ZCME 6211 EXPLORING ISLAMIC CAPITAL MARKET

LECTURER: DR. ROSLAN BIN JAAFAR

INDIVIDUAL ASSIGNMENT

Islamic Product in Financial Institution: Takaful (Islamic Insurance)

MUHAMMAD AFIQ MD SHAH (ZP04173)

2018/2019
 1. What is the product?

Takaful is usually referred to as sharia insurance; this is due to the real similarity between
insurance contracts of kafalah (ensure) and insurance.

In any case, takaful is established on the helpful standard and on the guideline of partition
between the assets and tasks of investors, in this way passing the responsibility for
Takaful (Insurance) store and activities to the policyholders. Muslim legal scholars reason
that protection in Islam ought to be founded on standards of commonality and co-task,
incorporating the components of shared duty, joint reimbursement, normal intrigue and
solidarity.

In takaful, the insured are joint investors with the insurance provider (the takaful operator),
who acts as a mudarib, a manager or a business agent for the insured. The insured share
the profits of the investment fund, as well as their losses. A positive return on the policies
is not legally guaranteed, since any guarantee of fixed income would be similar to
receiving interest and offending the prohibition against riba.

For some time, it was considered that conventional insurance is not incompatible with the
Shari'ah that prohibits excessive uncertainty in transactions and investment in assets with
interest; Both are factors inherent in the conventional insurance business.

Be that as it may, takaful conforms to the Shari'ah (which diagrams the standards of
remuneration and shared duties among the network) and has been endorsed by Muslim
researchers. There is currently broad, health and family (life) takaful plans accessible for
the Muslim people group.
 2. What are the basic difference between the product from Islamic and
conventional perspectives?

As a matter of first importance, Islamic protection, in conformance with the Islamic

Shari'ah, is a type of social solidarity (takaful), in view of the standards of trusteeship and
co-operation.

In conventional insurance, the insured person replaces certainty with uncertainty. In

exchange for a predetermined payment, the premium, he / she transfers to the insurer
the possible economic losses derived from the stipulated risks. In Islamic insurance,
participants share all risks to each other and there is no transfer of risk involved.

Conventional insurance companies are motivated by the desire to make a profit, while
Islamic insurance companies are non-profit, shareholders are not entitled to share the
profits of the company, although they are entitled to charge fees for their services and
share the returns on investments of the funds managed by them.

The insured of a conventional insurance company do not have the right to vote in the
elections of the directors of the company or to see the annual accounts of the company,
while in the Islamic companies; These facilities are available to all participants who pay a
certain stipulated amount of premiums (contributions).

In a conventional life insurance policy, the agent's payments are paid with the premiums
paid by the insured, while in the Islamic model, the agents work for the company and,
therefore, are paid by the company.
 3. What the contract used in the product and explain the concept of the
product?

Type of contract that used in Takaful

Takaful contracts always have significant insurance risk and takaful fund as an
accumulation of contribution will allocated to pay claims only. This will form the contract
of insurance assets and liabilities of the company.

Tabarru Contract

The most famous version of takaful agreement is tabarru. Tabarru approach a donation,
charity or present which cannot be taken again. In Takaful, a percentage of the player’s
contribution can be considered as tabarru and for that reason cannot be taken back, as
it's miles the precept of the joint assure to assist other participants. as soon as a
participant be part of to the Takaful policy, a part of his contribution is allocated via the
tabarru principle to help all individuals from unexpected however described risks. Tabarru
contract does no longer have embedded by-product or discretionary participation feature.

Mudarabah Contract

Mudarabah means benefit sharing, a special type of association where policyholders

grant money to takaful operators to manage the risk on behalf of all policyholders. If there
was a surplus of subscription, the policyholders and the sole operator could have a share
in the profits. There are some opinions that do not agree with the takaful operator taking
the surplus of takaful contributions subscription. In the real situation, for example, large
companies have the responsibility to manage a member of a large group of health
insurance or personal accident contract. They want the takaful operator to handle the risk
on their behalf. The Mudarabah model is an alternative for the large company and the
main operator has a mudarabah contract.

Kafalah Contract

Kafalah generally means collateral. This is a contractual guarantee given by the guarantor
to assume the responsibility and obligations of the party guaranteed on any claim. This
principle is also applied in special guarantees that takaful operators act as guarantor and
take responsibility of policyholders when policyholders fail to discharge their obligations,
then takaful operators take responsibility for the obligations of policyholders. Kafalah is
more specifically for general insurance products such as third party obligations or
professional compensation.

Hawalah Contract

Hawalah means changing a thing from one place to another. Technically, as a term of
law, hawalah means the change or assignment of debt from the original debtor's liability
to the responsibility of another person. Hawalah operates to free the original debtor from
the debt. The Hawalah model was adequate to cover life annuity contracts in which the
policy holder (employer) has the obligation to pay the annuity to the participant
(employee). The policy holder (employer) was transferred to the takaful operator and the
contribution was paid. The operator receives the obligation to pay the annuity to the
participant (employee).

The concept of Takaful

The principles of guarantee, derived from the word "Kafala", are the basis of Takaful.
Takaful means that the majority guarantees the loss of minorities, namely the majority
share the poor minority burden through raising funds. This form of cooperative insurance
already exists in several countries, permitted by Sharia.

Furthermore, this principle is further enhanced to include the concept of "Tabarru" "which
means donation, which explicitly states that the money collected will be used for the
purpose of helping" fellow participants who need assistance in accordance with the
agreed conditions so far. By considering these basic Takaful concepts, practitioners have
taken a step further to expand the model into a more commercially feasible Takaful model.

The Islamic Insurance Model follows the concept of cooperative insurance, where a group
of customers contribute to the collection of funds. Every time one member makes a
legitimate claim, they withdraw money from the pool. Meanwhile, funds go in the pool are
invested in an Islamic manner and without exposing the policy holders to any extra
significant risk. Unclaimed profit is then distributed among the policy holders.
 4. Why conventional product is not Islamic?

The current approach to risk mitigation is to buy an insurance policy in which the insured
will transfer the risk to the insurance company which in return for the premium accepts
the responsibility of compensating the insured if the insured risk is realized. This risk
mitigation method has been declared unclean by most Muslim scholars because it
contractually contains illicit elements such as usury, gharar and maysir.

Riba (Interest or Usury)

Usury is proven in conventional life policies in two situations; first, the amount of money
received by the insured, whether in the event of an insured event or when the policy is
due, is always more than the total premium actually paid. Usury clearly affects both parties
in the contract because there is no similarity between the installments paid by the insured
party and the compensation paid by the insurance company. What is actually paid by the
company may be more, less or equal to what is paid by the insured and equality is very
unlikely. In addition, because payments are deferred, compensation greater than the
installments paid by the insured is a usury surplus (usury al-fadl) and usury credit (riba
al-nasiah).

Gharar (Unknown or Uncertain Factors).

The conventional insurance contract is basically an exchange contract, that is, purchase
and sale, by which the policy (indemnity) is sold as goods, with the premium as the price
or the consideration. The consideration must be true for an exchange contract.
Uncertainty (gharar) in insurance contracts refers to the "delivery capacity" of the matter.
That is, there is uncertainty as to:

• Will the insured receive the compensation promised by the insurance company?

• How much will the insured receive?

• When will the compensation be paid?

Therefore, conventional insurance implies an element of uncertainty in the subject of the

insurance sales contract, which makes it void according to Islamic law.
Maysir (gambling).

Gambling refers to a contract where the payment of one party to the contract is certain
while the liability / payment of the other party to the contract is unlimited.

The third major issue that renders conventional insurance impermissible is the thing of
Maysir or gambling. coverage is truly now not a form of gambling. however, the structures
of traditional coverage rules lead them to akin to playing. that is due to the fact; the insured
may additionally by no means have any claims and therefore never get hold of any
"attention" for payments made. this is corresponding to playing wherein any of the two
parties worried may also win a amount of cash from the opposite, however one in all them
is destined for total loss relying on the happening of an unsure destiny occasion. although,
insurance does now not entail triumphing a amount of money, it clearly includes
indemnifying a loss that's unsure. thus, it has a very sturdy semblance to gambling. The
insured may also have simplest paid a single top rate and has now turn out to be worthy
of big amounts to compensate him for the loss that has happened. then again, he may
additionally pay charges everlastingly without having the “possibility” to make a claim. for
this reason, simply as how in gambling the benefits or liabilities of both birthday party are
uncertain, so is the case in conventional coverage.