Topic 13 Voluntary Islamic Financial Institutions

Topic 13Voluntary Islamic Financial Institutions

1. The Institutions of Takaful 1. History of Takaful • Insurance practices were known before time of the Holy Prophet Muhammad PBUH. • Have ever since gradually developed until the beginning of the 19th century, when a Hanafi lawyer, Ibn Abidin (1784-1836) became the first Islamic scholar to come up with the meaning, concept and legal basis for an insurance contract.

Takaful • The growth of takaful could be classified into the following six stages:-

The doctrine of al-aqilah as a tribal custom • It was a common practice among the ancient Arab tribes that when a member of a tribe was killed by a member of another tribe, the heir of the victim would be paid an amount of blood money as compensation by the close relatives of the killer. • The central idea of aqilah was that the ancient Arabs tribe had to be ready to make financial contributions on behalf of the killer to compensate the victim’s heir.

The doctrine of al-aqilah as a tribal custom • Such readiness to make monetary contribution is similar to the premium paid in insurance practices. • While, the compensation paid under al-aqilah could be similar to the indemnity in today’s insurance practices.

Practices of Holy Prophet PBUH • Prophet PBUH himself accepted the concept of aqilah in the following verdict given a dispute between two women frm the tribe of Huzail:- Narrated by Abu Hurairah r.a., who said that: “once two women from the tribe of Huzail clashed when one of them hit the other with a stone, which killed her and also the foetus in the victim’s womb. The heirs of the victim brought an action to the court of the Holy Prophet PBUH, who gave a verdict that the compensation for the infanticide is freeing of a male or female slave while the compensation for killing the woman is the blood money (diyat), which to be paid by the aqilah of the accused”

Practices of Holy Prophet PBUH • Relevant provisions contained in the first constitution of Madinah in 662 CE – prepared by the Holy Prophet PBUH soon after his migration to Madinah. • It included and introduced a kind of social insurance which appeared in the following forms, namely:- • Through the practice of al-diyah • Article 3 of the constitution of Madinah provided that: “The immigrants among Quraish shall be responsible for their word and shall pay their blood money in mutual collaboration”. • Similarly, BanuAwf, BanuHarithand other tribes living in Madinah at that time, were also obliges to pay blood money in mutual collaboration relying on the doctrine of al-aqilah as regulated by the constitution.

Practices of Holy Prophet PBUH • Through the payment of fidyah(ransom) • The Holy Prophet PBUH also enacted a provision in the first constitution that was concerned with rescuing the lives of prisoners. • Should any person be made a prisoner of war by the enemy, the al-aqilah of the prisoner shall contribute ransom to be paid to the enemy in order to enable the captive to be freed.

Practices of Holy Prophet PBUH • By way of other forms of social insurance • Articles 4-20a of the constitution of Madinah provided that:- • The society shall be responsible to establish a joint venture with a mutual understanding towards providing necessary aid and help for the needy, ill and poor

Practices of companions • A further development in the practice of insurance can also be seen during the period of the second Caliph, Sayyidina Umar r.a. • The government encouraged people to practice al-aqilah nationwide. • Sayyidina Umar r.a. commanded that a Diwan of Mujahidin be established in various districts. • Those whose names were recorded and contained in the Diwan had to contribute blood money for any act of manslaughter committed by someone from their own tribe.

Developments during the 14th -17th Centuries • During this period, a Sufi Order, the Kazeruniyya, was active especially in the port cities in Malabar (off the coast of India) and China. • This order served as a kind of marine travel insurance company . • It was associated with the tomb of Abu Ishaq Ibrahim IbnShahriyah (963-1035 CE) whose blessings (barakah) were considered as protection against the perils of sea voyages. • Ceased due to decline of the spirit of barakah of Abu Ishaq. • Such decline also attributed to the fact that there were several insurance companies from Europe which had reached the shores of the Indian Ocean and offered more attractive alternative protection against such risks.

Developments during the 19th Century • During the 19th Century, Ibn Abidin (1784-1836 CE), a Hanafi lawyer discussed the idea of insurance and its legal basis. • He was the first person to deal with insurance as a legal institution, and not as customary practice. • His idea prompted other Muslims to accept the idea of involvement in the insurance business. • Thereafter, Muslim began to practice insurance not only by buying it from foreign companies, but also establishing insurance companies of their own and becoming insurers themselves.

Developments during the 20th Century • In the 20th Century, the well-known Islamic jurist Muhammad Abduh issued fatwas between 1900-1901, legalising insurance practices. • He views the relationship between the insures and the insurance group as a mudharabah contract. • The other fatwa legitimise a transaction similar to endowment life insurance. • There has been gradual development of Shari’ah based insurance practices in the 20th Century, in both Muslim and non-Muslim countries. • Though, there still exist some areas which need to be developed so as to better meet the needs and necessities of society today.

Developments during the 20th Century • Although, there are certain aspects of conventional insurance practices that cannot be practiced by Muslim because they involved unlawful elements. • Thus, we have to provide an alternative for Muslim Ummah as we are also requires protection in the event of unexpected risk and peril.

Definition • Takaful, in Arabic, word ‘Kafalah means joint guarantee. • Section 2 Malaysian Takaful Act 1984 – Takaful as a ‘scheme based on brotherhood, solidarity and mutual assistant which provides for mutual financial aid and assistance to the participants in case of need whereby the particants mutually agree to contribute for that purpose”.

cont • Contract based on mudharabah (profit loss sharing) • Concept of tabarru’ (sincere contribution and gift) and taa’wun(helping each other). • Should any member or suffer a disaster, he would receive a certain sum of money or financial benefit from a fund to help him meet the loss or damage. • It can be visualised as a pact among a group of members or participants who agree to jointly guarantee each among themselves against loss or unexpected risk.

There are over 60 companies offering takaful services (including windows-5%) in 24 countries around the world. • Takaful products are available to meet the needs of all sectors of the economy, both at individual and corporate levels

Takaful must possess certain fundamental characteristics before it can be held valid. It can be further classified into three main categories:- • Sincerity • Absolute shari’ah principles • Moral attributes

Types of Takaful product • Family Takaful • General Takaful - Fire takaful -Motor Takaful -Accident Takaful - -Marine Takaful -cargo -Engineering Takaful such as machinery breakdown

Types of Takaful accounts • Participants Account (PA) • Participant Special Account (PSA)

The socio-economic Benefits of Takaful 1) Insurance coverage/protection -mutual financial aid from payment of Takaful benefits to policy holder or heir. -Family takaful -general takaful e.g – Fire takaful,Motor Takaful, accident Takaful,Marine Takaful and engineering Takaful.

Cont… 2) Mobilisatation of saving -a Takaful company plays the role as savings institution and a custadion of money deposited in its custody to serve the future interest of the Muslim community (Ummah) 3) Islamically approved (Halal) investment Opportunity. - A Takaful company will mobilize the savings of the contributors in Islamic approved counters (stocks and shares)

4)Participate in the economy in a collective way (jama’ah) -mutual cooperation -brotherhood. 5)Opportunity to perform good deeds and do charitable works. -charity and welfare

2. The Institution of Waqf • A waqf, also spelled wakf, وقف‎, pronounced [ˈwɑqf]; plural Arabic: أوقاف‎, awqāf • the context of 'sadaqah', an inalienable religious endowment in Islamic law, • typically donating a building or plot of land or even cash for Muslim religious or charitable purposes.

The donated assets are held by a charitable trust. • The grant is known as mushrut-ul-khidmat, while a person making such dedication is known as wakif.

History of Waqf • Waqf has existed since the time of Rasullullah S.A.W, when Saidina Umar r.a gained a land in Khaibar. Saidina meet the Prophet Muhammad S.A.W to know what he should do with the obtained land. Rasullullah S.A.W said, Saidina Umar can donate the proceeds and not sell or give it to others (Safiah Mohamed et. Al 2006).

Cont… • Waqf is also the property of the Muslims which is waqf for the benefit of the Muslims generally and welfare of the trustee to gain merit till the netherworld. • According to Ahmad Zaki Abd Latif et. al (2006), the Al-Quran has clearly mentioned that waqf institution is for the humans to do good deeds for the society. • Allah decreed : “O you who have believed, bow and prostrate and worship your Lord and do good that you may succeed.”(Al-Haj17:77)

“Never will you attain the good [reward] until you spend [in the way of Allah ]from that which you love. And whatever you spend - indeed, Allah is Knowing of it.” (Al-Imran 4:92) • Waqf is much needed in Islam although it is not compulsory.

Cont… • Minister at Prime Minister’s Department, Datuk Jamil Khir Baharom explained, unused waqf land involves about 9,937 hectares of land. Unused waqf landwith an estimated value of RM1.9 billion must be developed efficiently and systematically so it will benefit the Muslims (waqf land,2009)

The Beneficiaries of the waqf • It can be persons and public utilities. The founder can specify which persons are eligible for benefit (such the founder's family, entire community, only the poor, travelers). Public utilities such as mosques, schools, bridges, graveyards and drinking fountains, can be the beneficiaries of a waḳf. • Modern legislation divides the waqf as "charitable causes", in which the beneficiaries are the public or the poor) and "family" waqf, in which the founder makes the beneficiaries his relatives.

Cont… • There can also be multiple beneficiaries. For example the founder may stipulate that half the proceeds go to his family, while the other half go to the poor.

Valid beneficiaries must satisfy the following conditions: • They must be identifiable. • The beneficiaries must not be at war with the Muslims. • The beneficiaries may not use the waqf for a purpose in contradiction of Islamic principles.

Types of Waqf 1) WaqfAhli/Dzurri In the family endowment or waqfahli, the waqf property is held for the family of its founder, until the distinction of his or her descendants, whereupon it is diverted to a charitable purpose.

2) Waqf Khairi The charitable or public endowment or waqf khairi involves the permanent dedication of property to charitable purposes. The majority of endowments are land, where the permanence and security of the act of 'continuous charity', which is central to waqf is easily evidenced. 3) Waqf Mustarak A mixed condition of waqf ahli and waqf khairi

Waqf Institution in Malaysia • In year 2000, Malaysia with a population of close to 24 million people with GDP per capita of USD 4707, it is reported that there are over 32,000 acres of wafq land in which may be utilized to benefit the Muslims society.

Cont… • In Malaysia, the waqf property is regulated and managed under different laws and regulations within the purview of the States Islamic Religious Council consisting of thirteen states and federal territories. • On the 27th March 2004, the honorable Prime Minister of Malaysia announced the formation of the Department of Awaqf, Zakat and Hajj with the aim of making their administration systematic and effective throughout the country.

Ironically the western colonialism has impacted the Islamic economic system until Muslims in the world including Malaysia eventually saw the erosion in the potential and capacity of waqf in pooling the socio-economic strength and civilization of Islam.

The economic significance of waqf

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Topic 13 Voluntary Islamic Financial Institutions