Understanding Takaful: Islamic Insurance Fundamentals

Muhammad Zubair Mughal Chief Executive Officer AlHuda : Centre of Islamic Banking & Economics • Takaful • (Islamic Insurance ) • An Ideal Alternative to Conventional Insurance. • 11th Feb, 16- Intl Takaful & Conventional Mutual Insurance Consortium - Dubai

Outline of Presentation • Introduction to Takaful ( Islamic Insurance ) • Difference b/w Conventional Insurance & Takaful • Takaful Through Time • General & Faimly Takaful Types • Takaful Models Worldwide. • Takaful - Target Market • Challenges to Takaful • Prospects of Takaful in Turkey.

Meaning of Takaful • “Takaful” is the Sharia Compliant brand name for the Islamic alternative to conventional insurance. Its based on the principle of Ta’awan or mutual assistance. • Takaful comes from the Arabic root-word ‘kafala’ — guarantee. • Operationally, takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of loss.

What wrong with Insurance practice ? The contract between the insurer & insured is technically wrong from the sharia perspective because of • Interest (Riba) • Gharar (Uncertainty)) • Gambling (Qamar & Maisir) • Risk Transfer Issue

Basic Elements of Takaful • Mutuality and cooperation. • Takaful contract pertains to Tabarru as against Aqd – e-mu’awadat in case of conventional insurance. • Payments made with the intention of Tabarru (contribution) • Eliminates the elements of Gharrar, Maisir and Riba. • Wakalah/Modarabah basis of operations. • Joint Guarantee / Indemnity amongst participants – shared responsibility. • Constitution of separate “Participants’ Takaful Fund”. • Constitution of “Shariah Supervisory Board.” • Investments as per Shariah.

Comparing Takaful to Conventional Insurance

Takaful through Time • Origins in the First Constitution of Madina. • Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional insurance. • The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up in Bahrain.

Takaful through Time… (Cont’d.) • Poor Insurance penetration in the Muslim countries (<1% of GDP). • Average growth rate higher than conventional insurance companies (around 25%). • Non–Muslims increasingly opting for Takaful products for commercial benefits.

Takaful Operators The number of Takaful operators worldwide is now estimated at: • 280+ Takaful companies • 13 Re-takaful companies • In 56 Countries.

General Takaful Types • General Takaful – offers all kinds of non-life risk coverage. It is normally divided into following classes: • Property Takaful • Marine Takaful • Motor Takaful • Miscellaneous Takaful

Types of Family Takaful • Term Life Takaful • Whole Life Takaful • Endowment Takaful • Universal Takaful • Marriage Plan • Education Plan

TAKAFUL - TARGET MARKET • People who do not insure due to religious reasons. • People who insure and are insensitive to religious reasons. • People who currently do not insure at all.

Different Models of Takaful • Wakalah Based on Waqf Model : The participant's donate the fund and operator charge an agency fee. • Pure Mudarabah Model : The participants and operator enter into modarabah Contract. • Wakalah Model : An Agency Agreement is made between participants and Operators on the basis of Wakalah ( Agency agreements)

Takaful

Participants Contribution Participants Pool of Contributions

Participants Contribution Investment in Shariah Complaint Avenues Participants Pool of Contributions Profit from Investment (Part of the profit goes to the Company for acting as mudarib)

Participants Contribution Investment in Shariah Complaint Securities Participants Profit from Investment (Part of the profit goes to the Company for acting as mudarib) Pool of Contributions Wakala Fee Claims Re-Takaful Expense etc.

Participants Contribution Investment in Shariah Complaint Securities Participants Profit from Investment (Part of the profit goes to the Company for acting as mudarib) Pool of Contributions Wakala fee, Claims, Re-Takaful Expenses SURPLUS

Participants Contribution Investment in Shariah Complaint Securities Participants Profit from Investment (Part of the profit goes to the Company for acting as mudarib) Pool of Contributions Wakala fee, Claims, Re-Takaful Expenses SURPLUS Contingency Reserve Charity Distribute Among Participants

Participants Contribution Investment in Shariah Complaint Securities Participants Profit from Investment (Part of the profit goes to the Company for acting as mudarib) Pool of Contributions Wakala fee, Claims, Re-Takaful Expenses SURPLUS Contingency Reserve Distribute Among Participants Charity

Participants Contribution Investment in Shariah Complaint Securities Participants Pool of Contributions Profit from Investment (Part of the profit goes to the Company for acting as mudarib) - + + Claims Re-Takaful Expense etc. Wakala Fee = SURPLUS Charity Distribute Among Participants Contingency Reserve

Share Holder Wakala-Waqf Model S H A R E H O L D E R S’ F U N D (S.H.F.) Wakalah Fee Investment Income Admin Expenses, Employee’s etc. Management Expense of the Company Profit/Loss Takaful Operator Investment by the Company WAQF Claims & Reserves Surplus (Balance) Operational Cost of Takaful / ReTakaful Investment Income Participant P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.)

Challenges to Takaful • Skepticism. • Lack of uniformity in Models & Shariah decisions. • Regulatory issues. • Capacity constraints. • Limited Investment avenues. • H.R. issues.

About AlHuda CIBE

Thank You for Listening with Patience Muhammad Zubair Mughal Chief Executive Officer AlHuda Centre of Islamic Banking and Economics Zubair.mughal@alhudacibe.com www.alhudacibe.com

Understanding Takaful: Islamic Insurance Fundamentals