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Cooperative Takaful as a New Operational Model: A

Conceptual StudyMuzakarah Penasihat Shariah Kewangan Islam Kali ke 10,

Hotel the Royale Chulan Kuala Lumpur3 Disember 2015

Assoc Prof Dr Azman Mohd Noor,

Institute of Islamic Banking and Finance, International Islamic University Malaysia

www.drazman.net

Outline

• Introduction

• Concept of Cooperative Takaful (Al-Musharakah Al-Ta`awuniyyah)

• The Principles of Al-Musharakah Al-Ta`awuniyyah

• Al-Musharakah Al-Ta`awuniyyah’s Structure

• Salient Features of the model

• Sudan’s experience

• Comparison

• Conclusion

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Introduction

• The Islamic Fiqh Academy affiliated to theOrganisation of Islamic Cooperation (OIC)recognized in its 21st session held between15th-19th Muharram 1435H, i.e. 18th-22ndNovember 2013 the concept of “Al-Ta‘min al-Ta’wuni” (cooperative partnership) as a newterm and represents a new foundation in thefield of cooperative insurance/takaful.

Introduction cont…

• In efforts to establish Islamic financial institutions thatundertake this type of cooperative insurance there are twoviews amongst its proponents:

• Al-Musahamah/al-Musyarakah al-Ta‘awuniyyah is based onthe Qur’anic text which admonishes cooperation, solidarity,and commitment in paying charity and encouragements onreducing risk in accordance to fundamental purpose of theShariah i.e. strive for masalih (benefits) and prevention ofmafasid (harms).

• This notion of the takaful concept, proposes a new modelwith added values to the existing model based on theprinciple of al-tizam bi al-tabarru (making a commitment todonate).

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Concept of Al-Musahamah Al-Ta‘awuniyyah

• The word “al-Musahamah” is similar to “al-musyarakah”, which is derived from the verb“Sharaka” which literally means to partner orparticipate (al-Humayri 1991).

• The narration of Abdullah Ibn Ubayd Ibn Umayrabout the decree of the Prophet, may Allah exalt hismention, regarding the people of Khaybar, that halfof the dates are for the Muslims and the other halfare for them, on condition they guarantee the labour(al-San’ani 1403H).

The Conceptual Meaning of Al-Musahamah Al-Ta‘awuniyyah

• This new concept is vulnerable to different views and definitions:• A contractual agreement among a group of people who agreed in

principle to be responsible for all liabilities, loss, damage anddefections that occur to anyone of them by sharing theircontributions to elevate such a problem from him or to compensatehim for the loss or damage” (al-Ghanayim 2010).

• A contractual cooperative system between a group of people, theyagree to shoulder all burdens of any harm that befell on one ofthem through participation in monetary contribution to alleviateharm from him or to compensate him for the loss or damage (Jamal2010).

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The Conceptual Meaning..

• Hence we can define Al-Musahamah/Al-MusharakahAl-Ta‘awuniyyah in a manner which is nearer to theactual formulation of this type of transaction, means:“The process whereby a group of people make amutual and bilateral promise among themselves basedon cooperative partnership to cooperate in bearing theburden of any harm which might befall any one ofthem with the aim of alleviating such a harm for whathad befallen, through monetary contribution by payingspecified monetary shares, which provides security tothem in terms of financial aid/compensation”.

The Principles of Al-Musahamah Al-Ta‘awuniyyah

• There are various Islamic legal sources principles that serve as thebasis of justification for al-Musahamah al-Ta`awuniyyah:

• (وتعاونوا على البر والتقوى وال تعاونوا على اإلثم والعدوان)

• “[...] And cooperate in righteousness and piety, but do notcooperate in sin and aggression [...]” (Qur'an 5:2).

• In the same sense the Prophet {p.b.u.h} has been reported tohave said:

• من نفس عن مؤمن كربة من كرب الدنيا نفس هللا عنه كربة من كرب يوم القيامة، "الحديث... ومن يسر على معسر يسر هللا له في الدنيا واآلخرة

• “Whosoever relieves a believer of a calamity of this life, Allahshall relieve him of a calamity on the Day of Judgement, andwhosoever relieves someone in difficulty, Allah will relieve hismatters in this life and in the hereafter […]” (Muslim, Vol. 4, P2074).

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Cont’..the Principles..

• The Justification by Shariah

• This is Islamic legal ruling or sources which is specificallyconfined and limits to a particular issue such as thecooperative insurance.

• Abu Musa Al-Ash`ari, {may Allah be pleased with him} whosaid: The messenger of Allah, may Allah be pleased with him,said, ‘When the people of Ash`ari had lost their spouses inbattle, or their children in Madinah had insufficient food, theywould gather everything they have into one garment, andequally divide it among themselves into one vessel. TheProphet SAW said: “They are from me, and I am from them.”(al-Bukhari 1422H).

Cooperative Takaful’s Structure

1. A Group of Participants/policy holders

2. Pure Cooperative Basis contractual relation

3. Managing Company/Takaful Operator

4. Investment Body

5. The Shari‘ah Compliance supervision

6. Surplus Distribution/Refund

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Salient Features and Fundamentals of Al-Musharakah Al-Ta`awuniyyah

Almost similar to takaful model in terms ofmutual idemnity, cooperation, but more evidentin:

1. Pure cooperative basis.2.Risks sharing3. Participation and Representation in the operation4. Surplus sharing is not the target.5. More transparency6. Cost effective as no unnecessary fee is imposed7. Non Profit oriented

Cooperative Takaful Sudan’s Model

1. Operational FrameworkThe Sudanese experience in Islamic insurance is based on the pure cooperative model where capital is just a legal requirement to incorporate the company and stands not to gain or lose from insurance operations.

2. Surplus SharingShareholders are not allowed to have a share, whatsoever, in the surplus. However, as Mudarib, they are entitled for a share in the investment returns of the accumulated retained surplus. This share is expressed as a percentage decided by the Board of Directors and approved by the Sharia’ Supervisory Board and the Policyholders’ General Assembly.

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Cont..Sudan’s Experience

3. Segregation of FundAs per its Articles of Association, each insurance company is required to maintain two distinct separate accounts, one for the shareholders, known as the Shareholders’ Account, and the other for the policyholders, known as the Policyholders’ Account. This entails separate and segregated reporting of transactions and balances relating to the shareholders and the policyholders. All risks and rewards relating to capital are attributable to the shareholders while all risks and rewards arising from insurance operations are attributable to the policyholders and the financial statements are to be drawn up accordingly.

Cont. Sudan’s experience

4. Deficit of Fund

Deficit, if any, in the policyholders’ fund is to be covered from the general reserve set out from the surplus. In case of inadequacy or non-existence of this reserve, this deficit is to be covered from the shareholders’ fund by way of Qard Hassan (free of interest loan) to be repaid from future surpluses.

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Cont..Sudan’s experience

5.Governance– 1.The General Assembly– 2.The Policyholders’ Assembly

• Each insurance company is to form a Policyholders’ Assembly as set out in its Articles of Association. The Policyholders’ Assembly is formed of the policyholders whose annual contributions exceed a minimum amount decided by the Board of Directors and has the authority to discuss the Board of Directors annual report and the financial statements as well as the surplus/ deficit statement, the External Auditor’s report and the Sharia’ Supervisory Board’s report and submit its recommendations to the General Assembly.

• The Policyholders’ Assembly is also authorized to elect a minimum of two of its members to represent the policyholders in the Board of Directors.

Similarity between Existing Takaful Concept vsSudan’s Cooperative

Takaful

Participants (Insured)Participants (Insured)

Takaful Operator (Company)

1.The contract is between Participants and Takaful Operator which acts as a fund manager (managing the risk and investment portfolios)

2.The concept is always based on the principles of: mutual guaranteed and cooperation and finally mutual protection

3.The risk is shared among the Participants. 4.Shariah supervision and Halal Investment.

5. Participant is insured and insurer at the same time. 6. Segregation of Fund. 7. Qard from shareholder in event of deficit.

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Differences between Existing Takaful Concept vs Sudan’s Cooperative

Takaful

Participants (Insured)Participants (Insured)

Takaful Operator (Company)

1. Non Profit Oriented

2.Policy holders Assembly.

3. Two reps of Policy holders in the BOD

4. Surplus sharing is only among the participants, operator only shares PSR of Mudharabah

5. Fees to takaful operator

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The Simple Flow Wakalah Model

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Policyholders(Takaful

Participants)

1) Payment of claim

2) Distribution of Surplus

Takaful Fund

Takaful Operator

Contributions

The Takaful Operator provides services with fee for:1) Managing the fund 2) Investing the fund

Outcome

Takaful Operator is notpart of this donationand mutual assistancearrangement, but it isan agent of theparticipants to managethe fund, underwritebusiness, issuingtakaful certificates andpayment of claims.

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Cont.. Wakalah Model19

Participants

Contrib

utions

Risk FundContributions

+Profit

Surplus

Takaful Operator

Participants

Expenses

Two separate accounting treatment for Takaful Operator and for the Tabarru‘ FundThis model is approved by AAOIFI, up to 30% for the operator

X%

Y%

Fees to Takaful

Operator

Profit

19

Sudan’s model

20

Participants

Contrib

utions

Risk FundContributions

+Profit

Surplus

No surplussharing

Participants

Expenses

Two separate accounting treatment for Takaful Operator and for the Tabarru‘ Fund

X%

Y%

No fees

Profit

20

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Observation over Sudan’s cooperative takaful model

• Is it similar to mutual Insurance?

• The policy holders are not share holders.

• Segregation of account.

• Guarantee of wakil/mudarib.

• Not clear about operational expenses.

• Not clear the aqad between operator and policy holders.

Mutual Insurance vs Cooperative Takaful?

• A mutual insurance company is an insurance company owned entirely by its policyholders.

• Any profits earned by a mutual insurance company are rebated to policyholders in the form of dividend distributions or reduced future premiums.

• In contrast, a stock insurance company is owned by investors who have purchased company stock; any profits generated by a stock insurance company are distributed to the investors without necessarily benefiting the policyholders.

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Mutual Insurance vs Cooperative Takaful

• The concept of mutual insurance originated in England in the late 17th century to cover losses due to fire. The mutual/casualty insurance industry began in the United States in 1752 when Benjamin Franklin established the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire. Mutual property/casualty insurance companies exist now in nearly every country around the globe

Mutual Insurance vs Cooperative Takaful

• The global trade association for the industry, the International Cooperative and Mutual Insurance Federation, claims 216 members in 74 countries, in turn representing over 400 insurers. In North America the National Association of Mutual Insurance Companies (NAMIC), founded in 1895, is the sole representative of U.S. and Canadian mutual insurance companies in the areas of advocacy and education.

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Other Possible Cooperative Partnership Takaful Model

25

Participants

Capitalise

dC

ontributions

Risk FundContributions

+Profit

Surplus

Participants

Participants

Claims

No separation of accounts

investments

expenses

25

Participants’

Funds

Participants’

Representatives

Capitalised

Tabaaru‘

Fund.

Mudharabah

Wakalah

Participants’ Profit %

Agency Fees

mudharib’s

Profit%

Participants’

Profits

Payment of

claims. Surplus is

refunded to the

participants

Cooperative Partership Model

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The model and Some Controversial Shariah Issues

• Surplus Sharing between the operator and the participants.

• Guarantee of wakeel

• Marketing-Agents Incentives

Challenges

1. Funding

2. Research and Strategy

3. Awareness and Readiness

4. Profit oriented vs non profit

5. Expertise

6. Legal framework

7. Marketing

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References

• Abdul Aziz, H. H. (1405H). ‘Uqud al-Ta’min haqiqatuha wa hukmuha. Journal of International Islamic University al-Madinah al-Munawwara, Vol. 650, p. 95.

• Al-Bukhari, M. I. (1422H.). Sahih al-Bukhari. Dar Tawq al-Najjat. • Abu Ghaddah, A. (2008). Nizam al-ta’min al-takafuli min khilal al-waqaf badilan ‘an al-ta‘min bi iltizam bi al-tabrru‘.

A Working Paper presented at the International Conference on al-Ta’min al-ta ‘wauni min khilal al-waqaf held at Kuala Lumpur.

• Al-Dawsari, M. A. (2010). Mafhum al-ta’min al-ta‘awuni. A Working Paper Presented at the Cooperative Insurance: Progress and Challenges under the Purview of the Shari‘ah Conference. The International Fiqh Academy, Jordan: Centre for Islamic Research and Training.

• Al-Sanad, A. A. (2010). Al-Ta’min al-Ta‘awuni wa al-ahkam al-munadhdhimah li ‘alaqat hamalat al-watha’iq. A Working Paper Presented at the Cooperative Insurance: Progress and Challenges under the Purview of the Shari‘ahConference. The International Fiqh Academy, Jordan: Centre for Islamic Research and Training.

• Al-Shazily, H. A. (2010). Al-Ta’min al-ta‘awuni haqiqatuhu, ‘anwa‘uhu’ wa masru‘riyyatuh. A Working Paper Presented at the Cooperative Insurance: Progress and Challenges under the Purview of the Shari‘ah Conference. The International Fiqh Academy, Jordan: Centre for Islamic Research and Training.

• Salah El Din Musa Mohamed Sulieman, Islamic Insurance in Sudan, 2013.• International Islamic Fiqh Academy (2013). Al-Ahkam wa al-dawabit al-Shari‘ah li asas al-ta’min al-ta‘awuni. Al-

Riyadh: Resolution 200 (12/6). • Mulhim, A. S. (2010). Al-Jawanib al-itifaqiyyah wa al-furuq al-jawhariyyah bayna al-ta’min al-tijari wa al-ta’min al-

ta‘awuni: A Working Paper Presented at the Cooperative Insurance: Progress and Challenges under the Purview of the Shari‘ah Conference. The International Fiqh Academy, Jordan: Centre for Islamic Research and Training.

• Qarar Majma al -Fiqhi al-Islami, no 21, 2013.

Thank You

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