Takaful in Arabic, means joint guarantee. Thus it can be visualised as a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage that may inflict upon any of them as defined in the pact. Should any member or participant suffer a catastrophe or disaster he would receive a certain sum of money or financial benefit from a fund, as also defined in the pact, to help him meet the loss or damage.
In other words, the basic objective of takaful is to pay for a defined loss from a defined fund. Each member of the group pools effort to support the needy. It means mutual help among the group.
As an insurance system, we are to confine the operation of takaful within the `Tijari' (commercial) sector or popularly known as the private sector. Thus the transactional aspect of the commercial activitiy of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with the Shariah. Within this fundamental framework the contract of `tijari' takaful is therefore based on the Islamic commercial profit-sharing principle of al-Mudharabah.
Takaful is an insurance concept which is grounded in Islamic Muamalat, observing the rules and regulations of Shariah. It is a concept that has been in practice for over 1,400 years.In principle, Takaful system is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants.In other words, it is the provision of shared contributions to help those who are in need.These fundamentals are based on the sayings of Prophet Muhammad s.a.w. Some of the examples are:
Basis of Co-operation
Allah will always help his servant for as long as he helps others.(Narrated by Imam Ahmad and Imam Abu Daud)
Basis of Responsibility
The place of relationships and feelings of people with faith,between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim). One true Muslim (Mu'min) and another true Muslim (Mu'min) is just like a building whereby every part in it strengthens the other part. (Narrated by Imam al-Bukhari and Imam Muslim).
Basis of Mutual Protection
By my life, which is in Allah's power, nobody will enter Paradise if he does not protect his neighbour who is in distress. (Narrated by Imam Ahmad). Based on the above hadith, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs.
Understanding the Takaful Contract
Although insurance as a concept is permissable under Shariah law, certain practices in conventional insurance breach Shariah law. The current Takaful Practise uses a combination of two types of contracts ('aqad). These are a contract of Donation (Tabarru") with a condition precedent and a contract of Agency (Wakala) which are free from the elements of usury (Riba), wager or gambling (Maisir) and uncertainty (Gharar). The Takaful system stresses the spirit of co-operation and joint responsibility among participants.
Saturday, January 3, 2009
MUDHARABAH
By this principle, the entrepreneur or al-Mudharib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra's-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the takaful operator is to be shared, in accordance with the principle of al-Mudharabah, between the participants as the providers of capital and the takaful operator as the entrepreneur. The sharing of such profit (surplus) may be in a ratio 5:5, 6:4, 7:3, etc. as mutually agreed between the contracting parties.
In order to eliminate the element of uncertainty in the takaful contract, the concept of `tabarru' (to donate, to contribute, to give away) is incorporated in it. In relation to this a participant shall agree to relinquish as tabarru', certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.
In essence, tabarru' would enable the participants to perform their deeds in sincerely assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of takaful, is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure.
Therefore the provision of insurance cover as a form of business in conformity with Shariah is based on the Islamic principles of al-Takaful and al-Mudharabah.
Al-Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other; whilst Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.
Thus it is necessary to emphasise at the outset that the takaful business as practiced in Malaysia is of the kind of cooperative takaful (al-takaful al-taawuni) participated by a group of members of the public for their own cause within the domain
In order to eliminate the element of uncertainty in the takaful contract, the concept of `tabarru' (to donate, to contribute, to give away) is incorporated in it. In relation to this a participant shall agree to relinquish as tabarru', certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.
In essence, tabarru' would enable the participants to perform their deeds in sincerely assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of takaful, is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure.
Therefore the provision of insurance cover as a form of business in conformity with Shariah is based on the Islamic principles of al-Takaful and al-Mudharabah.
Al-Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other; whilst Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.
Thus it is necessary to emphasise at the outset that the takaful business as practiced in Malaysia is of the kind of cooperative takaful (al-takaful al-taawuni) participated by a group of members of the public for their own cause within the domain
ISLAM & INSURANCE
As the essence of insurance could be seen in the system of mutual help in relation to the custom of blood money under the Arab tribal custom, Muslim jurists generally accepted that the concept of insurance does not contradict with the Shariah. In fact, the principle of compensation and group responsibility was accepted by Islam and the Holy Prophet. Muslim jurists acknowledged that the basis of shared responsibility in the system of `aqila', as practiced between Muslims of Mecca (muhajirin) and Medina (ansar) laid the foundation of mutual insurance.
As a complete religion, the teaching of Islam encompasses the essence of peace, economic well-being and development of the Muslim at the individual, family social, state and `ummah' levels.
To illustrate the importance of this relationship in a life of a Muslim, Islam calls for the protection of certain basic rights, viz.: -
The right to protect the Religion.
The right to protect the life.
The right to protect dignity/honour.
The right to protect the property.
The right to protect the mind.
It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance.
In view of the above as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists this concept of insurance is acceptable in Islam because,
the policyholders would cooperate among themselves for their common good;
every policyholder would pay his subscription in order to assist those of them who need assistance;
it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;
the element of uncertainty will be eliminated insofar as subscription and compensation are concerned;
it does not aim at deriving advantage at the cost of other individuals.
The generally accepted view of the Muslim Jurists is that the operation of the conventional insurance as an exchange transaction under a buy and sell agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements :-
al-Gharar
There is the element of al-Gharar (unknown or uncertain factors in the operation of a contract) in both the life and general insurance policies. This arises due to the uncertainty of the subject matter of the contract or `ma'qud'alaih' of which one of the basic rules of contract in Islam is that the ma'qud'alaih must be clear. In such a contract the insured or the policyholder agrees to pay a certain sum of premium and in turn the insurance company guarantees to pay a certain sum of compensation (sum insured) in the event of a catastrophe or disaster. But the insured or the policyholder is not informed, for example, of how the amount of the compensation that the company will pay him is to be derived nor is he certain of the amount.
In addition, any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is also classified as Gharar. This is prevalent in both the life and general insurance policies. In the former, for example the loss of premium suffered by the policyholder if he would have to cancel his policy before the policy acquires the forfeiture status. Similarly the "double-standard" condition of charging customary short period in general insurance if the policyholder is responsible for the termination of the policy whilst a proportional refund of premium is applicable if the insurance company terminates the cover.
al-Maisir
There is the element of al-Maisir (or gambling) which arises as a consequence of the presence of al-Gharar, in particular in the case of life insurance. When a policyholder dies before the end of the period of his insurance policy after paying only part of the premium, for example, his dependents will receive a certain sum of money which the policyholder in the first place has not been informed and has no knowledge of how and from where it is to be derived.
al-Riba
There is the practice of al-Riba (or interest) and other related practices in the investment activities of the conventional insurance companies which contravene the rules of the Shariah.
As a complete religion, the teaching of Islam encompasses the essence of peace, economic well-being and development of the Muslim at the individual, family social, state and `ummah' levels.
To illustrate the importance of this relationship in a life of a Muslim, Islam calls for the protection of certain basic rights, viz.: -
The right to protect the Religion.
The right to protect the life.
The right to protect dignity/honour.
The right to protect the property.
The right to protect the mind.
It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance.
In view of the above as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists this concept of insurance is acceptable in Islam because,
the policyholders would cooperate among themselves for their common good;
every policyholder would pay his subscription in order to assist those of them who need assistance;
it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;
the element of uncertainty will be eliminated insofar as subscription and compensation are concerned;
it does not aim at deriving advantage at the cost of other individuals.
The generally accepted view of the Muslim Jurists is that the operation of the conventional insurance as an exchange transaction under a buy and sell agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements :-
al-Gharar
There is the element of al-Gharar (unknown or uncertain factors in the operation of a contract) in both the life and general insurance policies. This arises due to the uncertainty of the subject matter of the contract or `ma'qud'alaih' of which one of the basic rules of contract in Islam is that the ma'qud'alaih must be clear. In such a contract the insured or the policyholder agrees to pay a certain sum of premium and in turn the insurance company guarantees to pay a certain sum of compensation (sum insured) in the event of a catastrophe or disaster. But the insured or the policyholder is not informed, for example, of how the amount of the compensation that the company will pay him is to be derived nor is he certain of the amount.
In addition, any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is also classified as Gharar. This is prevalent in both the life and general insurance policies. In the former, for example the loss of premium suffered by the policyholder if he would have to cancel his policy before the policy acquires the forfeiture status. Similarly the "double-standard" condition of charging customary short period in general insurance if the policyholder is responsible for the termination of the policy whilst a proportional refund of premium is applicable if the insurance company terminates the cover.
al-Maisir
There is the element of al-Maisir (or gambling) which arises as a consequence of the presence of al-Gharar, in particular in the case of life insurance. When a policyholder dies before the end of the period of his insurance policy after paying only part of the premium, for example, his dependents will receive a certain sum of money which the policyholder in the first place has not been informed and has no knowledge of how and from where it is to be derived.
al-Riba
There is the practice of al-Riba (or interest) and other related practices in the investment activities of the conventional insurance companies which contravene the rules of the Shariah.
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