Allah in the name of,

the most Affectionate,

the Merciful

Presented By:
Mufti Syed Sabir Hussain
Resident Shariah Board Member, MCB Islamic Banking

Part 1: Introduction to Takaful.

Origin of Word Takaful
Definition of Takaful
Historical Precedents
Risk in the eyes of Shariah
Kind of Risk
Takaful & Tawakkul

Part 2: Conventional Insurance

Core Issues Related Insurance

Part 3: Takaful an Alternative of

Insurance & its Basis
Conclusion of Muslim Jurists
Shariah Compliance Features of Takaful
Shariah Basis of Takaful

Part 4: The Solution Islamic

Cooperative Insurance (Takaful)

Mudarabah Model
Wakalah Model
Waqf Based Wakalah Model

Part 1:

Introduction to Takaful

introduction to Takaful
Origin of the Word Takaful

The term Takaful is derived from the Arabic word

Kafaala which means to give guarantee on the other
hand Takaful means guaranteeing each other.
The Kafalah and its appropriates words used in the Holy
Quran and the Sunnah.

(37:3 )
and gave her in Zakarias guardianship
(72:12 )O
and I am its guarantor.

 In the Narration of the Holy

introduction to Takaful
Origin
Prophet
:of the Word Takaful

"
(Sunan Ibne Maja, 2499) . . "

A Janaza brought to be performed funeral .1

prayer/Salat. The holy Prophet (Peace be upon
him) told to the companion that you perform the
funeral prayer/Salat as the deceased person was
owing debt. Hazrat Abu Qatada (R.T.A) responded
to Hazrat Mohammad (Peace be upon him) that
the payment of the deceased persons debt as my
.guarantee debt

I and the person who takes care of orphans . 2

simillar like (Prophet Mohammad (Peace be upon
.him) stood his two fingers in the air

Definition of Takaful

introduction to Takaful

The concept of Takaful or Islamic Insurance is being used,

as a risk mitigating tool, to cover the losses or hazards of
uncertainty of its policy holders.
It is based on the concept of mutual help and group
responsibility.

Historical Precedents
Doctrine of
Doctrine of

Doctrine of
Doctrine of

introduction to Takaful

Al-Aqilah
Dhaman Khatr at-Tareeq:
Aqd al-Muawalat:
Al-Hilf:

f-

Risk in the Eyes of Shariah

Introduction to Takaful

What is Risk?
Risk is the potential danger that threatens to harm
or destroy an object, event or person

g. Kinds of Risk

Introduction to Takaful

Risk is of two kinds

Financial Risks
Healthy risks
Property risks
Liability risks

Non Financial Risks

Moral risks
Emotional risks

Kinds of Risk
Introduction to Takaful

Q : Does Takaful mitigate all risks?

A : No Takaful only mitigates financial risks
Q : Can Takaful prevent any losses?
A : No, but it can ease the financial burden
resulting from misfortunes

Takaful and Tawakkul

Introduction to Takaful

A misconception is the problem of planning ahead or

Tawakkul

Tawakkul means to utilize all available sources to achieve a

certain result but the final outcome of these efforts should be
left onto Allah Taala alone.
Tawakkul

An instruction regarding this concept appears in the Hadith

about the owner of the camel who was asked to tie your camel
first and then rely upon the destiny ordained by Allah
(swt) (Al Tirmidhi).

Part 2: Conventional Insurance

CORE ISSUES RELATED

INSURANCE

Conventional Insurance
Lexical Meaning: To insure
Insurance is a contract between an insurance company
and the policy holder in which the insurance company
accepts to compensate the specified losses of the policy
holder against the premium.
The basic principal of insurance is to gather the potential
losses of policy holders and transfer them to the
insurance company .
Insurance is one of the risk mitigation tools.

Conventional Insurance
According to Shariah rules there are two aspects of
Conventional Insurance, namely:
1. Conceptual Aspect
2. Practical Aspect
So far as the Concept of Insurance is concerned, it is not
only recognized by the Shariah but in certain situation it is
recommended.

Practical Aspect
Types of Insurance:
1.General Insurance
2. Life Insurance
* General Insurance is forbidden due to these three reasons:
1. Riba
2. Gharar
3. Qimar
4. Bai Kali Bil Kali
* Life Insurance is forbidden due to the element of Riba.

Islam and Insurance Core Issues

Elelment of Riba:
Lexically: Usury or interest,
Technically: The excess on one side in the
exchange between the amount of premium and the
sum insured. -This is Direct Riba.
The interest earned on interest based investments.
The profits that given by the insurance company
earned through interest bearing financial
institutions. -This is Indirect Riba.

20

General and Life Insurance

Element of Gharar:
Gharar; Lexically: uncertainty,
Technically: Gharar is the uncertainty of the
consideration or the subject matter or the period in a
commutative contract.
In general Insurance subject matter is uncertain.
Element of Qimar :
In general insurance there is chance of total loss of one party only.

General and Life Insurance

Bai al-Kali bil-Kali; Lexically: The both sides of a sale are
deferred,
Technically, Insurance is the sale of money for money, of a
greater or lesser amount, with a delay in the payments of
both sides of the contract, that the premium and the
claims.

Part 3: Takaful An Alternative of

Insurance

a. Conclusion of Muslim Jurists

b. Shariah Compliance Features of Takaful
c. Shariah basis of Takaful

TAKAFUL An Alternative of Insurance..

Conclusion of Muslim Jurists

Muslim Jurists (Shariah Scholars) have done
a lot of work to make the alternative of
insurance.
To give Takaful as a substitute of
conventional insurance, the resolution
passed by Islamic Fiqh Academy that;
the alternative contract which confirms to
the principles of Islamic dealings is the
contract of cooperative insurance, which is
founded on the basis of charitable donation
and Shariah compliant dealings.

Conclusion of Muslim Jurists

TAKAFUL An Alternative of Insurance..

Muslim Jurists (Shariah Scholars) have

concluded that:
The Takaful company must conduct all of its
dealings (i.e. creating of pool, investments
etc) under the guidelines of Islamic Shariah.
Takaful should be based on the principles of
mutuality and cooperation.
Takaful products should be established on
the basis of Tabarru an Arabic noun means
donation, gift, contribution (with or without
condition of consideration).
The participants mutually contribute to the
same fund for the purpose of mutual
indemnity in case of risk and loss.

TAKAFUL An Alternative of Insurance.

Shariah Compliance Features of Takaful

Five Fundamental Features:
1- Intention or utmost sincerity (Ikhlas):
All transactions and dealings of the Participant
and the Takaful Operator must be done
according to the Islamic Shariah in order to
achieve the desire of Allah Subhanahu wa
Taala.
2- Integration of Shariah Conditions:
A Takaful contract will not be valid, if its
aspects contravenes any Shariah Rulings.

TAKAFUL An Alternative of Insurance

Shariah Compliance Features

3- Presence of Moral Values and Ethics:

Takaful Business is conducted openly in
accordance with utmost good faith, honesty, full
disclosure, truthfulness and fairness in all
dealings.
4- No Unlawful Elements:
Free from all unlawful elements and non
Shariah dealings.
5- Appointment of SSB :
For Shariah Oversight, Takaful Operator
appoints a Shariah Supervisory Board (SSB)
consisting of a panel of three or more
experienced, credible and learned Shariah
Scholars.

The Solution
Islamic Cooperative
Insurance
( Takaful)

Islamic alternate
Since the conceptual aspect of Insurance is not in conflict with
the principles of Shariah, therefore it is an obligation upon
Muslim Scholars in particular and the wider Muslim
community in general to provide the Islamic alternate of
Insurance.
The Islamic alternate must have at its core acceptable to
Shariah as well as being practically viable.
We have two types of contracts:
Commutative
Non commutative

Islamic alternate
Commutative contract
Bai, Ijarah , Qard, Rahan, Shirkah ,Mudarabah, Sulah bil mal,
Salam ,Istisna,Kula, Nikah.
Non commutative contract :
Aariyat,Wasiyat, Sadqa, Hiba, Waqf
Pakistani Scholars adopted the concept of waqf
Arab scholars adopted the concept of Wakalh
Malaysian Scholars adopted the concept of Mudarabah

Different Models
Pure Mudarabah model
The participant and the operator enter into a Mudarabah contract
from the beginning of the relation, for indemnification and share
of the underwriting results.
Wakalah Model (hybrid of Wakalah & Mudarabah)
An agency agreement is made between an individual willing to
participate in the fund and the operator working as the manager
of the fund. The operator earns an upfront deductible fee and
shares the profit of investments, it does not share the results of
underwriting.
Wakalah based on Waqf
The share-holders create a Waqf fund to extend the help to those
who want cover against financial losses. The participants donate to
the fund and the operator manages the fund. All underwriting
results belong to the fund which itself has a legal entity.

Waqf Model

Waqf Model
Definition:
To transfer ones property into the ownership of Allah (Subhana
hu Wa Taala) for the benefit of human being
Basic rules of Waqf :
Waqf property cannot be sold nor gifted and neither can it be
distributed among the heirs of the waqif.
Waqf is a legal entity therefore it acts as a legal (natural) person.
It is allowed that the waqif can stipulate that he himself will be
the manager of waqf.
The usufruct of the Waqf must be used in a way that enables the
corpus of to be maintained
Another form of waqf which is termed as waqf of currency is
recognized by Shariah, and it can only be invested in low risk
investments.

Waqf Model
Waqif is allowed to stipulate that he will be the
beneficiary of waqf for his entire life.
Whenever donation is given to the waqf, it is not
treated as waqf, rather it is treated as the property of
waqf.
Conditions as laid down by the waqif are treated as
orders given by Allah .

Waqf Model
A Takaful Company is formed with the capital of some
investors for the purpose of investment into Halal
business and compensate the victims of various losses.
A Waqf Fund is established by the shareholders of a
Takaful Company to help victims of financial losses
and accidents as per the rules and regulations defined in
the Memorandum of the Takaful Company and waqf
deed through the contribution of Ceding amount

Waqf Model
Any person by signing the proposal form,
contributing to the Waqf and subscribing to the policy
documents shall become the member of the Waqf Fund.
Waqf Fund will extend benefits to its members strictly
in accordance with the Waqf Rules lay down in the
Waqf Deed.
The Waqf Fund will becomes owner of all
contributions and has the right to act as a legal entity as
per its terms for investment, compensations and dealing
with the surplus amounts.

Waqf Model
The Donation For Waqf can be determined by the
Takaful company on the basis of Actuary.
The Takaful company, while managing the Waqf Fund,
will play two different roles simultaneously:
Operator/Manager
Mudarib

Waqf Model
As Operator/Manager, the Takaful Company will
perform all functions necessary for the operations of
the Waqf against a Wakala fee to be deducted from the
Contributions of the Participants.
As Mudarib of the fund, the Takaful Company will
manage the investment of the excess funds of the Waqf
into Shariah compliant investments and will participate
in the profit of the funds investments at a specified
ratio of profit.

Waqf Model
The Takaful Company may distribute the surplus amounts
on the following three basis:
A portion kept as reserve to mitigate the future losses.
A portion distributed among the participants to
differentiate it from the conventional insurance
procedures.
A portion utilized for the charitable purposes every year.

WAKALAH WITH WAQF MODEL

COMPANY

TAKAFUL OPERATOR FEES

FOR
ADMINISTRATION
EXPENSES
25% TO 30%

SHARE OF
PROFIT FOR THE
COMPANY

MANAGEMENT
EXPENSES OF
COMPANY

PROFIT / LOSS
ATTRIBUTABLE TO
SHAREHOLDERS

40
%
INITIAL
DONATION BY
SHAREHOLDERS
TO CREATE WAQF
FUND

PROFIT SHARING ON
MUDARABHA BASES

WAQF

INVESTMEN
T BY FUND

PROFITS FROM
INVESTMENT

60%

PARTICIPANT

DONATION
PAID BY
PARTICIPAN
T

WAQF
FUND
75% TO
70%

WAQF
FUND

OPERATIONA
L COST OF
TAKAFUL
/RETAKAFUL

SURPLUS

SHARE OF
SURPLUS FOR
THE PARTICIPANT
100%

Re-Takaful
An Islamic alternative to conventional reinsurance based
on a Shariah compliant approved concept for
reinsurance.
Takaful Operator pays an agreed premium from its
takaful fund to the Re Takaful operator in return for the
Re Takaful Operator providing security for the
assurance that the Takaful Operator is protected.

JAZAK ALLAH
&
Thank You