Introduction to Takaful For beginners

Introduction to Takaful

WASIM HANIF

Outline of Presentation

What is Shariah Compliant ?

Sources of Shariah

Conventional Insurance

Takaful – Definition & Mechanism

Comparison (Takaful & Insurance)

Islam has provided a list of “Don’ts” for doing business.

ا�سلام میں ممنوعات کےبارے میں بیان کردیا گیا ہے دین

We only have to check that our transactions don’t contain any of those “Don’ts”

ہمیں یہ دیکھنا ہے کہ کہیں ہما رے معاملات میں ممنو عات و�لی کوئی چیز تو نہیں۔ یعنی جن سے منع کیا گیا ہے

This alone is prove enough for it being in accordance with Shariah principles

�ور یہی �صول کسی چیز کے حلال ہونے کے لیے کافی ہے

What do you mean by Islamic or Shariah Compliant?

Sources of Shariah

The recognized primary sources of Islamic law are the Qur'an and Sunnah. In matters that were not clearly spelled out in these sources, Muslim jurists developed other methods of finding a solution to a question. The first is ijma' or unanimous consensus among jurists, and the second is qiyas, or decision by analogy.

Qur’aan Kareem

Sunnah / Hadidth

Ijma / Ijtihad

Qiyas / Replacement

Conventional Insurance

What is Insurance ?• It is nothing but a promise of compensation for

specific potential future losses.• In exchange of a consideration an insurer, or

insurance carrier, is a company selling the insurance policy.

• The insured, or policyholder, is the person or entity buying the insurance policy.

Shariah’s Stance on Conventional Insurance

concept of Insurance?

practice of Insurance??

Shariah has no objections as to the concept or objectives of insurance ; it has reservations only with the way it is being practiced…

Insurance Business Model

Policyholders--Insured--

Insurance Company--Insurer--

Premiums

Claim Payment (upon Risk actualization)

Sum Insured (Subject-Matter)

Premium (Consideration)

The Conventional Insurance Process

• The customer pays premiums in exchange for claims (at the time of risk actualization) from the Insurer

PREMIUMS (MONEY)

CLAIMS (Upon Risk Actualization)

Types of Contracts

معاوضہ عقدCommutative Contract

• Example: Selling Purchasing, Leasing (Ijarah), Nikhah, Rahan etc.

تبرع عقدTaburru Contract

• Example: Hibah (Gift), Sadqah, Loan, Ariah, Wasiyyah, Waqf etc.

Shariah’s perspective/stance on Insurers’ Business Model

• Insurer: The insurance company is selling “Sum Insured”• Insured: The policyholder is buying Sum Insured by paying fixed

“Premiums”• Nature of Contract:• It is a sales purchase contract, bi-lateral, commutative i.e. Aqd-e-Muawaza

– Subject Matter: “Sum Insured” ; Consideration: “Premium”• It is a Risk-Transfer Mechanism

– The insured (financially weaker party) is transferring its risk to the insurer (financially stronger party)

– The insurer is charging a fee called “Premium” for accepting the risk and promising to pay “Sum Insured” if a covered event takes place

Riba , Qimar & Gharar

R I B A Qimar/Maysir Gharar

Riba, Qimar and Gharar are prohibited in Shariah.

sales-purchase contract is Aqd Muawaza and due to this some ills involves:

RIBA – Interest or Usury

Riba Al Qura’an:A conditional or understood increase versus a loan is Riba.Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said: :Sale is but like riba.‘‘, while Allah has permitted sale, and prohibited riba. (Surah:2,Verses:275)

جو لوگ سود کھاتے ہیں وہ )قیامت میں ( �ٹھیں گے تو �س شخص کی طرح �ٹھیں گے جسے شیطان نے چھو کر پاگل یی بنا دیا ہو۔ یہ �س لئے ہو گا کہ �نہوں نے کہا تھا کہ ‘‘ بیع بھی تو سود ہی کی طرح ہوتی ہے’’، حالانکہ �للہ تعال

نے بیع کو حلال کیا ہے �ور سود کو حر�م قر�ر دیا ہے۔

Riba literally means:increase, addition, expansion or growth.

Riba• Riba al Quran• Riba al Hadith

RIBA – Interest or Usury

Riba Al Hadith: A conditional increase in commutative contract without consideration.Sayyidina Ubadah ibn Samit (RA) reported that the Prophet (SAW) said, “Sell gold for gold like for like, and siiver for silver like for like, and date for date like for like, and wheat for wheat like for like, and salt for salt like for like, and barley for barley like for like. If anyone exceeds, in taking or giving then he has dealt in interest. Sell gold for silver as you like on spot payment, and wheat for dates as you like on spot payment, and barley for dates as you like on spot payment.” (credit and less measure are disallowed).(Termazi)

QIMAR / GAMBLING

• The word ‘maisir’ literally means ‘getting something too easily’ or ‘getting a profit without working for it’

• It means that both parties stake their money in such a way that one party draws total profit and the other party incurs total loss

• Four elements in Qimar;1. Commutative Contract between two.2. Everyone puts his money on risk.3. Uncertainty in conclusion of event.4. One draws total profit and the other 100% total loss.

GHARAR - UNCERTAINITY

• Literal meaning of Gharar is: To Cheat, Deceive, Lure, Entice, Risk, Danger, Hazard. خطرہ �ور دلانا، �مید غلط دہی، دھوکہ

• In the Fiqh, Gharar is the element of uncertainty in the basic parts of commutative contract. i.e. Subject Metter, Price, period, Delivery etc.

• Basic conditions of effectiveness of Gharar;1. should be found in Commutative contract.2. Should be major.3. Shouldn't found in contracts which are exempted.4. Should be found as in basic contract. (isalatan)

TAKAFUL - DEFINITION

Takaful is a community-pooling system,based on the principles of brotherhood and mutual help, wherein participants contribute in a fund, to help those who need it most in times of financial difficulties.

EXAMPLES: The concept of Takaful exists in cooperative societies and joint-family systems etcIn practice, Takaful can serve as a risk-mitigation tool and an alternative to conventional insurance.

WAQF

• Transferring the ownership of a physical thing to Allah.

• That is for the benefit of people.

• Waqf item(asset) neither be sold nor be distributed in inheritance (meerath)

• By using that thing, it should not be diminished.

(Like; well, water cooler, school, Masjid, hospital etc.)

کسی چیز کا �پنی ملکیت سے نکال کر �للہ کی ر�ہ میں دینا

وقف کے منافع �للہ کے بندوں کے لئے ہوتے ہیں

وقف کی خریدو فروخت �ور ھبہ نہیں ہوسکتا �ورنہ ہی موقوفہ شے میر�ث میں تقسیم ہوسکتی ہے

یہذ� پانی کا وقف جائز نہیں، کنو�ں کا وقف وقف کا بقا ضروری ہے، لہوسکتا ہے

FUNCTIONALITY OF FAMILY TAKAFUL - MODEL

Participant’s Investment

Account (PIA)

Waqf Fund Operator / Wakeel

ParticipantContributions

Profits from Investment Wakalee Fee(s) for Investment

Management

Contributions for Takaful Benefit

Payment of Claims

Surplus Distribution (if any)

Wakala Fee for Operating Waqf

Fund

1

23

4

5

6

7

PROCESS OF TAKAFUL

• Takaful Operator creates the Waqf Fund or the “Taburru Fund”

• Participants contribute their premiums/contributions on the basis of “Taburru” into this Waqf Fund

• The Waqf Fund pays the claims

• Takaful Operator creates the Waqf Fund or the “Taburru Fund”

• Participants contribute their premiums/contributions on the basis of “Taburru” into this Waqf Fund


Takaful Operator

WAQF FUNDContributions

Claims

Surplus

KEY POINTS ON TAKAFUL BUSINESS MODEL

• Contributions are paid on the basis of Taburru. In Shariah such a contract is called Aqd Taburru

• Contributions are credited to the Waqf Fund; Operator acts as Wakeel


• Contributions are invested only in Shari’ah Compliant investment avenues

• An independent Shariah Board supervises business activities for Shariah compliance

WAQF


• Takaful resonates with the beliefs and values system of people from different cultures:

Shariah Compliant Ethical

Transparent and Full

Disclosure

Shariah and Socially

Responsible Investments

Surplus Sharing


Conventional Insurance vs. Takaful

TAKAFUL VS INSURANCE

Section Takaful Companies Conventional Insurance Companies

Nature of Contract

Takaful is based on mutual cooperation.

Conventional insurance is based solelyon commercial factors.

Riba / Qimar Takaful is free from interest (Riba),gambling, (Maysir), and uncertainty(Gharar).

Conventional insurance includeselements of interest, gambling, anduncertainty.

Two separate funds

All or part of the contribution paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing protection against potential risks.

The premium is paid to conventionalinsurance companies and is owned by them in exchange for bearing all expectedrisks.

Shariah Monitoring

Takaful companies are subject to thegoverning law as well as a Shari’aSupervisory Board.

Conventional companies are onlysubject to the governing laws.


Section Takaful Companies Conventional Insurance Companies

Restricted Investment

The Plan Owners’ and shareholders’ capital is invested in investment funds that are Shari’a compliant.

The capital of the premium is invested in funds and investment channels that are not necessarily Shari’a compliant

Surplus Distribution

Any surplus in the Takaful Fund is shared among Participants only, and the investment profits are distributed among Participants and shareholders on the basis of Mudaraba or Wakala models.

All surpluses and profits belong to the shareholders only.

The End. Jazak Allah

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Introduction to Takaful For beginners

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Transcript of Introduction to Takaful For beginners