Mahyuddin Khalid emkay@salam.uitm.edu.

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ISLAMIC FINANCIAL LEGAL FRAMEWORK

LEGAL FRAMEWORK OF TAKAFUL

CONTENT
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INTRODUCTION HISTORICAL DEVELOPMENT OF TAKAFUL CONCEPT OF TAKAFUL TAKAFUL VS CONVENTIONAL INSURANCE TAKAFUL ACT 1984 LICENSING OF TAKAFUL OPERATOR GOVERNANCE OF TAKAFUL INSURABLE INTEREST LEGAL ISSUES IN TAKAFUL CONCLUSION

INTRODUCTION
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The legal framework for Islamic banking and takaful in Malaysia is currently undergoing the legislative process towards its enactment. The new legal framework would not only streamline the legal requirements across sectors but would also ensure that the law was reflective of the nature and features of Shariah contracts. It would also ensure that the degree of regulation would commensurate with level of risks that Islamic financial institutions, markets and products pose to the overall financial sytem Greater clarity on the legal and prudential requirements underpinned by Shariah principles will enable participants of the Islamic financial system to align to their practices and expectations accordingly when undertaking Islamic financial business and transactions

HISTORICAL DEVELOPMENT OF TAKAFUL

Insurance practices were known before the time of the Prophet Muhammad SAW and had gradually developed. Ibn Abidin (1784-1836), became the first Islamic scholar to come up with the meaning, concept and legal basis of an insurance contract. It was a common practise of the ancient Arab tribes that if any member of a tribe was killed, the concept of Aqilah was practised. The practice of paying blood money, ransom and societys responsibility to establish a joint venture to provide help and aid to the poor were practiced at that time.

CONCEPT OF TAKAFUL
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The main reason insurance being forbidden in Islam by the National Fatwa Council in 1972:

Life insurance is an unislamic (fasid)because it contains uncertainty (gharar), gambling and usury (riba).

Takaful is a protection scheme which provides mutual protection among its participants. Takaful is based on the concept of social solidarity: mutual assistance, trusteeship (Mudharabah) and co-operation, inspired by the teachings of Islam. Indeed the meaning of Takaful is guaranteeing each other. The co-operation element in Takaful stems from the fact that the participants are both the insured and insurers themselves. There is no transfer of risk, as all the losses are shared by the members themselves.

TAKAFUL VS CONVENTIONAL INSURANCE

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In Takaful, the company is not the insurer insuring the participants or members. The persons participating in the scheme mutually insure one another; and based on mutual assistance. Takaful company merely handles the matters of investment, business and administration, and as such it is a facilitator of the risk mitigation process. In insurance embodies various elements which are strictly and clearly prohibited by Islam, namely Gharar, Maisir and Riba.

TAKAFUL VS CONVENTIONAL INSURANCE

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Gharar
The service offered by insurance companies is transfer of financial and economic losses arising from unforeseeable future associated with risk, in return for a predetermined payment known as the premium. Insurance allows the insured to substitute uncertainty with certainty. The insured agrees to pay premium in return for a guarantee by the insurance company that the latter agrees to pay a sum of compensation in the event of a disaster, but the insured is being informed/uninformed how such compensation is to be derived.

TAKAFUL VS CONVENTIONAL INSURANCE

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Maysir
Any person who embarks on contract which encompass uncertainty, necessarily indulges in a form of gambling. The insured holds a specific financial interest of the insurance, and entitled to compensation only if he suffers any loss occasioned by an insured peril and not otherwise, and indemnified only to the actual loss or damage. The insured event itself is not guaranteed to occur, any money put on stake as such for that purpose is construed as a gamble in Islam. In the case of life insurance ,when policy-holder dies before the maturity date and only paid part of the premiums, his beneficiaries will receive a certain portion of money which is unsure of its origins and source.

TAKAFUL VS CONVENTIONAL INSURANCE

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Riba

Insurance is essentially an interest-based products. In life insurance, the insured receives an amount far greater than the premiums he paid. In general insurance, the amount paid to the insured on the occurrence of incidence more than the premiums paid. The money collected by the insurance companies from insured persons is also invested in interest-bearing accounts and other unIslamic dealings. In Takaful, the agreement specifies how the profits (surplus) from the Takaful operations to be shared according mudarabah contract. The concept of Tabarru (to donate or contribute), where the participants agree to relinquish certain portion of their Takaful instalments as a contribution to a common pool, which the compensation is paid as agreed upon. In the case of surrender or lapse of the policy, conventional insurers will forfeit the insurers premium, whereas under the principles of Takaful there is no such forfeiture.

Other differences

TAKAFUL ACT OF 1984

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Takaful Act, 1984 is the Act for the regulation of Takaful business. It was enacted following the establishment of Bank Islam in 1984;

Due to the fact that Islamic bank needs insurance cover for its own assets and interests arising from the financing and credit facilities

Section 2 : defines Takaful as a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid to the participants in case of need, whereby the participants mutually undertake to contribute solely for that purpose. It gives clear description that the participants of Takaful scheme are joint contributors to receive mutual protection.

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LICENSING OF TAKAFUL OPERATOR

Section 4 provides requirements for carrying on business as a Takaful operator. Section 4 (1) : Takaful business shall not carried on in Malaysia except by a company in the Companies Act or society runder the Co-operative Societies Act. Section 4 (2) : the following criteria would have to be fulfilled to become Takaful operator:

Must be registered under the act in respect of that class of business or both; Maintains at all times a surplus of assets (cash or securities) over liabilities of not less than the amount as may be prescribed from time to time Made the deposit as required with the accountant general a value of not less than the amount as may be prescribed. It is a member of a takaful association approved.

FINACIAL REGULATION

Maintains a surplus of assets over liabilities

Takaful (Surplus of Assets over liabilities) Regulations 1985. Family Solidarity Business: RM5 million Takaful Business: RM10 million.

Made deposit with the Accountant General

Takaful Statutory Deposits Regulations 1985. Not less than RM300,000.00

Takaful operator must pay annual registration fee to BNM.

FSB or GB: RM2500.00 FSB and GB: RM5000.00

TAKAFUL BUSINESS

Family Solidarity Business:

Long

terms mudharabah contract which provide cover mutual aid among participants, expressed in the form of financial benefits paid in family takaful fund should any of its members be inflicted by a tragedy.

General Business:
Short

term basis. Protection in the form of mutual help to compensate members of financial loss arising out of material damage to personal property and belongings.

GOVERNANCE OF TAKAFUL
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Section 54(l) : the Governor of the BNM shall be the Director General of Takaful. Section 8 : the Director General shall be responsible for the registration and may or may not be made with conditions. Section 10 : the Director General may impose conditions of registration on an operator who is already registered under the Act Section 8(5) : Before registration, the Director General must be satisfied that:

the aims and operations of the Takaful will not involve any element which is not approved by the Shariah; a provision for the establishment of a Shariah advisory body to advise on the operations of its Takaful business

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SHARIAH GOVERNANCE OF TAKAFUL

Section 53A : a Takaful operator, agent, broker or adjuster may seek the advice of the SAC of BNM on Shariah matters relating takaful business and they shall comply with the advice of the SAC. Section 11 : Registration may be cancelled if the operator is pursuing aims or carrying on operations involving any element which is not approved by Shariah.

INSURABLE INTEREST
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Insurable Interest is defines as the interest an individual must have in insurance coverage carried by someone else. From legal perspective: the party to the insurance contract who is the insured or policy holder must have a particular relationship with the subject matter of the insurance whether that be a life or property or a liability to which he might be exposed. Section 152 (1) Insurance Act 1963: The absence of insurable interest in conventional insurance will render the contract illegal, void and simply unenforceable. The purpose of insurable interest:

to determine the motive for purchasing insurance and in the assignment of a beneficiary in a life insurance policy. to avoid gambling or wagering practices.

INSURABLE INTEREST
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The provision on insurable interest in life insurance provides exemptions on:

Close family members such as husband and wife, child or ward under the age of majority. An employee. A person that the policyholder depends on. Mr A pays premium on behalf of his wife and names her as beneficiaries - The insurance company recognizes it because in the event of unexpected death, the family would suffer an economic loss. Mr A pays premium of insurance for another party let say his best friend, if that person names him as the beneficiaries - The insurance company will not issue the policy.

Example:

RELEVANCIES OF INSURABLE INTEREST IN TAKAFUL

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The requirement of insurable interest is not relevant under Takaful because:

The Takaful Act 1984 does not require this principle in family takaful or general takaful. The nature of family takaful makes this element irrelevant as a participant participates in this scheme only for the benefit of himself and his family. He cannot do so for the purpose of benefiting or on behalf of the 3rd party. It is irrelevant because the participant cum insured could not have any interest on his life. The principle of takaful: takaful contract must be concluded between the participants themselves, a party who is neither insured or insurer is not eligible to participate in contract.

CONCLUSION
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Takaful is a venture which epitomizes the virtues of co-operation, mutual help and shared responsibility among the participants The business is conducted on the basis of profitsharing (Mudharabah) and the Takaful mechanism mutually guarantee the well-being of all the participants. No business participation is undertaken directly or indirectly in matters prohibited by the Shariah. The Takaful contract attempts to determine the terms of the contract with clarity to minimise any uncertainty. The philosophies of brotherhood, mutual assistance and solidarity enjoined and encouraged by Islam in all aspects of life can be gleaned especially from the bases which font the operation of Islamic insurance itself.

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END OF CHAPTER