Issues Takaful Conventional Mutual

Usury (Riba)

CONCEPT

Insurers seek to supplement their pure insurance income stream by investing surplus funds. Those funds may be invested, for example, in interest-producing funds, or equity-type funds generating dividends and investment gains. It is simply a matter of choice by the managers or stakeholders as to where they place the investments. Interest-yielding funds generate greater certainty regarding income, cash flow, and security. Profit participation funds offer less certainty to income volumes and cash flow but they can be equally secure.
The funds held by the Takaful operator are usually invested equity type funds. They can also be held in non fixed interest bearing accounts. There is also permissibility for these funds to be held in ‘tracker’ accounts which are linked with either the BRM (base rate mechanism) or the growth forecasts of certain financial institutions and products. Concept of usury is only breached under the Islamic principles where monies are loaned or deposited for a fixed percentage irrespective of the growth development potential of the investment. Usury is prohibited in Islam as it is based on the doctrine of exploitation. Where any return of investment is fluid and attached to the viability of the investment, then it is deemed to be Halal. In normal circumstances insurers do not place the premiums collected from the policy holders in fixed investments. This is because they require liquidity in order to pay for claims that may arise. In such circumstances normal insurers may place some of the monies on short term fixed deposits. Usually they place only the surplus funds in long term investments with fixed returns. In normal circumstances insurers do not place the premiums collected from the policy holders in fixed investments. This is because they require liquidity in order to pay for claims that may arise. In such circumstances normal insurers may place some of the monies on short term fixed deposits. Usually they place only the surplus funds in long term investments with fixed returns.

Gambling (Maysir)

CONCEPT

The very notion of gambling is anathema to insurance companies. Insurers seek to provide restitution to a policyholder. The most important element of the insurance business model is that the insured will not be better off in the event of an insurance settlement. Any policyholder who benefits unfairly from protection purchased is disadvantaging the other stakeholders in the transaction. In an insurance transaction, the policyholder has to have an insurable interest, and actually be exposed to a potential loss. There are types of insurance where there is an element of unpredictable profit linked to the risk transfer, but in all cases the risk transfer is contractually separate from the uncertainty of the profit component. The implications of these structures are, however, clearly identified in the contractual terms and conditions, and not concealed from parties to the transaction.
An insurance policy does not involve the element of gambling or betting. Shaykh Mustafa Al Zarqa of Syria maintains that the gambler, in a transaction of gambling or betting, is always hoping for a chance to gain materially and with the spirit of defeating other gamblers rather than co-operating. In contrast, the parties in a contract of insurance, are bound together in a spirit of mutual co-operation and good will in providing material security for one´s own self against an unexpected future loss, damage or peril. The same as Takaful applies. The same as Takaful applies.

Speculation (Qimar)

CONCEPT

This is based on the principle that one man should benefit from the others loss.
There is no element of Qimar in any insurance policy. It is also an Islamic teaching that, one should make and spend wealth in a lawful way, and simultaneously one should also have an economic plan to save a portion out of his earnings for future security against unexpected risk. The Holy Prophet p.b.u.h. provided guidelines for the provision of an economic plan: "Allah Almighty blesses those who acquire wealth in good manner, then the wealth is spent accordingly and the remaining is saved for future use when risk occurs." Bukhari & Muslim. An insurance policy does not depart from the guideline provided by the Holy Prophet (S.A.W.) in the above hadith, because the nature of an insurance policy is that, the policyholder pays regular premiums (especially in a life policy) to the insurer as a saving for safe keeping for future security against unexpected risk. There is no element of Qimar in any insurance policy. There is no element of Qimar in any insurance policy.

Uncertainty (Gharrar)

CONCEPT

All insurance policies seek to provide certainty to the policyholder in relation to the premium charged; of transferring an uncertain risk to another party; and reimbursement for losses suffered. The relationship between insured and insurer is heavily regulated. Insurance companies have come under ferocious regulatory intervention for conducting insurance business with a lack of contractual clarity to policyholders. Insurance management and conduct of business rules generally embrace certainty and clarity, and this is welcomed in all insurance and applies across the business spectrum.
There is no element of uncertainty in Takaful Insurance products. There is no additional element of uncertainty in any of the conventional insurance products. There is no additional element of uncertainty in any of the mutual cooperative insurance products.

Reliance on Fate (Tawakkul)

CONCEPT

In an insurance policy, the insured puts a trust on the insurer to protect him against an unexpected loss instead of putting his trust on Almighty Allah (S.W.T.). Such practice is against the principle of ‘Tawakkul’ as every believer is obliged to put his own trust (Tawakkul) in Allah (S.W.T.) only. Allah (S.W.T.) says: ".... but on Allah (S.W.T.) put your trust (Tawakkul) if you have faith....."
A policy, be it general or life, simply means that both the operator and the participant in a contract of insurance mutually agree to work for a compensation or security against an unexpected tragedy. Such concept is of course in line with the Islamic principle whereby Islam encourages the ‘ummah’ to strive hard in overcoming difficulties in their lives. The Prophet (S.A.W.) said: ".... Narrated by Abu Huraira® the Holy Prophet (S.A.W.) said: Whosoever removes a worldly grief from a ‘mu‘min’, Allah (S.W.T.) will take away from him one of the grieves of the hereafter. Whosoever alleviates a needy person, Allah (S.W.T.) will alleviate from him in both the world and the hereafter...." In an insurance policy, the insured is not putting his trust (Tawakkul) in the insurer for a future protection but it is only a mutual transaction whereby both parties agree to work for the welfare or protection of the insured against an unexpected occurrence of loss or damage. This is of course in line with the Divine principle of mutual co-operation as Allah (S.W.T.) commanded to the effect: "... co-operate you one another in righteousness and piety...." Indeed, in accordance with the Islamic concept of ‘Tawakkul’, man is asked to strive to the best of one´s ability in performing a particular act or job before putting one’s trust in Allah (S.W.T.). The Holy Prophet (S.A.W.) explained the principle of ‘Tawakkul’ in the following Hadith: "The Holy Prophet (S.A.W.) told a Bedouin Arab who left his camel untied, trusting to the will of Allah (S.W.T.), "tie the camel first then leave it to the will of Allah (S.W.T.)...." Therefore, it is concluded here that, the practice of insurance does not contravene the Islamic principle of ‘Tawakkul’. The practice of insurance does not contravene the Islamic principle of ‘Tawakkul’ The practice of insurance does not contravene the Islamic principle of ‘Tawakkul’

Contribution by policyholder

CONCEPT

An insurance policy involves the payment of a contribution/premium (al-Musahamah). For instance, the insured in a general policy pays regular premiums for the purpose of seeking compensation in case of unexpected loss or damage occurring to the particular subject matter of the policy.
The levy of a premium or participant´s contribution to initiate a Takaful policy is based on their personal circumstances and history. The Participant is punished and rewarded according to their prevailing circumstances at the time of the inception of the policy. Contributions paid by the policyholder vary based on the risk profile of the individual or corporate entity. The contributions paid in a general policy on a short term basis is exactly the same as a contribution in to a mutual fund in which the participant is also regarded as a member of the fund and the designated members are the ones who have the right to seek material security against an unexpected risk, if it occurs to the subject matter of the policy. Premiums paid by the policyholder vary based on the risk profile of the individual or corporate entity. The contributions paid in a general policy on a short term basis is exactly the same as a contribution in to a mutual fund in which the participant is also regarded as a member of the fund and the designated members are the ones who have the right to seek material security against an unexpected risk, if it occurs to the subject matter of the policy. Premiums paid by the policyholder vary based on the risk profile of the individual or corporate entity.

Unfairness

There is a minimum risk of unfairness as the concept of Takaful is based on brotherhood and treating all customers fairly. This is subject to the supervision of the legislative supervisory authorities, e.g. the FSA in the UK and the Shariah Supervisory Board. The FSA ensures that all insurance operators comply with its direction under ‘TCF’ (treating all customers fairly) There is a minimum risk of unfairness as there is stringent supervision by the legislative supervisory authorities, e.g. the FSA in the UK. There is also severe competition in this sector, so the terms of the policies are carefully worded to enshrine confidence in the policyholder. The FSA ensures that all insurance operators comply with its direction under ‘TCF’ (treating all customers fairly) There is a minimum risk of unfairness as there is stringent supervision by the legislative supervisory authorities, e.g. the FSA in the UK. There is also severe competition in this sector, so the terms of the policies are carefully worded to enshrine confidence in the policyholder. The FSA ensures that all insurance operators comply with its direction under ‘TCF’ (treating all customers fairly)

Investments

In Takaful, the funds must be invested in non-fixed interest bearing assets where investment returns are generated through some form of profit sharing or appreciation. All investments must comply with the guidelines of Shariah. As such, investment returns must not be driven by any unethical, immoral commercial activities that may be in conflict with Islamic beliefs. Assets are typically invested in a variety of interest-bearing assets, such as fixed-income instruments, as well as in equity-related securities. Each company typically develops a set of investment guidelines considering domestic insurance regulation, the profile of the insurer´s liability base and the company´s appetite for risk. Assets are typically invested in a variety of interest-bearing assets, such as fixed-income instruments, as well as in equity-related securities. Each company typically develops a set of investment guidelines considering domestic insurance regulation, the profile of the insurer´s liability base and the company´s appetite for risk.

Supervisory board

All transactions are subject to the supervision of a properly constituted supervisory Board. The Takaful operator must always comply with local, national laws. All transactions are subject to the national regulatory authorities All transactions are subject to the national regulatory authorities

Sanctity of contracts

The Takaful fund is operated on the strict agreement between the participant and the operator. The insurance policy is one of good faith, but nevertheless it operates on the basis of the strict agreement reached between the insurer and the insured. The insurance policy is one of good faith, but nevertheless it operates on the basis of the strict agreement reached between the insurer and the insured.

Underwriting

The principles of underwriting in the Takaful model are the same as in the conventional model. No differences noted. No differences noted.

Regulations

Regulations affecting Takaful are based on the Divine sanction (Quran & Hadith) and secondary sources of Islamic Law. Insurance law is based on national legislation. These are based on the national legislation and the agreement of the members of the mutual cooperative.