TAKAFUL AS A BUSINESS

ORGANIZATION
Chapter 4
 OBJECTIVES

To identify the parties to the contract

To differentiate the types of contracts available under a takaful scheme

To differentiate the investment activities and managerial aspects between the

popular takaful business models
 PARTIES TO THE CONTRACT
• There are generally four parties involved in a takaful operation
1. Participants, who contribute tabarru’ to the takaful fund
2. The takaful operator, who is a licensed body who manages the fund
according to Shari’ah principles.
3. The insured, who could be the participants or another party who
face the risk and are assisted by the fund
4. The beneficiaries, who are those who benefit from the fund
 TAKAFUL AQAD (CONTRACT)
• Aqad or takaful contract is an agreement based on Shari’ah. This agreement is between
takaful participants and takaful operators.
• In conventional insurance, the form of aqad is aqad mu’awadat, which the form of selling
and buying, as there is a transfer of risk with a price(premium) in the form of selling the risk
to insurer.
• It is unlawful in Islam because it is akin to an insured selling the uncertainty of risk to the
insurer . At the same time, the insurer is promising to pay on an uncertainty event in the
future.
• In order to address the uncertainty in the contract and make it lawful under shari’ah, the
contract used in takaful is tabarru’.
• Another contract available under the takaful system is wakalah and mudharabah.
 TABARRU’
• The takaful cover that is based on the tabarru’ aqad covers the following elements.
• Responsibility to one another
• Cooperation and helping one another
• Protecting one another from any difficulties and disaster
• Thus, tabarru’ can be defined as a form of sincere donation that is given by one party with
the intention of helping others to bear monetary losses and misfortunes that may entail. One
does not expect any exhanges or reward from other parties
• It is considered as a noble practice in Islam since there are so many benefits that can be
derived from it, as long as it is with an ‘ikhlas’ intention.
 TWO TYPES OF TAKAFUL
• General takaful which cover risk for properties
• For general takaful, all participant contribution and liabilities will be pooled into the takaful
fund and
• under the tabarru’ contract, the participants understand that they are donating the
contribution and they are not expecting any exchanges as a return.
• In the event of a loss, the sources of the fund to cover the financial loss comes from the
pooled takaful fund.
• With this aqad, the gharar in insurance can be eliminated.
 FAMILY TAKAFUL
• Family takaful which is almost similar to conventional life insurance. In family takaful, the
participants’ contribution is divided into two funds for example
• Participants’ Special Account (PSA)
• Participants’ Account (PA)
• A smaller portion will be taken from the contribution into the PSA as tabarru’ to cover for
the risk
• The PA will be used for investment and the participants will enjoy the benefits and returns of
investment from the fund once the contract matures.
• Some takaful operators use the term Participant Risk Investment Account for PSA and
Participant Investment Account for PA
 MUDHARABAH
• The mudharbah contract is essentially a basis for sharing profit and loss between the takaful
operator and participants.
• The takaful operator manages the operation in return for a share of the underwriting surplus
and a share of profit from investment.
• Under the mudharabah principle, the profit as universally defined by conventional insurance
companies, which in the case of general business is taken to mean returns on investments
plus underwriting surplus, is then shared according a mutually agreed ratio between the
participants and the operators.
• Management expenses of the operator including staff and agency remunerations shall be
borne by the shareholders fund and not from the takaful fund
PURE MUDHARABAH BUSINESS MODEL IN GENERAL TAKAFUL
PURE WAKALAH BUSINESS MODEL IN GENERAL TAKAFUL
 WAKALAH
• In Islamic finance, wakalah means a contract in which one person appoints another to act as an
agent on his or her behalf in a transaction.
• Under this contract, a takaful operator is the party acting as an agent handling the pool of
funds contributed by the participants.
• For the acts, the agent / takaful operator may claim a management fee from some portion of
the contribution, called wakalah fee.
• Net of contribution after wakalah fee goes into the takaful fund.The wakalah fee covers most
of the expenses of the business.
• The fee rate is fixed annually in advance consultation with the shari’ah board of the company.
• The takaful operator is allowed to undertake incentive fees upon the good governance of a
takaful fund, in terms of percentage from the investment profit or underwriting surplus.
• The muharabah business model was the most popular model in Malaysia during the early
stage of takaful setup in the country, whereas the wakalah business model is made popular
later.
• In a recent development, takaful operators have a new business model comprising a
combination of wakalah and mudharabah model, which allows less wakalah fee charges and
attractive mudhrabah package for the participants
• The wakalah fees are deducted from the PSA while the mudharabah profit sharing between
the takaful operator and participants are applied on the net profit from investment.
 DIFFERENCES BETWEEN TAKAFUL BUSINESS
MODELS
Business model wakalah mudharabah Wakalah for management of risk
and mudharabah for investment

Fees Fixed amount of fees paid to the No fees paid. The takaful operator will Fixed amount of fees paid to takaful
takaful operator share in the profit (investment profit operator for underwriting services. The
underwriting surplus) takaful operator will share in the
investment profit

Profitability to Solely from fees income minus Depends on actual investment profit Depends on fee income plus profit
takaful operator all cost and expenses minus management cost of takaful sharing less management expenses
operators

Underwriting Surplus may be “shared” as Surplus must be returned to the Surplus goes to participant in family
surplus incentive fee to the takaful participants/ capital providers in family takaful while surplus may be “shared”
operator takaful on a predetermined agreed ratio as an incentive fee in general takaful