfortunes is

through insurance. The concept of insurance where resources are pooled to help the

needy does not necessarily contradict Islamic principles.

Three important differences distinguish conventional insurance from Takaful:

1. Conventional insurance involves the elements of excessive uncertainty (gharar)

in the contract of insurance;

2. Gambling (maysir) as the consequences of the presence of excessive uncertainty

that rely on future outcomes

3. Interest (riba) in the investment activities of the conventional insurancecompanies;

4. Conventional insurance companies are motivated by the desire for profit for the

shareholders;

5. Conventional system of insurance can be subject to exploitation. For example, it

is possible to charge high premium (especially in monopolistic situations) with the

full benefit of such over -pricing going to the company.

The key difference between Takaful and conventional insurance rests in the way

the risk is assessed and handled, as well as how the Takaful fund is managed.Further differences are also present in the relationship between the operator (under

conventional insurance using the term: insurer) and the participants (under

conventional it is the insured or the assured). Takaful business is also different

from the conventional insurance in which the policyholders, rather than the

shareholders, solely benefit from the profits generated from the Takaful and

Investment assets.



Difference between Conventional and Takaful Insurance:

Under conventional insurance, insurance is a r i sk transfer mechanism by which an

organization can exchange its uncertainty for certainty. The uncertainty

experiences would include whether loss will occur, when it will take place, how

severe it will be and how many there might be in a year. Insurance offer the

opportunity to exchange this uncertain loss with certain loss. The organization

agrees to pay fixed premium and in return, the insurance company agree to meet

any loss which fail within the terms of the policy.

Exchange of uncertain loss with certain loss as it is done in conventional insurance

is exactly fall into Gharar meaning and it is not allowable in Islam. In Takaful

concept Risks are operator.

Takaful therefore, there is no transfer of risk from participants to the



Summary

This project is submitted on the topic of Takaful (Islamic insurance). The basic aim

of this project is to find the importance of Islamic insurance in modern world, andimportance the difference between conventional and Islamic insurance. Takaful is

an Islamic way of guarantee for securing incase of loss or death or any other kind

of protection. This system contain interest based system and works on complete

way of Islamic gaudiness. This report consist of introduction/history of Takaful,

ways of Islamic insurance, base of Takaful, difference between Takaful and

gambling, basic principle of Takaful and how Takaful works. The importance of

Takaful can be seen through this that more of the commercial banks also forced to

introduce Islamic insurance packages due to its increasing demand. Because

peoples know realize the importance of Islamic insurance. This report helps to

identify that Islamic ways of business and securities are best as an alternative of

conventional system.

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Summary takaful