Summary of Presentation

• Origins & Development• Global Takaful Industry• The Takaful Concept• Key Differences• Practicals of Takaful• Q & A04/21/23 Takaful Insurance of Africa 1

DEFINATIONS OF TAKAFUL

• AOIFI defines Takaful as follows:“ Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants.”

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ORIGIN & CURRENT STATUS

Global Takaful Industry

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4

Africa3%

East Indian Sub-Continent

0%Far East

12%

GCC35%

Levant0%

Middle East (Non Arab)50%

Africa East Indian Sub-Continent Far East GCC Levant Middle East (Non Arab)

Contributions by Region

Source: World Islamic Insurance Directory 2012

5

Number of Islamic/Takaful companies

Africa, 26East Indian Sub-

Continent, 12

Far East, 35

GCC, 72

Levant, 9

Middle East (Non Arab), 18

Others, 7

Africa East Indian Sub-Continent Far East GCC Levant Middle East (Non Arab) Others

185 companies

* GCC: 72 companies including all licensed companies in KSA

Source: World Islamic Insurance Directory 2012

DEVELOPMENT OF ISLAMIC FINANCE

Government Directives

Private Initiatives

People’s Driven

Government Directives

Revolutionary(Full Islamisation)

Gradualist(Partial Islamisation)

Pakistan Iran

Sudan

Malaysia

1980s

A new dawn emerges in East Africa

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Definition of Takaful

• AAOIFI defines Takaful as follows:“ Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants.”

Azman Ismailwww.iifin.net

Islam As A Way of Life

ISLAM

ShariahPractices & Activites

AKHLAQMoralities & Ethics

AQIDAHFaith & Belief

IBADAHMan-to-God Worship

MUAMALATMan-to-Man Activities

ECONOMIC ACTIVITIES

SOCIAL ACTIVITIES

POLITICAL ACTIVITIES

RISK MANAGEMENT / INSURANCE

Religion

Culture

Education WORLDVIEW

History

Geography

Technology

Certification of permissible Financial Instruments through fatwas

(ex-anteShariah Audit) & verification of Transactions’ compliance

With Issued fatwa (ex-post Shariah Audit)

Disposal of Non-Shariah Compliant

earnings

Advice on the distribution of income & expenses among s/holders

Issue report to certify the conformity of all transactions with the Shariah

principles

The calculation & paymentOf Zakah

Roles and Responsibilities of Shariah Supervisory Council (SSC)

Fatwas and resolutions on conventional insurance

• 1972 Fatwa by National Council for Islamic religious affairs of Malaysia that life insurance is not lawful as it contains gharar, maysir and riba.

• 1985, OIC Fiqh academy, in its resolution No.9 (2/9) rules that commercial insurance is haram as it contains gharar etc.

What is gharar?

• Uncertainty,• deception, risk, • hazard, • ignorance.• Gharar is where the buyer does not know

what he bought, or the seller does not know what he sold (Ibn Hazm).

ARGUMENTS FOR GHARAR

• Identify the gharar element in conventional insurance.

• Will insured get the compensation as promised?

• How much will the Insured get?• When will the compensation be paid?• Can the above be considered gharar? If yes,

what extent of gharar, minor or major?

Riba

• Investment of premium in riba-based financial instruments (e.g, interest bearing accounts and conventional bonds).

• May impose charges for late payment of premiums.

Azman Ismailwww.iifin.net Topic 2azmanwong@yahoo.com

Investment

• Premiums are invested in non-shariah compliant instruments – what about shariah investment link?

• Can the legal maxim “whatever leads to haram, is haram itself” be applied here?

• Degree

Maysir (gambling)

• How does conventional insurance involve gambling?

• By purchasing the policy with non-proportionate premium in the hope of getting much higher compensation should peril occur.

ELEMENTS OF GHARAR, RIBA MAYSIR IN TAKAFUL?

• These elements do not exist in Takaful as long as it is a contract of taburru’ (gratuitous contract), not a contract of exchange (‘aqd mu’awadah) as in conventional insurance.

Key Differences

Between Takaful & Conventional Insurance

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Insurance Company

Payments

Claim Paid

Unfortunate

Loss

Insurance

Takaful

Risk Fund

Claim Paid

Unfortunate

Loss

Payments

Customer

CustomerAny Difference?

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Insurance Company

Insured

Premiums

Unfortunate

Loss

Indemnify

Risk Trading Concept(Financial Risk)

Insured sells his Risk / Insurer Buys the Risk (financial risk)

Operation of ‘Insurance’

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Tabarru Fund (Contribution Fund)

Participants/Members

Contributions

Unfortunate

Loss

Indemnify

Concept of Mutual Assistance

Company

Fund Manager

Pooling of Risks

Operation of ‘Takaful’

Management Fee

Risk Pooling Concept(Financial Risk)

Refund of Surplus

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TIA Ushirika Model

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SHARE HOLDERFUNDS

PARTICIPANTS CONTRIBUTIONS

INVESTMENTS

MANAGEMENTEXPENSES

RESERVES

TAKAFUL ADMIN AND MGMNT EXPENSES

SURPLUS DECLARED

TO PARTICIPANTS.

DIVIDENDSTO

SHAREHOLDERS.

INVESTMENTINCOME

SURPLUS/ DEFICIT

PROFIT/LOSS TO

SHAREHOLDES

GENERAL TAKAFUL FUNDS.

X%

Y%

QH

P%

Q%

QH

Actual Transaction Cost.

Re-Takaful,Levies/Duties.

One-Off

Commissions,Claims,

Re-Takaful.

DONATIONS POOL

( TABARRU’).

( + )

CONTRIBUTION

CLAIMS & REINSURANCE

INVESTMENT INCOME

PROFIT / SURPLUS ( = )

TAKAFUL OPERATOR - INSURANCE COMPANY

TABARRU (DONATIONS)

( - )

MANAGEMENT FEE ( - )

Operations

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• When there is a will, there is way

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Q & A

?s

PRACTICALS OF TAKAFUL

• After concept and development what practical actions make each insurance stage compliant:

Promotion / Marketing StageProducts DevelopmentRisk Assessment / UnderwritingFinance / AccountingReinsurance & ClaimsConcept in Family Takaful

AT PROMOTION/MARKETING Explain/Demystify Takaful Concept For all but sharia compliance makes it

especially acceptable to Muslims. Offers same classes under different –

Compliant - Business Model:• Contribution into own fund instead of

premium payment• Possibility of Surplus Share at end of year –

Bond beyond premium payment• Unethical and harmful pursuits excluded

AT PROMOTION/MARKETING There is dual governance – by Internal

Auditor to the Board of Directors and by Head of Sharia Department to Sharia Supervisory Council

Quarterly Sharia audits and rulings Despite additional costs to ensure Sharia

Compliance we ensure competitive pricing. Participate in and abide by industry

regulations and Insurance law of the country An equal opportunity employer.

WHILE DEVELOPING PRODUCTS Ensure CLARITY - Strive to remove any apparent

ambiguities to reduce contentions at claim Develop Membership Certificate and Cover Summary

in addition to usual working docs – PF, PD, Schedules, Cover Notes, Clauses,

PF & PD to contain the Sharia Compliant Declaration. PF & PD to contain the key non compliant exclusions –

Pork, Gambling, Alcohol, pornography, Khat, Riba, unethical businesses and pursuits harmful to society

Use compliant terms such as Contribution instead of Premium, Participant instead if Insured ** Sum covered

COMPLIANT DECLARATION Recognises the agency relationship between

Participant and (appoints) Operator to run fund Participant vouches info given is true to the … Sets out the premium segregation ratio–40/60 Allows investment in compliant instruments Authorises purging of uncompliant income and

channeling it to charity. Agrees sharing ratios for investment income Entrenches the sharing of any surplus from the

risk fund.

QUOTING & COMPLETING P. FORM

Capture sufficient participant and risk info to facilitate bonding beyond insurance and availing shared surplus

Quotation to contain key non compliant exclusions. Not exhaustive and Participant to be guided by the ejusdem generis rule for others.

Highlight need to continuously advise change of use or business to reduce contention at claim

Affirms importance of completing proposal form – Info capture & Compliant Declaration

RISK ASSESMENT / UNDERWRITING Ensure completeness of Documentation and details –

Subject of Sharia Audit. Also IRA & KRA audits Accept only compliant risks and reject others. Where

in doubt consult Sharia Department. Being ethical, adhere to industry guidelines including

Motor terms, Listed Risks, WIBA Tariffs Exercise Equity in rating – avoid huge subjective rate

disparities. NCD, fleets & volume discounts allowed Issue Cover Summary as you book any new business. For Comprehensive motors valuation letter at

inception and renewal to minimise contention at claim

FINANCE – PREMIUM DISTRIBUTION Segregation of funds - 5 different accounts Premium Receiving Account. From here distributed to

respective accounts. Commissions, Levies, Stamp duty and purchases of Yellow Cards & Motor Certs drawn from here.

Other accounts are Operator, Risk Fund, Charity Account.

Operator Account – office Rent, stationery, salaries, marketing & promotion, transport, office running

Risk Fund – Direct Claims expenses, Reinsurance. Surplus Account – If and once Surplus amount is

determined it is moved from the Risk Fund to this account for sharing among qualifying participants

CLAIMS Claims payment is considered one of the justifications for

the existence of Takaful – not a wasted expense. Reality of covered events and need to cushion oneself.

There are no ex- gratia considerations. A claim is either payable or not. Equity demands that what you do to one, be ready to do to the entire group

Payments are out of the risk fund and must be sanctioned by the Sharia Department upon satisfying themselves

The highest body of appeal on any claims issue is the Shariah Supervisory Council whose ruling is final unless one wishes to pursue in a court of law

To cushion the Fund some of the Surplus at the end of the period is retained in the Risk Fund and rest is distributed among qualifying participants.

REINSURANCE / RETAKAFUL Reinsured/Cedant becomes Takaful Operator

and Reinsurer becomes Retakaful Operator The Retakaful Operator must be Sharia

Compliant – we expect surplus from them as we share surplus with our participants

Led Inward facultative support to other players but obtain outwards facultative only from compliant operators who will support the Surplus already shared

Give the Mandatory cessions to Kenya Re, Zep Re and Africa under their Sharia compliant windows / operations

PECULIARITY OF LONG TERM TAKAFUL

Promotion, Product Development, Underwriting and Reinsurance are more less as in General

Group Life and Credit Protection surplus share not to individuals but companies and lenders who are in actual sense the participants. Are annual

Pension & Annuities and Endowment Plans are long term investments. Funds are not segregated.

No Surplus Share is envisaged. Only substantial growth each year and end term bonuses.

PA Rider may be considered for Surplus Share

END

QUESTIONS & ANSWERS?s