Shariah Issues in Takaful

SHARIAH ISSUES IN ISLAMIC FINANCE
Shariah Issues in
Takaful
A Brief Assessment Through Literature
Review and The Opinions of Industry
Experts
Prepared by:
Mohd Shahrulnizam Abd Hamid
Email: msnra2@yahoo.com
Executive Summary
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Shariah Issues in Islamic FinanceMohd Shahrulnizam Abd Hamid
The takaful industry is a new industry. The industry is tracked back to 1979, when the concept
was launched in Sudan 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 surplus sharing. In addition, some minor issues also discussed in this paper to
make our understanding better. 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.
Tags: Takaful, hibah, surplus, mudharabah, wakalah, jualah, shariah issues, Islamic insurance,
tabarru, taawun, mutual contribution, nomination, MRTT, Shariah resolution.
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1.0 Introduction
Islamic Finance has captured a universe of USD 1 trillion dollar in assets under
management, and yet growing very fast. The industry has captured the attention of most of
the financial professionals worldwide. Acknowledge as the fastest growing industry in the
world, it comprises of mainly three sectors namely Islamic Banking, Islamic Capital Market
and Islamic Insurance (Takaful). Although Takaful is the slowest growing segment of Islamic
Financial industry, it has generated a vast interest among investors and insurance providers.
Wahab, Lewis, & Hassan, (2007) revealed that the concept of Takaful, which started in Sudan
in 1979 and later in Saudi Arabia, recently, has operators and products offered in more than
22 countries and is gaining popularity elsewhere as well.
According to The World Takaful Report released in April 2010 in conjunction with World
Takaful Conference held in Dubai, the global Takaful contribution grew 29% in 2008 to reach
US$ 5.3 billion and remain on course to surpass US$ 8.9 billion by 20101. The premium is
projected to increase to US$12.5 billion by 2015 with over US$30 billion in funds.
Interestingly, this figure for 2015 was revised from an earlier similar estimate of $7.5 billion
done in 1999, which in a way indicates that business expectations may be materializing at a
faster pace, driven to a large extent by strong market growth in the Gulf region and especially
Malaysia. Nowadays, the Takaful industry is populated by 110 operators worldwide2.
Surprisingly, American Insurance Group (AIG) is the largest Takaful fund operator in the
world.
With a good prospect of the future, The World Conference on Takaful which was held in
Dubai this year is a meaningful platform for Takaful practitioners to promote and develop the
industry. This industry has a lot to improve from its framework, model up to its operational
systems.
1 The World Takaful Report, released by Ernst & Young in April 2010.
2 Retrieved from BNM website on Friday, 12th November 2010. The URL
is:http://www.bnm.gov.my/microsites/financial/0204_ib_Takaful.htm
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As a segment of the Islamic Financial industry, Takaful is also subjected to many Shariah
issues related to its framework, model, application and operations. The issues have been
solved from time to time, but there is much heavy works still need to be done in order to
stabilize the industry. This paper will look into the Shariah issues in the Takaful industry that
still be an issue. The paper will start with the elaboration on the Takaful industry continued
by the Shariah issues related to this industry. Three main issues have been selected to be
discussed thoroughly and few solutions will be given, if any. Later, two additional Shariah
issues will also be highlighted and discussed in this paper. Lastly, this paper will be ended
with some recommendations and conclusions.
2.0 The Takaful Industry
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 cooperation, encompassing the elements of shared responsibility, joint indemnity, common
interest and solidarity.
There are four underlying principles of Takaful which are;
1. Taawun
Taawun is mutual help of a group of people.
2. Tabarru
Tabarruat is willingly relinquishing individual rights over the contributions paid, for
collective benefits.
3. Losses are divided and liabilities spread according to the community pooling system.
4. It does not seek to derive advantage at the cost of others.
Bank Negara Malaysia, in its website has interpreted Takaful as follows;
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Takaful (Islamic insurance) is a concept whereby a group of participants mutually
guarantee each other against loss or damage. Each participant fulfils his / her obligation
by contributing a certain amount of donation (or tabarru) into a fund, which is managed
by a third party - the Takaful operator.3
2.1 Types of Takaful Products

There are basically two types of Takaful products in the market worldwide- General and
Family Takaful. Let us analyze each type further.
2.1.1
General Takaful
General Takaful are Takaful policies that cover everything else except the family and
health benefit. It usually a short term policy, as short as few days coverage only. Some of the
examples of General Takaful products are as follows;
1.
2.
3.
4.
5.
6.
Fire Takaful;
Car Policy;
House Coverage;
House Content Coverage;
Group Coverage;
Travel Policy.
2.1.2
Family Takaful
Family Takaful is basically a Life Insurances counterpart. It covers family, health and
education benefits. It usually a long term policy, may up to 30 years. Some of the products
are;
1.
2.
3.
4.
5.
Family Takaful;
Health Benefit Takaful;
Critical Illness Coverage;
Education Benefit;
Saving Benefit.
2.2 How does Takaful works?
3 Retrieved from BNM website on 12th November 2010. The URL

is:http://www.bnm.gov.my/microsites/financial/0204_ib_Takaful.htm
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Takaful framework works using Taawun concept. It derives from the Quranic verse that
commands Muslims to help each other in good deeds and not wrong doings. Initially, the
participants of Takaful will each pay a Takaful Contribution, based on their individual risk
and the likelihood of making a claim, to create a Takaful fund. The nature of the risk covered,
and the period of cover, is specified in the Takaful Contract. Later, the Takaful fund is
invested strictly in Shariah-compliant activities under non-interest bearing conditions in
order to maximize the fund value.
Generally, there are two types of Takaful products- General and Family Takaful. General
Takaful covers, among others, motor policy, fire, MRTT and group policy. On the other hand,
Family Takaful is meant to secure the family conditions if anything happen to the head of the
family in the future. In addition, it also designs to create savings and assist future expenses
on strategic fields such as childs education.
Currently, there are a few models used in Takaful which is Mudharabah, Wakalah and
Jualah model. The Waqf model is not yet implemented, and still a theoretical discussion.
2.3 Bright Prospect in the future
Taking into consideration the massive attention that the Islamic Finance industry is
gaining now, it is a real possible that this industry, with all its three main sectors, will grow
faster than expected. For Takaful industry, the low penetration rate of Takaful and insurance
is a clear indicative of better future. Swiss Res research publication, Sigma, demonstrates
that less than 1% of GDP per capita is spent on insurance premiums in most of the Middle
Eastern countries even where affordability is not an issue.
Within Asia, Pakistan, Bangladesh, and Indonesiaall with largely Muslim populations
the percentage spent are between 0.1 to 0.3%. In India, the GDP and socioeconomic
conditions being somewhat similar, and the Muslim population being some 15 to 20% (which
accounts over 160 million Muslims), the percentage of GDP spent on insurance is 0.6%. This
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tends to indicate that among Muslims, the low insurance penetration also relates to religious
beliefs, besides other reasons.
Penetration is greater on the nonlife side, perhaps due to compulsory insurance
requirements in many areas of nonlife business. Muslims are more reluctant when it comes to
insuring their lives (life, health, and personal lines such as motor) due to religious concerns4.
Therefore, it is a big opportunity for the Muslim to expand the Takaful industry into Muslim
market, and grow the industry even faster.
3.0 Shariah Issues in Takaful
3.1 The Validity of Hibah and its Application
3.1.1 Conceptual Framework
Hibah and nomination in Takaful are also issues in Shariah. There are some parts of these
two areas which raise questions from the Shariah perspective. Hibah is an Arabic word,
which means gift in English. In Takaful, especially Family Takaful, as it deals directly with
death of the participant, a question arises whether the tabarruat (insurable) amount or the
claim can be distributed as Hibah to the beneficiaries or not? Must it be distributed solely
based on faraidh? Before we go deeply into the Shariah discussions, let us see clearly what
issues are revolving the Hibah area. Initially, there are four main issue related to this topic,
which are as follows;
1.
Whether Takaful benefits qualify as an asset for Hibah;
2.
Whether the status of Hibah changes to will (wasiah), if the participant dies,
since the transfer of the assets ownership would take place after the death of the donor;
3.
Whether a participant can revoke the Hibah, before the maturity of the Takaful
certificate; and
4.
What is the implication, should the recipient of the Hibah die before the maturity
of the Takaful certificate.

4 Abdul Rahim, A. W. (2006). Swiss Re SITC publication.
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In this paper, we will discuss the first two questions and give solutions for the
sustainability of the industry.
3.1.2
Current Practices
As currently practiced by the industry, only a few Takaful operators are applying Hibah in
their model. According to Mr. Tirmizi Mohamed Din5, the only Takaful operator in Malaysia
that has already applying Hibah is Takaful Ikhlas, while other operators still using faraidh
method for the distribution process.
3.1.3
The Shariah Issues

3.1.3.1 Are Takaful benefits qualified as an asset for Hibah?
Basically, we will give a real and tangible asset as a gift to another person. For example,
during our sons 20th birthday, we may give him a car as a gift. Its normal and no issues
related to that practice. On the other hand, Takaful benefits are intangible as at the time you
make it as Hibah, it is still an intangible benefit- not been cash yet. Thus, is it qualified to be
made a gift? Should gift is a real and tangible assets only?
3.1.3.1.1
Scholars Discussions
Which one should be done- give the sum covered amount as Hibah or distribute them
through faraidh? The Muslim scholars are still divided in the opinion of this issue.
3.1.3.1.1.1 Is the sum covered wealth of the deceased?
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.
5 Mr. Tirmizi Mohamed Din is a Shariah Executive of Takaful Ikhlas. I had the opportunity
to interview him on 27th October 2010.
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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
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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.
This situation is similar with the stipulated condition made by the performer of Waqf as
his stipulated condition is binding. As the contribution made by the policy holder through the
premiums is considered as tabarru act (donation) just like in the case of Waqf contract, he
can also put condition to whom the financial assistance should be paid as sole beneficiary or
as a trustee.
If the participation in the Takaful activity renders the participant the right to the proceeds
as his financial right, as claimed by contemporary scholars, it would mean that by merely
joining the Takaful plan, the participant is engaging in a business which entitles him or her to
financial benefits in terms of wealth creation in his or her or the familys favour. This would
also mean that simply by joining the scheme, the participant is entering into a contract that
would in return provide an amount of money exceeding the amount contributed.
This assertion however can be criticised that it would amount to a ribwi transaction and
undoubtedly be unlawful. This is because it is similar to buying a policy where the contract is
a transaction (i.e. a contract of exchanging two counter values). This type of contract should
abide with the rules of sales which among others there should not be any uncertainty for the
counter values, and the serious one is the counter values are money. It is exchanging money
with money, buying money with money which should follow its particular rules which is at
par and on spot for the same denomination and being on spot for different denomination.
This in turn would make the whole Takaful contract invalid according to Islamic law.
Being a ribw transaction, there would be no issue regarding the succession of the
money payable because the money received by the participant or his beneficiaries clearly
constitutes haram and therefore not subject to inheritance, apart from the premiums the
participant has paid. At the same time, it would be equivalent to a gambling activity in the
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sense that the policyholder enters into the contract with the hope of gaining more than he or
she contributes based on chance6. Therefore, choosing a moderate view is very important in
making all the transactions relevant and beneficial to the Muslim society at large.
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.
3.1.3.1.2
BNM Shariah Resolution
Bank Negara Malaysia (BNM) in its 34th 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.7
6 (Noor & Abdullah, 2008)

7 The 34th meeting of The Shariah Advisory Council, BNM, held on 21st April 2003 / 19
Safar 1424 has resolved this issue.
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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.
3.1.3.2 Can the status of Hibah change to will (wasiah)?
In this matter, the question arises, whether the Hibah will change status to will after the
death of the participant. The basis for this argument is that, if the participant dies, since the
transfer of the assets ownership would take place after the death of the donor, so its not a
Hibah anymore, it should be a will. A Hibah is given while a person still alive, and any gift
given after the death is considered as will, not Hibah. Is it so? And if it is so, what is the
implication derived?
3.1.3.2.1
BNM Shariah Resolution
The Shariah Council of BNM has agreed that the status of Hibah in Takaful plan does not
change into a will (wasiah), since this type of Hibah is a conditional Hibah, in which the
Hibah is an offer to the recipient of Hibah for only a specified period. In the context of
Takaful, the Takaful benefits are both associated with the death of the participant, as well as
maturity of the certificate. If the participant remains alive on maturity, the Takaful benefits
are owned by the participant, but if he dies within such period, then the Hibah shall be
executed.
3.1.3.2.2
Implications if it does change status to will
If the Hibah status can change to will after the death of the participant, it will drive a big
implication. Firstly, the amount of will must be shrink to only one third of the deceaseds
total assets. If the sum covered amount is exceeded the one third proportion of the total
assets, the nominee will only entitled for lesser amount and must left the remaining to
faraidh. This situation may harm the real beneficiaries. The ruling on will was commanded
by Rasulullah in one hadith recorded in Sahih Muslim;
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Mus'ab b. Sa'd reported on the authority of his father. I was ailing. I sent message to
Allah's Apostle (may peace be upon him) saying: Permit me to give away my property as
I like. He refused. I (again) said: (Permit me) to give away half. He (again refused). I
(again said): Then one-third. He (the Holy Prophet) observed silence after (I had asked
permission to give away) one-third. He (the narrater) said: It was then that endowment
of one-third became permissible.
This shrinking in proportion will lead to the second implication- the remaining balance
are now must go through faraidh process. To make thing worse, if there is no consensus
among the legal beneficiaries, the remaining amount will stuck under the trustee and will not
benefit either the beneficiaries or legal heirs. This situation will likely increase the burden of
the immediate family and the real dependant of the deceased.
3.2 Nomination in Takaful

3.2.1 Conceptual Framework
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. We will discuss their opinions
later.
3.2.2
Nomination in Legal Perspective
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Legally, a Takaful operator is bound to distribute the saving and the sum insured (applied
mainly for family Takaful products) as pre-determined by the participant. Section 65(1) of
the Takaful Act 1984 states that,
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.
However, Ismail (2009) had clarified that the proper claimant is not necessarily the
nominee as Section 65(4) of the Act states that;
In this section, proper claimant means a person who claims to be entitled to the sum
in question as executor of the deceased, or who claims to be entitled to that sum under
the relevant law.
Thus, from the legal perspective, it is clear that the nominee can be from legal
beneficiaries and non-beneficiaries such as adopted children and charity organizations.
3.2.3
Nomination from Shariah Perspective

3.2.3.1 The Main Issue- Who are eligible for nomination?
Nomination is an important issue as it will determine who are eligible to conduct and will
benefit from the sum covered and saving of a Takaful participant. From Islamic point of view,
Shariah scholars are differs on this issue. Those who opined that the sum covered is the
wealth of the deceased, so that it must be distributed through faraidh, decided that only
the legal heirs of faraidh system are eligible.
On the other hand, those who opined that the sum covered can be made as Hibah decided
that anybody, whether they are the legal beneficiaries or not, are entitled for the sum
covered as long as the deceased participant has nominate their name. For saving, it is clear
that it must be distributed through faraidh as it is part of the deceased wealth.
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3.2.3.2 Nomination as a trust

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. AlQuran 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.
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. 9
Again Allah (s.w.t.) commanded the trustee to return the trust to the right beneficiary:
"Verily Allah (s.w.t.) doth command you to render back your trust to those to whom they
are due 10
8 al-Quran, Surah an Nisa 4:6.
9 al-Quran, Surah al Anfal 8: 27.
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In other places also Allah (s.w.t.) warned against those who breach their trust. Allah
(s.w.t.) says:
"Contend not on behalf of such as betray their own souls; for Allah loveth not
one given to perfidy and crime. 11
"Verily Allah will defend (from ill) those who believe: verily, Allah loveth not any that
is a traitor to faith or shows ingratitude. 12
"If thou fearest treachery from any group, throw back (their covenant) to them, (so as
to be) on equal terms: for Allah loveth not the treacherous. 13
In the light of those Quranic verses, it is clear that the Takaful nomination is a
trust- in Islamic perspective. Thus, the obligation of a trustee is very big and those
who are appointed to be a nominee should execute the trust justly.
3.2.4
The Practice and The Proposed Solution
Currently, many of the Takaful operators have resort to give Hibah instead of
faraidh. Thus, they explicitly or implicitly accept that nomination should be open to
those who the participant thinks suitable to benefit from the policy, taking into
consideration the dependence level of each beneficiary. As discussed under Hibah
12 al-Quran, Surah al Hajj 22:38.
13 al-Quran, Surah al Anfal 8:58.
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issue, it is important to ensure that all dependent individuals will be benefited and
their burden will be relieved through Takaful benefits. And, bear in mind that, some of
the dependents are not included in the legal heirs of faraidh. Thus, it is important to
open the nomination process in order to uphold the justice.
As Takaful benefit is from Tabarru fund, it is appropriate to give away Takaful proceeds
as Hibah as it will definitely brings greater benefit as the possibility of it leading to dispute,
hatred, and devouring others wealth wrongfully is very small. For example, if the participant
has not saved any money and that he needs to provide a certain amount for his single
daughter who is a minor, it is better the sum covered is to be given to the daughter instead of
dividing them to many heirs of faraidh. This action will more likely to enhance justice as the
Takaful policy is meant to secure the livings of immediate and dependable family members
after the death of the participant.
For this issue, where there is nomination in Takaful, I would like to summarize the
proposals given by Ismail (2009) as follows;
1. Takaful operator should pay to the nominee, whether or not the nominee is
the beneficiary and that the Takaful operator should be discharged from all
liability in respect of the sum paid.
2. To ensure that the family of the participant has immediate access to
financial assistance in the interim period before eventual distribution of
the estate.
3. Therefore, in Malaysia, should there be an amendment or review of the
Insurance Act 1996 or the enactment of another act to replace it, this
matter should be given consideration.
3.3 Surplus distribution
3.3.1
Conceptual Framework and Current Practice
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Surplus distribution is still an issue to the Takaful industry. It is a prolong issue, not yet
resolved. Surplus distribution is an important operation in Takaful business. Being a taawuni
instrument to provide a mutual guarantee for possible risks, surplus arises as an issue of what
to do with it if such risks are dealt with through risk transfer or indemnification. As far as
surplus distribution is concerned, two juristic views have surfaced and dominated the Takaful
industry in the Middle East and Malaysia. The first one categorically prohibits the sharing of
the underwriting surplus between the Takaful operator and the participants, but the other view
validates the sharing, based on ratios that differ according to the line of products offered.14
Soualhi (2008) has defined the underwriting surplus in Takaful as the excess of premiums
over claims, plus investment returns. As widely practiced, the surplus, if any, is shared by
both the Takaful operator and the participants based on pre-agreed ratio. Based on the model
used, the scholars opinions differ regarding this issue. Basically there are three main model
used in Takaful products- Mudharabah, Wakalah (or/and Jualah) and mix of those model.
Each model carries different application of underwriting surplus distribution.
In addition, the misunderstanding of the concept of profit and surplus makes the thing
worse.
3.3.2
Surplus under Mudharabah Model
The distribution of underwriting surplus under Mudharabah model has brought the
criticisms from Shariah scholars. Initially, Mudharabah model is an equity contract in which
the profit will be distributed proportionately while the loss will be born solely by the capital
provider. The most important part is that, the remaining principal capital, both under
profitable or losing conditions, must be return back to the capital provider. Now, let us see
what is happening in Takaful Mudharabah policy.
14 (Soualhi, 2008)
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Administration
Charge Shahrulnizam Abd Hamid
Shariah Issues in Islamic
FinanceMohd
18
Below is the Diagram 1 of a Takaful operator in Malaysia, for its Family Takaful product.
Let us analyze the model closely.
Taawuni Account Pool
Takaful Ikhlass Family Takaful Model

Balance
Net Surplus
On October 27th 2010, I got a chance to interview Mr. Tirmizi Mohammed Din, a Shariah
Executive of Takaful Ikhlas, a Takaful operator in Malaysia. He gave me the above model. It
is a Mixed Model which employs Mudharabah, Wakalah and Jualah contract into one
Takaful product. For simplicity, let us assume that this is a pure Mudharabah model, in which
the participant is the capital provider while the Takaful operator is the trustee. Based on the
model, the Takaful contribution made by a participant will go to Taawuni Account Pool and
Investment Account.
SURPLUS
If there is any surplus out of Taawuni Account Pool, it will be credited as surplus. Later,
the surplus, either profitable or not, will be distributed between the participant account and
the operator. The operators portion is called SAC (Surplus Administration Charge). This
Personal
Investment
Account
/ Personal
Risk
Account
(PRIA) Malaysia. The
SAC
is up
to
20 percent
of the (PIA)
surplus
amount,
as Investment
regulated by
Bank Negara
Investment
Fund
remaining balance of surplus will be forwarded to the risk fund and participants account.
Expense Fund (EF)
Risk Fund (RF)
Special Fund (SF)
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19
The first issue arises here is about the definition of the surplus. Under Mudharabah
contract, surplus should be profit, and not the principal. Thus, the operator is entitled for the
profit but not the remaining principal. What is happening in the market right now is that, the
surplus is anything left after the total risk fund is deducted with claims, and it includes the
balance principal.
Another issue arises here is whether the Takaful operator is entitled for the surplus (as
currentlydefined by the industry) distribution or not. Let us assume that the operator is using
Mudharabah model for the Family Takaful product. If the Takaful operator use the
Mudharabah model, it only entitle for the profit and not the principal amount. In addition, it
must return the principal amount back to the participant, a process which not happens yet in
the market. What is happening now is that, both the Takaful operator and the participant share
the profit (if any) and the principal amount.
3.3.2.1 Proposed Solution

After reviewing the vitality of Mudharabah model, we found discrepancies that need
adjustments. Therefore, I suggest to Takaful operators to switch from Mudharabah to
Wakalah- Jualah model, which possess lesser Shariah-compliance risk. Under WakalahJualah model, a Takaful operator is entitled for a Wakalah fee (i.e. Expense Fund (EF)) and
later also entitled for Jualah fee if there is any surplus. Jualah is a fee imposed on
performance basis.
4.0 Additional Shariah Issues
Shariah is a living matter. It concerns all parts of life, including Takaful industry. That is
why, there are many Shariah issues concerning the industry, either about its basis, model,
philosophy or its application and process. The Shariah scholars are working hard to resolve
each and every issue, and they need time to give the best and most practical model and basis
for the industry. For the time being, there are still few more additional Shariah issues relating
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to Takaful. In this project paper, I will discuss a few of them, in order to give more
understanding upon this industry, especially from the Shariah point of view.
4.1 The Concept of Tabarru

4.1.1
Conceptual Framework
The Takaful industry is simply a mutual insurance. The spirit of cooperative is shown in
the basic contract of Takaful- Tabarru.Since gharar (uncertainty) is acceptable in tabarru
and not in a usual contract of compensation, it is yet the best contract to represent the goals
and objectives of Takaful. Tabarru means donating, contributing, offering, or granting. In the
context of Takaful, what it means is a voluntary specific amount of donation made among
participants and managed by the Takaful operator. The pooled fund is then utilized to help the
unfortunate members.
The spirit embodied in the concept of tabarru is that the participants are not thinking only
of their own protection but they should also be thinking of helping other participants.
Without the concept of donation, the transaction would be that of buying and selling of
insurance. The promise may or may not be fulfilled depending on whether or not the event
insured against occurs.
Should there be no claim; the insurers will stand to earn the premium paid. However, in
the case of tabarru, the risk is equally shared by the participants; the Takaful operator is not
the owner of the fund, just its custodian. Uncertainty (gharar) in Takaful remains but is
among only the participants whose interests are the same and hence permitted, whereas in
conventional insurance it is between the insurer and insured, whose interests are different.15 It
is important to state here that, the tabarru fund, or also known as Participant Risk Fund is
not the asset of the company; rather it belongs to the participants.
4.1.2
Shariah Issues related to Tabarru
15 (Wahab, Lewis, & Hassan, 2007)
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21
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?
4.1.3
Proposed Solutions
For the first issues, some scholars permit the Takaful operator to take portion of the
surplus as administration charge. As Diagram 1 of 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 upfrontsometimes 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.
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22
4.2 MRTT for Conventional Housing Loan: Is It Shariah Compliant?

4.2.1
Conceptual Framework
MRTT or Mortgage Rate Term Takaful is a Takaful policy to cover the house financing.
In Malaysia, it is compulsory for every housing loan and house financing by a bank to have
MRTT. In the event of death of the principal borrower or customer of a housing financing,
while the financing is not yet fully paid, the Takaful company will come and cover all the
outstanding balance of the financing. The issue is that, whether it is Shariah compliant or not,
for a Takaful operator, to cover MRTT for a conventional housing loan?
4.2.2
Shariah Assessment
To solve this matter, I have personally consulted few Shariah experts, and the answer is
quite easy. As long as the MRTT coverage only cover the principal amount, and not the
interest amount, it should be permissible. For example, for 30 years housing loan, Ahmad had
already paid for 10 years and suddenly he died in a car accident. Let say the conventional
banks policy for early settlement is that, he should pay only the outstanding principal
amount, and no more interest charges attached. Thus, it is permissible for the Takaful
company to cover any outstanding principal amount as it not involves the interest.
On the other hand, if it involves any interest charges, let say there will be a two percent
charge for any early settlement, the interest charges cannot be paid by the Takaful provider. In
addition, from the market and industry assessment, it is better not to cover the conventional
housing loan. Through this practice, those who intent to get MRTT coverage must also take
Islamic financing, which in the long run will help the growth of Islamic Banking sector.
5.0 Recommendation: Standardization or Diversification?
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23
Shariah issues rise from the diverse interpretation of the same Islamic sources. In order to
boost the industry forward, should we standardize the Shariah opinion? Or, should we let it
continuously diverse?
The issue of standardization and diversification of Shariah rulings is not a new issue in
Islamic finance. Some scholars have proposed it while others not in favor of it. From my
humble assessment, I am of the opinion that, there are few areas in the Takaful industry that
need Shariah standardization while, at the same time, we should tolerate more diversification
in other areas.
6.0 Conclusion
The takaful system is still in the process of evolving, with a number of issues raised by
various Shariah scholars. It is therefore desirable to encourage a process of discussion and
advance alternative approaches with ideas that may come from anywhere around the world.
The ultimate aim is to have a consensus model addressing as many current as well as future
legal concerns as possible. Such a process seems to be a logical way to move forward and
ensure that the takaful at some stage is governed by a uniform consensus-based model, if
standardization is proven the best method. Otherwise, a respectful diversification is another
reliable choice of conducting different Shariah views in the Takaful industry.
With a great prospect to grow ahead, we really believe that this industry will grow faster
than expected. With the current growth rate, and the opportunity from a very low Takaful and
insurance penetration rate of Muslim countries, it has been seen as a profitable industry in the
future. Despite all its great potential, it is also surrounded with challenges and defection that
demand our efforts and focus to improve the industry. Hopefully, one day, Takaful will be a
preferred insurance of the world, which promote justice and balance life. Wa Allahu alam.
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24
References
Al-Zuhayli, W. (2001). Financial Transactions in Islamic Jurisprudence.
Damascus: Dar Al-Fikr.
Ayub, M. (2007). Understading Islamic Finance. West Sussex, England: John
Wiley & Sons Ltd.
Bank Negara Malaysia. (2007). Shariah Resolution in Islamic Finance. Kuala
Lumpur, Malaysia: Bank Negara Malaysia.
Ernst & Young. (2010). The World Takaful Report 2010. Dubai: Ernst & Young.
Family Takaful. (2010). Retrieved July 5, 2010, from Takaful Ikhlas:
http://www.takaful-ikhlas.com.my/familyTakaful
(2009). Family Takaful Products and Processes, 7-8 July 2009. Kuala Lumpur:
Islamic Banking and Finance Institute Malaysia (IBFIM).
Iqbal, M. (2005). General Takaful Practice: Technical Approach to Eliminate
Gharar, Maisir and Riba'. Jakarta: Gema Insani Press.
Ismail, A. (2009). Nomination and Hibah Issues in the Takaful Industry. ISRA
Shariah Conference on Takaful 2009. Kuala Lumpur: ISRA.
Noor, D. A., & Abdullah, D. A. (2008). Ownership and Hibah Issues of the
Takaful Benefit. Kuala Lumpur: ISRA.
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Rosly, S. A. (2008). Critical Issues on Islamic Banking and Financial Markets.

Kuala Lumpur: Dinamas Publishing.
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Views and their Current Implementation. ISRA ISLAMIC FINANCE SEMINAR.
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Ma'ariful Quran.
Wahab, A. R., Lewis, M. K., & Hassan, M. K. (2007). Islamic Takaful: Business
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Theory and Practical. Singapore: John Wiley & Sons (Asia) Pte Ltd.

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SHARIAH ISSUES IN ISLAMIC FINANCE

2.1 Types of Takaful Products

2.2 How does Takaful works?

3 Retrieved from BNM website on 12th November 2010. The URL

Whether Takaful benefits qualify as an asset for Hibah;

of the Takaful certificate.

The Shariah Issues

3.1.3.1.1.1 Is the sum covered wealth of the deceased?

BNM Shariah Resolution

6 (Noor & Abdullah, 2008)

BNM Shariah Resolution

Implications if it does change status to will

3.2 Nomination in Takaful

Nomination in Legal Perspective

Nomination from Shariah Perspective

3.2.3.2 Nomination as a trust

The Practice and The Proposed Solution

Conceptual Framework and Current Practice

Surplus under Mudharabah Model

Takaful Ikhlass Family Takaful Model

Risk Fund (RF)

Special Fund (SF)

3.3.2.1 Proposed Solution

4.0 Additional Shariah Issues

4.1 The Concept of Tabarru

Shariah Issues related to Tabarru

15 (Wahab, Lewis, & Hassan, 2007)

There are two main Shariah issues related to Tabarru contract;

4.2 MRTT for Conventional Housing Loan: Is It Shariah Compliant?

5.0 Recommendation: Standardization or Diversification?

Rosly, S. A. (2008). Critical Issues on Islamic Banking and Financial Markets.

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