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.

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.

Gharar, Maisir & Riba To Be Avoided!

These three - Gharar, Maisir and Riba must be totally avoided by the Takaful operation. These are the areas where Takaful Insurance differs from the Conventional Insurance.

GHARAR (Uncertainty or Speculation) :

Uncertainty is a fact of human life - mankind faces uncertainties in every aspect of personal, social and business lives. Risks are always present in whatever we are doing and Islam does not ignore this fact neither does it prohibit people from facing the risks and uncertainties that life presents.

In order to avoid Gharar in Takaful:

1. There must be a complete clarity or full disclosure in any Takaful contract.

2. Full disclosure is applicable on both sides, i.e on both the subject matter and terms of the contract (scope of cover, etc). It is not allowed to enter into a takaful contract if there is any unknown element on the subject matter and/or unknown exposure to the extent of the contract itself.

3. The Takaful contract must be made in a way that there is no exchange of Gharar from one party to another.

MAISIR (Gambling) :

Maisir is regarded as the excessive side of Gharar. Where there is a serious Gharar (uncertainty) in a contract – then Maisir (Gambling or Speculation) will naturally exists. Gambling is against the basic principles of justice, equity, fairness, ethics and morality, which are obligatory values within Islam.

Although in theory, conventional insurance is also meant to exclude any form of gambling in the sales contract, in practice there is always a very thin line involved.

Insurable interest, utmost good faith (uberimae fidae) and indemnity doctrines within conventional insurance are not enough to eliminate a speculative (gambling) attitude from either side of the insured and insurer in some contracts – unless an in depth proper knowledge is present with the underwriter(s).

Therefore, whilst the participants (the insureds) may have an insurable interest ( in the subject matter but if the risk transfer (risk sharing in Takaful) contains any speculative element, then it is prohibited under Takaful.

RIBA (Usury or Taking and Charging Interests) :

Riba is totally prohibited under the Shariah Law and under a Takaful arrangement. According to some, this refers to excessive or exploitative charging of interest, though according to others, it refers to the concept of interest itself.

Therefore, to avoid Riba, Takaful treats participants’ contributions to the risk sharing scheme not as a premium in the way a conventional insurance does but as a contribution (Mushahamah) in the form of donation with a condition of compensation (Tabarru').

The pool of funds secured from the participants’ contributions or donations, must be managed and invested in accordance with the Shariah Law.

In the same way that Gharar and Maisir represent a continuous challenge for Takaful operators to ensure that pure Takaful arrangements are free of them, Riba free Fund Management too is becoming a specialist discipline which requires more in depth elaboration.

Whilst risk taking is a natural habit, it is therefore, difficult to eliminate this trait from human nature. What is not allowed in Islam however, is not the risk of uncertainty itself (which needs to be eliminated) - but selling or exchange of risk or risk transfer to a third party using sales or exchange contract, that is not allowed. On the other hand, helping each other especially in the event of misfortune, is highly encouraged in Islam.

As mentioned by Allah in the Quran:

“….Help ye one another in Al Birr and At Taqwa (virtue, righteousness and piety) but do not help one another in sin and transgression….’ - (Al-Maidah : 2).

Sharing the risk with the purpose of helping one another is therefore highly encouraged in Islam.

The Principles of Takaful

a. Policyholders co-operate among themselves for their common good.
b. Every policyholder pays his subscription to help those that need assistance.
c. Losses are divided and liabilities spread according to the community pooling system.
d. Uncertainty is eliminated in respect of subscription and compensation.
e. It does not derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden."

Commercial insurance is actually not allowed for Muslims because it contains the following elements:
i) Al-Gharar (Uncertainty) ( ii) Al-Maisir (Gambling) (iii) Riba (Interest)

There are three (3) models and several variations on how takaful can be implemented:
i) Mudharabah Model, (ii) Wakalah Model, (iii) Combination of both

What Is Takaful?

These days Islamic financial instruments seem to be gaining popularity not only amongst the Muslims but from the Non-Muslim communities too. One of these instruments is the takaful concept of insurance.

So what exactly is takaful then?

- Takaful is an Islamic insurance concept which is based on the Islamic Muamalat (banking transactions), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years.

- It originates from the Arabic word 'Kafalah', which means "guaranteeing each other" or "joint guarantee".

- In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance.


ISLAMIC REFERENCES TO TAKAFUL:

The fundamentals are based on the sayings of Prophet Muhammad. Based on the hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some of the examples are:

• Basis of Co-operation Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2)^[1]

• Allah will always help His servant for as long as he helps others. (Narrated by Imam Ahmad bin Hanbal 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 bin Hanbal)

“The basic fundamentals underlying the Takaful concept are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic Law."

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