TAKAFUL & RE-TAKAFUL�LECTURE NOTE 3:

PERMATA WULANDARI, S.E, M.SI, PH.D

FIQH ACADEMY RESOLUTION 1985

• Islamic Fiqh (science of Shariah) Academy, emanating from the Organization of Islamic Conference, meeting in its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul- Thani, 1405 A.H. (Dec 1985) issued a Resolution which in summary stated the following:
• The commercial Insurance contract… is prohibited (Haraam) according to the Shariah.
• The alternative Takaful contract which conforms to the principles of Islamic dealings is Halaal, being the contract of cooperative insurance, which is founded on the basis of charitable donation and Shariah compliant dealings.

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THE MEANING OF INSURANCE IN ISLAM

• Aman 🡪 security, peace, safety, protection
• Ta’amin , Aamana, is the word which one usually associates with insurance in Islam 🡪 to re-assure, safeguard, guarantee
• Three classifications of Islamic understanding of insurance:
1. Faith as insurance
2. Insuring the Hereafter
3. Worldly Insurance (consists of: livelihood, Fear and Poverty, Sadness and Grief, Himaya and Asylum, God’s punishment, etc)

THE CONCEPT OF TAKAFUL

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• Since Gharar is not allowed in compensatory contracts, the basis of any arrangement of risk mitigation may be accepted on voluntary bases;
• The voluntary basis of risk mitigation means joint pooling by a group of people of amounts or valuables for meeting any unexpected events for any member of the group;
• The principle of “fortunate many helping the unfortunate few” is a concept recognized by Islam;
• The Quran states in Surah Al-Maidah verse # 2: <“And help one another in righteousness and piety, but help not one another in sin and rancor”>;

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DEFINITION OF TAKAFUL (1)

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• Takaful comes from the Arabic root-word ‘kafala’ — guarantee.
• Guaraneeing each other/Joint Guarantee/ Share responsibility/Mutual Guarantee/Mutual support
• Takaful means mutual protection and joint guarantee.
• Operationally, takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or loss.
• It is a system of Islamic insurance, based on the principle of Ta’awun (mutual assistance) and Tabarru’ (Donation) where the risk is shared collectively by all participants voluntarily

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AAOIFI DEFINITION OF TAKAFUL

“ Islamic insurance is a system through which the participants donate part of or all of their contributions which are used to pay claims for a damaged sufferred by some of participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions”. (AAOIFI definition on takaful in Financial Accounting Standard No 12)

REFERENCE :

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• AL QURAN
• “Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2).
• Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in need / in hardship .
• HADITH
• “tie the camel first, then submit (tawakkal) to the will of Allah”
• The hadith implied a strategy to mitigate/reduce risk.
• Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to a large number of participants. This mitigates the otherwise very damaging losses, if borne individually.

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HISTORICAL DEVELOPMENT OF TAKAFUL

The essence of takaful could be seen in the system of mutual help in the relation to the custom of blood money or Aqila under the ancient Arab tribal custom and eventually was approved by the Prophet (pbuh)

PARTIES IN TAKAFUL CONTRACT

• Participants (Policyholder)
• Takaful Operator
• Beneficiaries

UN DERLYING CONTRACTS IN TAKAFUL

• Contract among Takaful Participants: Tabarru’
• Contracts between Participants and Takaful Operators*:
1. Mudharabah
2. Wakalah
3. Ju’alah
4. Waqf

* Will be discussed on next lecturing session

CLASSIFICATION OF TAKAFUL OPERATIONS

THE DIFFERENCE BETWEEN INSURANCE AND TAKAFUL (1)

• In conventional sense, insurance is the contract of selling indemnity for a premium.
• When people purchase this contract, risk is transferred from the policyholder to the insurance company.
• In contrast, takaful is mutual indemnity whereby participansts mutually indemnify each other.
• It is diferent from insurance in the sense that the contribution made is considered as donation.
• As a result of this donation, risk is shared between participants.

THE DIFFERENCE BETWEEN INSURANCE AND TAKAFUL (1)

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• Takaful – 6 Key Differences:
• Voluntary Contributions :
• Premiums are voluntary contributions (Tabarru) to collectively insure the participants;
• Defined Rights (minimizing speculation):
• Policyholders collectively own the pool to cover losses. The Company manages the pool according to certain takaful model and receive fees;
• Eliminating Uncertainty:
• Payment of premiums to pool are voluntary for mutual assistance without individual monetary gain;

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Tabarru

THE DIFFERENCE BETWEEN INSURANCE AND TAKAFUL (2)

• Eliminating the Interest:
• Investments are directed towards acceptable businesses / industries and returns are Riba free;
• Equity and fairness:
• Policyholders are owners of the Pool and entitled to its profits. Different Models treat this aspect with some variations;
• Social Goodness:
• Risk mitigation is based on mutual faithfulness with each other;

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THE COMPARISON: TAKAFUL VS. CONVENTIONAL INSURANCE (1)

THE COMPARISON: TAKAFUL VS. CONVENTIONAL INSURANCE (2)

FULFILMENT OF MAQASID SYARIAH VIA TAKAFUL (1)

1. Self and family protection

• Takaful allows for the continuity of the family in the event of death or total permanent disability of the breadwinner
• Sa’ad Ibn Waqas said that Prophet (pbuh) used to vsiit him at Meca, in the year of his farewell Pilgrimage. So he said (to the Prophet pbuh) shall he then bequeath two-thirds of his property in charity? The Prophet pbuh said “no”. He asked him for half, then the Prophet pbuh again said “no”. Then he asked(him) to bequeath one-third and (the Prophet pbuh said even) one-third is too much, for if he leaves his heirs free from he want, it is better than the he leaves them in poverty, begging of (other ) people. (An-Nasa’i. Vol.4, Book 30, Hadith 3657).

FULFILMENT OF MAQASID SYARIAH VIA TAKAFUL (2)

2. Asset Protection
1. Takaful helps to protect assets like house, car, etc,
2. The indemnity principle in Takaful allows for losses to be compensated so the financial condition of the policyholder will be returned to the situation before calamity
3. Loss of assets may also mean loss of income to some people

FULFILMENT OF MAQASID SYARIAH VIA TAKAFUL (3)

3. Mutual Protection

• Islam balances individuals’ rights and their duties and responsibilities towards others.
• This social obligation (i.e. Fard Kifayah) puts a responsibility on those who are capable or better off to assist those who are not capable or worse off.
• “ (Nor) those who are niggardly or enjoin niggardliness on others, or hide the bounties whic Allah hats bestowed on them; for We have prepared, for those who resist Faith, a punishment that steeps them in contempt.” (QS 4:37)
• Similarly, mutual cooperation and asssitance is among the primary underlying objective of Takaful.

FULFILMENT OF MAQASID SYARIAH VIA TAKAFUL (4)

4. Investment, Retirement, and Education

• Takaful assists in wealth creation for the urpose of retirement and child education.
• The objectives of investment-linked products can only be achieved via investment that are free from riba, ghahar, maysir and any element that is not inline with shariah
• The sharing of profit between Takaful fund and Takaful operator may be done via mudharabah model or giving incentives as performance fee for good investment performance and prudence fund management