ISLAMIC INSURANCE OR TAKAFUL MUHAMMAD UMAR 18221554-007 “BS 8th ACCOUNTING & FINANCE” HISTORICAL BACKGROUND OF WESTERN CONCEPT OF INSURANCE ● Takaful started some 30 years ago in the Middle East with the launching of two companies in 1979: ○ ● ● ● The Islamic Arab Insurance Co. (IAIC) in the UAE and ○ The Islamic Insurance Co. of Sudan But it took some time for the movement to take shape. Later in 1984, Malaysia played a pioneering role in setting the first Legal framework specific to Takaful (Takaful Act Malaysia). This was instrumental in the successful launching of the Takaful movement in Malaysia and in other countries of South East Asia. 1. Ottoman Empire- First introduce western concept of insurance- Maritime Code 1863. 2. Ottoman Law of Insurance 1874-only life insurance is haram or unlawful. 3. Since then, western concept of insurance is practiced almost in all countries in the world Risk And Insurance: • Risk and uncertainty are fundamental facts of life. All human activities are subject to risk, which may lead to financial or physical losses to him. Insurance is a device to cover the losses arise due to occurrence of some undesired event. Definition of Insurance Insurance is an economic device whereby the individual substitutes a small certain cost (premium) for a large uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance. CLASSIFICATION OF INSURANCE BUSINESS By Type of Products i) ii) iii) Life insurance General insurance Liability insurance Nature of Insurance Contract • • • • Aleatory Contract Unilateral Contract Conditional Contract Contract of Adhesion Definition of Tkawful DEFINITION Takaful, also called Islamic insurance, is a system of cooperative insurance for followers of Islam. Members of a tkawful contract contribute to a pool of money that’s used to financially support a member when they experience a covered loss. The concept of tkawful originates from the beginning of Islam. Community members used social insurance practices to pool resources and help cover losses. The takawful system is based on Sharia, or Islamic religious law, which is the code of conduct and religious guidelines for Muslims. Specifically, takaful follows Islamic principles including welfare, shared responsibility, and cooperation. Alternate name: Islamic insurance How Does Takaful Work? Unlike conventional insurance, participants in a takaful contract are both the insurers and the insured. Each member of the takaful group agrees to make regular contributions or premiums. The money is put into individual accounts and invested in Sharia-compliant investments. Part of joining the takaful contract is agreeing to donate a portion of the funds from your account if another member faces a loss. Likewise, your co-members agree to help cover you if you face losses.1 In practice, takaful can look a lot like conventional insurance. For example, say you protect your home with property takaful. A storm causes damage to your home and leaves it uninhabitable. It may seem like takaful is the same as conventional insurance, such as car insurance or homeowners coverage. However, a takaful agreement is Sharia-compliant, while conventional insurance is not. Conventional insurance violates three specific concepts in Sharia: gharar, maysir, and riba. Gharar: This is the concept of uncertainty, risk, or fraud in financial and business transactions. Under conventional insurance, you pay premiums for the promise that you’re covered if you experience a specific loss. However, you may never experience a loss or need to file a claim. Gharar is violated because both parties are uncertain whether you’ll use your insurance product or not. Maysir (Maisir): Maysir, or gambling, is prohibited in Islam as wealth should derive from productive work rather than winnings from games of chance or luck. Conventional insurance is often considered a type of gambling in Islam because of the uncertain risk and reward of a policy. For example, a person could only have insurance for a few months before experiencing a loss and getting the full value of the policy. On the other hand, someone may never need to use their policy and pay premiums for years without a benefit. Riba: Meaning “interest” or “usury,” riba is prohibited in contracts by Islamic religious law. Many conventional insurance companies invest premiums into bonds and funds that bear interest, which violates guidelines against riba. Types of Takaful Conventional insurance policies consist of policyholders and the insurance company. The policyholders pay the insurance company to insure them against risk. In takaful, however, the contract participants are both the insurer and the insured. To manage the takaful contract and coverage, several models of contracts are used: 1. Wakalah (agency) 2. Mudharabah (profit-sharing) 3. Hybrid Model Types of Takaful Explanation Wakalah This model works by the Islamic insurance company, or takaful operator, becoming an agent for the takaful contract. The agent manages the funds for participants. Participants pay the agent a fee for their services. Mudharabah While wakalah contracts are fee-based, mudharabah contracts are a profit-sharing venture between takaful participants and the contract manager. The takaful participants provide capital in the form of their premium payments. The manager of the contract provides expertise and managerial skills to invest the participants’ money into Shariacompliant investments. Profit made by the investments is shared among the participants and the manager at an agreed-upon rate. The shared profit pays for the manager’s time and experience rather than a straight fee. The manager doesn’t receive compensation if the investments don’t make a profit. Hybrid Model The mixed, or hybrid, model of takaful combines elements of both wakalah and mudharabah. In this model, the takaful manager receives a set wakalah fee as well as a portion of any profits from takaful fund investments. Takaful vs. Conventional Insurance Takaful Conventional Insurance • Risk is shared between participants. • Risk is transferred to the insurance company. • Any investments must be compliant with Sharia law. • Investments do not need to meet religious standards. • Profits from fund investments are returned to takaful participants. • Profits of the insurance company may be distributed to third-party shareholders, who may or may not be policyholders. Models Of Tkawful Mudarabah Model, Family Takaful Profit Attributed To Shareholders Company’s Admin & Manag. Expenses Company Takaful Contract based on Mudarabah Investment Profit 30% 70% PA PA FTF PSA PSA Payment from PA Payment from PSA Wakalah General Model Hybrid Model
