1. 1. TakafulTakaful An emerging niche market By: Capt. M. Jamil Akhtar Khan ACII, MCIT, Master Mariner Chief Executive Officer TAKAFUL PAKISTAN LIMITED 2 Days Specialized Training Workshop 10th & 11th August 2007. Al-HUDA CIBE
2. 2. Outline of PresentationOutline of Presentation Introduction to TakafulIntroduction to Takaful Objections to Conventional InsuranceObjections to Conventional Insurance Difference b/w Conventional Insurance & TakafulDifference b/w Conventional Insurance & Takaful Takaful Through TimeTakaful Through Time Takaful ModelsTakaful Models Takaful TypesTakaful Types BancaTakafulBancaTakaful ReTakafulReTakaful Foundations of Takaful in PakistanFoundations of Takaful in Pakistan Takaful Prospects in PakistanTakaful Prospects in Pakistan Challenges to TakafulChallenges to Takaful Introduction toIntroduction to TAKAFUL PAKISTAN LIMITEDTAKAFUL PAKISTAN LIMITED
3. 3. Introduction toIntroduction to TakafulTakaful
4. 4. Takaful comes from the Arabic root-wordTakaful comes from the Arabic root-word kafalakafala guarantee. guarantee. Takaful means mutual protection and jointTakaful means mutual protection and joint guarantee.guarantee. Operationally, takaful refers to participantsOperationally, takaful refers to participants mutually contributing to a common fund withmutually contributing to a common fund with the purpose of having mutual indemnity inthe purpose of having mutual indemnity in the case of peril or loss.the case of peril or loss. Meaning of TakafulMeaning of Takaful
5. 5. Reference Al Quran:Reference Al Quran: Help (taawan) one another in furtheringHelp (taawan) one another in furthering virtue (birr) and Allah consciousnessvirtue (birr) and Allah consciousness (taqwa) and do not help one another in(taqwa) and do not help one another in furthering evil and enmity. Al Maidah:furthering evil and enmity. Al Maidah: verse 2 (5:2).verse 2 (5:2). Takaful is a form of mutual help (taawun)Takaful is a form of mutual help (taawun) in furthering good/virtue by helping othersin furthering good/virtue by helping others who are in need / in hardship .who are in need / in hardship .
6. 6. Reference Hadith:Reference Hadith: tie the camel first, then submittie the camel first, then submit (tawakkal) to the will of Allah(tawakkal) to the will of Allah The hadith implied a strategy toThe hadith implied a strategy to mitigate/reduce risk.mitigate/reduce risk. Takaful provides a strategy of riskTakaful provides a strategy of risk mitigation/reduction by virtue ofmitigation/reduction by virtue of collective risk taking that distributes riskscollective risk taking that distributes risks and losses to a large number ofand losses to a large number of participants. This mitigates the otherwiseparticipants. This mitigates the otherwise very damaging losses, if bornevery damaging losses, if borne individually.individually.
7. 7. Declaration by Shariah scholarsDeclaration by Shariah scholars rendering conventional insurance un-rendering conventional insurance un- IslamicIslamic Fatwa issued in Judicial Conference held inFatwa issued in Judicial Conference held in Makkah in Shaban 1398 AH.Makkah in Shaban 1398 AH. Verdict of Supreme Court of Egypt on Dec.Verdict of Supreme Court of Egypt on Dec. 27, 1926.27, 1926. Unanimous resolutions and fatwa by UlamaUnanimous resolutions and fatwa by Ulama in the Muslim League Conference in Cairoin the Muslim League Conference in Cairo in 1965.in 1965. Unanimous decision by Muslim Scholars inUnanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972.seminar held in Morocco on May 6, 1972.
8. 8. Judicial Opinions and FatwasJudicial Opinions and Fatwas confirming validity of Takafulconfirming validity of Takaful Fatwa issued by Higher Council of SaudiFatwa issued by Higher Council of Saudi Arabia in 1397 A.H.Arabia in 1397 A.H. Fatwa Issued by the Fiqh Council of MuslimFatwa Issued by the Fiqh Council of Muslim World League in 1398 A.H.World League in 1398 A.H. Fatwa issued by the Fiqh Council of theFatwa issued by the Fiqh Council of the OIC in 1405 A.H.OIC in 1405 A.H. (1985)(1985)..
9. 9. Fiqh Academy Resolution 1985Fiqh Academy Resolution 1985 IslamicIslamic Fiqh (science of Shariah) AcademyFiqh (science of Shariah) Academy, emanating, emanating from the Organization of Islamic Conference, meeting infrom the Organization of Islamic Conference, meeting in its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul-its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul- Thani, 1405 A.H. (Dec 1985) issued a Resolution which inThani, 1405 A.H. (Dec 1985) issued a Resolution which in summary stated the following:summary stated the following: TheThe commercial Insurancecommercial Insurance contractcontract is prohibitedis prohibited (Haraam)(Haraam) according to theaccording to the Shariah.Shariah. The alternativeThe alternative TakafulTakaful contract which conforms to thecontract which conforms to the principles of Islamic dealingsprinciples of Islamic dealings is Halaalis Halaal, being the contract, being the contract ofof cooperative insurancecooperative insurance, which is founded on the basis of, which is founded on the basis of charitable donationcharitable donation andand Shariah compliant dealingsShariah compliant dealings..
10. 10. Basic Elements of TakafulBasic Elements of Takaful Mutuality and cooperation.Mutuality and cooperation. Takaful contract pertains toTakaful contract pertains to TabarruatTabarruat as againstas against muawadatmuawadat in case of conventional insurance.in case of conventional insurance. Payments made with the intention of TabarruPayments made with the intention of Tabarru (contribution)(contribution) Eliminates the elements of Gharrar, Maisir andEliminates the elements of Gharrar, Maisir and Riba.Riba. Wakalah/Modarabah basis of operations.Wakalah/Modarabah basis of operations. Joint Guarantee / Indemnity amongst participantsJoint Guarantee / Indemnity amongst participants shared responsibility. shared responsibility. Constitution of separate Participants TakafulConstitution of separate Participants Takaful Fund.Fund. Constitution of Shariah Supervisory Board.Constitution of Shariah Supervisory Board. Investments as per Shariah.Investments as per Shariah.
11. 11. Main drivers of TakafulMain drivers of Takaful Piety (individual purification)Piety (individual purification) Brotherhood (mutual assistance)Brotherhood (mutual assistance) Charity (Tabarru or contribution)Charity (Tabarru or contribution) Mutual GuaranteeMutual Guarantee Community well-being as opposed to profitCommunity well-being as opposed to profit maximization.maximization.
12. 12. Objections toObjections to ConventionalConventional InsuranceInsurance
13. 13. Insurance DefinedInsurance Defined Definition of an Insurance ContractDefinition of an Insurance Contract AnAn agreementagreement whereby one party,whereby one party, the insurerthe insurer, in, in return for a consideration,return for a consideration, the premiumthe premium, undertakes, undertakes to pay to the other party,to pay to the other party, the insuredthe insured, a sum of, a sum of money or its equivalent in kind on the happening ofmoney or its equivalent in kind on the happening of a specified event, which is contrary to the insuredsa specified event, which is contrary to the insureds financial interestfinancial interest Subject-matter of an Insurance ContractSubject-matter of an Insurance Contract what is it that is insured in a fire policy? Not thewhat is it that is insured in a fire policy? Not the bricks and materials used in building the house, butbricks and materials used in building the house, but thethe financial interestfinancial interest (i.e. money) of the insured in(i.e. money) of the insured in the subject-matter of insurance the subject-matter of insurance (Lord Justice Brett in Castellian v. Preston 1883)(Lord Justice Brett in Castellian v. Preston 1883)
14. 14. Objections to ConventionalObjections to Conventional InsuranceInsurance Scholars view the insurance contract as anScholars view the insurance contract as an exchange contract money is being exchanged forexchange contract money is being exchanged for money over time.money over time. This brings about the problem ofThis brings about the problem of gharrargharrar (which(which leads toleads to maisirmaisir) and in investments aspect,) and in investments aspect, ribariba.. Elements of:Elements of: Uncertainty Uncertainty GharrarGharrar Gambling Gambling MaisirMaisir Interest Interest RibaRiba UW + Investment Profit belongs to theUW + Investment Profit belongs to the CompanyCompany Note that the Scholars do not object to insuranceNote that the Scholars do not object to insurance per seper se but only to certain weaknesses in thebut only to certain weaknesses in the insurance contract.insurance contract.
15. 15. Uncertainty GharrarUncertainty Gharrar Conventional insurance contract is basically aConventional insurance contract is basically a contract of exchange (muawadat) i.e. buying andcontract of exchange (muawadat) i.e. buying and selling whereby policy (indemnity) is sold as goods,selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration.with the premium as the price or consideration. The consideration must be certain for exchangeThe consideration must be certain for exchange contract.contract. GharrarGharrar in insurance contracts pertains toin insurance contracts pertains to deliverability of subject matter, i.e. uncertainty asdeliverability of subject matter, i.e. uncertainty as to:to: Whether the insured will get the compensationWhether the insured will get the compensation promised?promised? How much the insured will get?How much the insured will get? When will the compensation be paid?When will the compensation be paid? Thus, it involves an element of uncertainty in theThus, it involves an element of uncertainty in the subject matter of the insurance sales contract, whichsubject matter of the insurance sales contract, which renders it void under the Islamic law.renders it void under the Islamic law.
16. 16. Gambling MaisirGambling Maisir Insurance is a contract upon speculation. GoodInsurance is a contract upon speculation. Good faith forbids either party from concealing what hefaith forbids either party from concealing what he privately knows, to draw the other into a bargain,privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing tofrom his ignorance of that fact, and his believing to the contrarythe contrary (Lord Mansfield in Carter v. Boehm(Lord Mansfield in Carter v. Boehm 1766). 1766). The insured loses the money paid for the premiumThe insured loses the money paid for the premium when the insured event does not occur.when the insured event does not occur. The company will be in deficit if claims are higherThe company will be in deficit if claims are higher than premium.than premium.
17. 17. Interest RibaInterest Riba . Allah has permitted trading and. Allah has permitted trading and forbidden riba (Al Baqarah 2 : 275).forbidden riba (Al Baqarah 2 : 275). Insurance funds are invested in financialInsurance funds are invested in financial instruments which contain the element ofinstruments which contain the element of Riba.Riba.
18. 18. Comparing Takaful to Conventional InsuranceComparing Takaful to Conventional Insurance IssueIssue Conventional InsuranceConventional Insurance TakafulTakaful Organization PrincipleOrganization Principle Profit for shareholdersProfit for shareholders Mutual for participantsMutual for participants BasisBasis Risk TransferRisk Transfer Co-operative risk sharingCo-operative risk sharing Value PropositionValue Proposition Profits maximizationProfits maximization Affordability and spiritualAffordability and spiritual satisfactionsatisfaction LawsLaws Secular/RegulationsSecular/Regulations Sharia plus regulationsSharia plus regulations OwnershipOwnership ShareholdersShareholders ParticipantsParticipants Management statusManagement status Company ManagementCompany Management OperatorOperator Form of ContractForm of Contract Contract of SaleContract of Sale Cooperative,Cooperative, Islamic contracts of Wakala orIslamic contracts of Wakala or Mudarbah with TabarruMudarbah with Tabarru (contributions)(contributions) InvestmentsInvestments Interest basedInterest based Sharia compliant, Riba-freeSharia compliant, Riba-free SurplusSurplus Shareholders accountShareholders account Participants accountParticipants account
19. 19. TakafulTakaful Through TimeThrough Time
20. 20. Takaful through TimeTakaful through Time Origins in the First Constitution of Madina.Origins in the First Constitution of Madina. It evolved and continued in one form or the otherIt evolved and continued in one form or the other throughout the Abbaside period and even later during thethroughout the Abbaside period and even later during the Ottoman empire.Ottoman empire. Serious efforts were made in modern times, in 1970s toSerious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventionalcome up with an Islamic alternative to the conventional insurance.insurance. The first Takaful company was set up in Sudan in 1979,The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up inalmost simultaneously followed by another one set up in Bahrain.Bahrain.
21. 21. Takaful through TimeTakaful through Time (Contd.)(Contd.) There are nowThere are now 85+85+ Takaful companies in over 25Takaful companies in over 25 countries.countries. The total insurance premium of OIC countries for 2004The total insurance premium of OIC countries for 2004 was USD 50 Billion; of this, Takaful contributionwas USD 50 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 2.5 Billion). This is expected toaccounts for 5% (i.e. USD 2.5 Billion). This is expected to increase to USD 15 Billion by 2015.increase to USD 15 Billion by 2015. Poor Insurance penetration in the Muslim countries (