Pertemuan 15 islamic finance and takaful

ISLAMIC FINANCE & TAKAFUL:
AN INTRODUCTION
Mohd Johan Lee
J. Lee & Associates
For Kowloon Mosque & Islamic Centre

OUTLINES
 Sources of the Shariah
 Framework of Islamic Finance
 Shariah, Fiqh & Mu’amalat
 Necessary Requirements of Islamic Finance
 Riba, Gharar, Maysir & Others
 Essential Contracts in Islamic Finance
 Products and Instruments
3/17/2012
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(c) Mohd Johan Lee 2012

SOURCES OF THE SHARIAH
 Primary Sources
 The Holy Quran
 Sunnah (the sayings, deeds and endorsements
of Prophet Muhammad PBUH)
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SOURCES OF THE SHARIAH
• Secondary Sources (mostly by the exercise of
Ijtihad (reasoning by the learned))
 Ijma (Unanimous decision of the Ulama)
 Qiyas (analogy)
 Istishan/ Istihab (equity in Islamic law)
 Maslahah (necessity of the people)
 Surdul Dara’ih (Blocking the means)
 U’ruf (custom)
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FRAMEWORK OF ISLAMIC FINANCE
 In general, the framework of Islamic finance is the same
framework used by the conventional finance practices.
 These frameworks are, inter alia legal and regulatory
framework, taxation framework, accounting and auditing
standards, etc.
 Might have different or additional framework, such as
accounting and auditing standard, etc, due to its peculiarity.
 In certain jurisdiction, Islamic banking and finance might be
regulated by different sets of regulations, either separate or
additional, e.g. IBA 1983
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CONT’D
 However, Islamic Finance, as the name
suggests, has another framework, which is
considered the major element that
differentiates IBF from the conventional
banking and finance.
 Any violation of this framework will definitely
effect the validity of Islamic finance itself.
 Shariah Compliance Framework
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THE SHARI’AH FRAMEWORK OF ISLAMIC
BANKING AND FINANCE
 Three main interrelated terminologies:
Shariah, Fiqh & Muamalat
 Shariah, when viewed from legal perspective
is the fixed elements of Islamic law, i.e. what
has been clearly stipulated and mentioned in
the text. E.g. five time prayers, prohibition of
riba’, etc.
 As such, it is revealed in nature
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SHARIAH & FIQH
 Shariah, in this sense, is wide and encompassing
various branches of Islam
 Normally, it comes in its generality and it emphasizes
only on the principles and not the detailed rules (not all
the time)
 It is the duty of the judge (qadi), mufti and jurisconsult
(ulama’) to exert their intellectual efforts in deriving and
applying these principles on certain given scenarios.
 The result of human reasoning and understanding to the
shariah is known as fiqh
 Fixed v. Flexible
 Agreements v. Differences
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FIQH MU’AMALAT (ISLAMIC COMMERCIAL
LAW)
 However, in its general usage, it is called al-syariat al-
Islamiyyah (Islamic law).
 Islamic commercial law is one of the components of Islamic
law
 Other components of Islamic law include:
 Islamic law of purification and worship
 Islamic family law
 Islamic criminal law
 Islamic law of evidence and procedure
 Islamic law of inheritance, etc
 The main subjects of Islamic commercial law are
commercial contracts and the rules governing them
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ISLAMIC FINANCE PARADIGM
 Original rule of permissibility:
- Initial legal ruling in commercial contract is permissibility
- Contrary to acts of devotion (Ibadat)
- No legal injunction is needed in sanctioning new contract
- Every contract is considered lawful and acceptable if no
principle of shari’ah is violated
- Open a very wide door for further innovations
 Real Economic Activities
 Transactions-oriented not loan-based.
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WHAT AMOUNTS TO SHARIÀH
COMPLIANCE?
 In Islamic jurisprudence, the main source of law is the
Shariàh or Islamic law as contained in the Quran and
Sunnah
 Underlying rule: all contracts are deemed permissible
except when there is contravention of any established
principles of Islamic law / Shariàh
 Legal maxim (qaìdah fiqhiyyah):
“Al Asl fi al Ùqud al Ibahah”
-“the original rule in contracts is permissibility”
 The parameter: Avoidance of any contravention of the
established principles and prohibitions in Islamic law
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WHAT TO DO AND WHAT TO AVOID
 Conclusion of contract by mutual consent
 The avoidance of riba’
 The avoidance of gharar
 The avoidance of transactions involving
maysir (gambling)
 The avoidance of transactions involving
prohibited commodities
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WHAT TO BE AVOIDED
 Riba – prohibited in many Quranic verses and
sayings of the Prophet s.a.w.
 Meaning: riba is every excess in return of which no
reward or equivalent counter value is paid, in short,
every unjust enrichment is riba
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THE AVOIDANCE OF RIBA’
 Literally: excess, expand, increase, growth
 Any unjustified excess above and over the
capital, whether in loans (between creditor
and debtor) or in trade (with similar
commodities)
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PROHIBITION OF RIBA IN THE
QURAN
First Stage
(30:39)
Second Stage
(4:160-161)
Third Stage
(3:130)
Fourth Stage
(2:275-281)
• Compare riba
with zakat &
charity
• Praising zakat &
charity, not riba
• Attaching the
practice of riba
with the Jews
• Consider the
practice as an
iniquity (zulm)
• Prohibiting the
practice of
charging double
and multiple riba
• Conclusively
prohibiting all
forms of riba
• Any excess over
the capital is
disallowed
4 STAGES
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(AR RUM 30: 39)
 “and that which you give in gift (to others), in
order that it may increase (your wealth by
expecting to get a better one in return) from
other people’s property, has no increase with
Allah…”
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4:160 - 161
 “… and their taking of Riba though they were
forbidden from taking it and their devouring
of men’s substance wrongfully…. and we
have prepared... a painful torment.”
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3:130
 “O you who believe, Eat not Riba doubled or
multiplied, but fear Allah that you may be
successful.”
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2: 275
 “those who eat riba will not stand (on the Day of
Resurrection) except like the standing of a
person beaten by Shaitan leading him to insanity.
That is because they say: trading is only like
Riba,” whereas Allah has permitted trading and
forbidden Riba. So whosoever receives an
admonition from his Lord and stops eating Riba,
shall not be punished for the passt; his case is
for Allah (to judge); but whoever returns (to riba),
such are the dwellers of the Fire – they will abide
therein forever.
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2: 276 - 278
 Allah will destroy riba and will give increase
for sadaqat (deeds of charity, alms).
 ….
 O you who believe, be afraid of Allah and
give up what remains (due to you) from Riba
(from now onward), if you are really believers
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2:279
 And if you do not do it, then take a notice of
war from Allah and hiss Messenger but if you
repent, you shall have your capital sums.
Deal not unjustly (by asking more than our
capital sums), and you shall not be dealt with
unjustly (by receiving less than your capital
sums).
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2:280 - 281
 And if the debtor is in a hard time (has no
money), then grant him time till it is easy for
him to repay; but if you remit it by way of
charity, that is better for you if you did but
know.
 And be afraid of the Day when you shall be
brought back to Allah. Then every person
shall be paid what he earned, and they shall
not be dealt with unjustly.
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CONT’D…
 There are also a number of narrations from the
Sunnah on the prohibition of riba
 Some of the narrations give general
prohibitions of riba, e.g.:
“The Prophet of Allah s.a.w. cursed the receiver
and the payer of riba, the one who records it and
the two witnesses to the transaction and said:
they are alike (in guilt)”.
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CONT’D…
 Under Islamic law, riba can occur in two main situations,
i.e.:
 riba al duyun (loan): the riba or excess which occurs in
debt and loan transactions because of extension/delay in
repayment
 riba al buyu` (exchange): the riba or excess which occurs
in trading transactions involving the exchange of riba-
bearing commodities without observing the required rules
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PROHIBITION OF RIBA (LOAN)
Interpretative Efforts
What amounts to
Trade Usury
Criteria
■ Oppressive / unfair distribution of
risk & return
■ Unjustified enrichment at expense
of others
Criteria
■ Fair exchange of goods or
value
■ Fair distribution of risk &
return
Surah al-Baqarah, ayat 275
“ … But Allah hath permitted trade and forbidden usury
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PROHIBITION OF RIBA (EXCHANGE)
Application
Staple Food
Rules
■ Same Type
■ At Par
■ Spot
■ Different Type
■ Spot
Rules
■ Same denomination
■ At Par
■ Spot
■ Different denomination
■ Spot
Currency
Sunnah of the Prophet:
Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates,
salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the
commodities differ, then you may sell as you wish, provided that the exchange is
hand-to-hand or spot transaction.”
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SUMMARY OF RULES UNDER THE HADITH
• money1 + money1 =
2 conditions:
– Equality
– Hand-to-hand
• food1 + food1 =
2 conditions:
– Equality
– Hand-to-hand
• money1 + money2 =
1 condition:
– Hand-to-hand
• food1 + food2 =
1 condition:
– Hand-to-hand
• money + food = No condition – free trading
• others + others = No condition – free trading
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CONT’D…
 In contemporary finance, riba can occur in:
 All interest-based lending activities (e.g. all
conventional bonds)
 Fixed return on deposits in conventional banking (e.g.
designated accounts for receivables of the bonds)
 In the secondary trading of debt securities – if the
transaction is not spot & if there is discounting
(according to global Shari`ah standard)
 Thus, to be Shari`ah compliant, all contracts in
Islamic finance cannot be involved in any of the
usurious activities mentioned above
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THE AVOIDANCE OF RIBA’
 Literally: excess, expand, increase, growth
 Any unjustified excess above and over the
capital, whether in loans (between creditor
and debtor) or in trade (with similar
commodities)
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DIVISION OF RIBA
Riba’ al-Duyun
(RIba’ in Loan
Contract)
Riba’ al-buyu’
(Riba in exchange
contracts )
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RIBA’ AL-DUYUN
 The debtor borrowed money to be paid in certain
time, and the amount is more than the amount
borrowed
 A creditor gives a periodic loan and takes
monthly interest. The capital sum lasts until the
expiration of the period. Upon expiry, if the
debtor cannot pay, the period to pay back the
capital will be extended and interest will be
charged
 Arising out of exchange contract, a buyer must
pay a consideration. If he failed to settle on time,
the period will be extended by increasing the
amount (principle + interest).
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RIBA AL-BUYU’
 Mainly based on the saying of the Prophet:
“Gold for gold, silver for silver, wheat for
wheat, barley for barley, dates for dates, and
salt for salt; like for like, hand to hand, in
equal amounts; and any increase is riba’”.
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CONT’D
 These commodities can be classified under two
main categories which make the illah (ratio
decidendi) for their prohibition:
- i- medium of exchange (currency): Gold and
Silver
-ii- Staple foods: Wheat, barley, dates and salt
 Any other items, even though not mentioned in
the hadith but serve the same purpose will be
considered as having the same illah by way of
qiyas (analogy)
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RIBA IN MODERN
FINANCIAL TRANSACTIONS
 Riba’ al-duyun in loans and certain
controversial contracts (bay’ al-’inah, bay’
al-dayn, etc)
 Riba’ al-buyu’ mainly in bay’ al-sarf
(exchange of currencies)
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THE AVOIDANCE
OF GHARAR
 Meaning of gharar:
- Literally: risk, uncertainty, hazard
- The sale of probable item whose
existence or characteristics are not certain,
due to the risky nature which makes the
trade similar to gambling
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EXAMPLES OF THIS KIND OF SALE
IN HADITH
 Sale of fish in the sea, birds in the sky
 Sale of unborn calf in its mother’s womb
 Sale of runaway animal, slave
 Involve item which may or may not exist
 However, the Prophet did not lay down the
principles (qawa’id) for the prohibition of gharar.
 Examples given in the hadith were some of the
manifestations of the doctrine, but not principles.
 This has led to the dispute among jurists on the
area and coverage of gharar.
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GHARAR
 Meaning: has a range of negative connotations,
such as, uncertainty, deception, risk, hazard,
ignorance etc.
 If there is gharar, the contracting party/ies do not
really understand the attributes / consequence of
the contract
 Under Islamic law, gharar is prohibited because
its existence in the contract may deny the parties
of equal bargaining power and they cannot make
informed decisions; or if there is risks on
deliverability of the object of the contract
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PROHIBITION OF GHARAR
What amounts to
Trade by Mutual Consent
Criteria
■ Offer & Acceptance, indicating
consent
■ Elimination of mistake, fraud etc
Criteria
■ All illegal & defective elements
in contracts including gharar &
uncertainty
Unjust (batil)
Surah an- Nisa’: ayat 29
“ … squander not your property amongst yourself unjustly (batil)
except it be a trade among you by mutual consent…”
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PROHIBITION OF GHARAR IN THE SUNNAH
 The sunnah uses the word gharar and its derivatives
much more extensively than the Qur`an in the sense that
several new meanings are added
 In relation to commercial transactions, the Prophet s.a.w.
in many of his sayings directly prohibited the sale
involving gharar (uncertainty) and jahalah (ignorance)
 Thus, the prohibition of gharar is made conclusive by the
sunnah / hadith of the Prophet s.a.w.
 Examples: the prohibition of gharar sale (i.e., the sale
contract affected by gharar), the prohibition of the sale of
fish in the sea, bird in the air, unborn animals, lost items,
etc.
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CONT’D…
 In Islamic law, gharar can be of two degrees:
 Excessive or major (gharar fahish)
 Minor and tolerable (gharar yasir)
 Only major /excessive gharar will affect the validity of contracts,
where it will render the contract void / voidable, depending on
the degree of uncertainty
 Gharar affects trading and exchange contracts (mu`awadat); not
charitable and unilateral contracts
 In banking & finance – gharar can be triggered e.g. – in the sale
contract to create the indebtedness if the asset used is
uncertain / vaguely identified; the trading of a securitised debt
which is unconfirmed / not established, sale of insurance policy
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APPLICATION OF GHARAR
 Broadly speaking, gharar will effect the
validity of contract if it occurs in these areas:
- gharar in kind / type / attribute / quantity of
the object
- gharar due to delivery time
- gharar due to the price/ mode of payment
- doubt over the ability to deliver
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THE BENCHMARK
 Gharar which is excessive (gharar fahish)
occurs in exchange contracts (‘uqud al-
mu’awadat)
 To prevent gharar, the parties to contract
must have adequate knowledge and
information on the subject matter:
i- Their existence and deliverability
ii- Its quality, quantity and attributes are
known
iii- Time –frame for payment and delivery
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TOLERABLE GHARAR
 However, gharar is tolerable if:
- i) it is trivial (gharar yasir)
- ii) It occurs in other than exchange
contracts, such as in gratuitous contracts.
-iii) It happens to the ancillary object
(appendages) only (not the principal and
main subject matter of contract)
- iv) the economic need for the contract
embodying the risk is substantial
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OTHER THINGS TO BE AVOIDED…
 Transactions involving the prohibited
commodities, e.g., pork and liquor
 Surah al Maidah (5:3)
 Transactions involving gambling or maysir/qimar
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THE AVOIDANCE OF TRANSACTIONS
INVOLVING MAYSIR (GAMBLING)
 Involves the creation of risk for the sake of risk
 A combative relationship between two contracting
parties, each of whom undertakes the risk of loss
and the loss of one means gain for the other
 Apply to all games of pure chance
 No economic activities are gained in the practice.
The gambler will simply seek to amass wealth
without efforts.
 Gambling is gharar in its worst scenario.
 Prohibited by al-Qur’an in Surah al-Maidah (5:90)
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TRANSACTION INVOLVING PROHIBITED
COMMODITIES
 It is also not allowed to conclude contract on
illegal commodities such as pork, liquor etc.
 Illegality of certain commodities has been
spelt out clearly in the texts of al-Qur’an and
Sunnah of the Prophet.
 E.g. :
- Surah al-Maidah (5:3)
- Surah al-Maidah (5: 90)
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ESSENTIAL CONTRACTS IN ISLAMIC FINANCE
 Underlying principles utilised in devising products of IBF is
very important as they separate IBF from conventional
products.
 Contrary to conventional finance, which is specification driven
product, Islamic finance is more structure and principle based
product
 Rules and regulations will differ from one product to another,
depending on the structure employed
 In general, various underlying Shariah principles have been
utilised in devising products of Islamic Banking and Finance.
 They can be summarised as below:
- Sale based products
- Lease based products
- Participatory products
- Fee based products
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EXAMPLES OF THE PRODUCTS AND
UNDERLYING PRINCIPLES
 Banking products
 IIMM products
 Capital Market Products
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SHARI`AH COMPLIANCE: MAIN PRINCIPLES
Mutual consent Avoid
Interest
(riba)
Uncertainty
(gharar)
Gambling
(maysir/qimar)
Other prohibitions
e.g. Liquor, pork
Lawful Contractual
Objective
CONTRACTS
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ENCOURAGEMENT OF TRADE BY MUTUAL
CONSENT
 The Quran encourages work and trade
 The Prophet (s.a.w.) himself was a trader
 The encouragement of trade is evidenced by the
many instruments of trade available during the
Prophet's lifetime and in Islamic history
thereafter
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BUSINESS CONTRACTS
RECOGNISED IN ISLAM
 Contracts of sale and purchase (bay`), including all
its subdivisions, like:
 normal or spot sale
 mark-up sale (murabahah)
 deferred payment sale (BBA)
 sale with advance payment but deferred delivery (bay` al
salam)
 sale for future delivery of goods with flexible payment of
the price or manufacturing contracts (bay` al istisna`)
 sale of currency (sarf), etc.
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CONT’D…
 Some controversial sales:
 Sell and buy back (bay’ al `inah)
 Sale of Sale of debt (bay` al dayn)
 Islam recognises partnership contracts which
are mainly based on profit and loss sharing
(PLS), e.g.:
 mudharabah
 musharakah
 A relatively new invention in this regard is:
 Musharakah mutanaqisah
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CONT’D…
 Islam recognises public and private project
financing, e.g.:
 Leasing (ijarah) - private;
 Endowment (waqf) – private/public;
 State treasury (bayt al mal) – public.
 Modern forms of private project financing:
 Operational lease
 Financial lease – AITAB (hybrid contract)
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CONT’D… Islam recognises other additional contracts to provide
security to the parties in a contract, i.e., the contracts of
security (ùqud al tawthiqat), e.g.:
 suretyship/guarantee (kafalah): involves three parties
 mortgage (rahn): involves two parties
 These security contracts are normally combined with
other types of contracts, e.g.:
 the contract of BBA may be secured by a contract of
security involving collateral (rahn)
 Other contracts recognised in Islamic law:
 contracts of trusts (al amanat), e.g.: safe-keeping (wadiàh)
 contracts to do a specified task, e.g.: commision (juàlah);
agency (wakalah)
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KEY ISLAMIC COMMERCIAL CONTRACTS
Gratuitous
Contracts
Trading
Contracts
Investment
Contracts
Supporting
Contracts
Leasing Sale
Bay`
Bithaman
Ajil (BBA)
Operational
Lease
Financial
Lease Murabahah
Salam
Waqf
Loan
Mudarabah
Musharakah
Kafalah
Rahn
Hiwalah
Wadiah
Wakalah
Jualah
Muqasah
Ibra’
Gift
Istisna’ etc.
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Islamic Banking
SOURCES OF
FUND
APPLICATIONS
OF FUND
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3/17/2012(c) Mohd Johan Lee 2012
57
EQUITY
FINANCING
DEBT FINANCING
Fee Based Services
Wakalah
Kafalah
Sale based financing
BBA / Murabahah
‘Inah/Tawaruq/dayn
Salam
Istisna
Lease Based Financing
-Ijarah
-AITAB
Comsumer
Banking
Mudharabah
Musharakah
Corporate
Banking

ISLAMIC CAPITAL MARKET
Equity
Market
Bond
Market
Derivatives
Market?
Musyarakah
Mudarabah
-Debt Based
-ABS
-Equity Based
-Future Contract
-Options
-Swap
Mutual Fund / Islamic
REITs
Wakalah / mudarabah
/ musharakah
Islamic
Hedge Fund
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CONCLUSION
 Besides various frameworks applied to banking
practices (be it Islamic or conventional), Shariah
framework is a framework which is peculiar to
Islamic finance alone
 Yet, it forms the very substance of Islamic finance,
without which Islamic finance will loss its Islamicity
 As such, in practicing Islamic finance, the do’s and
don’ts must be clearly observed
 Islamic commercial law, from the fact that it subjects
to human interpretation and understanding admits
differences of opinion, as long as these differences
are grounded by valid evidence, produced by
capable personnel, done according to the right
methodology
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TAKAFUL
 Derives from the word Kafalah, a verb,
which means to bail, guarantee, warrant
or to secure ones need.
 Means Joint Guarantee.
 An arrangement between members of
community to jointly guarantee each
other should mishaps befall to any of
them
60
FOR MORE INFO...
Al Mawrid: A Modern Arabic-English Dictionary, Dar-el-Ilm
Lilmalayin, Beirut, Lebanon, 1991

PROLOGUE TO
MALAYSIAN TAKAFUL ACT 1984
 National Fatwa Committee in Malaysia resolved
that the present-day life insurance business
provided by the conventional insurance companies
was not in line with the principles of Shariah as it
contains elements which are against Islam such as
Riba (Usury), Gharar (uncertainty) and Maisir
(Gambling). ~~~ June 1972
61

PROLOGUE TO
MALAYSIAN TAKAFUL ACT 1984
 Perak Fatwa Committee subsequently also
declared that: “life insurance is not
permissible as it is based on riba from which
the profits of policyholders are derived. The
policyholders must pay premiums for an
indeterminate period which lead to the
element of gharar (uncertainty)”.
62

TAKAFUL PIONEERS
 Takaful started some 30 years ago in the
Middle East with the launching of two
companies in 1979:
 The Islamic Arab Insurance Co. (IAIC) in the
UAE and
 The Islamic Insurance Co. of Sudan
 But it took some time for the movement to
take shape.
 Later in 1984, Malaysia played a pioneering
role in setting the first Legal framework
specific to Takaful (Takaful Act Malaysia).
 This was instrumental in the successful
launching of the Takaful movement in
Malaysia and in other countries of South
63

OTHER ISLAMIC/ TAKAFUL LEGISLATIONS
 Other markets such as the Sudan and Iran
have Islamic regulatory environments and
became naturally Takaful markets.
 In Pakistan Takaful Act is enacted in 2005.
 In the Gulf countries specific Takaful
legislations are coming through in Bahrain
and in Saudi Arabia
64

TAKAFUL TODAY
From a handful of operators two
decades ago the Takaful movement
has blossomed into a fast growing
phenomenon in many Muslim
countries with very promising
prospects in other countries with a
large Muslim community.
65

TAKAFUL DRIVERS
This movement is driven by
a strong demand from a public who
would not insure otherwise (because of
religious beliefs); and
The successful development of Islamic
banking institutions providing capital
and Islamic financial instruments for
asset management and investment.
66

TAKAFUL DRIVERS
 Islamic banks and financial institutions
play a strategic and important role in the
distribution of Takaful products
(especially Life Takaful Products).
 Just as Bancassurance played an
important role in the distribution of
personal lines insurance products
Bancatakaful is an important driver for
Takaful.
67

TAKAFUL WORLDWIDE
The number of Takaful operators worldwide is
now estimated at:
 150 Takaful companies operating in 40
countries
 10 Retakaful companies and 6 Conventional
Reinsurance companies have established
Islamic windows.
 Takaful is one of the fastest growing
segments in insurance (at around 20% pa. on
average)
 World Takaful contributions are
conservatively estimated at around US$
3billions, of which:
 60% General Takaful
 40% Family Takaful
68

TAKAFUL GEOGRAPHICAL SPREAD
 South& East Asia : 56%
 Middle East : 36%
 Africa: 7%
 Europe, USA & Others: 1%
69

WORKING OF THE TAKAFUL BUSINESS: THE
MALAYSIAN CASE
 Takaful Business is based on the concepts of
Mudarabah and Tabarru. Involvement of these
two Islamic forms of business eliminates the
elements of Riba from insurance contract and
convert Gharar into tolerable form.
 In Family Takaful each Takaful installment is
divided and credited into two separate Accounts
namely, the Participants' Account(PA) and the
Participants’ Special Account(PSA). A substantial
proportion of the installments is credited into the
PA solely for the purpose of savings and
investment.
70

 The balance of the installments is credited into the PSA
as `tabarru' for Sharikah Takaful Malaysia to pay the
Takaful benefits to the heir(s) of any participant who
may die before the maturity of the contract.
 The amount accumulated in the PA is invested in
various business according to Islamic financing
techniques, and the resultant profits are divided
between the company and the participants according
to the agreed upon ratio, e.g., 30-70.
 The participant's share is calculated according to their
individual share in the PA, and credited into their
respective accounts, the PA and the PSA.
71

Company’s Admin
& Manag. Expenses
Profit Attributed
To Shareholders
PA
PSA
FTF
Investment Profit
PA
PSA
Participant
Company
Takaful Contract
based on Mudarabah
30%
70%
Payment from
PA
Payment from
PSA
Mudarabah Model
Family Takaful
72

PAYMENT OF CLAIMS
Should the Participant die or suffer Permanent
and Total Disability in the fifth year of
participation, Takaful benefit will be paid in the
following manner:-
 i. From Participant's Account =RM 4,890
(RM978 x 5)
profit if any, say RM 400
 ii. From Participants Special RM 5,000
Accounts (RM1000 x 5)
 Total Takaful Benefit Payable RM 10,290
73

IN CASE THE PARTCIPANT SURVIVED
Should the Participant survive until the
maturity of his FTP, payment of Takaful
benefit will be made to him as follows:-
i. From his Participant's Account = RM 9,780
(RM978 x 10)
profit from investment RM 1,800
ii. From Participants Special RM XXXX
Account
Total Takaful Benefit = RM 11,580 +
surplus determined
by Sharikah Takaful.
74

MUDARABAH MODEL
75
PROFITS
ATTRIBUTABLE TO
SHAREHOLDERS
COMPANY'S
ADMINISTRATION &
MANAGEMENT
EXPENSES
INVESTMENT BY
COMPANY
PROFITS
FROM
INVESTMENT
TAKAFUL
CONTRIBUTI
ON PAID BY
PARTICIPANT
GENERAL
TAKAFUL
FUND
GENERAL
TAKAFUL
FUND
OPERATIONAL
COST OF
TAKAFUL
OPERATIONAL
COST OF TAKAFUL
OPERATIONAL
COST OF
TAKAFUL
SHARE OF
SURPLUS FOR THE
PARTICIPANT
SURPLUS
(PROFIT)
SHARE OF
SURPLUS FOR
THE COMPANY
40% (Example Only)
60% (Example Only)
COMPANY
TAKAFUL CONTRACT
BASED ON PRINCIPLE OF
AL-MUDHARABAH
PARTICIPANT
General Takaful

WAKALAH MODEL
PROFIT / LOSS
ATTRIBUTABLETO
SHAREHOLDERS
TAKAFUL ADMIN & MARKETING
EXPENSES 25% TO 35%
INVESTMENT
BY FUND
PROFITS FROM
INVESTMENT
TAKAFUL
CONTRIBUTIO
N PAID BY
PARTICIPANT
GENERAL
TAKAFUL
FUND
65% TO 75%
GENERAL
TAKAFUL
FUND
OPERATIONAL COST
OF TAKAFUL /
RETAKAFUL
OPERATIONAL COST
OF TAKAFUL
OPERATIONAL COST
OF TAKAFUL
SHAREOF
SURPLUS FOR
THEPARTICIPANT
SURPLUS
(PROFIT)
100%
COMPANY
TAKAFUL
CONTRACT BASED
ON PRINCIPLEOF
AL-WAKALAH
PARTICIPANT
60%
SHAREOF PROFIT
FOR THECOMPANY
40%
MANAGEMENT
EXPENSES OF
COMPANY
76

Waqf Model
77

DEFINITION OF WAQF
 Waqf is an Arabic word and it means to stop to
withhold and not to let go.
 In technical meaning Waqf means to allocate or
donate some property or cash for a specific
purpose to get pleasure of Allah and not to let it
go through consumption or sale.
 The Waqf property comes into ownership of
Allah (SWT) and Waqif will have no property
rights on it.
78

 Waqif has right to set the rules for
Waqf and manage the Waqf.
 Waqf may be general purpose or
specific purpose, like Waqf ‘Ala al
Aulad or Waqf ‘Ala al Aqarib.
 In Islamic Law Waqf is a legal entity
79

WAQF MODEL
PROFIT / LOSS
ATTRIBUTABLETO
SHAREHOLDERS
TAKAFUL OPERATOR FEES FOR
ADMIN & MARKETING EXPENSES
25% TO 35%
INVESTMENT
BY FUND
PROFITS FROM
INVESTMENT
TAKAFUL
CONTRIBUTION
PAID BY
PARTICIPANT
WAQF FUND
65% TO 75%
WAQF FUND
OPERATIONAL COST OF
TAKAFUL /RETAKAFUL
OPERATIONAL COST OF
TAKAFUL
OPERATIONAL COST OF
TAKAFUL
SHAREOF
SURPLUS FOR
THEPARTICIPANT
SURPLUS
(PROFIT)
100%
COMPANY
TAKAFUL
CONTRACT BASED
ON PRINCIPLEOF
AL-WAKALAH
PARTICIPANT
60%
SHAREOF PROFIT
FOR THECOMPANY
40%
MANAGEMENT
EXPENSES OF
COMPANY
Waqf
INITIAL DONATION BY
SHAREHOLDERS TO
CREATEWAQF FUND
Waqf
PROFIT SHARING ON
MUDARABHA BASES
80

 A Waqf Fund would basically be a separate legal
entity to which the Shareholders would initially
make a donation to establish the Waqf Fund.
 The donation can be of any reasonable amount
(Shariah Board may specify such an amount).
 The objectives of the Waqf fund would be to
provide relief to participants against defined
losses as per the rules of the Waqf fund.
81

In this modified Wakala Model with Waqf, the
relationship of the participants and of the operator is
directly with the Waqf fund. The Operator is the
Wakeel of the Waqf Fund and the participants pay one
sided donation to the WAQF fund (not conditional)
which also eliminates the issue of Gharar. The WAQF
fund rules may define the sharing of surplus and other
rules under which it would operate but there is no
obligation to distribute surplus. Further the Qard
would be given by the shareholders to the WAQF
entity and not to individuals as in the typical Wakalah
model.
82

FUTURE OUTLOOK
 Despite the remarkable growth rate
recorded by Islamic finance and Takaful
industry, penetration is still far below the
enormous market potential offered by the
Muslim community worldwide (23% of the
total world population).
83

GROWTH OUTLOOK
 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 15% to
20% can be reasonably sustained for at least
the next 10 years in the existing markets (Far
and Middle East).
84

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.
85

ISLAMIC FINANCE AND TAKAFUL
PRODUCTS TO NON-MUSLIMS
 Islamic Finance and Takaful Products are not
exclusive to Muslims.
 Competitively priced and sold through the
right channel it could attract any consumer
irrespective of their origin or faith.
86

CONCLUSIONS
 Despite the challenges facing this “new”
industry, exciting times are ahead once the
latent potential is unleashed.
 The success of Takaful largely depends on
that of Islamic Financial institutions on a
global basis.
87

THANK YOU & WASSALAM
Mohd Johan Lee
J. Lee & Associates
 A-16-13, Tower A, Menara UOA Bangsar
 59000 Kuala Lumpur
 Tel:03-22881699 Fax:03-22881799
 email:jlee@jlee-associates.com
 mohdjohanlee@yahoo.co.uk
Also at:
Kuala Terengganu & Penang
88

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