Takaful

1. TAKAFUL (ISLAMIC
INSURANCE)
By: Camille Paldi
CEO of FAAIF
Mediterranean Week of
Economic Leaders Summit
of Islamic Finance, 28th of
November 2014. Casa Llotja
de Mar, Barcelona, Spain

2. Forum organized by:

3. WHAT IS TAKAFUL?
Takaful, or Islamic insurance, is a cooperative scheme, where in which
the participants pay a premium in the form of donation or tabarru in
a common pool in return for the ability to draw upon that pool upon a
valid claim.
The word takaful originates from the Arabic world kafalah, which
means "guaranteeing each other" or "joint-guarantee."

4. AAQILAH
The basis of shared responsibility is taken from the system of
aaqilah, which was an arrangement of mutual help or indemnification
customary in many tribes of the Arab world.
Under this system, if a member of a tribe was accidentally or unjustly
killed, the murderer was obliged to pay blood money (dia) to the
deceased's next of kin as a form of life insurance for the deceased's
relatives.

5. CONVENTIONAL V ISLAMIC
INSURANCE
Proprietary insurance is concerned with risk transfer, insured risks
being transferred from the insured to the insurer in return for a
premium;
Takaful is concerned with risk-pooling, whereby the policyholders
(takaful participants) mutually insure one another in a common risk
pool financed by their contributions (premium payments).

6. CONVENTIONAL V ISLAMIC
INSURANCE
The purpose of this Holy Book insurance system is not profits, but to
uphold the Qu’ranic, Christian, and Jewish principle of "bear ye one
another's burden."
Therefore, in contrast to conventional insurance, takaful is not a
contract of buying and selling where a party offers and sells
protection and the other party accepts and buys the service at a
certain cost or price.
Rather, it is an arrangement whereby a group of individuals each pay
a fixed amount of money and compensation for losses of members of
the group is paid out of the total sum.

7. CONVENTIONAL V ISLAMIC
INSURANCE
Return On Funds for the Participant.
The funds remaining in the takaful fund on maturity of the policy are
distributed back to the participants after deduction of the charges
due to the operator and according to the type of takaful management
model utilized by the fund.

8. CONVENTIONAL V ISLAMIC
INSURANCE
In conventional insurance, one enters a bilateral sale contract or
contract of exchange with the insurance provider and transfers risk of
loss to the provider.
The provider will bear the risk of loss in the event of an accident or
harm to the insured item or person.
In addition, the insurance provider speculates on risk in the
underwriting process.

9. CONVENTIONAL V ISLAMIC
INSURANCE
A conventional insurance company speculates on the risk by making
an assessment of the risk and then pre-determining profit based on
the estimated payout versus the premium.
It is in a sense gambling (Paldi: 2014).
In regards to transfer of loss or speculation on risk, there is neither in
Takaful.

10. CONVENTIONAL V ISLAMIC
INSURANCE
In Islamic Insurance, the loss and risk are essentially distributed
amongst the policyholders.
Overall, Takaful is a scheme of mutual protection that exists amongst
the participants making them both the insurer and the insured, which
is a concept promoted by all of the people of the Holy Books (Paldi:
2014).

11. CONVENTIONAL V ISLAMIC
INSURANCE
In conventional insurance, riba (interest) occurs as the amount of
money received by the insured, either on the occurrence of the
insured event or upon maturity of the policy may be more or less than
what is actually paid by the insured.
Furthermore, since the payments are deferred, the compensation
paid, which is greater than the instalments paid by the insured may
constitute surplus riba (riba al fadl) and credit riba (riba al-nasiah).
Secondly, the profits of conventional insurance companies result from
riba related transactions (ISRA: 2012).

12. CONVENTIONAL V ISLAMIC
INSURANCE
In addition, conventional insurance contracts contain gharar
(uncertainty) in that the subject-matter of the contract is not certain
until the insured event has taken place.
The amount being paid by the two parties is not known at the time of
execution of the contract.

13. CONVENTIONAL V ISLAMIC
INSURANCE
For example, an accident may occur immediately after the insured
makes the first payment requiring a payout or he or she may make all
the payments without any accidents happening, never receiving any
compensation back from the insurance company during the duration
of the policy (ISRA: 2012).

14. CONVENTIONAL V ISLAMIC
INSURANCE
In a conventional insurance contract, the policyholder agrees to pay a
certain premium sum in consideration for the guarantee of the
insurance company that they will pay a certain sum of compensation
in the event of a valid claim.
However, the policyholder is not informed of how much
compensation the company will pay him or her or how the amount
shall be derived (ISRA: 2012).

15. CONVENTIONAL V ISLAMIC
INSURANCE
Maisir or gambling means to court such risk as it involves both the
hope of gain as well as the fear of loss, which is not a necessary part
of any normal activity in life.
In conventional insurance, policyholders are gambling by betting
premiums on the condition that the insurer will make payment
contingent upon the circumstance of a specified event.
On the other hand, the insured does not get anything from his
premiums if the insured event does not happen at all (ISRA: 2012).

16. TAKAFUL MINIMIZES RIBA AND
GHARAR
Takaful minimizes riba (interest), gharar (uncertainty), and maisir
(gambling) through its cooperative donation scheme (tabarru) and
investment in halal activities.

17. GENERAL TAKAFUL
The general takaful contract is a short-term policy where takaful
participants pay contributions and operators undertake to manage
the risk.
According to ISRA (2012:512), the contributions paid by the
participants are credited into the general takaful fund, which is then
invested and the profits generated are paid back to the fund and
eventually to the participants in accordance with the terms of the
contract in a pre-agreed upon ratio after deducting operational costs.

18. GENERAL TAKAFUL
The tabarru element is more apparent in general takaful as
participants will normally undertake to regard their contributions as
donations to fellow participants (ISRA, 2012:513).
Tabarru is an agreement by a participant to relinquish, as a donation,
a sum of contribution that he or she agrees to pay with the purpose
of providing mutual indemnity to takaful participants, where the
donation acts as a mutual help and joint guarantee should any fellow
participants suffer from a defined loss (ISRA, 2012: 514).

19. GENERAL TAKAFUL
Tabarra is derived from the word tabarra'a, which means contribution,
gift, donation, or charity.
The purpose of this contract is to give a favor to the recipient without
any specific consideration in return (Al Huda CIBE).
Essentially, tabarru is a contribution or donation, which entails no
return, but rather a reward from Allah alone.

20. GENERAL TAKAFUL
There are two important pillars of tabarru, namely the absence of
counter-value and the intention to perform tabarru.
For example, if a donor contributes with an expectation of a counter-value
from the donation given, then the whole transaction will be
perceived as an exchange (muawadah) rather than a tabarru contract
(Al Huda CIBE).

21. GENERAL TAKAFUL
Takaful, unlike its conventional counterpart, is based on the
principles of mutual cooperation (ta'awun) and donation (tabarru).
Under the Islamic law of transactions, the existence of gharar
(uncertainty) and maisir (gambling), which normally nullifies an
exchange contract (muawadah) are tolerated in a contract of donation
(tabarru).

22. GENERAL TAKAFUL
This corresponds to the Islamic legal maxim, "uncertainties are
tolerable in a gratuitous contract." (Al Hude CIBE)
This is mainly due to the fact that parties who enter into a tabarru
contract do not aim to make profit out of the contributed sum, and
hence the potential dispute, which normally arises in a profit-making
transaction is deemed to be negligible in a gratuitous-based
transaction.

23. GENERAL TAKAFUL
Furthermore, the issue of uncertainty is nullified as the contributor
voluntarily gives away his property or right to the recipient without
any consideration (Al Huda CIBE).
In contrast, conventional insurance is based on exchange
(muawadah), aims at making profit from the insurance operations,
and is not Shari'ah compliant due to excessive gharar (uncertainty),
maysir (gambling), and riba (interest).

24. GENERAL TAKAFUL
A takaful contract cannot be considered a pure tabarru contract, but rather a
qualified or conditional tabarru contract due to the following reasons:
(1)The contribution made by a participant in takaful is with consideration to a
right to claim for compensation in the event of loss or damage of subject-matter.
Thus, the tabarru is not merely for charity, but conditional upon certain
consideration, namely the right to claim takaful benefits in the event of loss.
This is a violation of the fundamental objective of tabarru.

25. GENERAL TAKAFUL
(2) Takaful participants are normally obliged to pay different amounts
of contributions depending on the different degree of risk exposure.
This implies that their participation in the fund is conditional upon a
certain amount of contribution, which deserves compensation.
This is in contradiction to the principle of tabarru as the real intention
of the contracting parties is not for donation, but rather to make
them eligible for certain benefits under takaful.

26. GENERAL TAKAFUL
(3) Takaful includes a few controversial practices such as
surrendering of benefit, survival of benefit, or sharing of underwriting
surplus among participants of takaful although they have surrendered
all of their rights over the monies of the fund.

27. GENERAL TAKAFUL
(4) Furthermore, when a participant pays a premium to the takaful
operator, he has effectively donated his contribution as tabarru,
hence, relinquishing his ownership over the object donated as
prescribed by the rules of tabarru.
Therefore, it should not return to the participants upon maturity of
the policy or liquidation of the fund (Al Huda CIBE).

28. GENERAL TAKAFUL
Many takaful products and operations are starting to converge closely
with conventional insurance.
The fundamental structure of takaful, which is premised on the basic
concept of tabarru, is questionable as many benefits are offered to
the participants in the beginning of the takaful contract in return for
the contributions paid to the tabarru pool managed by the takaful
operators (Revisit the Principle of Tabarru in Takaful Structures).

29. CONVENTIONAL PROPRIETARY
INSURANCE V CONVENTIONAL MUTUAL
INSURANCE V TAKAFUL
Takaful participants are not insured in the sense of proprietary
insurance, but share the profits and bear the deficits of the
takaful undertaking in a manner similar to conventional mutual
insurance.

30. CONVENTIONAL PROPRIETARY
INSURANCE V CONVENTIONAL MUTUAL
INSURANCE V TAKAFUL
The takaful operator plays an important role that the
management of a conventional mutual does not play in the
event of a periodic deficit in a takaful fund that exceeds the
reserves of the fund, thereby making it potentially insolvent.
In this case, the takaful operator acts as a lender of last resort
by providing a qard hassan loan to the takaful fund.
Such a loan will be repaid out of future underwriting surpluses.

31. CONVENTIONAL PROPRIETARY
INSURANCE V CONVENTIONAL MUTUAL
INSURANCE V TAKAFUL
In mutual insurance and takaful, investment profits belong to the
policyholders, except that, in takaful, the operator may share in these
profits as a mudarib or by virtue of a performance-related wakalah fee
for fund management.

32. Conventional
Proprietary
Insurance
Conventional
Mutual Insurance
Takaful
Contractual
Relationship
A policy in the form of an
exchange contract (sale and
purchase) between the
insured (policyholder) and the
insurance company.
A policy in the form of a risk-sharing
contract between the
individual insured and the
pool of insureds as
represented by the
cooperative insurance
company.
A combination of tabarru
contract (donations) and
contractual relationship
between (a) the individual
participants and the pool of
participants, and (b)
participants and the Takaful
Operator, as represented by
the takaful.
Responsibility of
Policyholders/Partic
ipants
Policyholders pay premium to
the insurer.
Policyholders pay
contributions to the pool in
the form of premiums paid to
the cooperative insurance
company. Any underwriting
surplus belongs to the
policyholders, who are also
liable for any deficit. Annual
surpluses are normally
retained in underwriting
reserves out of which any
annual deficits are normally
met.
Participants make donations
(tabarru) to the scheme, as
well as an element of savings
in life takaful where a plan
includes such a component.
Any underwriting surplus
belongs to the policyholders,
who are also liable for any
deficit (or see following
alternative allowed by Shariáh
scholars). In some takaful
undertakings, the TO
manages underwriting under
a mudarabah contract and
receives a share of the
underwriting surplus as a
mudarib fee. Something
similar may also occur in a
wakalah contract with a
wakalah performance-related
fee based on the surplus.

33. Conventional
Proprietary
Insurance
Conventional
Insurance Mutual
Takaful
Liability of the
Insurer/Operator
Insurer is liable to pay claims
according to the policy using
the underwriting fund and, if
necessary, shareholders
funds.
Pool is liable to pay claims
according to the policy using
the underwriting fund.
Takaful operator acts as the
administrator of the scheme
and pays the takaful benefits
from the takaful
(underwriting) fund. In the
event of the impending
insolvency of a takaful
underwriting fund, the takaful
operator may be expected to
provide an interest-free loan
to the takaful fund to enable
it to meet its obligations.
Access to Capital Access to share capital and
debt with possible use of
subordinated debt.
No access to share capital,
but access to debt with
possible use of subordinated
debt.
Access to share capital by
takaful operator, but not to
debt, except for interest-free
loan from operator to
underwriting fund.
Investment of Fund There are no restrictions
apart from those imposed for
prudential reasons.
There are no restrictions
apart from those imposed for
prudential reasons.
Assets of the takaful funds
are invested in Shariáh
compliant instruments.

34. I DEDICATE THIS PRESENTATION TO
MICHAEL BROWN AND ALL THE VICTIMS
OF EXCESSIVE POLICE VIOLENCE,
BULLYING, HARASSMENT, AND
SURVEILLANCE.

35. CONTACT FAAIF AT
CAMILLE@FAAIF.COM
GRACIASSS