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Outline of the PresentationInsuranceTakafulCharacteristics of TakafulNeed of TakafulDifference between Takaful and Conventional InsuranceProducts of TakafulModels of TakafulRole of Takaful in Islamic Economic SystemMarket StatusIssues & ChallengesSuggested MeasuresConclusion

Islamic Insurance ConventionalINSURANCE

INSURANCE

A contract in which an individual receives financial protection against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.

What is Takaful?

Takaful (Islamic insurance) is a financial transaction of a mutual co-operation between two parties towards providing a financial security for one of them against an unexpected material risk.

Thakaful is

Social scheme Arabic word Legally binding agreement

Common goodContributionsLosses & liabilities Uncertainty removes Fair distribution of surplus

The Quran says Help ye one another in righteousness and piety, but help ye not one another in sin and rancour. (Surah Al-Maidah verse:2)

The Prophet Muhammad (P.B.U.H) said:The believers, in their affection, mercy and sympathy to each other, are like the body, if one of its organs suffer and complains, the entire body responds with insomnia and fever (Muslim)

Practices of the Holy Prophet (SAW)

The relevant legislations passed in the first constitution of Medina was in 622 B.C

Practices of the Companions

Hazrat Umar (R.A) ordered to a group of Mujaheedin in each district, to contribute an equal amount of money to help legal heirs of those victims, in case if any person is killed by any other person of the same district.

Characteristics of TakafulEstablishment of two separate fundsSolidarity principle and equal surplus distributionRestricted investmentsEstablishment of Shariha board

Why Conventional Insurance is unacceptable in Islam???

Objections to Conventional InsuranceScholars view the insurance contract as an exchange contract money is being exchanged for money over time.Insurance is a buy and sell agreement..Elements of:Uncertainty Gharrar Gambling MaisirInterest RibaProfit distributionInvestment of fundsNature of capital

GHARAR-UncertanityGharar is forbidden in Islam because it is not showing the full knowledge , disclosure and transparency.Gharar describe RISK..

In insurance Gharar exist in three forms:

Gharar in the outcomesGhaarr in the results of exchangeGharar in contract period

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Maisir resembled with Risk taking whereby insured get a huge amount without any equivalent input. Insurance include Maisir where insured makes a bet on the happening of loss and insurer also do it.Maiser-Gambling

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Riba-Interest: . Allah has permitted trading and forbidden riba (Al Baqarah 2 : 275).

Every profit must be based on liability and risk otherwise it is Riba according to Islam.Conventional insurance companies normally place the insurer fund in interest bearing instruments like loans and bonds.

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Investment Of FundsInsurance companies invest in such type of assets that are totally prohibited in Islam such as alcohol, gambeling, bonds etc. while the Takaful companies invest in interest free funds that are halal-o-haram.

Nature of Contract:In Takaful every policyholder has the right to know .???How their money is used? How the surrender value is calculated?& the Takaful policyholders must be careful that the funds are used for halal purposes.Insurance contract based on interest.

Profit DistributionIn Takaful every policy holder has the right to know about the distribution of profit among partners but in conventional insurance there is no hard and fast rule about that, its totally depend upon management of company

DIFRENCE BETWEEN TAKAFUL AND CONVENTIONAL INSURANCE

IssueinsuranceTkafulRiskRisk transferRisk sharingGhararGharar existGharar brought down by making conditional donationsMaisirPayment depends upon chanceObviates the element of maisirInvestmentInterest basedInterest freeSurplusSurplus in hands of shareholdersDistribution according to proportions

PRODUCTS OF

TAKAFUL

General Takaful:General takaful offer all kinds of non life risk coverage

It is normally divided into following classes

Property Takaful Marine Takaful Motor Takaful Miscellanea Takaful

Family Takaful

Children Education Plan:

Long term savingsProtection for child educationEducation will continue when you are not around

Children Marriage Plan:Loan ProtectionEase in coming financial challengesPlan will continue Received good lump sum amount

Financial protection + Saings Plan:

"A companion of Prophet Muhammad (s.a.w.w.) asked: 'O Prophet of Allah! Should I tie my camel and then entrust Allah or should I leave the camel untied and then entrust Allah?' The Prophet (s.a.w.w.) replied: 'Don't leave your camel untied; instead first tie the camel and then put your Tawakkal on Allah.'"

"It is narrated that Hazrat Muhammad Mustafa (s.a.w.w) said:

It is better to leave your heirs wealthy rather than poor and asking others for their needs.

Common Benefits of Plans:Financial protectionInvestment of amount in Halal businessAvailability of other financial ridersMaturity of amountLoan protectionPartial withdrawalsAvailability of planTax free plan

TAKAFUL MODELSThere are three main different Takaful Models use today. Takaful Models

Mudharabah

Wakalah

Wakala -waqf model

Takaful models implemented in PakistanWAKALA-WAQF MODEL

Wakala model with waqf fund

WAKALA IN ARABIC AGENCY

The wakala concept is essentially an agent-principal relationship, where the takaful operator acts as an agent on behalf of the participants. Operator as wakil/Agent: Operator is an organization which manages Takaful Fund of participants.Participant as principal: A contributor to Takaful Fund by participating in any protection scheme.

Tabarru / Donation: The contribution of participants in waqf fund.Waqf fund

Initial donation by shareholders. Wakala fee: The fee received by a Takaful Operator from the Participants to manage Takaful fund.

Participant contribution / Tabarru

Administrated by OpretorParticipants/policyholder contribution

Shareholders / Waqf fundOverall takaful contract as wakeelOnly investment portion as mudarib

WAQF FUNDSaved for payment of wakalah fee claims or retakaful expenses.12This portion is invested, or used for making investment.

Waqf fundInvestment in 100% Islamic transactions or sharia complaint securities. Profit for the shareholder Profit for participants Profit on investmentProfit sharing on MUDARBAHA basis

Profit for the company MinusAdministration expenses like employees salary etc.MINUSManagement expenses of company.

Profit distribute between shareholders.

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_Waqf fund

Waqf fund

Mudarabah model(partnership of sharing profit and loss)Policy holderTakaful operatorProvide capitalManage the whole takaful operation and make investments.Rabb-ul-malMudarib

Takaful models not implemented in PakistanIssues in Mudarabah model.Nature of contract is undermine.Sharing in underwriting surplus.General takaful.Qard-al-hasan.

Issues in wakalah model.

Sharing in underwriting surplus.Not reduce operator fee for largest clients reduce the risk premium rates.Initial expenses of takaful are not born by shareholders.

Issues & challenges faced by Takaful

1. Development Of Human ResourceTakaful is obstacle by less human resources.

Lack of talented, skilled and experienced people.

It is good to teach people Takaful concept.

2. Lack of AwarenessIslamic financial institutions are not putting too much effort in developing Takaful. It is crucial for marketers to enhance the industry and the innovation of new products. Financial markets must understand the needs and wants of customer .Many consumers are still stick to conventional insurance.It is important to address educational issues and to develop consumer awareness.

3. Regulatory Framework Often, scholars are not agree each other to establish a framework for Takaful.

The issue of different regions i.e Malaysia and Middle East countries.

Model of Takaful is being practiced by specific region.

4. Cooperate Governance Quite self interest between Shariah Supervisory Board and the board of directors of the Takaful.There is no clear mission and responsibility of Shariah board.At present, there are no manual and standard terms of reference.

5. Shortage of Shariah-compliant assetsThe lack of appropriate investment vehicles, especially with the long term duration.

The limited range of shariah compliant asset could be the result of asset risk.

6. Distribution channel Micro insuranceLife

7. Lack of standardization Kind of model of Takaful Every nation has its own model of Takaful. Terms of standardization is mainly based on different regions.The lack of standardization will harm the development of Takaful.

Role of takaful in Islamic economic system.1.Create exploitation free society.2.It is a safeguard against people faith, life, prosperity and property.3.Facilitate capital formation.4.Motivate individual for saving.5.Utilization or resources.6. Greater employment.