2. CONTENT
2
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
3. INTRODUCTION
3
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
4. HISTORICAL DEVELOPMENT OF
4
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
society’s responsibility to establish a joint venture
to provide help and aid to the poor were
practiced at that time.
5. CONCEPT OF TAKAFUL
5
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.
6. TAKAFUL VS CONVENTIONAL
INSURANCE
6
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.
7. TAKAFUL VS CONVENTIONAL
INSURANCE
7
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.
8. TAKAFUL VS CONVENTIONAL
INSURANCE
8
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.
9. TAKAFUL VS CONVENTIONAL
INSURANCE
9
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 un-
Islamic dealings.
Other differences
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 insurer’s premium, whereas under the principles of
Takaful there is no such forfeiture.
10. TAKAFUL ACT OF 1984
10
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.
11. LICENSING OF TAKAFUL
11
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.
12. 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
13. SHARIAH GOVERNANCE OF
13
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.
14. INSURABLE INTEREST
14
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.
15. 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.
Example:
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.
16. 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.
18. 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 profit-
sharing (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.
