Hibah in Takaful Industry


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Hibah in Takaful Industry

  3. 3. ACKNOWLEDGEMENTAssalamualaikum w.b.tFirst and foremost, Alhamdulillah, praise be to Allah S.W.T, The Might for giving usgood health and strength to undergo and complete our assignment successfully. Incompleting this assignment, there are many parties who kindly give us theircooperation and guidance. Firstly, we would like to express our appreciation toKnowledge Management Centre (IBFIM) and Takaful Ikhlas Sdn Bhd for giving us anopportunity to get many valuable knowledge and experience.Our gratitude also goes to our lecturer Ustaz Khairul Anwar Ahmad for his kindlymoral support and guidance. We also wish to express our sincere appreciation toUstaz Ahmad Termizi Bin Mohamed Din, Executive, Shariah Compliance Departmentof Takaful Ikhlas Sdn Bhd for his advice and guidance.Lastly, special thanks to our family and friends for their pray, encouragement, careand full support. Finally, we would like to say our deepest gratitude to all peoplearound us for those who are involved directly or indirectly in completing thisassignment.Truthfully,FARAH SULASTRY BINTI SUHAIMINUR ATIQAH BINTI ZAKARIAROSWAHIDA BINTI AHAMAD SHUBELI 3
  4. 4. 1.0 INTRODUCTION Takaful is not a new concept. In fact, it has been practiced by Muslimcommunities for the longest time ever. The objective of takaful is to guarantee to helpeach other. The concept of takaful (Islamic insurance), where resources are pooledto help the needy does not contradict Shari’ah principles.1 It is in line with theprinciples of compensation and shared responsibilities among the community.Basically takaful is a mutuality arrangement among the community members. Andthe cooperative takaful way is seen as the unique alternative to avoid the elements ofgharar (uncertainty), riba (interest) and maisir (gambling), which makes conventionalinsurance not acceptable to Muslim scholars.2 Some Muslims believe insurance is unnecessary, as society should help itsvictims. Muslims can no longer ignore the fact that they live, trade and communicatewith open global systems, and they can no longer ignore the need for banking andinsurance. The demonstrates of how early clerical apprehensions were overcome tocreate pioneering Muslim-friendly banking systems, and applies the lessons learnt toa workable insurance framework by which Muslims can compete with non-Muslims inbusiness and have cover in daily life. It uses relevant Quranic and Sunnah extracts,and the arguments of pro- and anti-insurance jurists to arrive at its conclusion thatMuslims can enjoy the peace of mind and equity of an Islamic insurance scheme.31.1 THE HISTORICAL DEVELOPMENT OF AL-TAKAFUL Takaful is a growing and fast developing industry. The main reason behindthe introduction and development of takaful is to offer an Islamic and Shari’ahcompliant alternative to conventional insurance.4 Thus, similar to conventionalinsurance, takaful is designed to provide protection and indemnity to both individualsand corporate bodies against loss or hazards to their selves or properties. Takaful (‫ )التكافل‬is an Islamic insurance concept which is grounded in Islamicmuamalat (banking transactions), observing the rules and regulations of Islamic law.5This concept has been practiced in various forms for over 1400 years. Muslim jurists1 http://www.mifc.com/publication/p.9.10.pdf2 Ibid3 Mohd. Ma’sum Billah, Islamic and Modern Insurance Principles and Practices, Ilmiah Publishers, 20034 Dr. Engku Rabiah Adawiyah Engku Ali, Essential Guide To Takaful (Islamic Insurance), CERT, 20085 What’s Takaful: A Guide To Islamic Insurance, 2008 4
  5. 5. acknowledge that the basis of shared responsibility in the system of aquila aspracticed between Muslims of Mecca and Medina laid the foundation of mutualinsurance. Human society has in fact, practiced ‘insurance’ in one form or another sincetime immemorial. The concept of protection against loss by natural hazard has beentracked back by some historians to at least 215 B.C, when the Roman Governmentwere required by suppliers of military stores all risk of loss, arising from the attack ofenemies or from storms, to the supplies which they placed in the ships. One the other hands, some people consider that it was the Pharaoh of Egyptwho invented the insurance principle when, on the advise of the Prophet Joseph, thedirected the latter to store grain in the years of abundance to meet the demand thelean years.6 Similarly, each Arab ethnic group tied by blood ties considered the loss of anyindividual member, including his liability towards the payment of blood money, as itsown and was obliged by custom and tradition to come to his rescue and take suitablemeasures to give rise cover such loses or liabilities collectively. 7 This took the form ofmutuality and gave rise to the custom of losses being share by the group as a whole.Furthermore, Islamic societies have always collectively assisted their members, bothin cash and kind, when they have been required to incur some unusual or additionalexpenditure on deaths, births, marriages, etc. All the above practices mutualassistance can be considered as origin forms of insurance.1.1.1 DEFINITION Takaful is derived from the Arabic root-word “ kafala “, a verb, which meansguarantee , bail , warrant or an act of securing one’s need. 8 Therefore, takaful (in itsgive and take form) means joint guarantee, whereby a group of participants agree tomutually guarantee each other against a defined loss. In the context of Islamicinsurance, takaful refers to an arrangement for mutual indemnity in providingprotection and compensation to the participants who suffered from perils or hazards.96 Note of Takaful From Ustaz Ali Jinnah7 Ibid8 Dr. Engku Rabiah Adawiyah Engku Ali, Essential Guide To Takaful (Islamic Insurance), CERT, 20089 Ibid 5
  6. 6. According to Section 2 of the Malaysian Takaful Act 1984: “ Takaful is a scheme based on brotherhood , solidarity and mutualassistance which provides for mutual financial aid and assistance to the participants ,in case of need whereby , the participants mutually agree to contribute for thatpurpose “ .101.1.2 PRINCIPLES OF TAKAFULThe principles of Takaful are as follows:• Policyholders cooperate among themselves for their common good.• Every policyholder pays his subscription to help those that need assistance.• Losses are divided and liabilities spread according to the community pooling system.• Uncertainty is eliminated in respect of subscription and compensation.• It does not derive advantage at the cost of others.1.2 TREND IN TAKAFUL INDUSTRY1.2.1 KEY TRENDS IN THE TAKAFUL LANDSCAPETakaful as a Key Institutional Investor:11 Islamic funds have found their appeal withretail and HNW individuals, but institutional investors (including Islamic pensionplans) are bound to grow in importance. This implies more sophisticatedrequirements: greater diversification, longer track records and heavier scrutiny ofrisk-adjusted returns. The arrival of takaful assets foretells a second wave of growthfor Islamic funds, with a greater focus on Shari’ah-compliant products than thecurrent driver of GCC liquidity (which doesn’t necessarily seek Islamic productsexclusively).Takaful as a Driver of Discretionary Portfolios: 12 While demand for pooled vehicleswill remain strong, more operators would seek to customize their portfolios viasegregated accounts, a common trend in the SRI industry. In fact most SRI assetsare placed not in mutual funds but rather in discretionary portfolios (92% in the USand 79% in Europe). Furthermore, the size of takaful operators would not always10 Malaysian Takaful Act 198411 Comparative Study of Insurance and Takaful (Islamic Insurance), Muhammad Anwar, 17 March 200612 Ibid 6
  7. 7. justify an in-house asset management team, prompting outsourcing of severalcomponents to specialized firms (i.e. for allocations into real estate, alternatives, etc).This could also widen the demand for fund of funds programmers as a morestandardized alternative.Takaful as a Fully-Compliant Investor:13 Despite the above comparison to SRI (globalassets at approximately USD2.3 trillion), takaful operators will fully allocate intoShari’ah-compliant instruments, making their impact far more prominent.Conventional insurance/pensions are not required to fully invest in SRI, and in somecases these are marginal allocations. Takaful, on the other hand, also has muchmore elaborate requirements (Shari’ah screening and compliance), whereas 80% ofSRI screening is focused purely on tobacco and alcohol exclusion. In this sensetakaful must not only seek a few compliant products but take a portfolio-wideapproach that tackles all asset classes.Takaful as a Source of Product Demand: 14 While the growth and issuance of sukukseems to grab more headlines than takaful, the two go hand in hand. In fact, sukukcan be regarded as being driven by product supply (especially from government andgovernment-linked issuers), whereas takaful exemplifies product demand (and fixedincome being the most prominent product gap). What remains to be seen is whetherthe appetite of takaful is strong enough for it to allocate into products with shortertrack records (such as emerging markets and alternative products). Furthermore,conventional insurance allocates extensively to balanced funds, and the demand forthese mixed-asset funds should also be expected from takaful investors.1.2.2 SIGNIFICANT TREND IN TAKAFUL INDUSTRYFirst There has been a significant momentum in terms of growth and participationof takaful players in the global market. With its rapid annual growth of between 15-20%, the global takaful industry is one of the fastest growing components of theinsurance market.15 Based on the 2007 Oliver Wyman Report, the potential premiumfor takaful worldwide, is at least USD20 billion annually, while the current figures forpremium is estimated at USD4 billion. The report also estimates that up to 20% of the13 Ibid14 Ibid15 Article about Takaful (Bank Negara Malaysia) Assistant Governors Keynote Address at the InternationalTakaful Summit - "Global Takaful Industry: Moving to the Next Level of Excellence" 7
  8. 8. takaful revenues originated from non-Muslim customers. The strong growth was alsoattributed by the increasing number of companies offering takaful services acrossjurisdictions. Currently, there are more than 250 takaful operators worldwide. There isalso a growing participation of established conventional players in the takaful andretakaful industry. There are large conventional players from the UK, US andGermany that have set-up takaful or Retakaful companies within their groups. This isan important development. A strong and credible retakaful industry is a crucialcontributor to promote the expansion of the takaful industry worldwide.16Second There is a growing global demand for takaful products following thephenomenal growth of various components in the Islamic financial system particularlythe Islamic banking sector and the Islamic capital market. The advancement by bothsectors contributed towards the strong growth of takaful and retakaful industry.17 Forinstance, the tremendous growth of Islamic financing and mortgages provide naturaldemand for mortgage protection takaful covers as part of the package to complementIslamic financing products. The increasing popularity of sukuk issuance also providesgreat support to the growth of the takaful industry. The issuance of more sukuk withlonger tenure to match investment and risk management of longer-term liability wouldspur the growth of the investment-linked takaful products. The upside on this istakaful has a ‘natural constituent for it to grow further in the future.Third Much progress has also been achieved in the regulatory sphere in the lasttwo years. The Islamic Financial Services Board (IFSB) has established a jointworking group with the International Association of Insurance Supervisors to developstandards applicable to takaful operators.18 IFSB have made significant progress inthis initiative, including issuance of concept paper on the regulation and supervisionof takaful entities. Further, the IFSB working group is in the midst of finalizing anexposure draft on corporate governance standards for the takaful industry. Thecorporate governance standard will cover key issues in the takaful business includingrights and obligations of stakeholders in takaful operations and risks ownership.19IFSB has also set up a working group on solvency in takaful business. This willfurther improve comparability between takaful companies, promote harmonization of16 Ibid17 Ibid18 Ibid19 Ibid 8
  9. 9. practices and give more confidence to the industry as a whole. These are certainlypositive developments for takaful industry, to be recognized as an emergingcomponent in the mainstream global financial system.1.3 MODEL OF TAKAFUL1.3.1 GENERAL TAKAFUL MODELS A general takaful business can use any of the operational models as examplemudarabah, wakalah , or waqf models . The most popular models for general takafulin Malaysia are perhaps the modified mudarabah and modified wakalah models. Thereason being, general takaful operation is normally a short-term arrangement and therisks under coverage are generally inherent.201. General Takaful Operation – Mudarabah Model Under the pure mudarabah model, there will not be any sharing of the netunderwriting surplus. In this model , the sole source of income to the takaful operatorwill be the mudarabah investment profits as inadequate and do not commensuratewith their efforts in managing the takaful operation .21 This may deter the takafuloperator from opting for the pure mudarabah model and go for the modifiedmudarabah. Under the modified mudarabah model, the participants contribute to thegeneral takaful fund by way of donation or tabarru’.22 The participants then appointthe takaful operator to be their manager to invest the fund by way of a mudarabahcontract. All the investment profits are channeled back into the takaful fund. At thesame time, the takaful fund is used to pay claims and other expenses, such as, re-takaful and reserves. The net surplus (inclusive of the mudarabah investment profits)is treated as “mudarabah profits“, which are to be shared between the takafuloperator and the takaful participants at the agreed profit sharing ratio.2. General Takaful Operation – Wakalah Model20 Dr. Engku Rabiah Adawiyah Engku Ali, Essential Guide To Takaful (Islamic Insurance), CERT, 200821 Ibid22 Ibid 9
  10. 10. Under the wakalah model for general products, the participants as a groupappoint and authorize the takaful operator to be their agent (wakil) to manage thegeneral takaful fund.23 The takaful operator will be the participants’ agent (wakil) forboth the “insurance” as well as investment activities. A wakalah fee is charged for thetakaful operator’s efforts. If the takaful operator is not charging anything else overand above the original wakalah fee, this is considered as a “pure wakalah model “.However, if the takaful operator is charging an additional “performance fee” as apercentage of the net underwriting surplus, this is considered by some to be a“modified wakalah model“. Under the modified wakalah model, the participants contribute to the generaltakaful fund by way of donation or tabarru’.24 The participants then appoint the takafuloperator to be their agent (wakil) to manage their insurance and investment activitiesof the takaful fund. The operator is remunerated with an up-front wakalah fee. All theinvestment profits are channeled back into the takaful fund. At the same time, thetakaful fund is used to pay claims and other expenses, such as, re-takaful andreserves. The net surplus is to be returned to the participants after deducting anagreed percentage as “performance fee” for the takaful operator.1.3.2 FAMILY TAKAFUL MODELS Similar with general takaful, family takaful also has a variety of operationalmodels. Some takaful operators use mudarabah model, while others use wakalahmodel, or waqf model.25 In addition to the basic model, some family takaful modelsalso have additional features to better serve the various specific needs of participantsand make the products more competitive or efficient. For, example, the inclusion ofsome “riders“, the “drip” features, “takaful-link” or unit-linked.1. Family Takaful Operation – Mudarabah Model The earliest model for family takaful in Malaysia is the mudarabah model.26 Inpractice, takaful schemes in Malaysia normally use pure mudarabah or wakalahmodel for the PA, while the modified mudarabah or modified wakalah / ji’alah is usedfor the PSA.23 Ibid24 Ibid25 Ibid26 Ibid 10
  11. 11. Under the pure mudarabah model, the participants contribute to the FamilyTakaful Fund for two main purposes: saving / investment; and donation. 27 The savingand investment will be credited into the PSA. The PA belongs to the participants. ThePSA belongs to the family takaful risk fund. Both PA and PSA will be invested inShari’ah compliant investments by the takaful operator. Any investment profits will beshared between the participants and the takaful operator according to pre-agreedprofit-sharing ratio. The PSA will also be used to pay claims, reserve and others. Anynet underwriting surplus will be returned to the participants. The PA will beaccumulated and then paid together with the coverage amount from the PSA to theparticipants or rightful recipients upon maturity or claim.2. Family Takaful Operation – Wakalah Model In a family takaful operation that uses the wakalah model, the participants stillcontribute to the Family Takaful for the two main purposes of saving / investment anddonation.28 Similar with the mudarabah model, the saving/ investment portion will becredited into the PA, and the donation portion will be credited into the PSA. However,when the takaful operator manages the Family Takaful fund, it is done on the basis ofwakalah (agency contract) for which, a fee is charged by the takaful operator. Here, all underwriting surplus and investment profit belong to the participants/policyholders, with charges inclusive of investment management fee being taken asincome to the operator. These charges can take many forms, and could includeincentive compensation. It is the structure of these charges that can greatly changethe risk profile of the operator.1.3.3 THE CONCEPT AND WORKING SYSTEM OF TAKAFUL As a concept, insurance actually does not contradict the practices andrequirements of the Shari’ah. In essence, insurance is comparable to the system ofmutual help in relation to the tradition of blood money under the Arab tribal customs.It is the pooling of common resources to help the needy , a scheme which is verymuch in line with the principle of compensation and shared responsibility among thecommunity , as practiced between the Muhajirin of Mecca and the Ansar of Medina ,27 Ibid28 Ibid 11
  12. 12. following the Hijra of the Prophet (PBUH) over 1400 years ago . 29 In fact, Muslimjurists acknowledge that this practice laid the foundation of mutual insurance. However, Muslim jurists have generally accepted that the practice andoperation of conventional insurance, in its present form, do not conform to the rulesand requirements of the Shari’ah. In June 1972, The National Fatwa Committee ofthe Malaysian Islamic Affairs Council resolved that the present-day life insurancebusiness provided by the conventional insurance companies was not in line with theprinciples of Shari’ah. Similarly, in a comprehensive deliberation, The Fiqh Academyof the Organization of Islamic Conference (OIC), at its meeting in December 1985,resolved that no forms of insurance ( life or general ) conformed to Islamicprinciples .30 According to the jurists, insurance business is based on a buy-and-sellcontract which does not fulfill the characteristics of a buy-and-sell contract accordingto Islam, because of the presence of the following elements in the insurance contract.1.4 GROWTH IN TAKAFUL INSUSTRY The growth in Takaful business in Malaysia has been impressive. Startingfrom a low base in 1994, the annualized average growth used to be in the order of92% in Family Takaful and 34% in General. Since 1998, the growth rate has sloweddown to around 30% in Family Takaful and 17% in General.31 In Family Takaful theproducts sold were individual and group term and savings products, mortgagepolicies and pension plans. In General takaful all classes of business were sold.29 Directory of Islamic Insurance (Takaful) 2000, Institute of Islamic Banking & Insurance30 Ibid31 Position of The Takaful Industry in Malaysia, Takaful expected to constitute 20 percent of totalinsurance market by 2010. – Islamic finance news 12
  13. 13. TABLE 1: Growth of Takaful in MalaysiaUS$m Family % General % Total % Takaful Increase Takaful Increase Takaful Increase1998 55.0 36.6 91.61999 70.0 27 % 42.7 17 % 112.7 23 %2000 93.2 33 % 49.8 17 % 143.0 27 %Exchange rate RM2.43 to $ (1997 prices)A greater awareness of Takaful system is achieved • More Takaful companies are set up and run professionally • More global coverage is secured through international companies network and the use of modern IT technology • Sale through banks • Companies are well capitalized and demonstrate secure haven for the funds • Retakaful capacity with triple A rating is availableOther factors were also taken into account such as literacy levels in each country andthe take up rates for takaful products as opposed to conventional products.GRAPH 1 13
  14. 14. Twenty-seven countries were selected where most of the demographic andinsurance statistics was available. It was estimated that the global takaful premiumcould be in the region of US$7.4 billion in 15 years time, growing at nearly 20% perannum.32 This is not an unachievable task when we have Malaysian takaful businessgrowing at 60% pa and the Middle East at 10%. With concerted effort on part of theTakaful operators worldwide, a growth of 20% pa should be very much possible. 331.4.1 TAKAFUL INDUSTRY GROWTH The Takaful industry has grown significantly as the Islamic alternative toconventional insurance and has evolved from being a regional business to a globalone. The renaissance in Socially Responsible Investing (SRI) and customer demandfor Shariah compliant solutions has enhanced the community banking appeal ofTakaful-related products.34 Major markets currently include Malaysia, Iran, Pakistan,Saudi Arabia and other GCC countries. Annual average individual market growthrates range between 15% and 30%. The Takaful product family spans acrossgeneral, life, health and pensions business lines. The two main business models used in the Takaful industry are theMudharabah and the Wakalah models. The Mudharabah model is commonly used inMalaysia and involves the Takaful operator managing the operation in return for ashare of the surplus on underwriting and a share of profit from investments. 35 TheWakalah model is more prevalent in the Middle East region. In this model, theTakaful operator acts as an agent (Wakeel) for the participants, and manages theTakaful/re-Takaful fund in return for a defined fee.36 The global Takaful industry is relatively small in comparison to itsconventional insurance counterpart and the current Takaful market size is estimatedbetween US$2.5 billion (RM9.18 billion) to US$3.5 billion (RM12.85 billion) of annualpremium. It needs to gain critical mass, build worldwide brand recognition andexceed performance standards set by the conventional insurance industry. There areonly a few international Takaful suppliers. The major challenges faced by the nationaland cross-border Takaful suppliers include raising customer awareness andeducation; expanding product innovation, creative product design and marketing;32 Ibid33 Ibid34 Malaysian Islamic Finance Issuers and Investors Forum 2006, Sohail Jaffer35 Ibid36 Ibid 14
  15. 15. gaining brand recognition; offering attractive investment choices for customers infamily Takaful linked investment plans; intelligently deploying technology to enhancecustomer experience and overall consumer satisfaction levels; finding an AAA-ratedinternational reinsurance company willing to accept a re-Takaful solution, offerindividual risk-bearing capacity; and widening penetration of bank and alternativedistribution channels. The Takaful industry has been successful in distributing products through itsagency sales force, direct channel, e-commerce and, to a limited extent, via certainretail banks.37 Product customization for the different bank channels (retail, massaffluent, private banking), customer referrals and gaining brand loyalty are importantcritical success factors. Product packaging, customer convenience, customer careand transparency of product terms, conditions and pricing are also importantcatalysts to increase the share of the Takaful business across multiple distributionchannels. For family Takaful linked investment plans, an open investmentarchitecture platform is important for the retail banking channel. Clearly the ability totailor suitably diversified risk reward investment portfolios, select top quartileperforming funds from major international brands and control defined portfolio risklevels are powerful drivers for the retail value proposition. Furthermore, the productcertification by an independent Shariah board of experts and ongoing compliancemonitoring with high ethical standards has favorably impacted transparency,disclosure of different terms and conditions, charges and frequency of reporting. Several enterprising banks have included banc assurance in their productofferings, and some of the new Takaful operators are offering certain general Takafulproducts online. The distribution of Takaful life and savings products through bankchannels is relatively new, but the sales process through the branch banking networkhas been facilitated by the advent of web-based point of sale and onlineadministration systems.38 In addition to the benefits of customer convenience, the“white label” advantage of using own brand equity, transparency of product termsand conditions, open investment architecture and efficient online processing has allproved attractive to major bank distribution partners.37 Ibid38 Ibid 15
  16. 16. 1.4.2 CURRENT STATUS OF TAKAFUL INDUSTRY The current size of the takaful market based on 2005 figures is US$4.3 billionof premium contributions from about 107 companies if windows are strictly excluded.The industry is characterized by:• Lack of statistics & information;• Takaful operators are mostly new companies, local and small-sized players;• Lack of market research and R&D;• Lack of expertise & standardization;• Limited investment opportunities;• Heavy reliance on conventional reinsurance.1.5 COMPARISON BETWEEN TAKAFUL AND INSURANCE ConventionalParticulars Mutual insurance Takaful insuranceResponsibility Risk is transferredfor Mutual risk sharing Mutual risk sharing amongst from the insured toproviding amongst members participants the insurerprotection Secular law and Secular law and Secular law and regulation andGoverning law regulation regulation Shari’ah law Shareholders ofOwnership Members Participants insurance company Wakala (agency) / mudarabah (trust financing) agreement and Bilateral insurance Bilateral insuranceContract forms unilateral contracts based on policy policy principles of Tabarru’ (donation)Investment No restrictions on No restrictions on All investments to be in equity/debt equity/debt accordance with Shari’ah investments investments principles – excludes all debt 16
  17. 17. and some equity investments The members of the The participants are collectively The insurance mutual are responsible for the payment of company (and collectively claims and may be asked toLiability of the ultimately its responsible for the contribute in the event ofoperator shareholders) are payment of claims shortfall if the Takaful operator responsible for any and may be asked to does not provide Qard Hasan claims payments contribute in the (interest free loan) event of shortfallSurplus in Ultimately for account For account ofoperational For account of participants of shareholders membersincome2.0 THE CONCEPT OF HIBAH2.1 HIBAH IN DEFINITION Hibah is a gift. This is a token given voluntarily by a debtor to a creditor inreturn for a loan. Hibah usually arises in practice when Islamic banks voluntarily paytheir customers a gift on savings account balances, representing a portion of theprofit made by using those savings account balances in other activities. 39 It is important to note that while it appears similar to interest, and may, ineffect, have the same outcome, Hibah is a voluntary payment made (or not made) atthe banks discretion, and cannot be guaranteed.40 However, the opportunity ofreceiving high Hibah will draw in customers savings, providing the bank with capitalnecessary to create its profits; if the ventures are profitable, then some of thoseprofits may be gifted back to its customers as Hibah. And Hibah also defined as thetransfer of existing properties made voluntarily and without any consideration by theDonor to the Donee and accepted by or on behalf of the Donor during their life time.41“….and gives his wealth in spite of love for it, to the kinsfolk, to the orphan and to Al-Masakin (the poor), and to the wayfarer and to those who ask...”39 Undang-undang Harta dan Amanah, Akmal Hidayah Halim, IBFIM40 Ibid41 Ibid 17
  18. 18. (Verse 177, Surah al-Baqarah)“What is wrong with men who give their sons gifts and then keep them and if the sondies, they say, ‘My property is in my possession and I did not give it to anyone.’ But ifthey themselves are dying, they say, ‘It belongs to my son, I gave it to him.’Whosoever gives a gives, and does not hand it over to one to whom it was given, thegifts is invalid, and if he dies it belongs to the heirs in general.” (Narrated from Abdullah Ibn Umar; Abdullah Ibn Abbas)“The Prophet (Pbuh) said: It is not lawful for a man to make a donation or give a giftand then take it back, except a father regarding what he gives his child. One whogives a gives and then takes it back is like a dog which eats and vomits when it isfull, then returns to its vomit...” Thus it is necessary to emphasize at the outset that the takaful business aspracticed in Malaysia is of the kind of cooperative takaful (al-takaful al-taawuni)participated by a group of members of the public for their own cause within thedomain of the private sector.422.2 ADVANTAGES OF HIBAH The hibah property will not be part of the original owner because the contractconcluded that the transfer of the property to the beneficiaries is legal. The personwho gives his property as hibah will be protected against any legal action fromcreditors on the particular wealth.43 In Malaysia, there are few corporate and professional bodies that provide theconsultation on how to manage our financial planning, one of them is Darul HibahConsultant Sdn. Bhd.44 The person who dealing with hibah will not facing with anydifficulties in completing hibah transaction. It won’t take long time compared todocumentation completing faraid matters.42 Nomination and Hibah Issues in the Takaful Industry, Azman Bin Ismail, ISRA Shari’ah Conferenceon Takaful 200943 Ibid44 Panduan Wakaf, Hibah dan Wasiat Menurut Al-Quran dan Sunnah, Sheikh Muhammad Bin Shalih Al-Utsaimin, 2008 18
  19. 19. Hibah can eliminate the problem of quarreling among he beneficiaries inclaiming the ownership of the property.45 The owner of property has full rights totransfer any amount of his wealth to anybody; his legal heirs or not. Hibah has nolimitation as Faraid and wasiyah. Faraid is strictly distributed to legal heirs only andwasiyah cannot be distributed to any family member in legal heirs, and at maximumof 1/3 only.3.0 HIBAH IN THE TAKAFUL INDUSTRY In takaful industry, hibah concept is used in several family takaful products inwhich participants could give hibah in the form of assigning the takaful benefit to thenominee or hibah recipient. In order to eliminate the element of uncertainty in thetakaful contract, the concept of ‘tabarru’ (to donate, to contribute, to give away) isincorporate in it.46 In relation to this a participant shall agree to relinquish as tabarru’ ,certain proportion of his takaful installments or takaful contributions that he agrees orundertakes to pay thus enabling him to fulfill his obligation of mutual help and jointguarantee should any of his fellow participants suffer a defined loss.47 In essence, tabarru’ would enable the participant essence, tabarru’ wouldenable the participant who might suffer a loss or damage due to a catastrophe ordisaster. The sharing of profit or surplus that may emerge from the operations of thetakaful, is made only after the obligation of assisting the fellow participants has beenfulfilled.48 It is imperative, therefore, for a takaful operator to maintain adequateassets of the defined funds under its care whilst simultaneously striving prudently toensure the funds are sufficiently protected against undue over-exposure.3.1 HIBAH IN TAKAFULThere are several products that adopt the concept of takaful hibah. Hibahimplemented the takaful is in two forms:A. Hibah an Existing49Hibah something that is either in the form:45 Ibid46 TAKAFUL (Islamic Insurance), Concept and Operation System, From The Practitioner’s Perspective,1996 BIRT47 Ibid48 Ibid 19
  20. 20. (a) Hibah through Takaful Products Hibah is done by the takaful participants who are required to nominatehibah recipients as participants and takaful provider hibah takaful contributions astaxpayers. There are several facilities that offer takaful products such as Iqra’ byTakaful Nasional Sdn. Ltd, Students and Education by Syarikat Takaful MalaysiaBerhad and Youth Plan by Takaful Ikhlas Sdn Bhd. This product is only offered toparents who a son. (Student Brochure Takaful, Education and Iqra). The totalamount outstanding in the accounts of participants will be subject possessions syara’to the laws that have been discussed previously. That will benefit all results obtainedfrom the participants participation as one of the takaful participants will is he owned.Hibah in this type must not conflict with any rule of law because syara’ and conditionscan be implemented.(b) To Hibah Participants Takaful. Takaful Fund management through Tabarru’ wills hibah something toparticipants as a reward above a certain success achieved by the participants.Hibah in this type is clear and not in conflict with the principles of syara’ because allthe harmonious and conditions can be met.B. Hibah will find something and Effective Death After participants.50 Hibah was meant here is benefit takaful nominee to the specified by thetakaful participants through beneficiary form. This type of Hibah has long debated bylocal contemporary scholars widely. Cause of disagreement between them isbecause of the following:(a) Hibah something that did not even exist.(b) al-Qabd Troubleshooting(c) Status of takaful benefit.(d) Whos Right takaful benefit.(e) Law-related to Testament and Faraidh.3.2 TAKAFUL IKHLAS SDN BHD49 Article: Implementation Of Business In Industry Takaful: Kind And Command , Abdul Razak Bin MohdZamerey (Takaful Ikhlas Sdn. Ltd.) & Shofian Ahmad Department of Shariah, UKM50 Ibid 20
  21. 21. 3.2.1 MODEL OF TAKAFUL IKHLASIn line with international and local developments in the practice of Islamic financialprotection services, Takaful IKHLAS has adopted the Wakalah contract as oursystem and have modelled our operations accordingly. Wakalah is a form ofrepresentative relationship between Takaful IKHLAS and a participant(Principal/Customer).Takaful IKHLAS employs the following contracts to govern our business:  Tabarru’ is a contract where the participant agrees to donate a pre- determined percentage of contribution to the Risk Fund to provide assistance to fellow participants.  Wakalah is a contract where the participant authorises Takaful IKHLAS to conduct the affairs of Takaful business i.e providing protection, investment etc. on his/her behalf.  Takaful IKHLAS Model allows the use of intermediaries as a medium to better serve the customers’ needs, payment of surpluses and profits, where applicable to participants and calculation of shared benefits on a monthly basis. 21
  22. 22. Note:For GRIA, a portion of the contribution in the investment account is set aside forTabarru’ at the onset which will be dripped to the Risk Fund (RF). Any investmentincome derived from this amount in the investment account shall be allocated to theRisk Fund (RF). In this instance, IKHLAS will not charge a fund management fee (%).Net surplus distribution will be allocated and administered on an annual basis. Theway that they selected which one to be invested into fund with see in which one gainhigh return and it will also have the high risk of that fund.Contract in Islamic divide into four categorize:- 1) Grant of ownership Grant of ownership is divided into two namely: a. Muawadhah means exchange contract b. Tabarru means thing given without any exchange Under the part of tabarru, there are 4 main concept which is , a) Gift (hibah) b) Infaq c) Alms (sadaqah) d) Donation 22
  23. 23. 2) Partnership 3) Reserve and care (Wadiah) 4) Representation (Wakalah)There are two types of Hibah that applied in Takaful Ikhlas Sdn Bhd which is; i. for its takaful benefit ( surplus ) Hibah in tabarru is use when there is Surplus Administration Charge (SAC). When it is come to surplus, takaful will put a charge on it. If takaful did not put a charge on it, it will go to the participant account back through hibah to the account ta’awuni. ii. for when there is death The second point of hibah in takaful industry happen is when death occurred. The participants have to fill 2 forms namely; a) Required Takaful Act Form (Borang Wajib Akta Takaful) b) Nominee Form (Borang Penama) Under the nominee form, those persons were already named, the property would not be awarded to his/her but they are just appointed to manage the property for the dead people. Furthermore, the property will be distributed according to faraid. The 2 types of form above are compulsory to fill up but there is another formthat issued by Takaful Ikhlas itself called Hibah Suggestion Form (BORANGCADANGAN HIBAH). This form is issued to the participant to propose name/s forrecipient of hibah. The recipient of hibah is among parents, legal couple (husbandand wife), biological child and sibling only. This form is not compulsory to fill up bythe participants. 23
  24. 24. 3.3 THE ISSUES OF HIBAH IN TAKAFUL INDUSTRY Generally, any asset in its tangible form or in the form of its benefit (usufruct)can be given as hibah to another party. The issues that arise are: 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? 4. What is the implication, should the recipient of the hibah die before the maturity of the takaful certificate?The Council, in its 34th meeting, held on 21st April 2003 / 19 Safar 1424, resolvedthat 1. 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 Shari’ah 2. 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. A participant has the right to revoke the hibah before the maturity date, because conditional hibah is only deemed to be completed after delivery is made (qabdh) 4. A participant has the right to revoke the hibah to one party and transfer it to other parties or terminate the takaful participation, if the recipient of the hibah dies before maturity 5. The takaful nomination form has to be standardized and must stipulate clearly the status of the nominee, either as a beneficiary or an executor (wasi) or a trustee. Any matter concerning distribution of takaful benefits must be based on the contract. Participants should be clearly explained on the implication of every contract being executed. 24
  25. 25. The next issue is whether participants can give away the takaful proceeds ashibah. The takaful proceeds are made up of either the participant’s contribution inhis/her investment account or the risk account pooled from participants’ tabarru’portion. Under the shariah, the takaful proceeds from the investment account may begiven away as hibah as it is the property of the participant, but what is the status ofthe tabarruc portion? It seems that there are differing opinions on this. Some takafuloperators do not allow takaful proceeds in general to be given as hibah andparticipants do not have this option. Presumably their shariah committees have notapproved that the proceeds be given away as hibah. One possible argument for thisis that the takaful proceeds are non-existent at the time when the hibah is executed.According to jurists, when the object of gift is non-existent at the time the hibah isexecuted, the contract is void. On the other hand, giving away takaful proceeds as gifts will definitely bringsgreater benefit as the participant need not pay for a higher contribution and thepossibility of it leading to dispute, hatred, and devouring others’ wealth wrongfully isvery small. Indeed the Shariah Advisory Council of Bank Negara Malaysia has rightlyresolved that, “Takaful benefit can be used for hibah since it is the right of theparticipants. Therefore, the participants should be allowed to exercise their rightsaccording to their choice as long as it does not contradict with shariah.” Dallah AlBarakah has also come to the same conclusion although the rationale was different.It states, “It is permissible to distribute the (takaful) death benefit according to the lawof mirath (Islamic law of succession), as it is also permissible to distribute thepayment to a particular individuals or parties as specified by the participant on thebasis that the benefit is the contribution of other participants to the beneficiary asspecified by the participant and not his estate.” In financial planning, estate planningplays an important role and hibah is a very simple yet powerful that can be used. A consequential issue to the hibah concern is whether the hibah of the takafulproceeds can be revoked. In this respect, we need to consider the legal framework ofthe particular country in which takaful operates as it will affect the legality of thehibah and any jurisprudential opinion must give due consideration to it. Thisphilosophy is aptly captured by Imam Ibn Qayyim al-Jawzi when he said, “Changesin fatwa are evaluated by changes in time, places, conditions and customs.” In manycountries, legislation provides protection for spouses and children and in namingthem; a statutory trust in favor of the nominee of the policy moneys payable iscreated. Having said that, life insurance is important especially in some jurisdictions 25
  26. 26. as an additional means of providing liquid assets to the estate and surviving spouse.It is usually received by the beneficiary free of income tax and the proceeds can beused for the payment of estate debts and expenses and for support. The issue ofwhether a gift can be revoked has not only attracted the attention of Muslim jurists; inEnglish law the issue has been the subject of various legal principles, precedentsand legislation. Prior to the Policies of Assurances Act 1867, a life policy was notassignable in law and although equity always permitted such assignments, theassignee could only sue to enforce the policy if he joined the assignor in the actionand an insurer cannot obtain a good discharge against payment from assigneesalone. The Act protects legal assignment and the assignee can enforce it in hisname. It can also be assigned under Section 136 of the Law of Property Act 1925 buta court found that this is not strong enough. 26
  27. 27. 4.0 CONCLUSION After going through the models and products currently offered in the market,we can see that the products offered by the takaful operators are quite similar to thatof conventional insurance, at least in terms of the protection accorded and the rates /pricing. The main element that actually differentiates takaful from conventionalcommercial insurance is the tabarru’ feature which has been explained earlier.Following that, the relationship between the participants and the takaful operator hasalso changed. The takaful operator is not the insurer anymore. The takaful operatoris just the manager and operator of the takaful scheme. Nonetheless, confusions and differences of opinion regarding the realunderlying contracts in the various takaful operational models remain. For example,on the donation side: if it arrangement really tabarru’, then can the proceeds ormoney be given back to the donor as tabarru’ is like hibah (gift) or sadaqah (charity) .Perhaps, the usage of tabarru’ itself should be clearly explained to avoid confusionas it carries certain connotations. In a conclusion, the underlying concept of tabarru’in takaful model is different from literal understanding of hibah or sadaqah . It isactually a commitment to donate with a condition of compensation. All in all, thetakaful industry is still very much in the development stage, with new modelvariations emerging regularly. 27
  28. 28. 5.0 RECOMMENDATION What has been attained so far is comparatively small, but as shown from theperformance of takaful operators generally, is growing rapidly. Considering only a tinypercentage of the ummah have some form of life insurance cover, the potential fortakaful to penetrate deeper into the market is tremendous. In this context familytakaful products would have a strong chance to grow and expand. Therefore takafulis here to stay. However, the future of takaful would depend on the ummah. Whether takafulwould develop into an industry and eventually become the real insurance alternativefor the ummah would depend on the commitment and political willingness of theMuslims at the individual, community, national and international levels. What isurgently needed is the practical translation of these commitment and politicalwillingness by all. The time for polemic is past; it if no more discoursing on the basic issue ofhalal or haram. The way forward is on improving, correcting and developing theexisting operational structure, which has been generally accepted to be essentiallybased on either the principles of Al-Mudharabah or Al-Wakalah. It is clearlydemonstrated that in countries where there is commitment and strong politicalwillingness plus the application of modern management practices in its approach,countries have seen their takaful operations grow into a viable and profitablebusiness venture. 28
  29. 29. BIBLIOGRAPHY 1) Article: Implementation Of Business In Industry Takaful: Kind And Command , Abdul Razak Bin Mohd Zamerey (Takaful Ikhlas Sdn. Ltd.) & Shofian Ahmad Department of Shariah, UKM 2) TAKAFUL (Islamic Insurance), Concept and Operation System, From The Practitioner’s Perspective, 1996 BIRT 3) Directory of Islamic Insurance (Takaful) 2000, Institute of Islamic Banking & Insurance 4) http://www.mifc.com/publication/p.9.10.pdf 5) Mohd. Ma’sum Billah, Islamic and Modern Insurance Principles and Practices, Ilmiah Publishers, 2003 6) Dr. Engku Rabiah Adawiyah Engku Ali, Essential Guide To Takaful (Islamic Insurance), CERT, 2008 7) What’s Takaful: A Guide To Islamic Insurance, 2008 8) Note of Takaful From Ustaz Ali Jinnah 9) Malaysian Takaful Act 1984 10) Comparative Study of Insurance and Takaful (Islamic Insurance), Muhammad Anwar, 17 March 2006 11) Nomination and Hibah Issues in the Takaful Industry, Azman Bin Ismail, ISRA Shari’ah Conference on Takaful 2009 12) Panduan Wakaf, Hibah dan Wasiat Menurut Al-Quran dan Sunnah, Sheikh Muhammad Bin Shalih Al-Utsaimin, 2008 13) TAKAFUL (Islamic Insurance), Concept and Operation System, From The Practitioner’s Perspective, 1996 BIRT 14) Malaysian Islamic Finance Issuers and Investors Forum 2006, Sohail Jaffer 15) Article about Takaful (Bank Negara Malaysia) Assistant Governors Keynote Address at the International Takaful Summit - "Global Takaful Industry: Moving to the Next Level of Excellence" 16) Position of The Takaful Industry in Malaysia, Takaful expected to constitute 20 percent of total insurance market by 2010. – Islamic finance news 17) Undang-undang Harta dan Amanah, Akmal Hidayah Halim, IBFIM 29
  30. 30. APPENDICES TAKAFUL IKHLAS SDN BHD (593075U) Business Operations, 4th Floor, Wisma KT, No 14, Jalan 19/1, 47300 Petaling Jaya, Selangor Darul Ehsan. Tel : 03-7801 1288/1488 Fax : 03-7801 1388 Website: http://www.takaful-ikhlas.com.my (A Subsidiary of MNRB Holdings Berhad) BORANG CADANGAN HIBAHSaya sebagai Pemilik Sijil bagi pelan takaful yang akan dikeluarkan oleh Takaful Ikhlas SdnBhd (kemudian disebut Syarikat) dengan ini mencadangkan kepada Pengurusan TabunganAkaun Taawuni (TAP) supaya membayar manfaat kematian kepada penama-penama yangdisenaraikan dibawah apabila berlaku kematian sebelum sijil takaful ini matang dengan syaratdan terma seperti yang dinyatakan dalam sijil.A. KETERANGAN MENGENAI PEMILIK SIJILNama Penuh : __________________________________________________________(mengikut K/P)No. K/P (baru) : ______________________________B. KETERANGAN MENGENAI PENAMA(Sila gunakan borang yang lain sekiranya penama adalah lebih daripada 5 orang) No. Nama Penuh Peratusan Pertalian No. K/P (baru) Alamat (mengikut K/P) dengan atau Sijil Lahir Pemilik Sijil1. ____________________ Tandatangan Pemilik Sijil TarikhSyarat Penerima Hibah: Pelaksanaan: 1. Ibubapa 1. Hibah ini hanya boleh diberikan kepada penerima di atas. 2. Pasangan yang Sah 2. Pemberi Hibah adalah pengurusan TAP. 3. Anak-anak 3. Pengurusan TAP akan membayar manfaat kepada penama 4. Adik beradik selepas kematian peserta. 4. Manfaat kematian sahaja. 5. Senarai cadangan penerima manfaat takaful boleh diubah/tukar bila-bila masa oleh peserta. 6. Cadangan terbatal jika penerima yang dicadangkan meninggal sebelum peserta 30
  31. 31. TAKAFUL IKHLAS SDN BHD (593075U) BusinessOperations,4th Floor, Wisma KT, No 14, Jalan 19/1,47300 Petaling Jaya, Selangor Darul Ehsan.Tel : 03-7801 1288/1488 Fax : 03-7801 1388Website: http://www.takaful-ikhlas.com.my(A Subsidiary of MNRB Holdings Berhad) TAKAFUL IKHLAS SDN BHD (593075U) Business Operations, 4th Floor, Wisma KT, No 14, Jalan 19/1, 47300 Petaling Jaya, Selangor Darul Ehsan. Tel : 03-7801 1288/1488 Fax : 03-7801 1388 Website: http://www.takaful-ikhlas.com.my No Permohonan/Sijil / Proposal/Certificates No. (A Subsidiary of MNRB Holdings Berhad) BORANG PENAMA NOMINEE FORM Nama Name No KP Lama / Paspot No KP Baru Old I/C / Passport No New I/C No - - Saya sebagai Pemilik Sijil bagi pelan takaful yang akan dikeluarkan oleh Takaful Ikhlas Sdn Bhd (kemudian daripada ini disebut Syarikat) dengan ini mengarahkan pihak Syarikat supaya membayar manfaat takaful dan baki Akaun Pelaburan Peribadi (PIA)/ Akaun Pelaburan Risiko Peribadi (PRIA) yang berhak diterima oleh penama-penama yang dinamakan di bawah apabila berlaku kematian sebelum sijil takaful ini matang dengan syarat dan terma seperti yang dinyatakan dalam sijil. I, as the Certificate Owner for this takaful plan to be issued by Takaful Ikhlas Sdn Bhd (hereinafter known as the Company) hereby instruct the Company to pay all the Takaful Benefit and Personal Investment Account (PIA)/ Personal Risk Investment Account (PRIA) receivable to the nominees named below upon death before the maturity of this certificates with the terms and condition stated in the certificates. Bagi Peserta Kepada penama pertama yang diamanahkan dengan tanggungjawab untuk membahagikan manfaat tersebut kepada waris-waris saya yang berhak mengikut hokum Islam Syarak (faraid) tertakluk kepada Seksyen 65, Akta Takaful 1984 dan mana-mana perintah mahkamah Syariah. Sekiranya penama pertama meninggal dunia terlebih dahulu maka manfaat tersebut hendaklah diserahkan kepada penama yang kedua yang mempunyai tanggungjawab yang sama seperti penama pertama dan seterusnya. For Muslim To the 1st nominee which is entrusted with the responsibility to distribute the benefits to my beneficiary who is entitled in accordance with Syariah (Faraid Law) in Participant accordance to Section 65, Takaful Act 1984 and any order from the Syariah. Should the first nominee predeceased me then the 2 nd nominee will be entrusted to carry the same responsibility as the 1st and thereafter. Bagi Peserta Kepada penama-penama yang dinamakan dibawah. Sekiranya mana-mana di antara mereka itu meninggal dunia terdahulu daripada saya maka bahagiannya Bukan Islam hendaklah dibahagikan sama rata di antara mereka yang masih hidup menurut peratusan bahagian yang dinyatakan dibawah. For Non-Muslim To the person named below. If any one of the named beneficiary predeceased me his/her share will be equally shared between the survivor(s) according to the share Participant as stated below. Selanjutnya saya juga bersetuju bahawa Syarikat adalah bebas daripada sebarang tanggungan atau tuntutan setelah manfaat takaful dibayar kepada penama atau waris atau sesiapa sahaja di bawah sijil takaful tersebut. It is further agreed that the Company shall be discharged from all liabilities once the claim benefits have been made payable to the nominee/beneficiary under the said takaful certificate. Nama Penuh No KP Alamat Kediaman Pertalian *Peratusan Full Name I/C No Residential Address Relationship *Percentages *Bagi penama bukan Islam sahaja. Jika beliau bertindak sebagai Pentadbir, kotak peratusan tidak perlu diisi. *For a Non-Muslim nominee only. If he/she acts as an Administrator, the percentage box should remain empty. ______________________________________________ Tandatangan Peserta/ Pemilik Sijil Signature of Participant / Certificates Owner Bertarikh Dated _____________________________________ ______________________________________________ ______________________________________________ Tandatangan Saksi 1 Tandatangan Saksi 2 Signature of Witness 1 Signature of Witness 2 Nama Nama Name _____________________________________ Name _____________________________________ No KP No KP I/C No _____________________________________ I/C No _____________________________________ Bertarikh Bertarikh Dated _____________________________________ Dated _____________________________________ 31
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