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Root of Takaful and

Linkage to Mutuality

Assoc. Prof. Dr. Mohamad Akram Laldin

Executive Director of ISRA

ICMIF Takaful Network Meeting, 28 th Oct 2010, KL

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Presentation Outline

Introduction

Root of TakafulLinkage to MutualityTakaful At Present

Points to PonderConclusion

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Introduction

Although Takaful industry has rapidly developed since the past 30years, however the real takaful market is said to be still underserved.This is due to the low penetration that the industry experience.

This require improvement of the current practicesApart from that Takaful faces the criticism that the industry isgradually loosing its trademark in terms of mutuality andcooperative nature.This presentation intend to address this issue for further discussion.

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Root of Takaful

Takaful is from kafala and means mutual indemnityIt part of the virtues and attribute of Muslim society and prescribed

by the Shari ah

Examples of these early Islamic practices include the following:Compulsory obligation to pay zakah to help the needy in the societyMerchants of Mecca formed funds to assist victims of natural disasters orhazards of trade journeys.Surety called daman khatr al-tariq was placed on traders against lossessuffered during a journey due to hazards on trade routes.

Assistance was provided to captives and the families of murder victimsthrough a grouping known as aqila.Contracts, called 'aqd muwalat, were entered into for bringing about an endto mutual hostility or revenge.

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Root of Takaful

Now, Takaful is known as the Islamic alternative to insurance.This was due to the prohibition against conventional insurance

Majma Fiqh Academy: (December 1985, 2 nd Conference) Resolved:

1. The commercial insurance contract, has a high degree of uncertainty. Therefore, it isharamfrom the Shari ah point of view;

2. An alternative to commercial insurance is the contract of cooperative insurance, which is founded

the basis of charity and mutual cooperation. Similar ruling is extended to reinsurance,which is founded on the basis of cooperative insurance; and3. The Council encourages Muslim countries to establish cooperative insurance and reinsurance

institutions .This resolution led to various initiative to develop Islamic alternative.

RibaRiba (Interest)(Interest) GhararGharar ((UncertainityUncertainity)) QimarQimar (Gambling)(Gambling)

Basis for Prohibition of Conventional Basis for Prohibition of Conventional InsuransInsurans

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Root of Takaful

The term Takaful was used to name the Islamic alternative to insurance sothat it reflects the actual functions to be performed by the scheme, namely toprovide mutual indemnity and protection to its participants as embodied inits concept of mutuality and shared responsibility

Malaysian Takaful Act defines it as:a scheme based on brotherhood, solidarity and mutual assistance which provides for

mutual financial aid and assistance to the participants in case of need whereby theparticipants mutually agree to contribute for that purpose

AAOIFI defines it as :

a system through which the participants donate part or all of their contributions which areused to pay claims for damages suffered by some of the participants. The company srole is restricted to managing the insurance operations and investing the insurance

contribution.

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Linkage to Mutuality

Mutuality is a key attribute of Muslim society and Takaful operationUnder Takaful scheme, participants are encouraged to spend andcontribute into a fund that will help to ease the hardship faced by itsmembers or their dependants.

And shareholders assist them by initiating a company that will managethe Takaful Fund efficiently and fulfill the interest of the participants.In total, with the combination of the effort of the participants and theshareholders, Takaful excel by providing avenue or mechanism for members of the society to obtain social security .

This is clearly part of the intention of the Shari ah that at all times callfor mutuality (Ta awun).

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Linkage to Mutuality

The Qur an:And help one another in goodness and piety, and do not help one another in sin and aggression .

(Al Maidah: 2)And do good that you may succeed (Al Hajj: 77)

The Sunnah:The believers in their mutual affection, mercy and sympathy are like the body, when one of its

organs suffers, the rest of the body follows it by sleeplessness and fever (Narrated by ImamMuslim)

Legal Maxims:Damage or Harm is Removed

Islamic Practices:Various righteous and charitable deeds are encouraged by Islam.

From the monetary aspects, various instruments were prescribed, among others are zakah, waqf,hibah, hadiyyah, waqf, al nihd/tanahud, qard hasan and etc. Partnership between parties of

similar or different resources were also encouraged by virtue of musyarakah and mudharabah contracts.

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Points to Ponder

The early Majma and other institutions resolutions encouraged thedevelopment of cooperative and mutual insurance or Takaful as alternative tocommercial insurance.

However now, Takaful Fund is managed by Corporate Body (with Shareholders). Is current Takaful is demutualized?However, although participants may establish takaful fund and manage it on their own, it is expected to be less efficient and provides limited coverage.

Various Takaful Operators moved from adopting pure wakalah ormudharabah model to modified models, thus, allows Takaful Operator receivevarious income from Takaful operation. Also, hesitation of shareholders togive Qard Hasan due to Fund s deficit.

It raises conflicts and issues:Conflict between the supposed cooperative nature of Takaful and thebusiness nature of its operators (a Co. with shareholders).Or such move is to overcome the statutory and commercial challenges ordue to business competition or to fulfill demands of commercially motivatedclients

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UnderwritingSurplus

Participants

Contribution(Premium)

ParticipantAccount

(Personal)

InvestmentProfit

Policy Benefit

Participant SpecialAccount (Common)

Actual ManagementExpenses

Investment Profit

Operator

Pure Cooperative / Mutual Model

Cooperative / MutualTakaful Profile:

1. Non Profit Making

2. No Shareholders

100%100%

100%100%

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Conclusion

Unless, there is readiness and commitments to initiate the aboveCooperative/ Mutual Takaful from all Takaful stakeholders, the requestedtotal mutuality cannot be achieved.If not, among the solutions for the present time:

All Takaful Stakeholders (including managers and shareholders) must

understand that their involvement in Takaful is noble and contribute to thewelfare of the societyThus, they should share and work towards this common goal.And, they should be less commercially motivatedIn return, Takaful Operator will provide various socially responsible schemessuch as Micro-Takaful and others.As a result, a secured and balanced society will be developed

Most importantly, Takaful cannot be perceived or treated as insurancecompany which seeks profit. But, it is a noble Islamic initiatives .

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