INCEIF

The Global University in Islamic finance

Kuala Lumpur, Malaysia

CIFP part 2
SH2002 Shariah issues in Islamic finance




Shariah issues in Takaful



Semester September 2012


Name: Fashola Olayinka Nurudeen
Matric No: 1100275.




Abstract.
The takaful industry is a relatively new industry; the industry is tracked back to 1976 during the
international conference on Islamic Economics held in Makkah. The concept was later
launched officially in Sudan by 1979 and later in Saudi Arabia. Recently, Shariah scholars have
raised a number of concerns about the Shariah permissibility of the business models employed in
the industry. This article examines the basic principles of takaful and then analyzes the Shariah
issues related to the industry. Some of the issues related to Takaful is about Hibah distribution,
nomination and Tabarru.

Lastly, some recommendation will be provided to help enhance the industry. Hopefully, the
Shariah issues will be resolve from time to time, until the industry mature.


Key terms of the research.
Takaful, Islamic Insurance, Insurance, Tabarru, Hibah and nomination.




Objectives of the research:
The objectives of this research are highlighted below:
To provide insight into the Takaful industry
To identify Shariah issues as it relates to the Takaful industry.




Table of Contents
Abstract ........................................................................................................................................... 2
Key terms of the research. .............................................................................................................. 2
Objectives of the research: .............................................................................................................. 2
Table of Contents ............................................................................................................................ 3
1.0 Introduction. .............................................................................................................................. 4
2.0 The Sharia Issues. ..................................................................................................................... 5
3.0 The Concept of Hibah ............................................................................................................... 6
3.2 The current practice .................................................................................................................. 6
3.3 The Shariah Issue. ..................................................................................................................... 7
3.4 Scholars view. .......................................................................................................................... 7
3.5 Industry Resolution. .................................................................................................................. 9
4.0 The Concept of Nomination...................................................................................................... 9
4.1 The function of Nomination.................................................................................................... 10
4.2 The Current Practice. .............................................................................................................. 10
4.3 The Shariah Issues. ................................................................................................................. 10
4.4 Views of Scholars ................................................................................................................... 10
4.5 Industry Practices. ................................................................................................................... 11
5.0 The Concept of Tabarru ......................................................................................................... 11
5.1 The function of Tabarru. ........................................................................................................ 12
5.2 The Current Practice. .............................................................................................................. 12
5.3 The Shariah Issues. ................................................................................................................. 13
5.5 Proposed Alternative Solution. ............................................................................................... 13
6.0 Conclusions and Findings ....................................................................................................... 14
References ..................................................................................................................................... 15
1.0 Introduction.
The bedrock of any activity by Muslim should at all times be based on the principles of the
Shariah, thus the understating of the Shariah and how it relates to all our daily activities is of
great concerns for every Muslim including our financial transactions.

The four fundamental sources of shariah are the Quran, Sunnah (traditions of the Prophet
Muhammad), Ijmac (consensus) and Qiyas (analogy) respectively. In other words should there
be a problem, one must look to the Quran first for the solution. If there exists a rule, then it is
taken. If not, one then searches the Sunnah. Both the Quran and the Sunnah are divinely inspired.
If no ruling is found in the Quran or the Sunnah, the ijmac of the imam mujtahids (those who do
ijtihad) is referred to. If there is none, then one does ijtihad (independent judgement) to come up
with a ruling based on qiyas (individual reasoning based on analogy). However, it should be
noted that qiyas must meet the following conditions:
That it must be resorted only in the absence of the applicable text of the shariah
That in no way should it contravene the shariah and
That the course of reasoning should not become entangled in any kind of sophistry or
complication of expression which might affect the peoples direct attachment to the
shariah or distort its brilliant clarity.

The implications of the above is that what is today called Islamic Insurance must at all times
conform to the details of the Shariah thus there must be verifiable evidence that must be linked to
the sources of Shariah as highlighted below else it would not be dimed acceptable.

Insurance is a mechanism whereby individual or business enterprises by paying out contribution
(termed premium in insurance) transfer some of the uncertainty of risks to the insurer. Insurer
in the event of loss from insured peril compensates the victim (insured) out of the contribution so
gathered from large numbers of insured. The contribution is usually a very small amount
compared to the amount of protection available. The concept of insurance is basically an
arrangement to mutually help one another in the event of an unfortunate event causing loss to
any of the member(s). In short the mechanism of insurance inter alia brings about peace of mind,
social stability and economic growth. In Islamic Finance the convention insurance is not sharah
complaint due to the presence of Riba, Gharar and Maisir, thus its not allowed for Muslims to
engage in such activities.

Takaful means guaranteeing each other and is based on the principles of Taawun (mutual co-
operation) and Tabarru (donation), where a group of Takaful participants (policyholders) agree
between themselves to share the risk of a potential loss to any of them, by making a donation of
all or part of their Takaful Contribution (premium) to compensate for a loss. Compared to
conventional insurances risk transfer, Takaful implies risk sharing framework where all the
Takaful participants share the risks together.

The word Takaful originates from the Arabic word Kafalah, which means "guaranteeing each
other" or "joint guarantee. In this modern world, Takaful is commonly referred to as Islamic
insurance even some people claim it as not an insurance contract. Takaful, as practiced
nowadays, is near to investment contract compared to insurance or pooled fund contract.
Technically, Takaful is based on principles of mutuality and co-operation, encompassing the
elements of shared responsibility, joint indemnity, common interest and solidarity.

Redzuan, Rahman & Aidid (2009), the majority viewpoint by many contemporary Islamic jurists
and scholars is that, for an insurance system to be acceptable by Islamic tenets, it must be
bounded on the principles of
Taawun: Taawun is mutual help of a group of people.
Tabarru : Tabarruat is willingly relinquishing individual rights over the contributions
paid, for collective benefits.
Losses are divided and liabilities spread according to the community pooling system.
It does not seek to derive advantage at the cost of others.


2.0 The Sharia Issues.
Just like every other sector within the Islamic finance space there are issues that relates to the
validity or otherwise of the practice of some certain concepts. These issues are based on Shariah
ruling towards ensuring that the concepts are in line with the spirit of the Shariah. The Takaful
industry is not left out in this space, thus for the purpose of this write up we shall be looking into
some areas that have generated a lot of divergent views among scholars on the permissibility or
otherwise of such practices within the Takaful industry these are:
Hibah distribution
Nomination
Tabarru


3.0 The Concept of Hibah
Hibah is an Arabic word, which means gift in English. Hibah according to Islamic term is a
contract (akad) that entails granting ownership of a property to someone else during his lifetime
without any reprisal (iwad). More specifically, hibah is a contract of granting the physical form
(ain) of owned property from one party to another party without reprisal (iwad) during the
persons lifetime on a voluntary basis, not expecting a reward in the hereafter and honouring a
person, with the pronouncement of ijab and qabul or the likes.
Based on the definition above, it can be concluded that the characteristics of hibah are as
follows:
An akad (contract) of granting property ownership to a specific party.
The property that can be given as hibah is a physical (ain) property and not debt or
benefits/interests.
Hibah contract is made without imposing any reprisal (iwad).
Hibah contract is in effect during the lifetime of the hibah provider.
It is made voluntarily without coercion.
The contract is made with no intension to receive reward or honour a particular person.

3.2 The current practice
As currently practiced by the industry, only a few Takaful operators are applying Hibah in their
model, only Takaful operator in Malaysia that has already applying Hibah is Takaful Ikhlas,
while other operators still using faraidh method for the distribution process.

3.3 The Shariah Issue.
The major shariah issues with Hibah as it relates to the Takaful industry are listed below:
1. Are Takaful benefits qualified as an asset for Hibah?
2. How to make hibah of something which not yet realized, i.e. there will be no death
benefit if the policy holder is alive until the maturity of the policy?
3. In a valid hibah, the ownership is transferred to the recipient. What if the recipient dies?
It becomes his/her estate. Can the recipient be replaced?
4. If a husband is paying a policy for his wife, can he be the recipient of the benefit or he
can only be a trustee/executor and takaful benefit should be treated as her estate which
shall be distributed according to rules of mirath/faraid?
5. If it is a hibah, can the policy holder retract the hibah because he/she takes the policy for
his/her own benefit upon maturity?
6. Hibah which is tied up with death is a will (wasiyyat). It is not allowed to make wasiyyat
to inheritor (waris). Another issue is that it may not serve the purpose of taking protection
to a particular recipient.

3.4 Scholars view.
Some scholars are still on the opinion that the claim amounts are the asset and part of the wealth
of the dead. Therefore, it must go for faraidh. It is compulsory. Noor & Abdullah (2008)
discussed that the payment of Takaful benefits upon the death of the participant before the
maturity of a plan seemingly belongs to the deceased participants legal heirs on the grounds that
it is the product of the deceaseds effort and hence is part of his assets.
Even though the money comes into existence only after the participants death, it is the effort of
the participant by entering into the contract, which realizes the financial assistance in favour of
his legal heirs upon his death. This is relatively analogous to the case of the fish netted by the
deceased or the animal caught in the trap fixed by the deceased, which occurs after his death.
The fish or the animals are part of the deceaseds assets because it is the deceaseds effort that
has caused the ownership.

On the other hand, some scholars of the opinion that the proceeds or claims from Takaful, after
the death of the participant is not simply his asset. Thus, it is not subjected to faraidh. Their
argument is that the proceeds of family Takaful can not be treated as being exactly the same as
the above netted fish examples. It is worth noted here that there are differences between the cases
of animals or fish trapped after the deceaseds death and the concept of financial assistance in the
family Takaful business. The animal or fish trapped or netted is the immediate product of the
deceaseds effort. This is a kind of activity that directly generates wealth in favour of the
deceased.

On the other hand, Takaful contracts realize the obligation upon the company to pay. They do not
create wealth in the insureds ownership, but rather they create an obligation to ease the burden
suffered due to the losses of fellow participants. The participants contribution is his or her
donation for the good of others, not for himself and is therefore different from the case of a trap,
which is deliberately fixed by the deceased for his own gain. The proceeds payable belong to the
fund on behalf of the participants, not the Takaful operator nor the single deceased participant.
Therefore, even though it is the deceaseds effort, the money is more appropriately to be
regarded as an obligation upon the Takaful tabarru fund to pay on behalf of other participants as
financial assistance to the insureds family in case of death. This is the importance of considering
a legal and financial entity for the fund. This monetary obligation is directly based on the
agreement or promises of mutual assistance stated in the contract. In other words, the tabarru
fund managed by the Takaful operator on behalf of the participants agrees to pay the proceeds,
and the matter of to whom they are paid should be freely and totally left to the agreement or the
stipulation made by the participant to the company.

In addition, some scholars argue that, the Takaful policies are meant to secure the rights of the
close beneficiaries, especially the immediate family who their lives depend on him. Thus,
distributing the sum covered as faraidh might hinder the objective of the Takaful contribution.
Maybe the deceased has an adopted son who still dependent on him, but not eligible as a heir
through faraidh. He is the real beneficiary compared to those who not dependent on the deceased
like his uncles and aunties. Rasulullah once said that, as reported in Sahih Muslim (hadith
number 3991) as follow;
to leave your heirs rich is better than to leave them poor, begging from
people; that you would never incur an expense seeking therewith the pleasure of
Allah, but you would be rewarded therefor, even for a morsel of food that you put
in the mouth of your wife.

Therefore, it is better to make the sum covered as Hibah, so that it will benefit those who really
in need and achieve the real intention of Takaful contribution.

3.5 Industry Resolution.
Bank Negara Malaysia (BNM) in its 34
th
meeting had come out with a resolution on this matter.
They agreed that the Takaful benefits can be used for Hibah, since it is the right of the
participants. Therefore, the participants should be allowed to exercise their rights, according to
their choice, as long as it does not contradict the Shariah principles.
In addition, they decided that it is permissible to distribute the (Takaful) death benefit according
to the law of mirath (Islamic law of succession), as it is also permissible to distribute the
payment to a particular individuals or parties as specified by the participant on the basis that the
benefit is the contribution of other participants to the beneficiary as specified by the participant
and not his estate.

4.0 The Concept of Nomination
Nomination in Takaful is the act of naming a person to receive policy moneys payable in the
event of the death of the policy owner. In this context, the nominee may or may not be a
beneficiary. In many jurisdictions, the nominee would be a beneficiary if he is the legal spouse or
child of the insured; otherwise the nominee would not receive them as a beneficiary. In the
Takaful industry, the issue of nomination only been discussed recently and there seems to be
divergent views on the matter since different Takaful operators implement different practices.

The main Shariah issue regarding nomination is whether a participant can nominate everybody
as he wishes or is there any restriction in nomination process. Shariah scholars differ in this
issue, based on their stand on the issue of Hibah.

4.1 The function of Nomination.
Like life insurance, the purpose of nomination in takaful is to ensure that the beneficiaries of the
participant have access to the takaful proceeds as quickly as possible without going through the
lengthy administrative delays of estate administration as it is not subjected to the Probate and
Administration Act 1959 and the Will Act 1959.

4.2 The Current Practice.
The current practice within the Takaful industry with respect to nomination is based on the
Section 65(1) of the Takaful Act 1984 which states: When a participant, in relation to any
family solidarity certificate or solidarity certificates, dies and on his death takaful benefits are
payable under the certificate or certificates, the operator may make payment to a proper claimant
such sum of the solidarity moneys as may be prescribed without the production of any probate or
letters of administration and the operator shall be discharged from all liability in respect of the
sum paid

Thus in every Takaful policy particularly when it relates to Family Takaful the policy holder is
mandated to provide a nominee.

4.3 The Shariah Issues.
The Shariah issues with respect to nominations can best be categorized as stated below:
Whether the takaful operator is obligated to pay the takaful proceeds to the nominee?
Status of nomination in takaful
Can nomination be revoked?
Whom can we nominate

4.4 Views of Scholars
Nominee is regarded as a trustee of the Takaful benefits. In addition, if he is the only nominated
beneficiary, he is considered as the absolute beneficiary of the Takaful benefit. Al-Quran has
emphasizes the role of trustee and the importance of trust in many verses. In Surah al-
Muminun, Allah has described the characteristics of a believer from the first verse up to the
ninth verse. In the eighth verse, Allah has prescribed that the believer is those who faithfully
observe their trusts and their covenants. Later, in verse tenth, Allah says that they are the heirs of
the Paradise.

Furthermore, when there are situations whereby if a person is being entrusted or nominated to
hold the minors property as a trustee, it is the nominees responsibility to hand over the property
upon confirming the maturity of the minor. Allah (s.w.t.) says;
"Make trial of orphans until they reach the age of marriage; if then you
find sound judgment in them, release their property to them; but consume
it not wastefully( Surah an Nisa 4:6)
In another ayat Allah (s.w.t.) commanded not to betray the trust. Allah says:
"O you who believe betray not the trust of Allah and the Messenger, nor misappropriate
knowingly things entrusted to you.(Surah Anfal 8:27).

4.5 Industry Practices.
The industry practices is based on the Insurance Act 1996 Section 163 of the Insurance Act 1996
gives the policy owner the power to nominate any person, albeit a natural one, to receive the
proceeds. Should that be the case, Section 65 of the Act compels the insurer to pay the proceeds
to the nominee even if it is not endorsed on the policy



5.0 The Concept of Tabarru
In order to eliminate the element of uncertainty in the Takaful contract, the concept of "tabarru"
(to donate or give away) is incorporated in it. In relation to this, a participant agrees to relinquish
as tabarru certain proportion of his Takaful installments or 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 sincerely in 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 that funds are sufficiently
protected against undue overexposure.

5.1 The function of Tabarru.
The function of Tabarru is to ensure that the Takaful operation is devoid of riba and this is one of
the concept in Takaful that separates and distinguish it from the conventional insurance. Once
Tabarru is removed from Takaful them it becomes riba based and there is no difference from the
conventional insurance.
5.2 The Current Practice.
In takaful plan, the participant would pay particular amount of money as contribution (known as
the premium) partly to risk fund (the participants' special account) using the concept of tabbaru'
(donation) and partly to another party (known as takaful company) with a mutual agreement that,
the kafiil is under a legal responsibility to provide for the participant's a financial protection
against unexpected loss, should it happen within the agreed period. In takaful, all of the takaful
holder will be a group of members or participants who agree to jointly guarantee among
themselves against loss or damage to any of them as defined in the pact. This is because in Islam,
all of the Muslim practice concept of brotherhood. This concept is suitable with the hadith.
Imperfect faith of the muslim until he love his relative like he love herself (By : al-Bukhari and
Muslim). For example in a pure Wakalah (Agency) Model, the Takaful may take 10% of the
premium as agency fee, 40% as Tabarru and the remaining 50% is invested and profit is shared
between the Takaful company and the Takaful contributors.

5.3 The Shariah Issues.
There are two main Shariah issues related to Tabarru contract;
1. As Tabarru fund belongs to the participants, the Takaful operator is not entitled for any
profit derived from the fund. Thus, any surplus from the fund must be return back to the
fund, for the mutual benefit of the participants in the future. On contrary, what is
happening right now is that, the Takaful operator also share the portion of the profit
derived from the fund.
2. Under the Tabarru concept, a person is not entitled to get back what he has contributed
to Tabarru as it already belongs to the mutual fund of all participants. The issue arises
when the Takaful participants are entitled for the surplus derived from the fund. Are they
really allowed to take the portion, or should them put all the surplus back into the tabarru
fund?

5.5 Proposed Alternative Solution.
For the first issues, some scholars permit the Takaful operator to take portion of the surplus as
administration charge. Takaful Ikhlas portray, the surplus taken by the operator is to compensate
its efforts in administrating the surplus fund. In addition, some practitioner argue that, the reason
why the Takaful operators in the Middle East are able not to take any portion of surplus because
they already taken a huge portion upfront- sometimes up to 90 percent of the contribution.
Unlike Middle East Takaful operators, Malaysian Takaful operators are taking surplus to cover
their expenses, due to the reason that they only take a small Wakalah fee upfront- not more than
35 percent of the contribution.

On the second issue, some scholars permit the participants to take surplus distribution as the
tabarru fund is meant to benefit the contributors themselves. Thus, if they agreed to benefit
from the surplus, what should prevent them from doing that? In addition, the practitioners argue
that, the surplus must be distributed to the participants in order to be competitive to insurance
counterparts. If Takaful operators do not distribute the surplus to the participants, they may run
away and subscribe insurance policy- which already ruled as impermissible and haram by the
OIC Fiqh Academy, Jeddah. Between two evil, choose the lesser evil is the basis of their
judgement.
6.0 Conclusions and Findings
The above discussion shows the facts about Sharia'h compliant insurance - Takaful. It reveals
that over the period of time the Sharia'h insurance has evolved as a comprehensive system
mainly by removing the features objectionable in conventional insurance. In this write up three
major issues were highlighted Nomination, Hiban and Tabarru as it relates to the Takaful and
the Shariah issues.
From the given background it can safely be concluded that though the concept of Sharia'h
insurance has developed, still there are issues that still need to be looked into critically to ensure
that all the shariah related issues are resolved and there is a common position among industry
players as to how the issues will be resolved for the common good of all in line with the Islamic
dictates.



















References
Books:
Al-Zuhayli, W. (2001). Financial Transactions in Islamic Jurisprudence. Damascus: Dar Al-Fikr.
Iqbal, M. (2005). General Takaful Practice: Technical Approach to Eliminate Gharar, Maisir and
Riba'. Jakarta: Gema Insani Press.

Noor, D. A., & Abdullah, D. A. (2008). Ownership and Hibah Issues of the Takaful Benefit.
Kuala Lumpur: ISRA.

Redzuan, H., Z.A. Rahman, & S.S.S. H. Aidid, 2009, Economic Determinants of Family Takaful
Consumption: Evidence from Malaysia, International Review of Business Research Papers.

Zamil Iqbal and Abbas Mirakhor. (2007). An Introduction to Islamic Finance: Theory and
Practical. Singapore: John Wiley & Sons (Asia) Pte Ltd.

Journals:
Bank Negara Malaysia. (2007). Shariah Resolution in Islamic Finance. Kuala Lumpur,
Malaysia: Bank Negara Malaysia.
Mohd Zamro Muda (2008): INSTRUMENTS OF HIBAH AND WILLS: ANALYSIS OF THE
REGULATIONS AND APPLICATIONS IN MALAYSIA. This paper was presented at the
Hibah and Faraid National Convention 2008, organized by JAKIM on August 7, 2008 at
Multipurpose Hall, the Wilayah Mosque, Kuala Lumpur.

Ismail, A. (2009). Nomination and Hibah Issues in the Takaful Industry. ISRA Shariah
Conference on Takaful 2009. Kuala Lumpur: ISRA.





Data from Internet:
Boudkeev, T., & S. Harris, 2006, Takaful: A Market with Great Potential,
http://tyo.ca/islambank.community/modules.php?op

Fisher, O. and D. Y. Taylor, 2008, Prospects for Evolution of Takaful in the 21st Century,
http://www.takaful.com.sa/m4sub3.asp#ans5

Pillsbury, D., 1998, Insurance for a New Affinity Group, The Muslim Community",
http://tyo.ca/islambank.community/modules.php?op

Wikipedia, history of insurance, http://en.wikipedia.org/wiki/history_of_insurance