Islamic Finance World Wide Report

One of  the three major components of Islamic fi nance, the takaful aspect has experienced slow growth in terms of range of products and expansion around the world. Despite these initial challenges, takaful remains a promising component of the global Islamic fi nance industry. From the available data, the takaful industry is currently concentrated in South-East Asia and the Middle Eastern and North African (MENA) countries, as shown in the fi gure. Although takaful has been less a_ ected by the global financial meltdown due to its concentration in emerging markets, there was a surge in the growth of the industry as a result of the paradigm shift on the part of international takaful giants such as the American International Group (AIG), which established AIG Takaful Enaya, headquartered in Bahrain.

(image taken from AIMS islamic fince university from the course of mba islamic finance)

According to Sameer Abdi, Head of Ernst & Young’s Islamic Financial Services Group: “Takaful markets now span much of the globe but there still exists a large, expanding and untapped Muslim population on almost every continent. We estimate that the global takaful market could be as high as US$7.7bn by the end of 2012.”5 Takaful operators need to diversify their products to

include new areas such as medical insurance and introduce frameworks to address complex risk issues. Partnering with international giants in o_ ering takaful products in Europe and America will further expand the market rather than concentrating on the MENA and South-East Asian countries. These key strategic issues need to be closely considered in the drive towards a

viable future direction and expansion of the takaful industry. There is much room for expansion of takaful products beyond the MENA region and South-East Asia. Potential markets such as Egypt, Nigeria, and Muslim minority communities in Europe and America should be the next focus. However, there is a need to restructure takaful products to be conventionally viable and competitive without violating any Islamic law precepts to be able to penetrate markets in Europe and America. The focus of the industry will now be turned towards the exploration of new international growth markets for takaful.

This article was written by my teacher when I was doing my islamic finance course 3 years before now iam sharing it for my students

Is life insurance allowed in Islam?

Takaful insurance refers to an Islamic way of mutual guarantee by members of

a group that pool their fi nancial resources together against certain losses. Family

takaful or life insurance can be acceptable under Islamic principles if correctly

structured. It has two components: a savings element, whereby individual

participants set aside a sum of money, belonging to each personally, to accumulate

over time; and a risk-sharing element, which is a donation, that a_ ords collective

fi nancial protection in the event a participant su_ ers disability or death. Of course,

as with conventional life insurance, the true recipient (benefi ciary) in the event of

the death of the participant is their family, as designated in the policy terms. Here

again, under takaful rules, the distribution of the policy benefi ts must adhere to

Shari‘ah principles, which provide guidance on priorities assigned for distribution

to nuclear family members, parents, siblings, cousins, etc, who survive the deceased.

As with conventional life insurance, a family takaful policy has a defi ned period

of maturity, an identifi able savings portion, and a periodic installment portion to

cover the risk protection element. There is medical underwriting, typically so that

the relative health of the participant a_ ects the total amount of contribution to

adjust the risk in fairness to the risk pool. There may also be a minimum age, usually

16, and a maximum age, usually 65, limitations, occupational risk considerations,

and adjustments depending upon the age at entry to the plan.

(image taken from AIMS islamic fince university from the course of mba islamic finance)

Provided that the savings element conforms to Shari‘ah investment principles,

there are no serious impediments to the use of family takaful (life) insurance—

assuming that the risk-sharing portion is operated strictly in accordance with

acknowledged takaful principles, including the concept of tabarru’ (donation) as a

contribution towards the collective risk protection element.

Whereas the risk-sharing portion of the contribution is donated to the common

risk pool, and thus belongs to the collective resources, the savings portion of the

contribution remains the exclusive property of the individual participant. Under

the rules of the family takaful policy, the savings accumulated may be withdrawn,

although often subject to fees or penalties for early surrender.

This article was written by my teacher when I was doing my islamic finance course 3 years before now iam sharing it for my students

Retakaful

As part of their risk management, takaful undertakings may subscribe to a retakaful

scheme that suits the needs and requirements for primary takaful undertakings to

protect against unforeseen or extraordinary losses. Retakaful can spread liability for

specifi c risks, share liability when losses overwhelm the primary takaful undertakings’

resources, and help them spread the risk inherent in some segments of takaful business.

Takaful operators should ensure that any retakaful arrangement duly serves the purpose

of the takaful undertakings and holds the interests of takaful participants foremost.

(image taken from AIMS islamic fince university from the course of mba islamic finance)

 The pricing and protection o_ ered by the retakaful operator should be consistently reviewed

from time to time to ensure that it is commensurate with the needs and requirements

of the takaful undertakings. As far as possible, takaful operators should strive to use

retakaful operators, rather than conventional reinsurers, in support of a fully Shari‘ahcompliant

fi nancial system for takaful undertakings.Insurance (Takaful )

•        Takaful companies must prevent capital fl ow from the takaful fund to conventional

·         reinsurance fi rms. In other words, the reinsurance agreement should be designed

·         in favor of takaful operations. Moreover, preference should be given to Islamic

·         reinsurance operators in the matter of securing reinsurance protection whenever

·         possible.

•        The reinsurance experts of the takaful operator should carefully determine the

·         quantum of liability to be reinsured.

•        The takaful operator should reinsure on a net premium basis and not receive any

·         reinsurance remunerations, profi t commissions, or interest on premiums it has

·         retained from premiums payable to its reinsurer.

•        The takaful operator should review its reinsurance requirement annually and

·         should progressively reduce dependence on conventional reinsurers.

•        The takaful operator must stipulate a condition exempting it from payment of

·         or receiving interest from a conventional reinsurance company. However, if the

·         reinsurance company cannot adjust its management and investment methods to

·         comply with this requirement, the takaful operator may accept the interest and

·         spend it on humanitarian activities and public infrastructure projects.

•        The takaful operator must encourage participants and shareholders to contribute

·         to a retakaful fund by consenting to increase their proportion of tabarru’, and seek

·         their consent to use their contribution for the purpose of reinsurance protection.

•        The premium paid for securing reinsurance protection shall be as low as possible.

•        Takaful operators should endeavor to persuade its conventional reinsurer to enter

•        into a profi t-sharing agreement and even suggest a method of management and

•        investment compatible with Islamic principles.

•        The ultimate goal of takaful operators must be to put an end to dealing with

•        conventional reinsurers whenever adequate reserves, or when numerous Islamic

•        reinsurance companies, are established.

This article was written by my teacher when I was doing my islamic finance course 3 years before now iam sharing it for my students

The Main Features of Takaful

As an alternative to conventional insurance, takaful has several features which make it

distinct. The three main features are cooperative risk-sharing, clear fi nancial segregation,

and Shari‘ah-compliance in underwriting policies and investment strategies.

Cooperative risk-sharing

As a well-articulated and exclusionary move to eliminate riba and gharar elements in

takaful, cooperative risk-sharing through the means of donation was designed. This

dramatic turn in the modern history of insurance is Shari‘ah-compliant as it encourages

mutual assistance. Takaful is based on more than one contractual relationship, although

the basis of it is mutual assistance. Other contractual relationships will be discussed in

this chapter while considering the models of takaful. Social responsibility, solidarity, and

the innate need to care for others are among the characteristics of such a cooperative

move, and therefore, instead of premiums, the concept of donations is adopted and

merged with other frameworks of Islamic commercial transactions. Although the

policyholders pay some sort of premium, they are considered as donations to the

common cause to assist those members who su_ er any loss.

(image taken form AIMS College course of islamic finance course)

Qur’an 5:2: “And help one another in righteousness and piety, but do

not help one another in sin and rancour.”

Clear fi nancial segregationmnsurance (Takaful )

behalf of the participants. Islamic law restricts the role of the insurance company to

that of an ordinary trustee who is responsible to the participants. In conventional

insurance business, the insurance company is a profi t-making entity that agrees to bear

the fi nancial burden and losses of its policyholders. The shareholders own the insurance

company and are entitled to receive any profi t and bear the burden of any defi cit recorded

at the end of the fi nancial year. Conversely, in Islamic law, the role of the operator of the

cooperative insurance business is clearly defi ned and segregated from the role of the

participants. The takaful model determines the exact roles of the participants on the one

hand and the operator on the other. These will be explained later in this chapter when

we discuss the models of takaful.

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Basic Concepts of Takaful

Defi nition of Takaful

The term takaful is an Arabic word that originates from the root verb kafala—to

guarantee, to secure, or to be responsible for others. In the literal sense, takaful means

joint responsibility or guarantee based on mutual agreement. That is, guaranteeing each

other through collective assurance and mutual undertaking among members of a

particular group. In such a symbiotic relationship, three basic concepts of mutuality are

embodied in the takaful model of insurance: mutual help, mutual responsibility, and

mutual protection from losses.

(image taken from AIMS islamic fince university from the course of mba islamic finance)

This triangular relationship in Figure 8.1 is based on the underlying principle of the

objectives of Islamic law, which seeks to bring benefi t to mankind and ward o_ every

form of harm.

Takaful is an alternative system of insurance whereby members contribute their

fi nancial resources to a common pool based on the principles of ta’awun (mutual

assistance) and tabarru’ (donation) and the group undertakes to share the mutual risk.

Generally, takaful is premised upon the concept of tabarru’, which encompasses mutual

assistance and mutual social security among the members. Tabarru’ is the concept of

donation in Islam and is often used to mean the premium in takaful although the two

terms are generally used interchangeably.

In the takaful structure, the members jointly agree to guarantee one another against

any unexpected loss or damage based on the common pool of resources. Accordingly,

AAOIFI defi nes takaful as the collective undertaking by the participants to donate.

This article was written by my teacher when I was doing my islamic finance course 3 years before now iam sharing it for my students

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