Islamic finance has developed mainly in two directions namely
Islamic banking and Islamic insurance (Takaful). While
information about Islamic banking is being increasingly
disseminated, features, models and structures of Takaful are
little known particularly in Pakistan. Purpose of this brief
article is to describe main features and models of Takaful
system operating in various parts of the world.
All human beings are invariably exposed to the possibility of
meeting catastrophes and disasters giving rise to misfortunes
and sufferings such as death, loss of limbs, accident,
destruction of business or wealth, etc. Notwithstanding the
belief of all Muslims in Qadha-o-Qadr, Islam provides
that one must find ways and means to avoid such catastrophes and
disasters wherever possible, and to minimize his or his family's
financial losses should such events occur. One possible way out
is to buy an insurance cover as in the conventional system.
Different views have been expressed about the status of
conventional insurance from the point of view of Islam. An
overwhelming majority of the Shariah scholars believe that it is
unlawful due to involvement of Riba (interest), Maisir
(gambling) and Gharar (uncertainty).@
Takaful, the Islamic alternative to
insurance, is based on the concept of social solidarity,
cooperation and mutual indemnification of losses of members. It
is a pact among a group of persons who agree to jointly
indemnify the loss or damage that may inflict upon any of them,
out of the fund they donate collectively. The Takaful
contract so agreed usually involves the concepts of Mudarabah,
Tabarru´ (to donate for benefit of others) and mutual
sharing of losses with the overall objective of eliminating the
element of uncertainty.
Takaful
is not a new concept in Islamic commercial law. The
contemporary jurists acknowledge that the foundation of shared
responsibility or Takaful was laid down in the system of
‘Aaqilah’, which was an arrangement of mutual help or
indemnification customary in some tribes at the time of the Holy
Prophet (pbuh). In case of any natural calamity, every body
used to contribute something until the loss was indemnified.
Similarly, the idea of Aaqilah in respect of blood money
or any disaster was based on the concept of Takaful
wherein payments by the whole tribe distributed the financial
burden among the entire tribe. Islam accepted this principle of
reciprocal compensation and joint responsibility.
The contract of Takaful provides solidarity in respect of
any tragedy in human life and loss to the business or property.
The policyholders (Takaful partners) pay subscription to
assist and indemnify each other and share the profits earned
from business conducted by the Company with the subscribed
funds. Takaful companies normally divide the
contributions into two parts, i.e., donations for meeting
mortality liability or losses of the fellow policyholders and
the other part for investment. Accordingly, the clause of
Tabarru´ is incorporated in the contract. How much of the
contribution is meant for mortality liability and how much for
investment account is based on a sound technical basis of
mortality tables and other actuarial requirements. Both the
accounts are invested and returns thereof distributed on
Mudarabah principle between the participants and the
Takaful operators. The profit attributable to the
participants is credited into the two accounts separately. To
describe from another angle, a Takaful contract may
comprise clauses for either protection or savings/investments or
both the benefits of protection as well as savings and
investment. The protection part of Takaful works on the
donation principle according to which individual rights are
given up to indemnify the losses reciprocally. In the Savings
part, individual rights remain intact under Mudarabah
principle and the contributions alongwith profit (net of
expenses) are paid to the policyholders at the end of policy
term or before, if required by him.
The distinction between the conventional insurance and
Takaful business is more visible with respect to investment
of funds. While insurance companies invest their funds in
interest-based avenues and without any regard for the concept of
Halal-o-Haram, Takaful companies undertake only
Shariah compliant business and the profits are distributed in
accordance with the pre-agreed ratios in the Takaful
Agreement. Likewise they share in any surplus or loss from the
pool collectively. Takaful system has a built-in
mechanism to counter any over-pricing policies of the insurance
companies because whatever may be the premium charged, the
surplus would normally go back to the participants in proportion
to their contributions.
The terms ‘Family Takaful’, ‘Takaful Ta´awani’ or
just ‘Takaful’ are generally used for family solidarity
in place of conventional life insurances. Other products
available in various countries are General Takaful,
Education/Medical Takaful, etc. Based on the nature of
relationship between the company and the participants, there are
various models like Wakalah (agency) Model, Mudarabah
Model and the combination of agency and Mudarabah models.
In the Sudanese Takaful Model that is preferable to
majority of the contemporary Shariah experts, every policyholder
is also the shareholder of the Takaful Company. There is
a Board that runs the business on behalf of all the participants
and there is no separate entity managing the business. The legal
framework in other Islamic countries normally does not allow
this arrangement and Takaful companies work as separate entities
on the basis of Mudarabah (as in Malaysia) and on the
basis of Wakalah (as in the Middle East region). In
Mudarabah model that is practised mainly in the Asia Pacific
region, the policyholders get profit on their part of funds only
if Takaful Company earns profit. The sharing basis is
determined in advance and is a function of the developmental
stage and earnings of the Company. The Shariah committee
approves the sharing ratio for each year in advance. Most of the
expenses are charged to the shareholders.
In Wakalah Model, the surplus of policyholders’ funds
investments – net of the management fee or expenses - goes to
the policyholders. The shareholders charge Wakalah fee
from contributions that covers most of the expenses of
business. The fee rate is fixed annually in advance in
consultation with Shariah committee of the company. In order to
give incentive for good governance, management fee is related to
the level of performance.
The Takaful business has proved its viability in a period of
only two decades. It has been growing at the rate of 10-20%
p.a. compared to the global average growth of insurance 5% p.a.
A large number of Takaful Companies exist in the Middle East,
Far East, Iran, Turkey, and Sudan and even in some non-Islamic
countries. There are over 60 companies offering Takaful services
(including Windows- 5%) in 23 countries around the world.
Malaysia has developed Re-Takaful business as well.
Takaful products are available to meet the needs of all
sectors of the economy, both at individual as well as corporate
levels to cater for short and long term financial needs of
various groups of the society.
A Convention of D-8 countries was held in Kuala Lumpur in
November, 2002 on “The Emergence of Takaful in the Wake of
Globalization”. It is worth noting that among D-8 countries it
is only Pakistan where Takaful business has not been
introduced so far. Islamic banks and financial institutions
require Takaful services for their operations. Although,
the insurance business in Pakistan falls in the jurisdiction of
the Securities & Exchange Commission, Pakistan, institutions
operating Islamic banking would have to deal with insurance. As
such, the Central Bank should desire that Takaful
business be introduced in the country at the earliest. In the
revised Insurance Act, the Government of Pakistan has added the
provisions for Takaful companies in the country. As
reported in the press, Pak Kuwait Investment Corporation has
recently been allowed by the SEC to establish a Takaful
Company in Pakistan under the name of “First Takaful
Insurance Company Limited” with authorized capital of Rs 100
million.
By: Muhammad Ayub
