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The Council of Islamic Fiqh Scholars (1975) ruled that conventional insurance is prohibited due to the presence of three main elements namely :
1) Existence of al-Riba in Insurance : There is the practice of al-Riba (interest) and other related practices in the investment activities of the conventional insurance companies which contravene the rules of the Shariah. 2) Gharar may originate from : Ignorance and lack of information over nature and attributes of subject matters. Doubt over its availability and existence. Doubt over its quantity. Lack of information concerning the price and terms of payment (including currency to be paid). Prospect of delivery (including vendors ability to make delivery according to contract). Uncertainty is present in conventional insurance because the value and timing of compensation cannot be determined and known at the time the contract is made.
The Takaful principle : 1) Mutual responsibility : The principles are illustrated through the following Hadiths compiled in Sahih Bukhari and Sahih Muslim. The relationship between one believer and another is like that of a building where one part of the building strengthens the other parts. A believer to another believer is like a building where each part enforces the others. Each of you has a responsibility and each of you is responsible towards those under your responsibility. Each one of you is a person of responsibility, and each one of you is responsible for those under your responsibility.
2) Mutual cooperation : The principle of cooperation is established through the Quran and Sunnah. E.g : Surah (al-Maidah : 2) and (al-
established the principle of cooperation as illustrated in the compilation of Hadith narrated by Abu Dawood : whosoever fulfils the intention of a brother, Allah will fulfill his intentions.
3) Mutual protection : From disasters. Disaster and prosperity are both sent by Allah and the advocating to help one another is found in the following Hadith narrated by Ibnu Majah : indeed a believer who can give security and protection to the life and property of mankind.
The insured Participants who face the risk The beneficiaries Those who benefit from the fund
The operator A licensed body who manages the funds according to Shariah principles
Beneficiary in a policy is usually determined on the test of whether the person has an insurable interest on the subject matter. This is determined under the following principles : Al Milkiyah (ownership) Al Mirath (inheritance) Al Wasiyah (bequest)
1) Al Milkiyah (ownership)
Under Takaful, the benefits of the policy are the sole ownership (Al Milkiyah) of the policyholder while he/she is alive, except in instances of Waqf (charitable trust). Under Waqf, the property becomes the ownership of Allah and no longer belongs to an individual. After death, the principle of sole ownership remains true but the benefits of the policyholder is moved to the beneficiaries of the properties left by the policyholder, as follows : the total benefits are calculated together with other wealth held by the policyholder. the total wealth is used to pay off any outstanding debts by the policyholder as debts to other individuals is considered as debt to creatures, which needs to be settled immediately. the surplus is to be used to pay off any funeral expenses, which should be separated from the distributable surplus.
2) Al Mirath (inheritance) After deduction for payment of debt, funeral expenses and execution of the policyholders will, the remaining property is to be distributed to the living heirs according to Islamic law, based on the pre-determined share, guided by the provisions in the Quran.
3) Al Wasiyah (bequest)
Of the surplus properties, only up to 1/3 of the surplus can given away via a will. This is to reduce the possibility of injustice where the policyholder, while is the full owner of the benefits of the policy when alive, may choose to will away the whole surplus properties to third parties or in favour of certain heirs and not in favour of the policyholders rightful heirs. Therefore, under Islamic law, only 1/3 can be given away as per policyholders bequest.
Wakala Model
Waqf Model
1) General Takaful
Provide protection against damage or destruction to property and related liability subjected to a oneyear underwriting period. Motor Takaful Personal accident Takaful Home Takaful Medical and health Takaful Marine Takaful Engineering Takaful
2) Family Takaful Not meant to insure lives financial protection for beneficiaries against unexpected financial risk such as premature death or total disability commonly linked with saving plan. Family Takaful divided into Participants Account (PA) and Participants Special Account : Investment-linked Takaful Child education Takaful
Re-Takaful is defined by the Malaysian Takaful Act. 1984 as an arrangement consistent with sound Takaful principles for Re-Takaful of liabilities in respect of risks incurred or to be incurred by the Takaful operator in the course of his carrying on Takaful business.
A Takaful company is backed or reassure from any insufficiency in meeting the claims by another Takaful company the percentage borne by these companies is determined through mutual agreement.
Two coverage systems : the facultative : product- by -product coverage. the treaty system : covers the whole range of claims.
Conventional Insurance Profit for shareholders Risk Transfer Profits maximization Secular/Regulations
Takaful Mutual for participants Co-operative risk sharing Affordability and spiritual satisfaction
Investments
Surplus
Interest based
Shareholders account
The Takaful industry is imminent from the projections made. This will most definitely entice other players to join in, such as opening Takaful windows and creation of retro-Takaful in the future. The most important factors for successful operations are the transparency of operations, the establishment of Shariah compliant products and robust Shariah supervisory boards that guide product design and ensure Shariah compliance.
The Takaful industry is to improve efficiency and to reach critical mass in order to benefit from the economies of scale that are currently the privilege of only a handful of players. It is hoped that these will be met with the expansion of the market and proper regulation.