Functions and Dominant Models Hashcm Abdullah AlNcmcr Abstract Takaful is a growing and fast-developing industry, which oers an insurance policy that complies with Islamic law. Such business is highly recommended by most Muslim scholars because it reects the real meaning of brotherhood in protecting individual and corporate bodies against loss or hazards to themselves and their properties. As a result, a number of operational models have been applied by takaful operators 1 by adopting one or more contracts, such as Mu- darabah, wakalah or waqf. Tis paper will therefore highlight im- portant issues that deal with the background of Islamic insurance in terms of denition, functions, as well as exploring takaful contract constructions and various mechanisms linking the contract parties. Finally, this paper will highlight the most dominant and practiced models used by takaful operators worldwide. Keywords: denitions, Functions, contract mechanisms, models. Introduction Takaful is thc !slamic countcrpart ol convcntional insurancc. Takaful prcmiums havc rcportcd a gradual, yct incrcasingly high ratc ol growth. Tc global takaful markct was cstimatcd to bc at a lcvcl ol ovcr U.S. 8 2.1bn ol prcmiums lor 2002. 8y 2008 thc cstimatcd sizc ol thc global takaful prcmium was US 8 5.3bn and to rcach US 8 8.9bn in 2010 (8hatty, 2010). Tis was cxpcctcd to risc to a gurc ol US 8 12.5bn by 2015 (Lcwis et al., Lccturcr in Financc, King Abdulaziz Univcrsity Jcddah, Saudi Arabia, mail: dr.hashcm.alncmcrCgmail.com Afro Eurasian Studies, Vol. 2, Issues 1&2, Spring & Fall 2013, 231-253 232 2007). !ntcrcstingly, this gurc lor 2015 was rcviscd lrom an carlicr similar cstimatc ol 87.5 billion madc in 1999, which to a grcat cxtcnt indicatcs that busincss cxpcctations may havc bccn matcrializing at a lastcr pacc than initially anticipatcd, drivcn largcly by strong markct growth in thc Gull rcgion and in particular Malaysia (Abdul Vahab et al., 2007). Tcrc wcrc somc 179 takaful companics and windows (20) in 2008, and thc numbcr ol such cntcrpriscs in 2010 can casily bc said to bc in cxccss ol 200. Tc total capital committcd within thc takaful industry in 2007 was around US8 3.5bn (8hatty, 2010). Saudi Arabia rcmains thc largcst takaful markct in thc GCC with contributions ol US8 2.9 bn in 2008 ( & Y, 2010). Tc high growth ratc ol Takaful is strongly bascd on thc uniquc charactcristics ol thc takaful busincss contract, which dicr lrom com mcrcial insurancc busincss, in that thc lattcr arc bascd on salc and pur chasc ol policy or protcction covcr in rcturn lor a prcmium paymcnt, and all associatcd prcmiums and any invcstmcnt rcturn prot or un dcrwriting surplus arising lrom thc policyholdcrs collcctcd pools will bc automatically dircctcd to thc insurancc company lund. Howcvcr, in casc ol thc takaful busincss, thc prcmium paymcnt by thc participants 2 is considcrcd as a donation contribution or tabarru, which is paid lor thc purposc ol brothcrhood or mutual indcmnity among all par ticipants. Tc Takaful- opcratcd company is considcrcd as an agcnt to managc thc lund contributcd to by participants with thcir lull conscnt. Tus, a clcar scgrcgation bctwccn thc sharcholdcrs and participants lund(s) is onc ol thc principlcs on which thc takaful busincss is con structcd, which satiscs thc compliancc rcquircmcnts ol thc Shariah 3 compliancc rcquircmcnts. Accordingly, takaful busincss will havc dicrcnt opcrating modcls and contractual tcrms, conccpt and mcchanisms than convcntional insurancc systcms. Denition of Takaful Takaful is dcrivcd lrom thc Arabic root word kafala, a vcrb which mcans guarantcc, bail, warrant or an act ol sccuring oncs nccd (ngku et al., 2008). Takaful is also dcncd in Scction 2 ol thc Malaysian Takalul Act 1984 as, 233 A schcmc bascd on brothcrhood, solidarity and mutual assistancc which providcs lor mutual nancial aid and assistancc to thc participants in casc ol nccd whcrcby thc participants mutually agrcc to contributc lor that pur posc. AA!F!s 4 , also dcncd !slamic insurancc on (2004/2005) as pcr thc Financial Accounting Standard No. 12, in Appcndix , !slamic insurancc is a systcm through which thc participants donatc 5
part or all ol thcir contributions which arc uscd to pay claims lor damagcs sucrcd by somc ol thc participants. Tc companys rolc is rcstrictcd to managing thc insurancc opcrations and invcsting thc insurancc contribu tions. 8y 2007 AA!F! dcncd !slamic insurancc as bcing in linc with shariah Standard 26 (2) 2007, !slamic insurancc is an agrccmcnt bctwccn pcrsons who arc cxposcd to risks to protcct thcmsclvcs against harm arising lrom risk by paying con tributions on thc basis ol a commitmcnt to donatc. Following lrom that (principlc) thc insurancc lund is cstablishcd and is trcatcd as a scparatc lcgal cntity which has indcpcndcnt nancial liability. Tc lund will covcr compcnsation against harms that bclall any ol thc participants duc to thc occurrcncc ol thc insurcd risks (pcrils) in accordancc with thc tcrms ol thc policy. Functions of Takaful !t may bc thought at rst glancc that takaful docs not dcviatc lrom convcntional insurancc, sincc both typcs dcpcnd on thc conccpt ol pool ing moncy lrom a group lor thc sakc ol hclping thc unlortunatc ol thc samc group in thc cvcnt ol cncountcring nancial loss. Howcvcr, unlikc takaful, spiritual mutual support is not a rcquisitc ol commcrcial insur ancc. Commcrcial insurancc is bascd on a lorm ol cxchangc whcrcby thc insurcd pays a prcmium in cxchangc lor protcction in casc ol ca lamity cxposurc, with no compcnsation 6 in a casc ol no loss. Howcvcr, thc takaful mcchanism is bascd on thc conccpt ol tabarru (donation) 7 234 combincd with thc intcntion (niah) to participatc in thc pooling aid mcch anisms. Hcncc, thosc who participatc in thc takaful mcchanism will bc lcss likcly to cncountcr thc lccling ol rccciving nothing il no claim occurs. Tcy will lccl sucicntly satiscd to hclp thcir collcaguc in thc samc pooling group in thc loss hc incurs. Anothcr uniquc lunction ol !slamic insurancc is thc strong rclation ship bctwccn takaful opcrator and participants, in that thc takaful opcrator will go cvcn bcyond thc provisions ol thc nccds ol spiritual satislaction 8 , by providing nobcl scrviccs which will bc rcwardcd by God only such as thc lollowing bcncts lor thc dcccascds lamily upon thc participants dcath. (i) To propcrly distributc thc dcccascds cstatc upon his/hcr dcath. (ii) To calculatc and distributc Zakah on bchall ol all participants. (iii) To mandatc othcrs to pcrlorm Hajj on bchall ol thc participant upon his/hcr dcath. (iv) To makc arrangcmcnts lor Sadaqah Jariah 9 (Nordin, 2007). Tc convcntional mcthod ol satislying a customcr is rcaliscd by lul lling thcir matcrial or worldly nccds with bcncts such as low priccs, highcr rcturns, lastcr dclivcry or cvcn bcncting thc dcccascds lamily mcmbcrs altcr his dcath in thc lorm ol lilc insurancc. Howcvcr, this docs not mcan that customcr satislaction in tcrms ol pricc, quality, dclivcry and prccision arc not important to thc takaful opcrator, in lact thcy rcmain important whilc thc satislaction ol thc customcrs spiritual nccds arc also mct. So whcn Muslims buy !slamic insurancc thcy can combinc two bcn cts, (i) Tcy rcccivc !slamic protcction that complics with Shariah rulcs against nancial loss, in thc samc way as convcntional insurancc guar anrtccs, as wcll as (ii) distancing thcmsclvcs lrom thc possibility ol sin 10 incurrcd by purchasing convcntional insurancc. Finally, although a bclicving Muslim is rcquircd to acccpt dcstiny, which may incorporatc ccrtain mislortuncs, !slam cncouragcs Muslims to takc cxtra prccaution to minimizc potcntial mislortunc, losscs or injury arising lrom unlortunatc cvcnts. Tus, having an insurancc policy is not considcrcd to bc against thc will ol Allah, rathcr thc will ol Allah can bc cnhanccd by holding an insurancc policy to osct (:) thc uncxpcctcd risk that cxists in day to day lilc. (AlZarqa, 1962, Attar, 1983). 235 Takaful Contract Tc majority vicwpoint hcld by contcmporary !slamic scholars is that takaful contract is lully consistcnt with Shariah principlcs (Fishcr et al., 2000, AlSalih, 2004). Akin to nglish law dcaling with contracts, !s lamic Law has cstablishcd lundamcntals which arc rcquircd in an insur ancc policy, such as partics to thc contract, lcgal capacitics ol thc partics, ocr and acccptancc, considcration, subjcct mattcr, insurablc intcrcst and utmost good laith (accy, 1989). Tc prcscncc ol ccrtain clcmcnts and thc abscncc ol othcrs can makc a dicrcncc bctwccn a valid or void contract in thc cycs ol the Shariah. As lor thc mcchanisms ol thc takaful contract, Tcrc arc lour partics involvcd in a takaful contract, namcly: thc participant 11 , opcrator 12 , insurcd pcrson, and bcncciary 13 . Hcncc, coopcration among thcsc partics crcatcs lour mcchanisms in thc takaful schcmc.
(i) Contract bctwccn participant and lund Tc moncy bclonging to thc participant is translcrrcd to thc lund. !n currcnt practicc, thc lund is bascd on thc principlc ol tabarru. !n casc ol loss risk, thc participant ,as is also thc casc with thc mcmbcrs ol thc lund, can rcccivc bcnct by thc covcr that thc lund providcs. Tus, thc moncy bclonging to thc lund is translcrrcd 14 to thc par ticipant. Tc currcnt takaful practiccs arc bascd on commitmcnt to tabarru 15 , i.e. thc takaful opcrator as thc agcnt ol all participants can claim a prcmium lrom participants, bccausc thc owncrship has bccn translcrrcd whcn thc agrccmcnt was signcd. Howcvcr, il thc contract is bascd on (purc tabarru) thcn thc takaful opcrator cannot makc dc mands to thc participant to pay thc prcmium, bccausc thc owncrship was absolutcly translcrrcd whcn thc participant dclivcrcd his prc mium and dclivcry did not occur whcn thc agrccmcnt was signcd. 16
(ii) Contract bctwccn company and participant Tc rclationship hcrc is not as insurcrinsurcd rathcr than ol a par ticipantsopcrator onc, thc participants insurc thcmsclvcs, whilc thc takaful opcrator is cngagcd by thc participants to managc thc takaful schcmc on bchall ol thcm (ngku et al., 2008). Tc participant in a takaful contract is considcrcd to bc a muwakkil (principal) and thc company as a wakil (agcnt) to managc thc participants moncy. Tc 236 dutics ol thc company as a wakil or agcnt ol thc participant, is to managc thc lund in tcrms ol a contractual arrangcmcnt, and to un dcrtakc all administrativc mattcrs, undcrwriting activitics and tcch nical issucs, as wcll as to managc thc invcstmcnt portlolio ol thc lund. cpcnding on thc typc ol thc undcrlying contract, thc takaful opcrator may rcccivc a lcc, or sharc thc prot on invcstmcnts as a rc ward lor managing thc takaful schcmc. Tc takaful company and thc participant will cntcr into a longtcrm takaful contract, whcrcby thc contract spclls out clcarly thc rights and obligations ol thc partics to thc contract. Tc participants arc thcn rcquircd to pay thc takaful in stalmcnts on a rcgular basis. !n rcturn lor participation in thc takaful plan, thc customcr dccidcs thc amount ol takaful instalmcnts that hc/ shc wishcs to pay subjcct to thc company minimum sum at thc timc ol signing thc contract. (Hassan et al., 2007) (iii) Contract bctwccn company and lund: Tc rclationship hcrc is to bc rcgardcd as a contract to invcst thc par ticipants moncy, thc moncy bclonging to thc lund is translcrrcd to thc company, acting as a wakil 17 or as mudharib 18 . Tc mudharib will invcst thc gcncral takaful lund in linc with Shariah principlcs and all rcturns on thc invcstmcnt will bc poolcd back into thc lund. n thc othcr hand, thc participants agrcc that thc company shall pay lrom thc gcncral takaful lund, compcnsation or indcmnity to lcllow par ticipants who havc sucrcd a dcncd loss. Tc lund shall also pay lor othcr opcrational costs ol gcncral takaful busincss such as rctakaful arrangcmcnts and thc sctting up ol tcchnical rcscrvcs (Tolclat, 2008). (iv) Contract ol thc participants mutual assistant: Undcr this systcm, participants mutually and voluntarily agrcc to contributc moncy to support a common goal ol providing mutual nancial aid to mcmbcrs ol thc group in casc ol spccic nccd 19 , this systcm is bascd on mutual protcction and solidarity 20 , thc partici pants should cmbody ccrtain principlcs and bclicls 21 whcn dcaling with cach othcr (Ali, 2006). n thc othcr hand, cvcryonc is allowcd to buy a takaful policy whcth cr Muslim or not. !n lact, in Malaysia, nonMuslims makc up thc largcst portion ol takaful policy purchascrs by 2007 with a sharc ol 60 (8hatty, 2008). Howcvcr not cvcryonc is allowcd to scll takaful policy. 237 Types & Models Of Takaful Contract Tc takaful products arc availablc in two lorms: general 22 and family 23 , thc product shcll ol thc gcncral takaful agreement is morc comprchcnsivc than that ol thc lamily takaful . Tc global avcragc markctsharc gurcs lor mix-life and gcncral takaful wcrc 30 lilc to 70 nonlilc by 2007. How cvcr thcrc arc somc rcasons that lcad lamily takaful to lag bchind gcncral takaful (8hatty, 2008). (i) Rcligious conccrns, (ii) Lilc insurancc appcarcd to bc morc as a wagcr on lilc, sincc it has intangiblc bcncts. (iii) !slamic invcstmcnt tools wcrc short tcrm in naturc and vcry limitcd. (iv) Tc nccd lor wcllcducatcd and talcntcd pcoplc to handlc gcn cral takaful products. Sudan was thc rst nation to introducc lamily takaful lollowcd by uropc and Malaysia in carly 1980, and Qatar and 8ahrain in 2001 and 2002 rcspcctivcly. Tc Arab countrics arc morc locuscd on thc group lam ily takaful. Malaysia, Singaporc, and !ndoncsia arc ocring scvcral plans 24 lor lamily takaful. !n contrast, Gcncral 25 takaful startcd rst in Sudan in 1979 and had thcn wcrc crcatcd lor thc Middlc ast markcts by carly 1980s including: thc UA in 1980, Saudi Arabia in 1983, 8ahrain in 1989 and Qatar in 1995, drivcn by thc boost in cconomic dcvclopmcnt as a rc sult ol high oil priccs. n thc othcr hand, thcrc arc scvcral takaful opcrational modcls that havc bccn adoptcd by takaful opcrator companics worldwidc such as mu- darabah, wakalah, waqf, hybrids ol mudarabah and wakalah, taawuni and nonprot lunds. Howcvcr thc rst two modcls arc most dominant, duc to thc lact that thc mudarabah is widcly uscd in Asia, whilc wakalah has bccomc popular in thc Middlc ast (Smith, 2007). Basic Wakalah Model General takaful Tcrc will bc scparatc contracts in thc wakalah modcl, ol which onc is uscd lor undcrwriting and thc othcr is uscd lor thc invcstmcnt activitics 238 ol takaful lunds. Although thc wakalah modcl has bccn widcly practiscd by takaful opcrator companics in undcrwriting activitics, it is rarcly adoptcd lor invcstmcnt activitics (Tolclat, 2008). !n thc wakalah modcl thc participants placc thcir contribution into a pool ol donation (tabarru), hcncc thc wakalah opcrator, is cntitlcd to a lcc (wakalah lcc), lor thcir cort to managc thc takaful lund rcgardlcss ol thc pcrlormancc ol thc pool. !t is an (uplront lcc) 26 which is calculatcd bascd on an agrccd pcrccntagc ol thc total lund. Tc wakalah lcc should bc approvcd by thc shariah supcrvisory board (SS8) 27 . Tcrcby, most ol thc opcrators will dcclarc thcir wakalah lcc at thc bcgin ning ol thc contract, but thc loading will bc calculatcd at thc cnd ol thc ycar oncc thc actual cncountcrcd cxpcnscs havc bccn dcclarcd according to an accuratc lcc calculation. Tc wakalah lcc should bc dircctcd to thc sharcholdcrs lund as an incomc lor thc opcrator. Altcr that action is con ductcd, thc opcrator managcs thc lund by complying with thc lollowing proccdural stcps. (i) All dircct cxpcnscs 28 arc dcductcd lrom thc rcmaining lund. (ii) !ndircct cxpcnscs 29 arc paid by thc opcrator only il thcrc is a surplus in thc takaful lund that has bccn sharcd bctwccn thc opcrator and thc participants, othcrwisc it will bc paid lrom thc takaful lund (Lcwis, 2003). (iii) Participants will givc thc right to thc opc tor to invcst thcir lunds lor an opcrator invcstmcnt lcc 30 . (iv) Tc takaful lund at this stagc rcprcscnts thc incomc gcncratcd lrom invcstmcnts altcr dcduction ol thc managcmcnt lcc lor thc opcrator with thc undcrwriting surplus addcd. Tc combi nation ol both ol thcsc amounts rcprcscnts thc total surplus in thc takaful lund. (v) Tc opcrator takcs part ol thc surplus as a rcscrvc to strcngthcn thc position ol thc takaful lund. (vi) Tc rcmaining surplus in thc takaful lund is solcly owncd by thc participants 31 and thc opcrator has no right ovcr this lund as pcr AA!F! 32 . As a rcsult, thc takaful opcrator has thrcc sourccs ol incomc (i) thc wakalah lcc lrom undcrwriting activitics, (ii) thc lund invcstmcnt lcc and (iii) invcstmcnts on thc opcrators own capital. 239 Figure 1: 8asic Wakalah Modcl lor Gcncral pcrational
Source: ngku ct al. (2008, 53), !FS8 (2009, 28) Family takaful Likc thc gcncral wakalah modcl, thc modcl hcrc uscd lor undcrwrit ing and invcstmcnt activitics, thc modcl hcrc can bc dcviatcd according to thc naturc and scnsitivity ol thc undcrwriting policy cncountcrcd (Tolclat, 2008). For cxamplc, il thc policy conccrns (i) risk protcction lrom dcath, thcn thc contribution splits into two channcls. Tc rst contribution gocs to thc wakalah Agcnt, lor thcir managcmcnt cort and othcr lccs rclatcd to thc lamily policy il any, whilc thc sccond contribution gocs to thc Participants Spccial Account PSA, in thc lorm ol donations 33 (tabarru) to participatc in thc risk ol dcath protcction pooling. n thc othcr hand, il thc policy is writtcn as (ii) a Family Takaful savings policy, thcn thc con tributions arc split into thrcc channcls. Tc rst two channcls lollow thc alorcmcntioncd policy. Howcvcr, a small portion this timc gocs to thc PSA to covcr mortality risk, whilc a substantial portion gocs to thc Participants Account PA lor thc purposc ol savings and invcstmcnts. Furthcrmorc, thc PSA, and sharcholdcrs lund opcratc in thc samc way as thc takaful opcr atcs in gcncral. Vhilc thc PA rcprcscnts thc savings policics, most ol thc invcstmcnts hcrc arc accomplishcd on a long tcrm basis, thcrcby thc takaful opcrator dcscrvcs a managcmcnt lcc which is calculatcd as a pcrccntagc ol thc total invcstcd asscts, and this lcc rcprcscnts thcir cort to managc such an invcstmcnt lund. Tc takaful opcrator as a rcsult has lour sourccs ol incomc, (i) the wakalah lcc lrom undcrwriting activitics, (ii) a lund invcst mcnt lcc lrom thc PSA, (iii) a lund invcstmcnt lcc lrom thc PA and (iv) an inccntivc pcrlormancc lcc il allowcd pcr thc opcration proccdurcs. 240 Figure 2: 8asic Wakalah Modcl lor Family pcrational
Source: !FS8 (2009: 28) Basic Mudarabah Model General takaful Tc contract undcr thc mudarabah modcl will involvc prot shar ing bctwccn thc invcstor 34 (rabb al-mal) and thc lund managcr (mudarib), according to a prcdctcrmincd ratio. !n thc classical contract thcrc is no xcd rcturn lor invcstors as prot is undctcrmincd and thc opcrator or thc mudarib has lull control, i.e. rabb al-mal cannot participatc in thc ordinary coursc ol busincss conductcd by thc mudarib. Howcvcr thc mudarabah in vcstmcnts arc considcrcd a sidc activity to optimizc thc usc ol lunds until claims arc madc or othcr cxpcnscs arc incurrcd (ngku et al., 2008). Tcrc is only onc contract to covcr both undcrwriting and invcstmcnt activitics, thc contract schcmc usually opcratcs on thc basis ol oncycar participa 241 tion. Tcrc will also bc no uplront managcmcnt lcc or invcstmcnt lcc to bc takcn out ol thc contribution toward thc sharcholdcrs lund as in thc wakalah modcl, howcvcr othcr cxpcnscs such as claims, rctakaful arrangc mcnt and dircct cxpcnscs arc dcductcd dircctly lrom thc takaful lund that was paid by thc participants, whilc othcr indircct cxpcnscs such as salarics and rcnt will bc paid lrom thc sharcholdcrs lund (Hassan et al., 2007). Furthcrmorc, thc opcrator and thc participants only sharc dircct invcst mcnt incomc in accordancc with a mutually agrccd mudarabah prot sharc, whilc thc undcrwriting surplus altcr dcduction ol all claims and rcscrvcs should not in principlc bc sharcd with thc opcrator bccausc thcy arc not a mudarabah invcstmcnt prot, but instcad a rcsiduc ol thc takaful lund (ngku et al., 2008). Tc Takaful opcrator as a rcsult has two sourccs ol incomc: (i) prot sharc in thc invcstmcnt activity surplus and (ii) prot on thcir capital invcstmcnt activitics. Figure 3: 8asic Mudarabah Modcl lor Gcncral pcrational
Source: !FS8 (2009: 28) Family takaful Tc opcrator schcmc hcrc lollows thc samc opcration channcls as thosc ol thc sharcholdcrs lund and thc PSA that wcrc adhcrcd to in thc wakalah lamily modcl. Howcvcr, sincc thc PA contains only a saving clc mcnt ol lamily takaful, thcn thc opcrator sharc prots arc gcncratcd lrom thc invcstmcnt activitics ol thc PA. Tc Takaful opcrator as a rcsult has two sourccs ol incomc, (i) thc prot sharc lrom invcstmcnt activitics lor PSA and (ii) thc prot sharc lrom thc assct invcstmcnt undcr PA. Mudarabah !nvcstmcnt Prots Takalul pcrator Contribution Prots Contribution Participants Tabarru Surplus Claims Lcss 100 100x x 242 Figure 4: 8asic Mudarabah Modcl lor Family pcrational Source: !FS8 (2009: 28) Modied Wakalah & Mudarabah Model Modied wakalah model Tc modicd wakalah modcl lollows thc samc opcrational conccpt as in thc (basic) gcncral wakalah modcl. Howcvcr, as thc opcrator hcrc will sharc in thc nct undcrwriting surplus 35 ol thc participants lund, such an act should bc conductcd only with thc lull conscnt ol thc participants (ngku et al., 2008, Asaria, 2009). Tc Takaful opcrator as a rcsult has lour sourccs ol incomc: (i) a wakalah lcc lrom undcrwriting activitics, (ii) a lund invcstmcnt lcc, (iii) invcstmcnts on thc opcrators own capital and (iv) an inccntivc pcrlormancc lcc, i.e. sharing in thc nct undcrwriting surplus ol thc takaful lund. Contribution Prots Participants Account, PA Participants Contribution Participants Spccial Account, PS Contribution Prots !nvcstmcnt !nvcstmcnt Risk Fund Participants Participants Takalul pcrator Takalul pcrator 243 Figure 5: Modicd Wakalah Modcl pcrational
Source: Asaria (2009:11) Modied Mudarabah model Tc modicd mudarabah modcl lollows thc samc opcrational con ccpt ol thc basic mudarabah modcl. Howcvcr thc opcrator will sharc in thc nct undcrwriting surplus, whilc thc invcstmcnt incomc is ploughcd back into thc takaful lund, i.e. thc opcrator will not sharc with thc participants in any prot arising lrom thc mudarabah invcstmcnt (ngku et al., 2008, Asaria, 2009). Tc prots arc dcncd as thc positivc dicrcncc (or surplus) bctwccn thc balancc ol thc takaful lund at thc cnd ol thc mudarabah contract and thc balancc ol thc takaful lund at thc bcginning ol thc mudarabah contract, i.e. thc opcrator trcats thc nct undcrwriting surplus as mudarabah prot and sharcs thc surplus according to an agrccd prot sharing ratio 36 . Tc Takaful opcrator as a rcsult has two sourccs ol incomc undcr this modcl: (i) prot sharc in nct undcrwriting surpluscs, and (ii) prot on thcir capital invcstmcnts activitics. !nvcstmcnt Prots Takalul pcrator Contribution Prots Vakala Managcmcnt Managcmcnt Frcc Pcrlormancc Frcc Contribution Participants Tabarru Surplus Claims Claims Lcss 100 244 Figure 6: Modicd Mudarabah Modcl pcrational
Source: Asaria (2009:10) Mixed Module General Takaful (Wakalah for Underwriting & Mudarabah for Investments) Undcr this modcl 37 thc wakalah contract is uscd lor undcrwriting activitics, risk asscssmcnts, rctakaful and in rcturn lor claim managcmcnt, thc wakil chargcs a spccicd and agrccd managcmcnt lcc. Tis lcc may vary bascd on thc pcrlormancc ol thc takaful opcrator (ngku et al., 2008, Asaria, 2009). At thc samc timc, a mudarabah contract is uscd lor thc pur posc ol invcstmcnts in which thc opcrator acts as a mudarib on bchall ol thc participants, that is thc opcrator managcs thc takaful lund asscts and sharc in thc incomc gcncratcd lrom thc invcstmcnts bascd on a prc agrccd prot ratio at thc contract inccption pcriod to satisly thc Shariah rcquircmcnts. Unlikc, thc wakalah modcl, thc opcrator rcccivcs a sharc in thc prot oncc gcncratcd lrom invcstmcnt, othcrwisc thcrc would bc no incomc gcncratcd lor thc opcration, howcvcr, thc participants rcmain li ablc lor a loss cncountcr. Tc Takaful opcrator undcr this modcl has lour main sourccs ol incomc, (i) prot lrom thc wakalah lcc lor undcrwriting activitics, (ii) thc prot sharc gcncratcd lrom assct managcmcnt ol thc takaful lund, (iii) prot lrom thc opcrators own capital invcstmcnts, and (iv) a possiblc sharing on thc invcstmcnt rcturn, as an inccntivc lcc lor good pcrlormancc. Mudarabah !nvcstmcnt Prots Takalul pcrator Contribution Prots Contribution Tabarru Surplus Claims 100 100x x Participants 245 Figure 7: Gcncral Wakalah-Mudarabah Modcl pcrational
Source: ngku ct al. (2008: 53) Family Takaful (Wakalah for Underwriting & Mudarabah for Investments) Undcr this schcmc thc sharcholdcrs lund and thc PSA opcratc thc samc way as in thc gcncral mixcd modcl, whilc thc opcrator invcsts in thc PA lund on a mudarabah basis, thc gcncratcd prot will bc sharcd bctwccn thc opcrator and thc participants upon thc agrccd ratio. Tc opcrator has vc main sourccs ol incomc in this modcl: (i) prot lrom the wakalah lcc lor undcrwriting activitics, (ii) a prot sharc undcr PSA invcstmcnt activi tics, (iii) a prot sharc undcr PA invcstmcnt activitics and (iv) prot lrom thc invcstmcnt ol thc opcrators own capital couplcd with (v) thc possibil ity ol inccntivc paymcnts or good pcrlormancc lccs. !nvcstmcnt Rcvcrsc RcTakalul Mudarabah Prots Prots Sharing (100x) Prots Sharing x Takalul Fund Takalul pcrator Participants Cash rcturn Tabarru Surplus Claims Claims Lcss Vakalah Managcmcnt Vakalah Frcc 246 Figure 8: Family Wakalah-Mudarabah Modcl pcrational Source: !FS8 (2009:30) Waqf Takaful Model A Waqf 38 is cstablishcd by thc cquity holdcrs ol thc takaful company to compcnsatc thc bcncciarics or participants ol thc takaful schcmc in thc utmost sinccrity in ordcr to hclp thosc laccd with dicultics (!smail, 2006). Tc participants ol thc Takaful will givc a prcmium undcr thc intcn tion ol a donation or Tabarru to thc waqf to participatc in thc objcctivcs ol thc takaful principlcs, thc donation ol thc waqf can bc dctcrmincd by thc takaful company on thc basis ol an actuarial cstimatc. Any pcrson signing thc proposal lorm, contributing to thc waqf and subscribing to thc policy documcnts shall bccomc a mcmbcr and a bcncciary ol that waqf lund (!smail, 2006). Howcvcr, sharcholdcrs do not havc thc right to acccss thc waqf lunds capital, asscts or prots but rathcr thcir job is to makc rulcs lor and administcr thc lund (Tolclat, 2008). Contribution Prots Participants Account, PA Participants Contribution Vakalah Fccs Participants Spccial Account, PS Contribution Prots !nvcstmcnt !nvcstmcnt Risk Fund Participants Participants Takalul pcrator Takalul pcrator 247 Claims on surplus altcr dcduction and othcr cxpcnscs will bc dis tributcd according to thc waqf dccds into thrcc options: (a) a portion will bc uscd as a rcscrvc to mitigatc any luturc losscs, (b) a portion is to bc dis tributcd back to thc participants, and a portion is to bc distributcd to thc poor and lor charitablc purposcs (ngku et al., 2008). !n casc ol a dccit in thc lund thc opcrator will providc qard hassan to covcr thc dccit. Tc qard hassan will bc rcpaid lrom luturc surplus in thc lund (Tolclat, 2008). Waqf is considcrcd a lcgal cntity that can cxcrcisc owncrship rights ovcr thc contribution amount subjcct to thc tcrms ol thc waqf dccd, particularly on invcstmcnts, compcnsations and thc status ol surplus amount (ngku et al., 2008). Finally, il thc lund is liquidatcd, thcn thc outstanding balancc, altcr thc paymcnt ol all ducs and payablcs, will bc utilizcd lor charitablc purposcs (!smail, 2006). Figure 9: Tc rclationship bctwccn participants and thc takaful opcrator in thc Waqf schcmc.
Source: Cizakca (1998) Takaful-Waqf operation models Tc takaful opcrator is thc managcr ol thc takaful waqf lund, hcncc thcy will administcr thc lund bascd on two lorms, (i) Wakala waqf As pcrator/Managcr, thc takaful company will pcrlorm all lunc tions ncccssary to managc thc insurancc activitics ol thc waqf, such as thc undcrwriting ol contributions , thc actuarial asscssmcnt ol risks and paymcnt ol claims. Tc managcmcnt will bc conductcd undcr a wakala lcc to bc dcductcd lrom thc contributions ol thc participants. Allocatc Moncy onation Paid by Participants As a Vakccl Takalul pcrator Vaql Participants Vaql Fund As a Mudarib Company 248 (ii) Mudarabah waqf As mudarib ol thc lund, thc takaful company will managc thc invcst mcnt ol thc cxccss lunds ol thc waqf into Shariahcompliant invcst mcnts and will participatc in thc prot ol thc lunds invcstmcnts at a xcd, prcagrccd prot ratio.
Other Takaful Models Te Sudanese model Tc systcm ol takaful opcrating in Sudan workcd thc samc way as thc mixcd wakalah mudarabah modcl that wakalah uscd lor undcrwriting ac tivitics and mudarabah uscd lor invcstmcnt activitics. Tc opcrator acts as a managcr looking altcr participants lunds and dcaling with tcchnical issucs lor a wakalah lcc, howcvcr thc lcc is not calculatcd as a pcrccntagc ol thc total availablc lund rathcr as a lump sum to bc uscd as rcmuncration to thc board ol sharcholdcrs. Tc rcmuncration amount is considcrcd ncgligiblc comparcd with thc rcgular wakalah pcrccntagc lcc. A wakalah pcrccntagc lcc ol thc total contributcd amount was prohibitcd by thc Highcr Shariah Supcrvisory Council (HSSC) in Sudan, thcy considcrcd thc wakalah pcr ccntagc lcc as riba in thc scnsc that thc moncy is accumulatcd without any cort on thc part ol thc company (Alarir, 2004). Alariar argucs that thc participants ol an !slamic insurancc company should cstablish thc company and should act as sharcholdcrs ol thc company in thc samc way as in thc mutual insurancc company. Hc also bclicvcs thcrc is no nccd lor capital in thc !slamic insurancc company cxccpt to satisly thc lcgal rcquirc mcnts to cstablish thc company. Tc sharcholdcrs arc not allowcd to sharc thc surplus ol thc takaful lund or to sharc in thc invcstmcnts prots, and arc also not rcquircd to providc qard-hassan in thc casc ol dccit. Tc loan amount can bc takcn lrom thc availablc lund rcscrvcs, il thc rcscrvcs arc not sucicnt to compcnsatc thc dccit, thcn thc opcrator will cstablish a ccntral lund to act as thc lcndcr (Alarir, 2004). Te Saudi Arabian cooperative insurance model Tc Saudi Arabian Monctary Agcncy (SAMA) rcquircs all insur ancc companics to opcratc undcr a coopcrativc insurancc busincss modcl, which is a kcy lcaturc ol thc takaful modcl ( & Y, 2010). Shariah schol ars havc indicatcd that thc Saudi coopcrativc modcl is similar to a takaful modcl (in that it incorporatcs lunds scgrcgation and surplus distribution). 249 Tc coopcrativc insurancc modcl works in thc samc way as thc takaful modcl. Tc SAMA dircctivcs , ocially sct out in thc !mplcmcntcd Rcgu lations, Articlc 70, has idcnticd thc surplus distribution as bcing bctwccn thc company and thc participants. SAMA has indicatcd that 10 ol thc nct surplus shall bc distributcd to thc policyholdcrs cithcr dircctly or in thc lorm ol rcduction in prcmiums lor thc ncxt ycar. Tc rcmaining 90 ol thc nct surplus shall bc translcrrcd to thc sharcholdcrs incomc statc mcnt. Sharcholdcrs nct incomc shall bc translcrrcd to thc statcmcnt ol sharcholdcrs cquity similar to how this is conductcd in thc takaful modcl. Furthcrmorc, 20 ol thc nct sharcholdcrs incomc shall bc sct asidc as a statutory rcscrvc until this rcscrvc amounts to 100 ol thc paid capital (SAMA, 2005). Tcrclorc, any dccit in thc policyholdcrs lund is bornc solcly by thc sharcholdcrs. cspitc SAMA rcgulations, which arc dircctcd towards coopcrativc insurancc, only a numbcr ol coopcrativcs opcratc as solc T ( & Y, 2010, 2011). xamplcs ol thcsc opcrators arc (AlJazira, 2008, SAA8, 2009, AlAhli, 2010). Conclusion Tc main issuc that distinguishcs takaful lrom convcntional insur ancc is thc conccpt ol taburru and thc uniquc and lair trcatmcnt ol par ticipants which is quitc obvious by scparating thc sharcholdcrs lund lrom thc participants lund, in that cach party will havc his own balancc shcct. Furthcrmorc, somc opcrators might usc a homogcncous modcl such as wakalah or mudarabah, whilc thc othcr might usc a hybrid ol wakalah and mudaraba; namely, thcy usc thc wakalah modcl lor undcrwriting and thc mudarabah onc lor invcstmcnt. Such a mixcd approach has bccn adoptcd by scvcral opcrators worldwidc 39 . Accordingly, takaful contractual conccpts, tcrms and mcchanisms will dicr lrom convcntional insurancc in that in thc takaful busincss thcrc will bc a strong rclationship bctwccn partici pants and opcrators, participants and participants, participants and lund, opcrator and lund. Finally, takaful is still at thc dcvclopmcnt stagc with a numbcr ol challcngcs yct to ovcrcomc, such as innovativc products, build ing re-takaful capacity, assct managcmcnt and markcting channcls, and thc standardisation ol takaful modcls worldwidc. 250 xbxo:vs
1 Tc word opcrator uscd in thc takalul busincss instcad ol insurcr, which shows a strong rclationship bctwccn takalul company and its participants, that thc opcrator considcrcd as a custodian ol thc participants lund and not thc owncr ol thc lund, which comcs in contrast ol thc convcntional insurancc that thc convcntional insurcr is considcrcd thc owncr ol thc lund. 2 Policyholdcrs. 3 Tc !slamic law. 4 Accounting Auditing rganization lor !slamic Financial !nstitutions 5 Tc conccpt ol donation is considcrcd to bc thc backbonc ol takalul in supporting thc rcal mcaning ol mutual coopcration, as pcr |Quran, 5:|. 6 Tc insurancc valuc will bc so intangiblc that its valuc cannot bc apprcciatcd 7 AlQaradawi suggcsts that donation should bc thc basis ol thc contract, il insurancc is to bc sharia compliant (AlQaradawi,2003). Tc spirit cmbodicd in thc conccpt ol tabarru is that thc participants arc not thinking only ol thcir own protcction but thcy should also bc thinking ol hclping othcr participants, without thc conccpt ol donation thc contract will bc that ol buying and sclling ol insurancc. (Lcwis, 2003) 8 implcmcnting thc !slamic law whcn dcaling with insurancc 9 Continucd charity such as building mosqucs, librarics, hospitals and schools on bc hall ol thc participant upon his/hcr dcath 10 8ascd on thrcc prohibition clcmcnts: (1) unccrtainty ol outcomc (gharar), (2) gam bling (maisir), and (3) dcaling with !ntcrcst (riba) which is lrowncd upon by Shariah law. 11 Tosc among thc participants who lacc thc risk and arc assistcd by thc lund arc known as insurcd (almoaman alih). 12 Tc opcrator is dcncd according to Scction 2 ol thc takalul Act 1984 as a pcrson who carrics on Takalul busincss as Takalul opcrator, Takalul agcnt and Takalul bro kcr rcspcctivcly. 13 Tosc who contributcd to thc mutual lund (ras almal) arc known as participants (sahib almal), whilc thosc who actually bcnct lrom thc lund arc known as thc bcncciarics (almostad) ol thc coopcrativc lund. 14 Vhcn thc risk cvcnts occur. 15 Tc dicrcncc bctwccn purc tabarru and commitmcnt to tabarru dcpcnds on thc timing ol thc translcr ol thc owncrship. !n purc tabarru thc owncrship ol thc muta barri (donator) is not translcrrcd by thc absolutc contract wording, but rathcr trans lcr occurs whilc handling thc donation to thc nccdy, i.c. owncrship ol such matcrials moncy has bccn translcrrcd lrom thc donator to thc nccdy oncc it rcachcs thc nccdy custody. !n thc commitmcnt to tabarru, thc owncrship is automatically trans lcrrcd to thc mutabarra (donatcd pcrson) by thc absolutc contract 16 8ascd on an !ntcrvicw with r. Abdul Sattar Abu Ghuddah, Mcmbcr ol thc !slamic Fiqh Acadcmy, Jcddah, at thc First Public Mccting with 8ank AlJazira Sharia 8oard Mcmbcrs, Hilton Hotcl Jcddah, ct. 2009. 17 il thc contract is bascd on wakalah 18 il thc contract is bascd on mudharabah 19 Such as pcrils or hazard. 20 !l thc participants arc intcnding to invcst somc ol thc moncy as thcir savings and donatc somc portions lor mutual indcmnity, thcn thc govcrning contract is mush arakah, togcthcr with tabarru or donation ol a portion ol thc contribution to thc takalul lund (Ali and dicrno, 2008). 251 21 Such as picty purication, brothcrhood, charity (tabarru or contribution), mutual guarantcc, community wcllbcing as opposcd to prot maximization. 22 !slamic Gcncral !nsurancc. 23 !slamic Lilc !nsurancc. 24 Vithin thc scopc ol Family takalul arc ocrcd dicrcnt typcs ol saving and protcc tion products, such as cducation, mortgagc, rctircmcnt plans, protcction lor critical illncss or disability, rctircmcnt annuitics and waql plans. A lamily plan may last as long as 10, 15, 20 ycars or morc (8hatty, 2008). 25 Gcncral takalul is morc conccrncd with causality typcs ol product in thc lorm ol in dividual rctail products such as houschold rc protcction, motor, mcdical and hcalth covcr, pcrsonal accidcnt protcction during Hajj scason, or corporatc scgmcnt prod ucts such as marinc and aviation to covcr transit cargo, cnginccring, or rc, thc con tract lor which normally stands lor onc ycar. 26 Tc opcrator cannot ask lor an additional wakalah lcc in thc luturc il thc calculatcd lcc was undcrcstimatcd. 27 CC8 Rulcbook, 2005. 28 Such as claims, cxpcnscs, lcgal claims costs and rctakalul arrangcmcnts. 29 Such as salarics and rcnts. 30 8ascd on an agrccd pcrccntagc ol thc total managcd asscts rcgardlcss ol thc invcst mcnt pcrlormancc. 31 !t is wisc to mcntion that somc companics distributc thc surplus lor all participants including thosc who incurrcd a claim to satisly thc main purposc ol insurancc in !slam. 32 AA!F! shariah standard No. 26 (5/5) ol 2007 rulcs statcd Surplus can only bc distributcd back to thc participants and cannot bc takcn by thc takalul opcrator, thc distribution ol surplus will bc bascd on thc participants donation pcrccntagc sharc. 33 Participants donation varics in accordancc to his agc at thc timc ol thc contract (Hassan and Lcwis, 2007). 34 Tc participants do not pay thcir contribution lor thc mudarabah invcstmcnt capital as a principal objcctivc. Tc main objcctivc rcmains to cntcr into a brothcrhood mu tual indcmnity schcmc by implcmcnting thc donation or tabarru contract. 35 Tc undcrlying argumcnt is that sincc thc opcrator will providc qard hassan to covcr any dccit in thc takalul lunds, thcn thc opcrator is cntitlcd to sharc in thc positivc pcrlormancc ol takalul lunds. Additionally thcy arguc that thc surplus is a rcsult ol good and cxpcrt managcmcnt by thc takalul opcrator cspccially in thc undcrwriting ol contributions, asscssmcnt ol risks and claim managcmcnt. n account ol thc lact that good managcmcnt has contributcd to thc availability ol thc surplus , thcy should bc conscqucntly rcwardcd lor such good pcrlormancc. 36 Such a practicc bccn criticizcd as not complying with thc dcnition ol prot in mudarabah and thus is not compliant with mudarabah rulcs gcncrally (ngku ct al., 2008, Asaria, 2009). 37 Tis modcl is highly rccommcndcd by thc AA!F! to bc uscd by thc takalul op crator (AA!F!, 2003). !t has a dominating prcscncc on both Middlc astcrn and global markcts. 38 Tc word waql and its plural lorm awqal arc dcrivcd lrom thc Arabic root vcrb waqala, which mcans causing a thing to stop and stand still. 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