Friday, March 28, 2008

Types Of Takaful Contracts

The contract is the most essential part, which differentiates Takaful with conventional insurance. Takaful protects the practice of Gharar, Maisir and Riba with a proper Takaful contract.

As the nature of risks are uncertain ( or Gharar ), and whilst Islam prohibits sales or transactions that contain an element of Gharar, then Takaful contracts cannot be sales contracts. Gharar or uncertainty is prohibited within Takaful contracts and therefore must never involve Gharar in the aspects of contract, price, method, amount and time of payment between contracting parties, or terms of contract, and anything that is deemed to be uncertain or deceptive. However, It is worth noting that prohibition of Gharar does not apply to non-commercial contracts, such as unilateral contracts.

As mentioned before, in addition to Gharar, Islam also prohibits the following:
  1. Riba (interest/usury-taking and charging interest)
  2. Buying and selling unlawful property or rights
  3. Investing in unlawful portfolios (either containing Riba or unlawful activities)
  4. Gambling or the game of chance
  5. Manipulation and unjust practice.

To avoid or eliminate the above prohibited elements from Takaful contracts, the following are solid alternative contracts that can be used:

1.Mudharabah Contract ( Profit and Loss Sharing).

This is a contract between the capital providers and the takaful operator, where any profits is shared according to ratio or percentage agreed by both parties. Any losses borne entirely by the capital provider. In Takaful practice – participants or contributors provide capital to the Takaful operator.

2.Contract of Musarakah (Joint-Venture).

Both parties provide capital and or management. Profit is split either based on capital or upon negotiation, and any losses is distributed in proportion to capital contributions. Establishment of a mutual insurance company such as Oil Insurance Limited (OIL) can use this type of contract.

3.Kafalah Contract (surety-ship).

A guarantor becomes the surety in the event the debtor fails to honor his obligations towards the creditor. This type of contract can be used for the development of Takaful Scheme for financial products such as Bonds.

4.Wakalah Contract (contract of agency).

The principal appoints and authorizes someone to act on his behalf. The authorization could be either specific or general. The Wakeel (Agent) could then charge a fee to the principal. This model is suitable for most Takaful products including products for corporate risks such as a ‘Rent-A-Captive’ concept.

5.Ju’alah Contract (Contract of Commision).

Basically similar to the Wakalah contract except that the payment to the agent is measured on his output and performance. This contract could be used to develop distribution channels for Takaful.

The most important elements of a Takaful contract is that there must be a subject matter of contract upon which contracting parties mutually agree by an offer or Ijab (proposal) and an Acceptance or Qabul.