A CRITICAL APPRAISAL OF THE TAKĀFUL BENEFITS PROTECTION SYSTEM (TBPS) IN MALAYSIA

1. A CRITICAL APPRAISAL OF THE TAKĀFUL BENEFITS PROTECTION SYSTEM (TBPS) IN MALAYSIA Dr. Said Adekunle Mikail Assoc. Prof Dr. Said Bouheroua

2. Presentation Outline • Introduction • Overview of Deposit Insurance System in Malaysia • Takaful Benefits Protection Scheme in Malaysia • Critical Review of the Existing Model of Takaful Benefits Protection System • The Contractual Relationship between the Takāful Industry and MDIC • Operation of the Takaful Benefit Protection System (TBPS) in Malaysia • Sharīʿah Issues Related to the Existing TBPS Practice in Malaysia • Findings and Analysis • Shariah issues • Operational issues • Conclusion and Recommendations

3. Introduction • Takaful company is required by provision of Section 32 (2) of Malaysian Deposit Insurance Corporation Act 720, 2011 to be a member of Takaful and Insurance Benefits Protection System (TIPS). • TIPS is defined as “an explicit, limited protection system which covers takaful and insurance benefits” • Takaful company should make its contribution from shareholders’ fund for TIPS. • Taking the contribution for TIPS from the shareholders’ fund has stirred Shariah issues. • The Malaysia Deposit Insurance Corporation (MDIC) applies the concept of ujrah wa kafalah (fee and guarantee) in its relationship with takaful members. • This research is designed to critically examine the existing model of ujrah wa kafālah and highlight Sharīʿah and operation issues involved.

4. Overview of Deposit Insurance System in Malaysia • Malaysia Deposit Insurance Corporation (MDIC) is a government agency established in 2005 under Akta Perbadanan Insurans Deposit Malaysia (PIDM Act) to administer the national deposit insurance system aimed at protecting depositors. • On 31 December 2010, PIDM’s role was expanded to include administering of Takāful and Insurance Benefits Protection Scheme (TIPS) to provide protection to owners of takāful certificates and insurance policies from the loss of their eligible takāful or insurance benefits in the unlikely event of an insurer member failure.

5. Cont. • 31st Dec. 2010 marked the birth of TIPS in Malaysia. • It covers all locally incorporated takāful and insurance companies public excluding retakāful and reinsurance companies, captive insurers; offshore insurance companies; brokers, adjusters, agents as well international takāful operators as the local takāful /insurance companies deals with the Malaysian public.

6. The Takaful Benefits Protection System in Malaysia • The takāful business assets in 2016 was MYR26.792 billion with a cumulative annual growth rate of 15%. • Family takāful assets was MYR23,200 billion and it was accounted for 14.61% of penetration rate while general takāful asset was 3,593 billion. • Since 2013 Takāful sector has been contributing 2.2% to Gross National Income. • The percentage of total assets of the takāful and insurance industry in 2016 was 12.1%.

7. Cont. • The idea behind the Takaful Benefits Protection System (TBPS) is to protect takāful participants against loss of their claims when takāful companies failed. • Protection and assurance of payment of takāful benefits in such event strengthen public confidence and boost consumer demand for takāful products. • The guiding principles set by MDIC for TBPS are as follows: • • To provide protection for at least 95% of all takāful certificate owners; • • To minimise competitive distortion by setting similar standard for both conventional insurance companies and takāful companies • • To ensure Sharīʿah compliance in respect of all takāful dealings; • • To meet the unique needs of industry players.

8. Segregation of Levies from Takaful and Insurance Companies • The levies collected from takāful and insurance are maintained separately. • In case of the failure of a takaful member, MDIC will automatically be subrogated to the rights of the claimants to the extent of claims paid by MDIC. • For general takāful and insurance, protection is provided for Malaysian policies that insure risk related to death, critical illness, permanent disablement, medical and property damage.

9. CRITICAL REVIEW OF THE EXISTING PRACTICE OF TAKĀFUL BENEFIT PROTECTION SCHEME (TBPS) • The Contractual Relationship between the Takāful Industry and MDIC • MDIC in consultation with SAC-BNM applies the concept of ujrah wa kafālah (fee and guarantee). • SAC-BNM in its 80th meeting, dated 7th January 2009, approved kafālah bi ujrah as the Sharīʿah contract applicable to the operation of Islamic deposit insurance. • However, in the context of the takāful industry, SAC-BNM in 2010 approved ujrah wa kafālah (fee and guarantee) as the Sharīʿah contracts applicable to TBPS. • Each takaful member pays contribution to MDIC. The contribution is called ujrah

10. Cont. • The ujrah covers services MDIC provide for takāful member under TBPS. MDIC provide services such as follows: • i) Promotion of public confidence in the takāful industry; and • ii) Continuous assessment and monitoring of the risk profiles of takāful operators coupled with intervention measures for a distressed takāful operator when necessary.

11. Cont. • MDIC provides kafālah through the protection of takaful benefits of takāful participants in the event of the failure of a takāful operator. • This undertaking is in accordance with the agreed terms and conditions between the takāful operator and the participants. However, it is subject to the scopes of coverage and limits as stipulated in Section 69 of the PIDM Act, MDIC (Protected Benefits) Regulation 2011 and MDIC (Protected Benefits Limit) Order 2011.

12. Contractual Relationship between the Takāful Industry and MDIC • MDIC guidelines stated that contractual relationship between takāful operators and MDIC is ʾujrah wa kafālah (fee and guarantee) which is in essence similar to kafālah bī ʾujrah (guarantee with fee).This has been resolved to after rigorous research on the relevant Sharīʿah arrangement that suits the scheme (Note-PIDM, 2012, p.1). • Premium is a fee (ʾujrah)paid by takāful operators as insurer members to PIDM against the services and guarantee in case of bankruptcy or failure of the members to provide underlying benefit to their participants (BNM-SAC’s Resolution, 2010, p. 175). • It was first pronounced against credit guarantee facility with fee as in BNM-SAC Resolution No 101.

13. Diagram 1: Malaysia’s Takaful Benefit Protection Mechanism

14. Operation of the Takaful Benefit Protection System (TBPS) in Malaysia • The first premium and annual premium to be paid to MDIC should be taken from shareholders’ fund. • The levies belong to MDIC and be managed and maintained in both general takaful protection funds and family solidarity takaful protection funds. • Both are collectively referred to as takaful protection funds (TPFs). • The use of TPFs involves operational requirements and future obligations arising from intervention or resolution activities. • Direct expenses, costs and losses will be taken from the relevant funds. However, indirect or common expenses, costs or losses are allocated to the relevant funds and made proportional to the amount of levies collected for the respective funds in the beginning of the preceding assessment year. • The surpluses generated from the funds will be invested in Sharīʿah-compliant investment securities (Note-PIDM, 2012, p. 2).

15. Sharīʿah Issues Related to the Existing TBPS in Malaysia • This includes juristic long-term debate on kafālah bī al-ʾujrah (guarantee with fee) arrangement for the credit guarantee facility. • By extension, takāful and insurance benefits protection (TIPS) applies the concept of ujrah wa kafālah. • Critical analysis of the nature of takāful operations which are different in many aspects from that of depository institutions and other financial institutions such as banks and conventional insurance. • It highlights issue of a combination of diametric contracts; wakālah and kafālah contracts simultaneously.

16. Juristic Debate on Kafālah bī al-ʾujrah (Guarantee with Fee) Arrangement. • The major issue in kafālah bī al-ʾujrah is whether the premium paid to MDIC in exchange for protection and allied service is allowed from Sharīʿah point of view or not? • The debate of on the permissibility and impermissibility of kafālah bī al-ʾujrah is a breed of juristic debate on placing juʿl (commission) on guarantee (kafālah /ḍamān) (al-Ḍarīr, n.d., p.15).

17. Cont. • Thus, the classic and contemporary scholars of two views on kafālah bī al-ʾujrah: • The First View: Impermissibility of kafālah bī al-ʾujrah (Guarantee with Fee) • The great majority of classic and contemporary scholars are not in favour of kafālah bī al-ʾujrah (guarantee with fee). • The contemporary scholars include Sharīʿah committees and international Sharīʿah standard-setting bodies such OIC-Fiqh Academy, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). • Due to the following: element of gharar, maysir, riba.

18. Cont. • Permissibility of kafālah bī al-ʾujrah (Guarantee with Fee). • Some contemporary scholars view the permissibility on basis of maṣlaḥah (public interest) and needs in contemporary practice. They also consider other a number of Sharīʿah principles such as charging fee for one’s reputation (ʾujrah ʿalā al-jāh); charging fee for treatment by way of ruqyah (supplication for cure). • The proponents of this view are ʿAlī al-Khafīf, ʿAbdul Raḥmān ʿĪsā, ʿAbdul Ḥalīm Maḥmūd, Nazīh Ḥammād, BNM-SAC in its Resolution No 101 on credit guarantee facility with fee and Resolution No 109 on Islamic Deposit Insurance (BNM-SAC, 2010, p. 165-166, and 175).

19. Acceleration of Enforcement of Rule of Intolerance of Uncertainties and Equal Exchanges in TBPS. • It is permissible to use of kafālah bī al-ʾujrah (guarantee with fee). • As it is permissible convert ʿaqd tabarruʿ (charitable contract) into ʿaqd muʿāwaḍah (exchange contract). • What would be the consequence? • Changes in rulings with the changes in facts.

20. Cont. • اَلتَّابِعُ تَابِعٌ • It means: "What is auxiliary [to something in fact] is auxiliary [to it in ruling]"(ISRA, 2013, p.198). • The nature of exchange contracts necessitates equal exchange of the counter value to avoid ribā. Whereas, the nature of guarantee begets uncertainty in terms of whether the guaranteed will be able to settle the obligation or not. • In the case of takāful, the occurrence of failure of takāful operator is uncertain. Thus, getting fee in advance under this probability and uncertainty renders unequal exchanges in the contract of kafālah bī al-ʾujrah (guarantee with fee).

21. Cont. • Tolerance of uncertainty and unequal exchanges in exchange contracts (ʿuqūd muʿāwaḍāt ) are disallowed because it leads to ribā. • إِذَا زَالَ اْلماَنِعُ عَادَ اْلممْنُوعُ • It means when the factor inhibiting strict application of intolerance of uncertainties and unequal exchanges is removed which is being ʿaqd tabarruʿ (charitable contract), the original Sharīʿah rule is restored to full effect which is intolerance of uncertainties and unequal exchanges (ISRA, 2013, p. 123).

22. Cont. • This also because: • مَا جَاز لِعُذْرٍ بَطَلَ بِزَوَالِهِ • “Whatever is allowed because of Sharīʿah exemption becomes invalid when its cause disappears” (ISRA, 2013, p.123).

23. Differences between the nature of takāful operation and depository institutions • The primitive operation of the bank is money lending. • It takes money in as deposits and from other sources and lends money out (Marcy Gordon, 2009, p. 1-2). • Banks whether Islamic or conventional are being categorized under depository institutions because a huge portion of their products come under this segment; deposit products. • The products of Islamic banks include among other Islamic deposit products, wealth management products, commercial and consumer products (Asyraf and Irwani, 2011, p.95).

24. Cont. • Unlike banking institutions, conventional insurance is a risk management tool, in which insured transfers underlying risks to insurer. • The conventional insurance is a profit-moved institution through the exchange of risks via commercial transactions between insured and insurer. • However, takāful industry operates as an agent of takāful participants who mutually insure one another through the pool of tabarruʿ risk funds they jointly contribute and delegate takāful operator to manage the funds and provide the protected benefits whenever the claims arise.

25. Cont. • Islamic and other financial institutions as mentioned earlier collect short-term deposits from their clients and use the deposits for various activities in the form of credit or financing. At the same time, the banks make a certain average quota of deposit withdrawals with a given time. The short-term liquidity demand is invested in interbank market. This transformation exposes the depositors to the risk of inability to withdraw their deposits at short notice. The limit access or inability to withdraw the money may be vividly emerged, especially, if many depositors show up out of the blue demanding for their deposits back which causes the so called “bank run”.

26. Cont. • MDIC; a deposit insurance system comes in to prevent a run on an illiquid financial institution to cut off the spread of the crisis to other network partners (Bernet and Walter, 2009, p.8-9). • Contrarily, takāful operator is not insurer insuring the participants rather the takāful operator functions as administrators and managers of takāful fund (ISRA, 2011, p. 507). The takāful contribution is made up of tabarruʿ placed in tabarruʿ risk fund to indemnify each other in case of calamity. The compensation is paid from the tabarruʿ risk fund. It does not belong to takāful operator rather it is owned in common by the participants (Mohd Fadzli et al, 2011, p.55).

27. Combination of Contract of Guarantee (kafālah ) and Agency (wakālah) • Regulatory requirements to take the first and annual premium from shareholders’ fund while the beneficiary of the protected benefits remains takāful participants. • There is Sharīʿah issue because takāful operators only act with respect to protected benefit as agent on behalf of takāful participants to manage tabarruʿ risk funds and carry out the claims in accordance with terms and conditions specified in the policy.

28. Cont. • Taking first and annual premium from shareholders’ fund is amounted to holding wakīl (agent), in this context, takāful operator responsible for the protected benefits. • AAOIFI Sharīʿah Standard No 23 says: • “It is impermissible to combine agency and personal guarantee in one contract at the same time…because it conflicts with the nature these contracts”.

29. Effect of Insolvency in Takāful Set-Up • Section 92 of IFSA 2013 requests takāfuloperator to maintain and manage takāful funds, as follows: • pay all contributions into the takāful funds; • maintain assets of a value equivalent or higher that the liabilities of the takāful fund; • apply the takāful fund assets only to meet the liabilities and expenses incurred (e.g. claims)

30. Cont. • Section 95 of IFSA 2013 also obliges takāful operator in the event of the value of asset in takāful fund is less than its liabilities; or the fund is in deficit and incapable to meet all claims to provide qard or other forms of financial support from its shareholders’ fund subject to conditions by BNM. • If no financial assistance provided for takāfulfundit will eventually implicate shareholders’ fund. • Where takāful operator does in actual fact become insolvent and is petitioned for winding up, takāful fund remain intact.

31. Cont. • takāful participants have a right to claim the following subject to BNM’s ascertainment: • A refund of a portion of the general takāful contribution that is commensurate with the remaining period of the certificate; or • The value of family takāful certificate; or • The value of investments or savings held separately in respect to takāful certificate; or • Any other refund or amount

32. Cont. • Alternatively for takāfuloperator operating family takāful business which is petitioned for winding-up, the appointed liquidator has the right to transfer such business to be managed by another licensed takāfuloperator without having to affect a new takāfulcertificate (Section 216[1]). Such a transfer shall include all assets and liabilities under those family takāfulcertificates.

33. FINDINGS AND ANALYSIS • In Malaysian context, membership of MDIC member is compulsory and separation is partly maintained. • In section 41 of PIDM Act 2011, deposits have been categorized into two Islamic and conventional deposits.

34. Cont. • This study finds that the main issue taken against the existing model of kafālah bī al-ʾujrah is Sharīʿah issues. This is because the main factor distinguishing takāful from conventional insurance is type of contract adopted. • As the contractual relationship in conventional insurance is insurer and insured. One sells and one buys; that is the contract of sale and purchase which bilateral contract.

35. Cont. • In the takāful industry, the relationship is based on charitable contract (ʿaqd tabarruʿ). • It is a unilateral contract, which in essence reflects concept of mutual cooperation and guarantee. • This distinguished factor should be maintained and keep abreast at all times.

36. Cont. • It also finds during that other researchers have also called for the review of the existing model of kafālah bī al-ʾujrah (guarantee with fee). • As it plays in the same way that conventional insurance operates. • Hence, the same factors for the prohibition of the conventional can be emerged. • Such as means to circumvent ribā, gharar (uncertainty), maysir (gambling). This is because it is purely sale and purchase which is a kind of exchange contracts.

37. Cont. • Proposal of the principles of a two-tier European deposit reinsurance system, presented by Daniel (2013) indicates that there is no single way of doing deposit insurance, there is still room for improvement. • It is also clear that the nature of takāful operation is far different from banking and insurance companies because tabarruʿ risk fund belong to participants, the insurer and insured in takāful are the participants. It would be unfair to treat takāful industry the same with conventional insurance

38. Cont. • The subject matter to be protected is also different. In banks, deposits taken from customers remain as liability on the side of the banks. Also, in conventional insurance, having taken premiums against insurance makes it liability upon the insurer. On the contrary, takāful industry is not indebted and liable to anyone, because the tabarruʿ does not belong to it. It does not take the contribution in return for claims. Rather the industry is just a tabarruʿ fund manager and administrator paid for the services.

39. CONCLUSION AND RECOMMENDATIONS • The concept of the Takaful Benefits Protection System (TBPS) is novel and noble but needs to be tailored to the ideal contract that is consistent with the nature of takāful operation and in line with the rules and objectives of the Sharīʿah. • It is recommended that to have a sound and robust deposit insurance and takaful benefit protection system depends largely on concerted efforts from all stakeholders to meet the ever-increasing demand for large-scale Sharīʿah-compliant financing/takāfulin an international arena/cross border transactions.

40. Cont. • There is need to provide separate coverage for takāful different from that of banking institution and conventional insurance. This is in turn reflects an equal treatment and level playing field relevant to the nature of takāful operations. • Given the legal and regulatory mandate, it would be better to consider ideal Sharīʿah principle to the nature of takāful operation which is tabarruʿ contract.

41. Cont. • Kafālah bī al-ʾujrah (guarantee with fee) attracts thorny Sharīʿah and operational issues. For instance, put aside the juristic debate, the application of this principle will bring out the same issues for which contemporary scholars unanimously disallowed conventional insurance such as ribā (interest), gharar (uncertainty) and maysir (gambling). • Since the concept of ta’awun (mutual cooperation) and solidarity are ideal concept for takāful operation; it should be reformed in a better way that would accomplish the mission of TBPS.

42. شكراً على حسن استماعكم Thank you for your attention