Friday, March 28, 2008

The Mudharabah Model Of Takaful

Mudharabah means Profit Sharing.

By this principle, the entrepreneur or al-Mudharib (takaful operator eg. Etiqa Takaful) 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 profits (surplus) from the operations of takaful managed and administered 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 profits 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 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; while 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.