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Introduction to Takaful
Insurance – the Islamic Way
Mehar Muhammad Ashfaq
June 2 , 2010 Room 5-5
University of Applied Sciences Coburg-Germany
Introduction to Takaful 1
MBA Financial Management- Germany
Ds- Concept Factoring GmbH- Germany
MBA Banking & Finance Position Holder-Pakistan
Lecturer Punjab Group of Colleges- Pakistan
Research Analyst Pakistan & Gulf Economist.
Introduction to Takaful 2
Outline of Presentation
Part No 1
• Concept of Risk
• Introduction to Takaful
• Takaful Insurance Potential
• Islamic Finance and Takaful in Germany
• Basic Elements of Takaful
• Takaful Worldwide
Part No 2
• Objections to Conventional Insurance
• Difference b/w Conventional Insurance & Takaful
• Misconceptions about Takaful
• Takaful Products
Part No 3
• Takaful Models
• Takaful Accounting
• Uses of Takaful
• Takaful Challenges
• Growth and Future Outlook
Introduction to Takaful 3
Part No 1
" Good Character is the Best
Introduction to Takaful 4
What Do You Perceive From Picture
Introduction to Takaful 5
Risk and Insurance
Risk and uncertainty are fundamental facts of life.
All human activities are subject to risk, which may lead to financial or
physical losses to him.
“Insurance is a contract or an act of assuring by
which persons or precious items, articles or
valuable properties are guaranteed against a
possible loss or damage by a contingent event in
routine life. "
Introduction to Takaful 6
Classification of Insurance Business
By Type of Products
i) Life insurance
ii) General insurance
iii) Liability insurance
Introduction to Takaful 7
Methods of Handling the Risk
1. Risk Transfer
2. Risk Sharing
Introduction to Takaful 8
Meaning of Takaful
• Takaful comes from the Arabic root-word….
• So it means mutual protection and joint guarantee.
Introduction to Takaful 9
“To create solidarity, peace of mind and security by sharing
risks for mutual protection of assets and property against
damage or loss within the framework of Shariah”
Introduction to Takaful 10
Origins of Takaful
Prophet Muhammad (PBUH) 14 centuries ago practiced successful schemes of
co-operative risk sharing.
1970s Emergence of Takaful as Waqala Model.
First Ever Takaful Companies:
The Islamic Insurance Co. of Sudan
The Islamic Arab Insurance Co. (IAIC) in the UAE
1980s Emergence of Takaful as Mudarabah Model.
Introduction to Takaful 11
How Islamic Principles Works
AQIDAH SHARIAH AKHLAQ
Faith & Belief Practices & Activities Moralities & Ethics
Man-to-God Worship Man-to-Man Activities
Political Economic Social
Activities Activities Activities
Introduction to Takaful 12
Sources of Islamic Law
Primary Source Secondary Source
• Quran : the very word of
God reveled to the • Ijtihad : Independent
Prophet Muhammad judgment by:
(P.B.U.H.) through the – Ijma : juristic
angel Gabriel. consensus opinion;
• Sunnah: the sayings – Qiyas : reasoning by
deeds and approval of analogy;
the Prophet Muhammad
Introduction to Takaful 13
Growth Potential in EU % of GDP
Total Muslim Origins of Total
Population Population Muslims Insurance
UK 58.8 m 1.6 m Somalia 16.5 %
France 62.3 m 5m Algeria 11%
Germany 82.5 m 3-4m Turkey 6.7%
3.6 % Bosnia
Source: PriceWaterHauseCoopers Introduction to Takaful 14
Takaful Opportunities in Non-Muslim Countries with
significant Muslim Minorities
Source: PriceWaterHauseCoopers Introduction to Takaful 15
Potential Takaful Distribution ion
a Pakista Singapor
14% n e
a 1% Sri Lanka
Bangladesh United 17%
6% Yemen Syria
Source: Google Emirate
Introduction to Takaful 16
Low Takaful / Insurance Penetration in
Source: PriceWaterHauseCoopers Introduction to Takaful 17
Islamic Finance Enters in
First Islamic Finance Conference by Bafin in Frankfurt 2009
Issance of License by Bafin
Opening of Kuveyt Turk Participation Bank in Germany in 2011
Source: Islamic Finance Expert Introduction to Takaful 18
What German Companies Doing
Largest insurer in Europe and the
second largest in the world.
Allianz Takaful (Bahrain) subsidiary of Allianz
Business of Allianz Takaful:
Family takaful with a focus on life insurance and investment-
linked insurance as well as health and medical insurance.
Introduction to Takaful 19
What German Companies Doing
Establishment of Hannover Retakaful Company in Bahrain.
"The entry of a major reinsurance player, such as Hannover Re,
into the retakaful arena points to the tremendous growth
potential of the takaful and retakaful industry.“
(Ahmed Al Bassam, Director, Licensing & Policy, Central Bank Bahrain)
Views of Mahomed Akoob, CEO, Hannover Re Takaful, Bahrain
Gulf Business Report
Introduction to Takaful 20
Takaful – Regulatory Framework
• Takaful Act – 1984 of Malaysia.
• Saudi Arabian Monetary Agency (SAMA)
Regulations of Saudi Arabia - 2004 .
• Bahrain Monetary Authority (BMA) Rules – 2005.
• Takaful Rules – 2005 of Pakistan.
Introduction to Takaful 21
Basic Elements of Takaful
• Risk Sharing:
Risk is shared between participants and not bought or sold between
them and the Operator
• Nature of Contract:
3 party contract involving Takaful Operator, Company, and the Participant
No direct relationship of Participant with Takaful Operator.
• Investment Management:
All investments are done based on Shari’ah guidelines
• Shari’ah Compliant:
Takaful is accepted by Shari’ah Scholars as a Halal risk mitigation tool
• Constitution of separate “Participants’ Takaful Fund”.
• Constitution of “Shariah Advisory Board.”
Introduction to Takaful 22
Main drivers of Takaful
• Individual purification
• Mutual assistance
• Mutual Guarantee
• Community well-being as opposed to profit maximization.
Introduction to Takaful 23
• The first ever Takaful company was established in 1979 - the Islamic
Insurance Company of Sudan.
• 124 Takaful Companies in over 23 countries.
• Global Market Size
• – 2004: US$ 1.4 billion
• – 2010: US$ 8.9 billion
• Average growth rate (30 % for 2010 ) higher than conventional
• Non – Muslims increasingly opting for Takaful products for
Source: (Ernst &Young 2010, P. Ahmed)
Introduction to Takaful 25
Part No 2
" Insurance is like marriage. You pay, pay, pay,
and you never get anything back….. "
Introduction to Takaful 26
Introduction to Takaful 27
Declaration by Shariah scholars rendering
conventional insurance un-Islamic
• Fatwa (Unanimous Decision) issued in Judicial Conference held in Makkah
in Shaban 1398 AH.
• Verdict of Supreme Court of Egypt on Dec. 27, 1926.
• Unanimous resolutions and fatwa by Ulama in the Muslim League
Conference in Cairo in 1965.
• Unanimous decision by Muslim Scholars in seminar held in Morocco on
May 6, 1972.
Introduction to Takaful 28
Objections to Conventional Insurance
Because of following Elements of:
• Uncertainty – Gharar
• Gambling – Maisir
• Interest – Riba
• Risk Transfer Mechanism
Introduction to Takaful 29
Uncertainty – Gharar
• Conventional insurance contract is basically a contract of exchange i.e.
buying and selling whereby policy (indemnity) is sold as goods, with
the premium as the price or consideration.
• The consideration must be certain for an exchange contract.
• The timing and amount of loss to be paid is not Certain.
• Thus, it involves an element of uncertainty in the subject matter of the
insurance sales contract, which renders its void under the Islamic law.
Introduction to Takaful 30
Gambling – Maisir
• The insured loses the money paid for the premium when the insured
event does not occur.
• The company will be in deficit if claims are higher than premium.
Introduction to Takaful 31
Interest – Riba
• “ …. Allah has permitted trading and forbidden riba (Interest) ” (Al
Baqarah 2 : 275)
• Insurance funds invested in financial instruments which contain element
of Interest like securities etc.
Introduction to Takaful 32
How is Takaful Insurance Different ?
• Certain aspects of normal insurance conflict with Shariah
Maysir - insurers make bets on the loss occurrence
(Gambling) and this is deemed to be gambling
Gharar timing and amount of the loss are
(Risk & Uncertainty)
Riba investments in interest bearing securities
and possible interest on loans
Haram investments in commodities or involvement
(Forbidden / Unlawful) - in activities that are forbidden (alcohol, pork
Introduction to Takaful 33
Takaful and Conventional Insurance
Issue Conventional Insurance Takaful
Organization Principle Profit for shareholders Mutual for participants
Basis Risk Transfer Co-operative risk sharing
Value Proposition Profits maximization welfare and spiritual
Laws Secular Regulations Shariah regulations
Ownership Shareholders Participants
Management status Company Management Operator
Form of Contract Contract of Sale Cooperative,
Islamic contracts of Wakala or
Investments Interest based Shariah compliant, Interest-free
Surplus Shareholders’ account Participants’ account
Introduction to Takaful 34
Mitigating Misconceptions about Takaful
Misconception The Truth is…
Products only Covers Larger Investor Base
relevant to Muslims Both Muslims and Non-Muslims
Products are too Only difference is the Islamic
complicated screening process
2,545 stocks, USD 9.3 trillion market cap-
Restricted Dow Jones Islamic Market World Index*
Universe 50% of SP500 is Shariah (by mkt cap)**
Performance Drag Not Inferior to Conventional
Performance: Return, Volatility,
Source: *Dow Jones,30/01/09, **Standard & Poors 17/2/09
Introduction to Takaful 35
• General Takaful
offers all kinds of non-life risk coverages products like motor takaful,
marine takaful, fire takaful, home takaful, shop takaful, etc.
• Family Takaful
offers life coverage and it has significant success in SE Asia. Malaysia 73%
net contributions and cut throat competition among market players in SE
offers tailored coverage for banks.
Source: (Ernst &Young 2010)
Introduction to Takaful 36
Part No 3
" The chief beneficiary of life insurance policies for
young, single people is the life insurance agent…. "
Introduction to Takaful 37
1. Mudaraba Model
It is an equity Partnership .
The Profit Sharing Model.
The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as
mutually agreed between the contracting parties.
This is commonly used in Malaysia.
Introduction to Takaful 39
Mudaraba Model to
Company Admin. &
Participant Contribution General Surplus
Takaful Cost of
paid by Takaful (Profit)
Peter Fund Takaful
Introduction to Takaful 40
2. Wakala Model
It is an agency Model.
Cooperative risk sharing occurs among participants where a takaful
operator earns a fee for services (as a Wakeel or Agent) and does not
participate or a share in any underwriting (Profit) results as these belong
to participants as surplus or deficit.
Under the Wakala model the operator may also charge a fund
management fee and performance incentive fee.
This model is used in Middle East region.
Introduction to Takaful 41
Wakala Profit Share Management Profit/Loss
Company From of PTF’s
Fee Expense attributable to
(Capital) (30% to 35%) of the Company Shareholders
Contribution Investment by Investment Income Sharing
paid the Company on Mudaraba Basis
General Operational Surplus
Participants’ Investment Cost of Surplus Distribution
Takaful Income Takaful/
Takaful Fund Fund ReTakaful Participants
Introduction to Takaful 42
Two separate accounts are created:
1. Participants’ Takaful Fund.
2. Shareholders’ Fund.
Separate Accounts are created for:
1. Operational activities.
2. Investment activities.
Dual audit of all transactions:
1. Financial Auditors.
2. Shariah Auditors. (criteria: Accounting & Auditing
Organization of Islamic Financial Institutions, AAOIFI).
Introduction to Takaful 43
• Currently few ReTakaful companies worldwide offering a relatively small
– Sudan (1979) National Reinsurance.
– Sudan (1983) Sheikhan Takaful Company.
– Bahamas (1983) Saudi Islamic Takaful and ReTakaful Company.
– Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance
– Tunisia (1985) B.E.S.T. Re
– Malaysia (1997) ASEAN ReTakaful International. More than
– Dubai (2005) TakafulRe by ARIG. 18
– Lloyds of London to form a ReTakaful Syndicate. Retakafuls
– SwissRe to form a separate ReTakaful Pool
– MunichRe to form a separate ReTakaful Pool
Source: (Ernst &Young 2010, P. Ahmed)
Introduction to Takaful 44
Foundations of Takaful in Pakistan
• 1949 - Declaration made in the Objectives Resolution adopted by the
Constituent Assembly of Pakistan “Sovereign state of Pakistan is established
to enable Muslims individually and collectively to order their lives in
accordance with the injunctions of the Holy Qur’an and Sunnah”.
• 1973 - The Constitution of Pakistan declares Pakistan as “Islamic Republic of
Pakistan and Islam as the official religion of the state”.
• 1985 - Objectives Resolution was made ‘substantive’ part of the constitution.
• 1983 to 1989 - The Council of Islamic Ideology held its sessions in order to
survey the Islamic Insurance System.
• 1992 - The Council of Islamic Ideology submitted its report on Islamic
• 2000 - The Insurance Ordinance defines the term “Takaful” in Section 2 and
provides for establishment of Takaful companies in the country.
• Sept., 2005 - Takaful Rules notified .
Introduction to Takaful 46
Uses of Takaful
Takaful can be used to cover:
• Property like house, factory, mosque, offices
• Vehicles (car, motorcycle etc..)
• Goods ( like during import or export )
• Health, accidents and Life etc
Introduction to Takaful 47
Global Takaful Skilled
Introduction to Takaful 48
Despite the remarkable growth rate recorded by the Takaful industry,
penetration is still far below the enormous market potential offered
by the Muslim community worldwide (25% of the total world population).
Introduction to Takaful 49
• World Muslim population is estimated at 1.5 billions, of which around
97% are based in Asia and Africa.
• A two-digit growth in the range of 20% to 30% can be reasonably
sustained for at least the next 10 years in the existing markets (Far and
Introduction to Takaful 50
New Takaful Frontiers
• Markets like Europe, North and Latin America, Central Asia, Australia
where large Muslim communities live are huge untapped reservoirs;
• The recent opening towards “Islamic windows” in the banking sector in
Europe is likely to be followed by “Takaful windows” initiatives.
Introduction to Takaful 51
Takaful Products to Non-Muslims
• Takaful Products are not exclusive to Muslims.
• Competitively pricing and sale through the
right channel it could attract any consumer
irrespective of their origin or faith.
Introduction to Takaful 52
• The success of Takaful largely depends on that of Islamic Financial
institutions on a global basis.
• Takaful defined.
• Difference with conventional insurance.
• Takaful Models
• Takaful Worldwide
• Prospects and Outlook.
Introduction to Takaful 53
“Takaful is a viable Shariah compliant
alternative to Conventional insurance”!
Introduction to Takaful 54