OPERATIONAL AND
ACTUARIAL ASPECTS OF
TAKAFUL
 Development of Insurance and Takaful and
its Regulatory Aspects
TAKAFUL OVERVIEW
Participants
Actuary Shariah Operator
Monitor
Design
Advisors Scheme
& Review
Administration
Pricing
Valuation
Shariah Compliant Distribution
of Operations
Collections
& Governance
Underwriting
Investment
Claim payments
Risk management
Retakaful
Contributions
$$$
Wakalah Fees
Tabarru’/Donation
Mudarabah
Investment
& Returns
Takaful
Fund
Claims & Benefit
Payments
Taa’wun/Mutual Assistance
Regulators
Surplus/Deficit
Participants top up and shares
Operator advances and shares
Licensing
Regulation
Supervision
Standards Setting
Customer Protection
Promotion
INTRODUCTION

Risk a major component of our environment; human is
surrounded by innumerable risks from birth to death;
human learned to improve after experiencing misfortunes;
quest for security evolved since the dawn of man’s
existence;

According to Braise Pascal :
“As each generation progressed they will learn at least a
part of what their earlier generations had learned”.

Abraham Maslow’s hierarchy of needs:
 Survivable
 Security
 Love and Belongings
 Self esteem
 Self actualization
3
Definition of Insurance
The term Insurance in its real sense, is community
pooling, to alleviate the burden of the individual, lest it
should ruinous to him: “the simplest and most general
conception of insurance is a provision made by a group of
persons, each singly in danger of some loss, the incidence
of which cannot be foreseen, that when such loss shall
occur to any of the, it shall be distributed over the whole
group”. In sum, the aim of all insurance is to make
provision against the dangers which beset human life and
dealings.
[1]
Insurance in Encyclopedia Britannica(eleventh edition) Vol 14.p.656
HISTORY OF INSURANCE & TAKAFUL DEVELOPMENT
(a) Early Insurance Development :
 Introduction of the contract of Bottomry by the merchants of
Babylon about 4000-3000 B.C.;
 Code of Hammurabi, 2250 B.C.;
 Bottomry Contract adopted by the Phoenicians 1600-1000
B.C.;
 The Greeks adopted it around 4 B.C;
 Later adopted by the Romans;
 Thomas Gresham established the first Royal Exchange, 1570;
 Life insurance first practical in 1583;
 Lloyds of London established 1688; Lloyds Act passed in
1871;
5
(b) Takaful (early evolution) :
 Diyat; pre-islamic; pagan Arabs; aqilah system
 Adopted by Prophet; two situations:
 Dispute between the two women from the tribe of Huzail;
 Constitution of Medina, between Muhajirin and Ansar;
 The aqilah system was utilized;
 A fund known as ‘Al-Kanz’ was created to be used to pay
compensation on behalf of members who are liable to pay diyat;
 During the time of Umar the second Caliph, he ordered
preparation of registers (diwan) in all parts of the Muslim State;
names in the diwan owed one another mutual assistance;
6

Ibn’ Abidin (1784-1836) a Hanafi lawyer, became the first
Islamic Scholar to come up with the meaning, concept and
legal basis of an insurance contract;
( c ) Takaful in the Modern Era

The first modern Islamic insurance was formed in the
Islamic State of Sudan in 1979; the company was
based on the concept of cooperative i.e., The Islamic
Insurance Company of Sudan;

As of 2008, there more than 150 takaful operators
globally;

Growth expected to be between 15% and 20% annually;
revenue expected to reach USD 7.4 billion by 2015;
7
(d) Development of Takaful in Malaysia :



Evolutionary phase;
Nurturing phase;
Consolidation phase;
(e) Performance of the Malaysian takaful business:






The industry is about 25 years in operation;
8 (+1) Takaful and 2 Retakaful operators in the market;
More than 40,000 agents are utilized;
Net contribution exceeded RM 2 billion;
Total Takaful Fund Asset exceeding RM 8 billion;
Almost 3,000 employees.
8
(f)
Definition of Takaful :

The word ‘takaful is derived from the Arabic verb kafala
which means to guarantee one another; to help; to take
care of one’s needs;

“ 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
the participants mutually agree to contribute for the
purpose”. (Takaful Act 1984)

Based on the principle of Ta’awun (mutual assistance)
and Tabarru’ (voluntary contribution);

The operation of the concept must be within the spirit of
Shariah;
9
(g) Muamalat in Takaful :
 Nature of Takaful Contract;
 Based on the concept of ta’awun and tabarru’
 Syariah compliant;
 Element of Mudarabah;
 Based also on the principle of al-Musahamah;
 Scope of takaful contract;
 Wide and flexible covers life, health and non-life risk
 Subject to underwriting;
 Regulated and supervised by the authorities;
 Rational outlook of takaful;
 Provide material assistance against unexpected financial
losses;
 Reduction of poverty in society;
 Ensure security and produces a self-reliant society;
10
SHARIAH VIEWS OF INSURANCE:
(a) Opinion of Scholars :

Majority of scholars are of the opinion that the
conventional insurance practiced today is not
Shariah compliant ;

However, many do not object to the concept of
insurance per se but rather the contract ;

According to Dr. Yusuf Qardhawi :
11
 “Our observation that the modern form of insurance
companies and their current practices are objectionable
Islamically does not mean that Islam is against the
concept of Islam itself ; not in the least – it only opposes
the means and methods. If other insurance practices
are employed which do not conflict with Islamic forms of
business transaction ; Islam would welcome them”.
“The Lawful & the Prohibited in Islam” (pg. 276)
 A Fatwa issued by a committee comprising of leading
scholars for the Saudi Arabia Government have said :
12
 “From the point of view of most Muslim jurists, cooperative
(or mutual) insurance is not only permissible by the
Shariah but also encouraged especially when looked at
from the aspect of cooperation towards welfare. As such it
is permissible for a bank to set up a cooperative (mutual)
insurance company to function for the benefit of many
activities but there is a need to state as clearly as possible
in the contract of insurance that the amount of money to
be paid by the participant is on the basis of donation to the
said company which can be used for the purpose of
assisting fellow participants who require assistance
according to the terms agreed as long as these terms are
not in conflict with the Shariah”
13
 The National Fatwa Committee Malaysia deliberated on
the question of life insurance (15th. June 1972) and below
is a translation of an extract from the minutes recorded :
“Life insurance as presently practiced by insurance
companies is a fasid transaction as it is contrary to the
Shariah principles of contract because it contains the
following elements :



Gharar ;
Maisir ;
Riba
As such from the
haram”.
Shariah point of view, insurance is
14

According to the late Tan Sri Prof. Ahmad Ibrahim in his
paper “Towards an Islamic System of Insurance” (1982):

“The practice of insurance presently follows the western
style of management and is therefore not in line with the
teachings of Islam in a number of ways :
(a) Many insurance contracts contain usury ; as it
promises to pay more than the premium paid ;
(b) Insurance companies invest the premiums which they
have collected, in interest bearing investments;
(c) The western method of insurance is a kind to gambling
as one can lose the premium to insurance companies ;
15
(d) The western method of insurance contain the element
of gharar and the contract is uncertain ;
(e) Western insurance companies can earn profits or loss
as a result of death or accident or risk to people”.

The above is a translation of an extract from the working
paper of a committee known as “ Badan Petugas Khas ” set
up by the government in 1982 to study the feasibility of
setting up Islamic Insurance in Malaysia.

The “Badan Petugas Khas” also concluded that conventional
insurance contract is fasid, however, the objection is not
against the concept of insurance per se but against the
existence of certain weaknesses in the insurance contract.
16
(b)
Elements of Gharar, Maisir and Riba
(i)

Gharar :
Element of uncertainty in a contract ;

The Prophet was reported to have forbidden all transactions
involving gharar but did not specifically state what these
constitutes ;

“Deficient of clarity (or uncertainty) with regard to the subject
matter (“Ma’kud ‘Alaih”) being contracted” ;

“O Believers ! Do not devour one another’s property by
unlawful ways : instead do business amongst you by mutual
consent”.
(An-Nisa, verse 29)
17

The following are examples involving gharar expressly
forbidden by the Prophet :
(a) Habal al-habalah – sale of the offspring of a still-to-be born
animal ;
(b) Musamasah – sale of fruit prior to ripening ;
(c) Bai’ munabadha – a sale performed by the vendor
throwing a cloth at the buyer and achieving the sale
without giving the buyer the opportunity to properly
examine the object of sale ;
(d) Al-Madhamin wa’ Imalagih – sale of what was in the loins
and wombs ;
(e) Bai’ Al-hassat – a type of sale where the outcome is
determined by the throwing of a stone on the object to be
sold ;
18

Gharar is present in all those business dealings in which
“one party does not know what is in store for him at the end
of the bargain” ;

Gharar is not just about lack of information regarding the
quality or quantity of the subject matter but according to Ibn
Rushd, it may originate from :
(a) Ignorance and lack of information over the nature and
attributes of an object ;
(b) Doubt over its availability and existence ;
(c) Lack of information concerning the price and terms of
payment ;
(d) Prospect of delivery ;
19

According to the “Badan Petugas Khas” Report with regards
to gharar in an insurance contact :

“It is clear that the insurance contract as practiced presently
give rise to Al-gharar as the “Ma’kud ‘Alaih” is not clear with
regards to :
(a) Uncertainty as to whether or not the insured will get the
compensation which has been promised ;
(b) Uncertainty as to how much the insured can get ;
(c) Uncertainty as to when the compensation can be paid ;
20
(ii)
Maisir
 The word ‘maisir’ literally means ‘getting something too easily’
or ‘getting a profit without working for it’ ;
 The Prophet forbade all forms of business in which the
monetary gain comes from mere chance or speculation and
not from work ;
 The prohibition with regards to games of chance is explicit in
the following verse :
“O Believers ! Intoxicants and gambling and divining arrows
are an abomination of satan’s handiworks. Leave it aside in
order that you may prosper. Indeed satan intends to sow
enmity and hatred among you by means of intoxicants and
gambling and to prevent you from the remembrance of Allah
and from prayer. Will you not, therefore, abstain from these
things? Obey Allah and His Messenger and abstain from these
things”.
(Al-Maidah 90-92)
21
 Insurance practitioners is of the opinion insurance reduces risk
where as gambling increase or create risk ; therefore they are
not one of the same ; the notion that the insured lost his premium
when claim do not occur is not quite correct ; the premium is in
fact has been exchanged for financial security ; to them this
should not be considered as ‘wrongful devouring’, it is totally
different from the money earned from gambling ;
 The elements of gharar and maisir are interrelated ; the presence
of gharar could lead to maisir if it is excessive ; there cannot be
maisir unless the element of gharar is present ;
22
(iii)
Riba
 Literally means ‘increase in’ or ‘addition to’ anything ;
 Islam prohibits riba ;
 The following Quranic verse :
“O you who believe, devour not usury, doubling or
quadrupling, the sum lent, Fear Allah and observe your duty
to Him ; that you may really prosper”.
(Al-Imran, verse 130)
 Present day insurance activities involve the element of riba.
For example :
(a) Investing in interest bearing instruments ;
(b) Paying interest on some of their products ;
(c) Many insurance contracts contain usury, as it
promises to pay more than the premium paid ;
23

(iv)


Riba is of two forms : riba al-fadl and riba al-nasiah ;
Muslim jurists differ in interpreting riba al-fadl however
they are all of the same opinion with regards to riba alnasiah ;
Roles of Takaful Operator :
As Custodian of Fund ;
 acts as manager/ operator of the takaful fund ;
 acts as Mudharib ;
As Risks Taker versus Risk Sharing ;
 Takaful operator does not own the takaful fund ; they acts
as the professional manager ;
 All the participants mutually agree to share the risk
among them ;
24

Transparency and Fairness
 Sincerity ;
- The parties to the contract must have the sincerity
not to gain but to be bound by the principles of
mutual cooperation, solidarity and brotherhood;
 Absolute Shariah Principles ;
- Aims and operations do not involve any element
which is not approved by the Shariah;
 Moral Attributes ;
- The parties involved in the contract should observed
the principles of utmost of good faith, honesty,
disclosure and truthfulness.
 Element of Contract.
- The parties to the contract must have legal
capacities;
must
have
insurable
interest;
consideration; mutual consent;
25
DIFFERENCES BETWEEN TAKAFUL AND INSURANCE
CONTRACTS
Takaful
Insurance
Based on mutual cooperation Based solely
and ‘Tabarru’
factors
Area
on
commercial Contract
Profit sharing between the Exchange of contract between Contract
individual participants and the policyholder and the insurance
pool of participants in the company
Takaful
Contracts of Agency between Insurance is a buy-sale
the participants and the Takaful contract. In which policies are
operator to manage the fund
sold and the policy-holders are
the buyers
Contract
Participants own the Takaful The fund belongs to the
funds and managed by the insurance company
operator. Participants give up
individual
rights
to
gain
collective
rights
over
contribution and benefits.
Contract
26
DIFFERENCES BETWEEN TAKAFUL AND INSURANCE CONTRACTS
Participants make contributions
to the scheme
Policyholders pay the premiums
to the insurance company
Contract
Free from ‘riba’, ‘gharar’ and Presence of ‘riba’, ‘gharar’, and Principles of the
‘maisir’.
‘maisir’.
contract
Profit/surpluses will be shared
among operator (company) and
participant on Mudharabah basis
or Performance Investment Fee
on Wakalah.
Underwriting profits belongs to Contract
the Company.
Musarakah
In
life
insurance,
only
participating policyholders will
share in the surpluses.
Depending on the Biz Model and
line of Biz, contributions may be
split or wholly credited to the alTabarru Fund (PSA), In General
Takaful
contributions
wholly
credited to the PSA in line with
the
principles
of
alMudharabah.
In Family, it is usually credited to
the PIA and then ‘dripped’ in the
PSA, (al-Tabarru or Waqf)
For general insurance, the paid- Contractual
premium is credited into the relationship
general insurance account.
In life insurance policy similarly,
the collected premiums are
credited into the life insurance
account or fund
of
27
TAKAFUL MODELS
(a) Mudharabah Model :
 A mudarabah contract is a commercial profit sharing contract
between the provider or providers of fund for a commercial venture
and the entrepreneur.
 In a mudarabah model the takaful operator acts as a mudarib and
the participant as rab ul mal. The takaful operator manages the
operations of the fund in return for a share of the surplus. The
surplus is shared in a pre-agreed proportion between the operator
and the participant.
 In a pure mudarabah model, the management expenses and any
other direct expenses for management of the fund will be borne
solely by the operator from the shareholders fund and its share of the
surplus of the underwriting and investment returns.
28
 Under the modified mudarabah model, the management
expenses direct or otherwise will be charged to the takaful
fund. The surpluses from the fund which is a combination of
the underwriting surplus and the investment surplus will be
shared between the participants and the operator in the preagreed proportion.
29
(b) Wakalah Model :
 In a wakalah model, the takaful operator acts as the agent on behalf
of the participants. The operator is paid a pre-agreed management
fee for the services rendered in respect of underwriting, management
and investment of the fund. The operator does not share in the
underwriting surplus.
 In underwriting, the takaful operator act as an agent on behalf of the
participants to manage the takaful fund. Any liabilities for risks
underwritten are borne by the fund and any surplus arising from
belongs exclusively to the participants. The operator is not liable for
any deficit of the fund. The operator is being paid a management fee
termed as wakala fee which is usually a percentage of the
contributions paid by the participants. This is normally deducted
upfront from the contributions. As for the management of the
investment activities of the fund, the operator is also paid a wakala
fee based on an agreed percentage.
30
(c) Waqaf Model :
 In a waqaf model, a waqaf fund is established by the
shareholders of the takaful company through the contribution of
‘ceding amount’ to compensate the beneficiaries or participant
of the takaful scheme. The ceding amount of the waqaf will
remain invested. The takaful fund, consisting of the
contributions paid as tabarru’, will be further invested by the
company based on the principle of Islamic modes of trades. Any
person by signing the proposal from contributing to the Waqaf
and subscibing to the policy documents shall become the
member of the waqaf fund.
31
CLASSIFICATION OF BUSINESS
 In general, the commercial takaful is categorized into two
basic types of business namely :
(i) Family business;
(ii) General business;
 In terms of licensing, it varies among the various jurisdictions
throughout the world. Some issue license on a composite
basis (both family & general) while some others issue on a
monocline of business basis. In Malaysia, under Takaful Act
1984, licenses are granted on a composite basis.
(a)
Family Takaful Plans :
 The Family Takaful Plan provides protection and also the
platform for savings for members. Various products are
designed to provide solutions to the needs and demands of
32
the individuals and the commercial segments.
 The following benefits can be by an individual participant in a





long-term family takaful plan:
Protection in the form of financial mutual aid to his family
members arising from the benefits of the takaful plan should
the participant die before the maturing of the takaful plan.
Regular savings for a definitive period with the view of
creating retirement fund to be utilized during old age.
Earning investment profits acceptable to Shariah from the
contribution to the fund.
Availability of funds to finance children education should be
chooses the education plan offered under the Family Takaful
business.
Avenue to assist each other through the concept of tabarru’.
33
 Basically a family takaful plan covers death benefit, maturity
benefit riders can be incorporated to provide hospitalization
benefits, accidental and permanent disability benefits and also
critical illness benefits.
34
 For the commercial sector, family takaful offers schemes such
as Group Family Plans and Group Family Takaful
Hospitalization and Surgical Plans. These are arrangements of
cooperation and mutually based on the principles of ta’awun
and mudarabah among members of the fund. Group Family
Plans are normally taken by the corporate bodies as employers
for the benefit of their employees under an employment
contract.
 Apart from the above, there are various other Family Takaful
Plans or products available to the individual or group such as :
 Takaful mortgage plans;
 Takaful education plans;
 Investments Linked plans;
 Credit Related Takaful plans;
35
 In general, the Family Takaful comprise of two funds
namely the Participants Account (PA) and the Participant
special Account (PSA). The PA is meant solely for the
purpose of savings and investments, while the PSA is to
pay takaful benefits such as death and maturity of the
contract.
(b) General Takaful Plans :
 The General Takaful business is basically a contract of joint
guarantee. It is a short-term contract usually covering a
period of one year or less. General Takaful contracts are
designed to meet the needs for protection in the event of
any material loss or damage or bodily injury consequent
upon the accident happening of a peril whether it is
catastrophic in nature or otherwise inflicted upon
properties, material belongings or mankind.
36
 In consideration of agreeing to contribute to the pool, the
participants undertake as Tabarru’ these contributions for the
purposes of mutual compensation to be made available to any
defined loss or damage or sufferings. These contributions are
pooled into a fund called general Takaful Fund and it is from
this fund that mutual compensation would be paid to any
participants suffering from a defined loss.
 The takaful operator will act as a mudarib for the fund and will
make all the necessary efforts to diligently invest this fund in
Shariah approved investment instruments to earn the
necessary returns or profits. In order to prudently manage the
fund and to protect it from suffering severe financial impact or
loss, appropriate re-takaful arrangements are made. The cost
of these re-takaful arrangements are charged to this fund
apart from the appropriate reserves for unexpired risks, claims
and also the incurred but not reported claims (IBNR) which are
deducted from this fund.
37
 The fund has to be managed prudently, any outflows must be
properly accounted for in order not to result in any deficit. Any
surplus from the fund will normally be shared between the
participants and the takaful operator depending on the
business model it has adopted. Should there be any
distribution of surplus, it can only be given to participants at
the expiry of their takaful contracts provided they have not
received any compensation or incurred any claims during the
period of the contract.
 The following are the various types of General Takaful Plans :
 Motor Takaful Schemes;
 Fire Takaful Schemes;
 Miscellaneous Accident Schemes;
 Marine Takaful Schemes;
 Engineering Takaful Schemes;
 Aviation Takaful Schemes;
38
SHARIAH PRINCIPLES
(a)
Sources of Shariah:
 There are four fundamental sources of Shariah :
(i) Quran;
(ii) Sunnah;
(iii) Ijma;
(iv) Qiyas;
 Apart from the four sources of Shariah that have been
agreed upon by Scholars, there are also other sources of
namely :
(i) Istihsan;
(ii) Maslahah Mursalah;
(iii) Istishab;
(iv) Uruf;
(v) Mazhab Sahabi;
(vi) Sharun man Qablana;
39
(b) Legal Maxims :
 Apart from the sources of shariah, qawaid fiqhiyah are also
used in the discussion of takaful; legal maxims are
statements of principles that are derived from the detailed
reading of the rules of Islamic Jurisprudence;
 There are five fundamental legal maxims which are :
(i) “Acts are judged by the intention behind them” (Al-umuru
bi-maqasidiha);
(ii) “Certainly is not overruled by doubt” (Al-yaqinu la yuzallu
bish-shakk);
(iii) “Custom is the basis of judgement” (Al-’aadatu
muhakkamatun);
(iv) “Hardship beget facility” (Al-mashaqqatu tujlab at-taysir);
(v) “Harm must be eliminated” (Ad-dararu yuzal);
The five legal maxims are further broken down into
seventeen corollaries.
40
 Some of the more common corollary legal maxims that has
been used in the discussion of takaful are :
(i) The original legal position of any matter is permissible
until there is evidence prohibiting it.
(ii) Whatever leads to haram, is in itself haram.
(iii) In contracts effect is given to intention and meaning and
not to words and phrases.
(iv) Difficulty brings ease.
(v) The ends do not justify the means.
(c) Law of Transactions :
 Law of transaction deals with fiqh muamalat which includes
exchange contracts (e.g., sale and purchase), profit sharing
contracts (e.g. mudarabah and musharakah), contracts of
guarantee, agency contracts and others.
41
 The Sale Contract
 The sale contract is the most prevalent form of contract and
can be said to form the basis of other contracts. The Quran
mentioned and legalised the sale contract the verse “And
Allah has permitted trade and prohibited riba” (Al-Baqarah
275). The Sunnah further sactioned and endorsed the sale
contract as narrated by Al-Hakim: “The work of a man with
the hands and the mabrur sale”.
 Tenets of a Sale contract
 In order for the sale contract to be accepted by Islamic law,
it has to fulfill certain tenets and conditions, which are;
(i) The contracting parties;
(ii) The objects;
(iii) The offer and acceptance;
42
(d) Principles of Takaful :

The takaful concept is based on the following principles :
(i) Mutual Responsibility;
(ii) Mutual Help and Cooperation;
(iii) Mutual Protection;
43
TAKAFUL STATUTES
(a) Malaysia :
 In Malaysia, the takaful operations are governed by the
Takaful Act 1984, which contains four parts and sixty eight
sections. The four parts are :
 Deals with definitions and classification of takaful
business;
 Deals with conduct of takaful business;
 Deals with returns, investigations, winding up and transfer
of business;
 Deals with miscellaneous and general provisions;
 Under the Takaful Act 1984, a takaful operator must be
incorporated as a company as defined in the Companies
Act 1965 or as a society as registered under the cooperative sociaties.
44
 The Act require the operator to establish a Shariah advisory
body which is approved by the Director General, to advise
an operator on the operations of its takaful business so as
to be shariah complaint.
(b) Bahrain :
 In Bahrain, the law governing the takaful industry is
Legislative Decree No.17 of 1987 with respect to insurance
companies and organizations. The Decree Known as “the
insurance law of 1987” contains 4 Chapters and 37 Articles.
However, the central Bank of Bahrain and Financial
Institutions Law 2006, which was passed recently,
superseded the Decree .
(c) Indonesia :
 In Indonesia, the takaful operations are governed by the
same laws governing conventional insurance.
45
(d) Singapore
 Like Bahrain and Indonesia, the same law that governs
conventional insurance governs the takaful operations in
Singapore. i.e., Singapore Insurance Act (SIA). SIA contains
4 Parts with 65 sections.
46
 The following are the statutory bodies entrusted to regulate
and supervise the takaful industry in each of the jurisdiction :
(i) Malaysia – Central Bank of Malaysia;
- Minimum paid up capital in RM100 million;
- Takaful Act 1984;
- Various guidelines have been issued to
regulate the industry in a systematic, orderly
manner.
(ii) Bahrain – Central Bank of Bahrain;
- CBB Rulebook Vol. 3;
- ES-1; ES-2; ES-1.19;
47
(iii) Indonesia – Peraturan Pemerintahan Nombor 73
Tahun 1992 tentang Penyelenggaraan
Usaha Peransurian.
- Mininum paid- up is RP50 milliard
(iv) Singapore – Monetary Authority of Singapore (MAS);
- Minimum paid-up not less than S$25 million;
- Set various levels of margins of solvency;
48
REGULATIONS ISSUED BY GOVERNING BODIES
 Governing bodies tasked with the development of the
takaful industry issuing fatwas and/or guidelines under the
international Islamic organizations are:
• OIC Fiqh Academy,
• The Islamic Financial Services Board (IFSB) and
• The Accounting and Auditing Organization of Islamic
Financial Institutions (AAOIFI).
49
 There is also the International Association of





Insurance
Supervisors (IAIS) formed in 1994 among governing bodies in
various countries for non-shariah matters. IAIS is mirrored
along the lines of Basel Committee on Banking Supervision
(BCBS) which issued Basel Capital Accord and Basel II.
The IAIS was established to promote cooperative among
insurance supervisors and liaise with supervisors and
regulators on other financial sector.
The IAIS develops principles, standards and guidance on
insurance supervision and is active in promoting their
implementation, in particular the Insurance Core Principles
and Methodology (ICPS) which consist of :
Essential principles that need to be in place for a supervisory
system to be effective;
Explanatory notes that set out the rational underlying each
principle;
Criteria to facilitate comprehensive and consistent
assessments;
50
 The ICPs serves as a basic benchmark for governing bodies
and can be used when establishing a supervisory regime for
identifying areas in existing regimes that need to be improved.
In addition, it provides a globally-accepted framework for the
regulation and supervision of the insurance sector. However,
there is a possibility that some of the ICPs may not be in line
with shariah. To address this issue, the IAIS and IFSB have
cooperated to review the ICPs so that they do not conflict with
Shariah. In this respect a Joint Working Group has been
formed to deliberate on this matter.
 After deliberating on the ICPs, the Joint Working Group
concluded that many of the ICPs are university accepted to
require no adaption to apply to takaful. Those ICPs which
require adaptation are :
51














ICP 1 – Conditions for effective insurance supervision;
ICP 3 – Supervisory authority;
ICP 6 – Licensing;
ICP 7 – Suitability of persons;
ICP 9 – Cooperate governance;
ICP 10 – Internal Control;
ICP16 – Winding-up and exit from the market;
ICP 19 – Insurance activity;
ICP 21 – Investments;
ICP 22 – Derivatives and similar commitments;
ICP 23 – Capital adequacy and solvency;
ICP 24 – Intermediaries;
ICP 25 – Consumer Protection;
ICP 26 – Information, disclosure & transparency towards the
market
52
 Apart from the IAIS and the FASB, the AAOIFI has played a
major role in issuing standards for the Islamic financial
services industry. Registered in 1991 in Bahrain, AAOIFI is
responsible for developing accounting for the international
Islamic banking and finance industry.
53
ROLE OF THE SHARIAH COMMITTEE
 The common roles of Shariah Committee are as follows;
(i) Ensuring that both the shareholders and takaful funds
are managed and administered in accordance with the
Shariah principles.
(ii) Providing expertise and guidance for the industry in all
matters relating to the Shariah principles, its structure
and investment process, and other operational and
administrative matters.
(iii) Consulting the authorities who may consult their Shariah
Advisory Council where is any ambiguity or uncertainty
as to an investment, instrument, system, procedure
and/or process.
54
(iv) Scrutinizing the company’s compliance report as provided
by the compliance officer, transaction report provided by or
duly approved by the trustee and any other report deemed
necessary for the purpose of ensuring that the investments
are in line with the Shariah principles.
(v) Preparing a report to be included in the company’s annual
report certifying whether the takaful business has managed
and administered in accordance with the Shariah principles.
(vi) Ensuring the company comply with any guideline, ruling or
decision issued by the authorities with regard to Shariah
matters.
(vii) Vetting and advising on the promotional materials of the
company.
(vii) Assisting and attending to any ad-hoc meeting called by the
authorities and/or any other relevant authority.
55
GLOBAL TAKAFUL GROWTH
 “The global takaful (Islamic insurance) sector is
expected to continue its rapid growth and become a
significant contributor to the global "risk transfer"
market place”
*Standard & Poor's Ratings Services.
GLOBAL TAKAFUL GROWTH
7
USD Billions
6
5
4
CONTR
3
2
1
0
2000
2004
2010F
2015F
Moody reports 13% Growth to USD 7 Billion by 2015
TAKAFUL V INSURANCE (MALAYSIA)
 Growth Rate (Last
3yrs)
 Asset size % GNI
 Cont/Prem % GNI
 Ave Life Policy Size
 Ave Life Cont/Prem
 Agents per Company
 Network Structure
*Life Cos- 4900
Takaful
Insurance
32.0%
6.7%
1.4%
19.4%
0.4%
4.3%
RM 35,700 RM 66,300
RM 877
RM 1331
5624
2868*
18 off.
17 off.
MUSLIM POPULATION GROWTH
Time
Period
World
%
Muslim
%
Diff
%
Double
(Years)
1970 –
2000
1.66
2.61
0.95
94
1990 –
2000
1.41
2.13
0.72
96
2000 –
2006
1.22
1.9
0.68
103
2000 –
2025
1.03
1.64
0.61
115
World Christian Encyclopedia
Natural Market Opportunities
 The total number of Muslims is huge, a little more
than one fifth (20%) of the world's population.
 If present growth rates for the world population and
the Muslim population continued in about 115 Years
half (50%) of the world's population will be Muslims.
THE END
62