Takaful is an Islamic alternative to conventional insurance based on mutual assistance and contribution to a common fund. There are various models of takaful including mudarabah, wakalah, and hybrid models. Main products include general takaful for assets and family takaful for life events. Any surplus from contributions after claims and expenses are distributed according to Shariah principles or used to cover deficits according to predetermined options.
Topic vi. islamic insurance takaful (7 files merged)SaudBilal1
This document provides an overview of Islamic insurance (takaful) and its basic concepts. It discusses the key features of takaful including cooperative risk sharing, clear financial segregation, and Shariah-compliant policies and strategies. The major differences between takaful and conventional insurance are explained relating to the parties to the contract, payment of premiums, and investment of insurance funds. Various takaful models are outlined including mudarabah, wakalah, hybrid, and waqf models. Finally, the document describes the main takaful products of general and family takaful and discusses underwriting surplus, technical provisions, and how to address deficits in participants' risk funds.
Re-Takaful provides risk sharing mechanisms for Takaful operators to limit liability on specific risks and increase capacity. It operates similarly to conventional reinsurance but without interest or excessive uncertainty, instead relying on actual expenses and risk sharing. Re-Takaful helps stabilize Takaful business by limiting losses that could overwhelm operators. However, the industry faces challenges in capacity, ratings, expertise, and standardization that must be addressed to effectively compete.
This document outlines Capt. M. Jamil Akhtar Khan's presentation on Takaful (Islamic insurance) to the Hailey College of Banking & Finance in Lahore, Pakistan on August 13, 2007. The presentation covers an introduction to Takaful, including its meaning and basis in the Quran and Hadith. It discusses objections to conventional insurance and how Takaful differs. The presentation also examines the history of Takaful, various Takaful models, types of Takaful coverage, and the foundations and prospects of Takaful in Pakistan.
Takaful is an Islamic alternative to conventional insurance that is based on mutual assistance and cooperation between participants. It involves participants contributing to a common pool and receiving compensation from that pool in the event of a valid claim. Takaful aims to avoid elements of uncertainty (gharar) and gambling (maisir) that are prohibited in Islamic finance by structuring the arrangement as a cooperative donation (tabarru) scheme rather than a commercial insurance contract involving the exchange of risk for premium. General takaful provides short-term coverage for risks like motor, health, fire and marine insurance through participants' contributions to the general takaful fund.
Takaful is an Islamic alternative to conventional insurance based on mutual cooperation and responsibility. It involves participants contributing to a common fund to guarantee each other against loss or hardship. Several fatwas have confirmed takaful's compliance with Sharia. In Pakistan, takaful is growing but faces challenges like lack of awareness, regulatory issues, and limited investment options. Improving products, services, and education can help takaful fulfill its potential.
This document summarizes the key differences between conventional insurance and Islamic insurance (takaful). Takaful is based on risk-pooling and mutual protection among policyholders, rather than risk transfer from policyholders to insurers. It avoids elements of riba (interest), gharar (uncertainty), and maisir (gambling) through a cooperative donation scheme where participants contribute to a common fund to make payouts to those affected by losses. While based on tabarru (donation), takaful also provides participants rights to claim compensation, so it is considered a qualified rather than pure tabarru contract.
This document provides an overview of the key concepts and philosophy of Takaful, which is an Islamic insurance system based on mutual assistance. It discusses how risk management is viewed in Islam and the Quranic principles of preparing for hardship. Takaful operates based on participants contributing funds and jointly guaranteeing each other in case of need, as opposed to conventional insurance which is seen as risky. The document outlines the definitions and origins of Takaful, compares it to conventional insurance, and explains some of the investment principles and contract types used in Takaful like Mudharabah and Tabarru.
The document provides an overview of the fundamentals of Takaful, which is an Islamic insurance system based on mutual cooperation and donation. It discusses the key principles of Takaful, including tabarru' (donation), ta'awun (mutual cooperation), and mudharabah (profit-sharing). The three elements typically found in conventional insurance that are not compliant with Islamic law - gharar (uncertainty), maisir (gambling) and riba (interest) - are also examined. The document then outlines the basic Takaful operating models used in practice and the legal/regulatory framework governing the Takaful industry in Malaysia.
Topic vi. islamic insurance takaful (7 files merged)SaudBilal1
This document provides an overview of Islamic insurance (takaful) and its basic concepts. It discusses the key features of takaful including cooperative risk sharing, clear financial segregation, and Shariah-compliant policies and strategies. The major differences between takaful and conventional insurance are explained relating to the parties to the contract, payment of premiums, and investment of insurance funds. Various takaful models are outlined including mudarabah, wakalah, hybrid, and waqf models. Finally, the document describes the main takaful products of general and family takaful and discusses underwriting surplus, technical provisions, and how to address deficits in participants' risk funds.
Re-Takaful provides risk sharing mechanisms for Takaful operators to limit liability on specific risks and increase capacity. It operates similarly to conventional reinsurance but without interest or excessive uncertainty, instead relying on actual expenses and risk sharing. Re-Takaful helps stabilize Takaful business by limiting losses that could overwhelm operators. However, the industry faces challenges in capacity, ratings, expertise, and standardization that must be addressed to effectively compete.
This document outlines Capt. M. Jamil Akhtar Khan's presentation on Takaful (Islamic insurance) to the Hailey College of Banking & Finance in Lahore, Pakistan on August 13, 2007. The presentation covers an introduction to Takaful, including its meaning and basis in the Quran and Hadith. It discusses objections to conventional insurance and how Takaful differs. The presentation also examines the history of Takaful, various Takaful models, types of Takaful coverage, and the foundations and prospects of Takaful in Pakistan.
Takaful is an Islamic alternative to conventional insurance that is based on mutual assistance and cooperation between participants. It involves participants contributing to a common pool and receiving compensation from that pool in the event of a valid claim. Takaful aims to avoid elements of uncertainty (gharar) and gambling (maisir) that are prohibited in Islamic finance by structuring the arrangement as a cooperative donation (tabarru) scheme rather than a commercial insurance contract involving the exchange of risk for premium. General takaful provides short-term coverage for risks like motor, health, fire and marine insurance through participants' contributions to the general takaful fund.
Takaful is an Islamic alternative to conventional insurance based on mutual cooperation and responsibility. It involves participants contributing to a common fund to guarantee each other against loss or hardship. Several fatwas have confirmed takaful's compliance with Sharia. In Pakistan, takaful is growing but faces challenges like lack of awareness, regulatory issues, and limited investment options. Improving products, services, and education can help takaful fulfill its potential.
This document summarizes the key differences between conventional insurance and Islamic insurance (takaful). Takaful is based on risk-pooling and mutual protection among policyholders, rather than risk transfer from policyholders to insurers. It avoids elements of riba (interest), gharar (uncertainty), and maisir (gambling) through a cooperative donation scheme where participants contribute to a common fund to make payouts to those affected by losses. While based on tabarru (donation), takaful also provides participants rights to claim compensation, so it is considered a qualified rather than pure tabarru contract.
This document provides an overview of the key concepts and philosophy of Takaful, which is an Islamic insurance system based on mutual assistance. It discusses how risk management is viewed in Islam and the Quranic principles of preparing for hardship. Takaful operates based on participants contributing funds and jointly guaranteeing each other in case of need, as opposed to conventional insurance which is seen as risky. The document outlines the definitions and origins of Takaful, compares it to conventional insurance, and explains some of the investment principles and contract types used in Takaful like Mudharabah and Tabarru.
The document provides an overview of the fundamentals of Takaful, which is an Islamic insurance system based on mutual cooperation and donation. It discusses the key principles of Takaful, including tabarru' (donation), ta'awun (mutual cooperation), and mudharabah (profit-sharing). The three elements typically found in conventional insurance that are not compliant with Islamic law - gharar (uncertainty), maisir (gambling) and riba (interest) - are also examined. The document then outlines the basic Takaful operating models used in practice and the legal/regulatory framework governing the Takaful industry in Malaysia.
Topic ii. participatory modes of islamic finance musharakah and mudarabah(2)SaudBilal1
Musharakah, Mudarabah, and Diminishing Musharakah are participatory modes of Islamic finance.
Musharakah is a partnership where both partners provide capital and work, and share profits according to agreement but losses according to capital contribution. Mudarabah is a partnership where one partner provides capital while the other provides expertise, with profits shared according to agreement but losses borne by capital provider.
Diminishing Musharakah allows a client to gradually purchase a financier's shares in a jointly owned asset over time through periodic payments until becoming sole owner, compensating the financier through return of capital. These structures can be used to finance various projects and transactions in
The document discusses various Islamic financial instruments used in Malaysia. It describes instruments like Mudharabah, Musharakah, Murabahah, Ijarah, and Wakalah. It explains how these instruments work, including the rights and responsibilities of parties in each contract. Shariah committees provide oversight to ensure Islamic banks operate according to Shariah principles.
This document discusses the concept of Musharakah, which is an Islamic form of partnership or joint venture. It defines Musharakah, discusses its evidence in the Quran and Hadith, outlines its key pillars and types. It also covers the conditions of Musharakah partnerships, examples like Musharakah Mutanaqisah, and its modern applications.
This document provides an abstract and introduction to a term paper on fraud and deceit in Islamic contract law from a comparative law perspective. The summary discusses how Islamic contract law may need further development regarding issues like securities fraud and deception. It also notes how comparative law can help one better understand their own legal system, and that Islamic law grew out of earlier scriptures and cultural practices, demonstrating it is acceptable to consider other legal approaches. The paper aims to draw attention to continuing development needed in Islamic contract law to support growing Islamic finance.
This document discusses Islamic investment in equities markets. It begins by outlining the types of securities, including common stock and preferred stock. Common stock represents ownership in a company and provides rights to dividends and voting. Preferred stock has limited voting rights but priority claim to dividends. The document then examines the underlying Shariah contract of stocks, which is based on principles of Musharakah profit and loss sharing. While common stock is generally permissible, preferred stock faces restrictions. The document concludes by discussing various ways shareholders can be rewarded, such as cash dividends, bonus issues, and rights issues, all of which can be compliant with Shariah perspectives.
Here are the steps to setup the Musharakah company for Case 1:
1. Partner A and Partner B form a Musharakah company on Jan 1 with a capital contribution of Rs. 10 million and Rs. 5 million respectively.
2. The company operates throughout the year and earns a profit of Rs. 3 million by Dec 31.
3. As per the agreed ratio, the profit of Rs. 3 million is distributed between Partner A and Partner B in the ratio of their capital contribution i.e. Partner A receives Rs. 2 million (10/15 of Rs. 3 million) and Partner B receives Rs. 1 million (5/15 of Rs. 3 million).
4.
The document discusses Islamic banking, its products and services, and how it differs from conventional banking. Islamic banking adheres to Sharia law which prohibits interest and gambling. Its main products include deposit accounts, investment accounts based on profit/loss sharing, and financing through leasing or partnership models. Investments in Islamic banks are not guaranteed and based on shared risk. Oversight of Islamic scholars ensures operations comply with Sharia. The relationship with customers is a partnership rather than debtor-creditor.
The document discusses the treatment of qard (interest-free loans) in Takaful (Islamic insurance). It begins by contrasting conventional and Islamic insurance models. When a Takaful fund experiences a deficit, the Takaful operator can provide an interest-free qard loan to ensure solvency. However, terms of repayment are sometimes unclear. The document then examines regulatory issues around qard, including disclosure requirements and how qard fits within related party frameworks. It concludes by outlining Malaysia's proposed risk-based capital framework for Takaful operators, including capital adequacy ratios and supervisory interventions when capital levels decline.
This document provides an overview of Murabaha, an Islamic financing structure. It defines Murabaha as a sale where the seller discloses the cost of an item and sells it for a higher price, adding a known profit. The document outlines the difference between Murabaha and Musawamah sales, basic rules of Islamic sales, evidence for Murabaha's validity, how it is structured as a financing transaction, potential issues, and mistakes to avoid. It concludes that Murabaha must be implemented carefully according to Islamic principles, as a legitimate sale rather than an interest-based loan.
This document discusses Wasiyah (Islamic will) under Islamic law. It defines Wasiyah, explains how it can be made orally or in writing, and lists its key characteristics. It discusses the different parties involved - the testator, legatee, and legacy. It outlines the pillars and formula of Wasiyah, when it can be canceled, and different types. It also lists what assets cannot be willed and compares Wasiyah to gifts. Finally, it discusses when making a Wasiyah is strongly required, recommended, preferred or not preferred under Islamic law.
The document discusses the concept of Mudarabah, an Islamic financing structure. Mudarabah is a partnership between an investor and a manager, where the investor provides capital and the manager provides labor/expertise. Profits are shared according to a pre-agreed ratio, while losses are borne solely by the investor. The document outlines the key elements of Mudarabah contracts including capital requirements, management roles, profit/loss distribution, and termination procedures. It also compares Mudarabah to other structures like Musharakah and analyzes various risks in Mudarabah like credit, market, and liquidity risks.
Sukuk are financial certificates that comply with Islamic law and its investment principles, which prohibit charging or paying interest. Sukuk represent ownership in tangible assets or business activities and provide investors returns from those assets or activities. There are different types of Sukuk based on principles like Murabaha, Ijarah, Musharakah, and Mudarabah. While Sukuk aim to enable organizations to raise capital in a Sharia-compliant way, some structures have faced criticism for replicating interest-based bonds too closely. Guidelines on appropriate underlying assets and tradability in secondary markets continue to be discussed.
Insurance has become a need of businesses and individuals for mitigating risks and losses and lessening the impact of catastrophes on their lives and wealth.
When Islamic banking started functioning in the 1970s, it also required a Shar¯ı´ah-compliant alternative to conventional insurance, considered against the Shar¯ı´ah tenets due to the involvement of Riba, Gharar and gambling. To fill the gap in the cycle of Islamic finance, the system of Takaful has been developed and a large number of Takaful companies are providing services in various regions of the world.
The document provides an overview of the underwriting process. It defines underwriting as evaluating risks to determine whether to provide insurance coverage. An underwriter's role is to evaluate applications, accept or decline risks, and determine contribution amounts. Sound underwriting is important for the success of the Takaful operator and equitable treatment of participants. The underwriting process involves establishing files, evaluating factors specific to the type of coverage, determining rates, and setting policy terms. Underwriters make decisions on whether to reject risks, issue substandard policies, standard policies, or preferred policies. They also monitor policies ongoing. Agents play an important role by gathering information to assist underwriters.
This document discusses the principles of Islamic investment. It begins by outlining Islamic worldviews related to investment such as accountability to God and society, justice, and public interest. It then defines Islamic investment as investments that adhere to Islamic principles through profit and loss sharing and avoiding interest, uncertainty, and gambling. The document outlines the sources of Islamic laws, criteria for permissible investments and activities, and challenges in Islamic finance. It also discusses concepts like zakat, speculation vs gambling, and the roles of Sharia supervisory boards and screening.
The document discusses Sukuk, an Islamic financial certificate that is an alternative to conventional bonds. Sukuk are asset-backed and represent partial ownership of an asset, rather than debt. They can be structured using various Islamic financing contracts like murabahah, ijara, musharakah, and mudharabah. Malaysia has been a pioneer in developing the Sukuk market, with the first issuance in 1990 and the establishment of regulatory standards. It remains one of the largest Sukuk issuing countries globally.
The document compares and contrasts insurance and takaful. It provides details on:
1) Insurance is a contract where one party agrees to take on the risk of another in exchange for premium payments. The risk bearer is the insurer and the party whose risk is covered is the insured.
2) Takaful is an Islamic insurance system based on mutual assistance and donation, where risks are shared collectively. It follows the principles of tabarru (donation) and ta'awun (mutual guarantee).
3) There are several takaful models including mudarabah, wakalah, and waqf models. The waqf model establishes a waqf fund through shareholder contributions to compensate
Takaful is an Islamic insurance system based on mutual assistance and donation. It involves participants voluntarily contributing to a collective fund to guarantee each other against losses. If a participant suffers a loss, they receive money from the fund to help cover costs. Any surplus contributions are shared among participants according to a Mudarabah agreement. Takaful aims to help those in need without involving interest, gambling or other prohibited elements unlike conventional insurance.
Takaful is an Islamic insurance concept based on mutual assistance and cooperation. It involves participants contributing to a common fund, which is used to pay compensation to any participant who suffers losses according to the terms of the Takaful agreement. There are different models for structuring Takaful, such as the Tabarru' model where contributions are seen as donations, or the Mudharabah model where profits from investing contributions are shared. Takaful aims to be free from elements like uncertainty and gambling that are prohibited in Islam. It is overseen by a Sharia Supervisory Council to ensure compliance.
This document discusses the concepts and models of Takaful (Islamic insurance). It begins by defining Takaful as an Arabic term meaning joint guarantee or responsibility based on mutual agreement. It then outlines some of the basic concepts of Takaful including mutual help, responsibility and protection. The document discusses the objectives of Takaful to provide an Islamic alternative to conventional insurance based on principles of mutual assistance and donation. It also summarizes some of the common objections to conventional insurance around uncertainty, gambling and interest. The document concludes by outlining the main models of Takaful including Mudarabah, Wakalah and hybrid models, and provides examples of common Takaful products like general and family Takaful.
Topic ii. participatory modes of islamic finance musharakah and mudarabah(2)SaudBilal1
Musharakah, Mudarabah, and Diminishing Musharakah are participatory modes of Islamic finance.
Musharakah is a partnership where both partners provide capital and work, and share profits according to agreement but losses according to capital contribution. Mudarabah is a partnership where one partner provides capital while the other provides expertise, with profits shared according to agreement but losses borne by capital provider.
Diminishing Musharakah allows a client to gradually purchase a financier's shares in a jointly owned asset over time through periodic payments until becoming sole owner, compensating the financier through return of capital. These structures can be used to finance various projects and transactions in
The document discusses various Islamic financial instruments used in Malaysia. It describes instruments like Mudharabah, Musharakah, Murabahah, Ijarah, and Wakalah. It explains how these instruments work, including the rights and responsibilities of parties in each contract. Shariah committees provide oversight to ensure Islamic banks operate according to Shariah principles.
This document discusses the concept of Musharakah, which is an Islamic form of partnership or joint venture. It defines Musharakah, discusses its evidence in the Quran and Hadith, outlines its key pillars and types. It also covers the conditions of Musharakah partnerships, examples like Musharakah Mutanaqisah, and its modern applications.
This document provides an abstract and introduction to a term paper on fraud and deceit in Islamic contract law from a comparative law perspective. The summary discusses how Islamic contract law may need further development regarding issues like securities fraud and deception. It also notes how comparative law can help one better understand their own legal system, and that Islamic law grew out of earlier scriptures and cultural practices, demonstrating it is acceptable to consider other legal approaches. The paper aims to draw attention to continuing development needed in Islamic contract law to support growing Islamic finance.
This document discusses Islamic investment in equities markets. It begins by outlining the types of securities, including common stock and preferred stock. Common stock represents ownership in a company and provides rights to dividends and voting. Preferred stock has limited voting rights but priority claim to dividends. The document then examines the underlying Shariah contract of stocks, which is based on principles of Musharakah profit and loss sharing. While common stock is generally permissible, preferred stock faces restrictions. The document concludes by discussing various ways shareholders can be rewarded, such as cash dividends, bonus issues, and rights issues, all of which can be compliant with Shariah perspectives.
Here are the steps to setup the Musharakah company for Case 1:
1. Partner A and Partner B form a Musharakah company on Jan 1 with a capital contribution of Rs. 10 million and Rs. 5 million respectively.
2. The company operates throughout the year and earns a profit of Rs. 3 million by Dec 31.
3. As per the agreed ratio, the profit of Rs. 3 million is distributed between Partner A and Partner B in the ratio of their capital contribution i.e. Partner A receives Rs. 2 million (10/15 of Rs. 3 million) and Partner B receives Rs. 1 million (5/15 of Rs. 3 million).
4.
The document discusses Islamic banking, its products and services, and how it differs from conventional banking. Islamic banking adheres to Sharia law which prohibits interest and gambling. Its main products include deposit accounts, investment accounts based on profit/loss sharing, and financing through leasing or partnership models. Investments in Islamic banks are not guaranteed and based on shared risk. Oversight of Islamic scholars ensures operations comply with Sharia. The relationship with customers is a partnership rather than debtor-creditor.
The document discusses the treatment of qard (interest-free loans) in Takaful (Islamic insurance). It begins by contrasting conventional and Islamic insurance models. When a Takaful fund experiences a deficit, the Takaful operator can provide an interest-free qard loan to ensure solvency. However, terms of repayment are sometimes unclear. The document then examines regulatory issues around qard, including disclosure requirements and how qard fits within related party frameworks. It concludes by outlining Malaysia's proposed risk-based capital framework for Takaful operators, including capital adequacy ratios and supervisory interventions when capital levels decline.
This document provides an overview of Murabaha, an Islamic financing structure. It defines Murabaha as a sale where the seller discloses the cost of an item and sells it for a higher price, adding a known profit. The document outlines the difference between Murabaha and Musawamah sales, basic rules of Islamic sales, evidence for Murabaha's validity, how it is structured as a financing transaction, potential issues, and mistakes to avoid. It concludes that Murabaha must be implemented carefully according to Islamic principles, as a legitimate sale rather than an interest-based loan.
This document discusses Wasiyah (Islamic will) under Islamic law. It defines Wasiyah, explains how it can be made orally or in writing, and lists its key characteristics. It discusses the different parties involved - the testator, legatee, and legacy. It outlines the pillars and formula of Wasiyah, when it can be canceled, and different types. It also lists what assets cannot be willed and compares Wasiyah to gifts. Finally, it discusses when making a Wasiyah is strongly required, recommended, preferred or not preferred under Islamic law.
The document discusses the concept of Mudarabah, an Islamic financing structure. Mudarabah is a partnership between an investor and a manager, where the investor provides capital and the manager provides labor/expertise. Profits are shared according to a pre-agreed ratio, while losses are borne solely by the investor. The document outlines the key elements of Mudarabah contracts including capital requirements, management roles, profit/loss distribution, and termination procedures. It also compares Mudarabah to other structures like Musharakah and analyzes various risks in Mudarabah like credit, market, and liquidity risks.
Sukuk are financial certificates that comply with Islamic law and its investment principles, which prohibit charging or paying interest. Sukuk represent ownership in tangible assets or business activities and provide investors returns from those assets or activities. There are different types of Sukuk based on principles like Murabaha, Ijarah, Musharakah, and Mudarabah. While Sukuk aim to enable organizations to raise capital in a Sharia-compliant way, some structures have faced criticism for replicating interest-based bonds too closely. Guidelines on appropriate underlying assets and tradability in secondary markets continue to be discussed.
Insurance has become a need of businesses and individuals for mitigating risks and losses and lessening the impact of catastrophes on their lives and wealth.
When Islamic banking started functioning in the 1970s, it also required a Shar¯ı´ah-compliant alternative to conventional insurance, considered against the Shar¯ı´ah tenets due to the involvement of Riba, Gharar and gambling. To fill the gap in the cycle of Islamic finance, the system of Takaful has been developed and a large number of Takaful companies are providing services in various regions of the world.
The document provides an overview of the underwriting process. It defines underwriting as evaluating risks to determine whether to provide insurance coverage. An underwriter's role is to evaluate applications, accept or decline risks, and determine contribution amounts. Sound underwriting is important for the success of the Takaful operator and equitable treatment of participants. The underwriting process involves establishing files, evaluating factors specific to the type of coverage, determining rates, and setting policy terms. Underwriters make decisions on whether to reject risks, issue substandard policies, standard policies, or preferred policies. They also monitor policies ongoing. Agents play an important role by gathering information to assist underwriters.
This document discusses the principles of Islamic investment. It begins by outlining Islamic worldviews related to investment such as accountability to God and society, justice, and public interest. It then defines Islamic investment as investments that adhere to Islamic principles through profit and loss sharing and avoiding interest, uncertainty, and gambling. The document outlines the sources of Islamic laws, criteria for permissible investments and activities, and challenges in Islamic finance. It also discusses concepts like zakat, speculation vs gambling, and the roles of Sharia supervisory boards and screening.
The document discusses Sukuk, an Islamic financial certificate that is an alternative to conventional bonds. Sukuk are asset-backed and represent partial ownership of an asset, rather than debt. They can be structured using various Islamic financing contracts like murabahah, ijara, musharakah, and mudharabah. Malaysia has been a pioneer in developing the Sukuk market, with the first issuance in 1990 and the establishment of regulatory standards. It remains one of the largest Sukuk issuing countries globally.
The document compares and contrasts insurance and takaful. It provides details on:
1) Insurance is a contract where one party agrees to take on the risk of another in exchange for premium payments. The risk bearer is the insurer and the party whose risk is covered is the insured.
2) Takaful is an Islamic insurance system based on mutual assistance and donation, where risks are shared collectively. It follows the principles of tabarru (donation) and ta'awun (mutual guarantee).
3) There are several takaful models including mudarabah, wakalah, and waqf models. The waqf model establishes a waqf fund through shareholder contributions to compensate
Takaful is an Islamic insurance system based on mutual assistance and donation. It involves participants voluntarily contributing to a collective fund to guarantee each other against losses. If a participant suffers a loss, they receive money from the fund to help cover costs. Any surplus contributions are shared among participants according to a Mudarabah agreement. Takaful aims to help those in need without involving interest, gambling or other prohibited elements unlike conventional insurance.
Takaful is an Islamic insurance concept based on mutual assistance and cooperation. It involves participants contributing to a common fund, which is used to pay compensation to any participant who suffers losses according to the terms of the Takaful agreement. There are different models for structuring Takaful, such as the Tabarru' model where contributions are seen as donations, or the Mudharabah model where profits from investing contributions are shared. Takaful aims to be free from elements like uncertainty and gambling that are prohibited in Islam. It is overseen by a Sharia Supervisory Council to ensure compliance.
This document discusses the concepts and models of Takaful (Islamic insurance). It begins by defining Takaful as an Arabic term meaning joint guarantee or responsibility based on mutual agreement. It then outlines some of the basic concepts of Takaful including mutual help, responsibility and protection. The document discusses the objectives of Takaful to provide an Islamic alternative to conventional insurance based on principles of mutual assistance and donation. It also summarizes some of the common objections to conventional insurance around uncertainty, gambling and interest. The document concludes by outlining the main models of Takaful including Mudarabah, Wakalah and hybrid models, and provides examples of common Takaful products like general and family Takaful.
Takaful is an Islamic insurance alternative that is based on principles of mutual cooperation and responsibility. It provides a way for Muslims to protect against risks in accordance with Sharia law. Takaful operates through pools funded by contributions from policyholders. Any surpluses are distributed among members, while deficits are covered by a special reserve without interest. Takaful structures use agency or partnership contracts to manage funds and ensure operations comply with Islamic laws and avoid interest, gambling, and uncertainty.
1. Takaful, or Islamic insurance, originated from early Islamic community practices of pooling resources to help cover financial losses. It operates based on Sharia principles of welfare, shared responsibility, and cooperation.
2. There are three main models of takaful contracts: wakalah, mudarabah, and a hybrid model. Wakalah uses an agency fee structure while mudarabah is a profit-sharing model between participants and managers.
3. Key differences between takaful and conventional insurance include that takaful participants are both the insurer and insured through risk-sharing, and investments must be Sharia-compliant rather than allowing interest.
This presentation provides an overview of Takaful (Islamic insurance):
1) Takaful is an alternative to conventional insurance that is based on mutual assistance and joint guarantee between participants. It follows Shariah principles by avoiding elements of uncertainty, gambling and interest.
2) There are different Takaful models including Mudaraba and Wakala that structure the risk-sharing arrangement and distribution of surplus between participants and the Takaful operator.
3) Takaful Pakistan Limited is a new Takaful company that aims to set benchmarks for client service, operations and prudent underwriting in the growing Pakistani Takaful market.
This presentation provides an overview of Takaful (Islamic insurance):
1) Takaful is based on mutual protection and joint guarantee, with participants contributing to a common fund to provide indemnity in case of loss. It avoids elements of uncertainty, gambling and interest that are objections to conventional insurance.
2) There are various Takaful models including Mudaraba and Wakala that structure the operations and distribution of surplus differently but are based on cooperation instead of profit-maximization.
3) Takaful Pakistan Limited is a new company that offers both general and family Takaful products in Pakistan, which has strong potential for Takaful given its predominantly Muslim population.
This document discusses the differences between conventional insurance and Islamic (takaful) insurance. It explains that takaful is based on risk-pooling and mutual guarantee between participants, avoiding issues like riba (interest), gharar (uncertainty), and maisir (gambling) that are present in conventional insurance. It describes the key concept of tabarru in takaful, where participants donate contributions to a common fund to mutually insure one another. If the fund faces a deficit, the operator can provide an interest-free loan (qard hassan) to ensure solvency, though the terms of repayment are sometimes unclear.
Takaful companies are based on mutual cooperation and free from interest, gambling, and uncertainty. They provide protection to participants from risks by donating contributions to a Takaful fund that helps other participants. Any surplus in the fund is shared only among participants, while deficits are covered through an interest-free loan. Both participants' and shareholders' capital are invested in Sharia-compliant funds.
Takaful companies are based on mutual cooperation and free from interest, gambling, and uncertainty. They provide protection to participants from risks by donating contributions to a Takaful fund that helps other participants. Any surplus in the fund is shared only among participants, while deficits are covered through an interest-free loan. Both participants' and shareholders' capital are invested in Sharia-compliant funds.
The document provides an overview of Takaful (Islamic insurance), including its definition, differences from conventional insurance, various Takaful models and types, the history and development of Takaful in Pakistan, and prospects for growth in Pakistan. It also introduces Takaful Pakistan Limited, a new Takaful company established in Pakistan as a joint venture between local and international institutions.
The document provides an overview of Takaful (Islamic insurance) including:
1. Takaful is based on mutual protection and joint guarantee, with participants contributing to a common fund to provide indemnity in case of loss.
2. There are different Takaful models including Mudaraba and Wakala that structure the risk-sharing and distribution of surpluses.
3. Takaful has grown significantly in recent decades and now operates in over 40 countries, providing an alternative to conventional insurance that is in line with Sharia principles.
Takaful is an Islamic alternative to conventional insurance that is based on mutual cooperation and responsibility among participants. It avoids elements like interest, gambling and uncertainty that are prohibited in Islamic finance. There are different business models for Takaful including Mudarabah, Wakalah and Waqf. While Takaful has grown significantly in recent decades, it still only accounts for a small portion of the potential market among the world's Muslim population. The Takaful industry faces challenges in standardizing business practices but also has opportunities for continued strong growth in both existing and new markets.
Mudarabah is an Islamic equity-based contract where the rabbul-maal provides capital to the mudarib for a business venture. Profits are shared according to a predetermined ratio, while losses are borne by the rabbul-maal. There are issues with using mudarabah as the basis for deposit instruments or financing facilities, as some structures violate risk-sharing principles. Bay' Bithaman Ajil (BBA) is an Islamic contract where payment for an asset is deferred through installments. It is commonly used for home financing in Malaysia, though some consider it controversial as the profit rate tracks market interest rates. Legal documentation for BBA financing includes sale and purchase agreements and security documents like charges over
Investment management is a key function for insurance companies to manage investments backing reserves and capital. Zurich Insurance Group commissions its investment management team to generate superior risk-adjusted returns relative to liabilities for shareholders and policyholders. Investment management creates value through a process that includes asset-liability management, strategic asset allocation, market strategy, asset manager selection, portfolio construction, and efficient asset management. The investment strategy aims to maximize economic objectives while minimizing unrewarded risks in order to create long-term value for stakeholders.
Takaful is an Islamic alternative to conventional insurance that is based on mutual assistance and contribution to a common fund. It operates using models of tabarru (voluntary contribution), mudaraba (profit-sharing), and wakala (agency). Some key differences from conventional insurance are that takaful eliminates elements of gharar (uncertainty), maisir (gambling), and riba (interest) and distributes any surplus to participants. It has grown in popularity due to its compliance with Sharia and has over 180 operators worldwide, though it faces ongoing challenges to further expansion.
1. Takaful is an Islamic insurance model based on mutual assistance and solidarity where participants contribute funds to help others in times of need, as opposed to conventional insurance which is based on a commercial transaction.
2. Conventional insurance involves elements prohibited in Islam like maisir (gambling) and gharar (uncertainty), and may invest funds in interest-bearing assets. Takaful aims to be free from these elements and can only invest in Sharia-compliant assets and businesses.
3. The key differences are that in Takaful, benefits are paid from participants' funds, profits are shared among participants, and the model operates according to Sharia principles of avoiding riba and promoting risk-
Unit Linked Insurance Policies (ULIPs) are life insurance policies that provide both risk coverage and investment. Most ULIPs offer a range of investment funds to suit different risk profiles and time horizons. Returns are not guaranteed as the investment risk is borne by the policyholder. Charges include premium allocation charges, mortality charges, fund management fees, and surrender charges. The document provides answers to frequently asked questions about ULIPs, such as what is a unit fund, benefits payable, consequences of discontinuing premiums, and fund performance reporting.
This document discusses stakeholders in takaful (Islamic insurance), the application of mu'amalat principles in takaful, and differences between takaful and conventional insurance. It defines stakeholders as those directly or indirectly affected by an organization. Key takaful stakeholders include participants, the takaful operator, regulators, and the community. The document also differentiates roles of the takaful operator from a conventional insurer, such as bearing risk through a tabarru' contract rather than an exchange contract.
Takaful is an Islamic insurance system where individuals contribute money into a pooled fund to guarantee each other against loss and damage. It is based on the Islamic principles of mutual responsibility and solidarity where people cooperate to protect one another. There are two main types: general takaful which provides short-term coverage for risks like property and motor insurance, and family takaful which offers long-term savings and protection benefits. Takaful operations use models like wakala, mudaraba, or a hybrid to structure the relationships between participants and operators. At the end of the coverage period, any surplus from the pooled funds is distributed back to participants and operators according to a pre-agreed ratio.
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2. Basic Concepts of Takaful
Takaful - Arabic word originating from the root verb
kafalah –to guarantee, to secure or to be
responsible for others
Literally, takaful means joint responsibility or
guarantee based on mutual agreement
Three basic concepts of mutuality are embodied in
the takaful model of insurance:
- Mutual help
- Mutual responsibility
- Mutual protection
2
3. Basic Concepts of Takaful
Triangular Relationship of the Major Aspects of
Takaful
3
4. Basic Concepts of Takaful
Takaful: Islamic alternative to conventional
insurance where members contribute financial
resources into a pool based on principles of:
- ta’awun (mutual assistance)
- tabarru’ (donation) where the group undertakes
to share the mutual risk together
An appropriate Shariah-compliant framework
effectively manages risks in commercial activities as
well as other civil engagements - following the hadith
‘Tie your camel first’
All prohibitive elements in Islamic commercial
transactions are prohibited in the design of takaful
models
4
5. Basic Concepts of Takaful
Main Features of Takaful
1. Cooperative Risk Sharing
2. Clear Financial Segregation
3. Shariah-compliant Policies and Strategies
5
6. Basic Concepts of Takaful
1. Cooperative Risk Sharing
Cooperative risk sharing through the use of donation
was designed to:
- eliminate riba and ghrar elements in takaful
- address issues of social responsibility, solidarity
and the innate need to care for others
Donations adopted/merged with other frameworks
of Islamic commercial transactions to replace
premiums
Premiums paid by policyholders are considered
donations to assist members who suffer any loss
6
7. Basic Concepts of Takaful
2.Clear Financial Segregation
In Islamic law:
Clear segregation between participants and operators
The role of the insurance company is restricted to an
operator managing the portfolio and investing insurance
contribution on behalf of participants
In the conventional practice of insurance business:
The insurance company is a profit-making entity which
agrees to bear the financial burden and losses of its
policyholders
The shareholders are entitled to receive profit and bear
the burden of any deficit at the end of the financial year
7
8. Basic Concepts of Takaful
3. Shariah-compliant Policies and Strategies
Investment of insurance funds should be made on
ethical businesses that cause no harm to people or
the environment
Ethical considerations in takaful extends to
investment in businesses or products that do not
contradict Shariah. Both the process and the end-
product must be Shariah-compliant
Takaful operators are required to put in place a
standard Shariah governance system to ensure
absolute compliance with the Shariah
8
9. Basic Concepts of Takaful
Takaful Core Principles
Ta’awun (mutual assistance)
Tabarru’ (donation)
prohibition of riba, gharar and maysir
9
10. Basic Concepts of Takaful
Major Differences Between Takaful and Conventional
Insurance
The major differences between the two frameworks are:
Parties to the contract
Payment of premiums
Investment of insurance funds
10
11. Major Difference Between Takaful
and Conventional Insurance
11
Parties to the Contract
In conventional insurance, there are two main
parties, the insurance company and the
insured party (who has nothing to do with other
insured parties in terms of guaranteeing one
another against any loss).
In the takaful scheme, the participants mutually
insure one another against any loss, and the
takaful operator is merely a fund administrator.
12. Major Difference Between Takaful
and Conventional Insurance
12
Payment of Premiums
The insured party in a conventional insurance scheme
pays regular instalments, called premiums, in return
for insurance cover.
The insurance company guarantees the payment of
compensation in the event that the insurance contract
occurs.
In takaful, premiums are not paid as regular
instalments, but instead as a donation from
participants into the common fund, to guarantee the
receipt of compensation (for other participants) in
the event that the insured-for occurrence happens.
The participants remain the owners of the
“premiums” even though they have donated them into
a pool of funds to indemnify any member of the group.
13. Major Difference Between Takaful
and Conventional Insurance
13
Investment of Insurance Funds
Takaful funds, unlike those of conventional
insurance companies, are invested solely in
Shariah-compliant products and companies.
Profits from such investments are distributed on
the basis of pre-agreed ratios (note: model of
takaful adopted by the stakeholders determines
the profit distribution as well) as the remuneration
of the takaful operator in the underlying takaful
contract.
14. Models of Takaful
The Mudarabah Model
The Wakalah Model
Hybrid Wakalah-cum-Mudarabah Model
Wakalah with Waqf Model
14
15. Models of Takaful
The Mudarabah Model
Islamic insurance model based on trust partnership
between the takaful operator (mudarib) appointed
to manage the takaful business by the participants
who act as the financiers, investors or fund
contributors (rabb al-mal)
The funds contributed by the participants are
divided into:
- Participants’ Risk Fund (PRF) and
- Participants’ Investment Fund (PIF)
The Takaful Participants are the capital providers
and the owners of the takaful undertaking
15
16. Models of Takaful
The Mudarabah model
The Takaful Operator is considered a business
partner of the participants in the investor-
entrepreneur relationship under the mudarabah
contract
The ratios of profit distribution are predetermined
Financial loss is borne by capital providers (Takaful
Participants), while the entrepreneur (Takaful
Operator) may lose his/her managerial efforts
Takaful Operator remunerated from the
underwriting surplus as agreed upon in the
underlying takaful contract
16
17. Models of Takaful
Surplus
The amount that remains after all expenses and
management fees for the administration of the
takaful fund
have been deducted and the contributions are more
than
the claims made by the participants
17
19. Models of Takaful
The Wakalah Model
Islamic insurance model based on the contract of agency
between takaful participants and takaful operator where the
former are the real owners of the fund while the latter acts as
an agent
Wakalah takaful is based on the contract of agency between
the takaful participants and the takaful operator where:
- the takaful participants are the real owners of the fund
- the takaful operator acts as an agent
The takaful operator is entitled to agency fee or commission
for its service. The agency fee must be specified and clearly
stated in the contract
Islamic insurance model based on the contract of agency
between takaful participants and takaful operator where the
former are the real owners of the fund while the latter acts
as an agent
19
20. Models of Takaful
IFSB-8 suggests that the agency fee should cover
the total sum of the following costs:
- management expenses;
- distribution costs, including intermediaries’
remuneration;
- a margin of operational profit to the Takaful
Operator
Any surplus realised from the investment of the
participants’ funds will go to the participants. The
operator only receives its agency fee based on the
nature of the takfaul model.
The Takaful Operator does not share in any risk
borne in the investment or management of the
20
22. Main Takaful Products
Hybrid Wakalah-Mudarabah Model
The hybrid takaful model (also called the mixed
model ) is a combination of the wakalah model and
the mudarabah model where:
- the wakalah model is employed for the
underwriting purposes
- the mudarabah model is utilised for the
investment activities
22
23. Models of Takaful
Hybrid Wakalah-Mudarabah Model
The twin role of the takaful operator makes the
model unique with its hybrid structure:
- the takaful operator is entitled to agency fee or mutually
predetermined commission for the role it plays as a wakil or
agent who manages the takaful funds
- the takaful operator is also entitled to a share in the profits
realised for managing the investment activities of the fund
as an entrepreneur (mudarib)
23
24. Models of Takaful
Hybrid Wakalah-Mudarabah Model
The sources of income of the takaful operator
consist of:
- agency fee
- incentive fee
- the profit share from the investment of the funds
One important element of the hybrid model is the
clear segregation between the shareholders’ funds
and the participants’ funds
24
26. Models of Takaful
Waqf-Wakalah-Mudarabah Model
The Waqf Component
The shareholders of a takaful company make
donations to a common pool of funds which is
established as a waqf.
Waqf funds are invested in Sharī‘ah- compliant
activities.
Returns from such investments in addition to
tabarru’ funds in Participants’ Special Account (
PSA) are used for the benefit of the participants.
The original capital amount contributed into the
common pool of funds must be reinvestment to
ensure continuity of waqf funds
26
27. Models of Takaful
Waqf-Wakalah-Mudarabah Model
The Wakalah Component
The shareholders of the Takaful company donate to it,
establishing a waqf fund
The company becomes the agent of the shareholders
and assumes responsibilities of proper management of
the waqf funds, paying necessary claims
Company stands to receive a pre-agreed fee for acting as
an agent of the shareholders
The company also manages the investment of such waqf
funds as an entrepreneur, therefore entitled to share in
the profit from investment
27
29. Main Takaful Products
Main Takaful Products
Available products in the takaful industry:
- General Takaful: is a Sharī‘ah-compliant
alternative to the general insurance
- Family Takaful: is a Sharī‘ah-compliant
alternatives to the life insurance
29
30. Main Takaful Products
Main Takaful Products
General Takaful
General takaful: a short-term policy renewable
periodically; covers assets and other proprietary
belongings of participants from foreseeable material
loss or any form of damage
General takaful fund established through participants’
contributions. Funds invested in Sharī‘ah-compliant
investments
Proceeds accrue from such investment will be
returned to the fund for indemnifying the takaful
participants
Underwriting surpluses of the takaful funds are
30
31. Main Takaful Products
General Takaful Covers (list is not exhaustive)
- Motor Takaful
- Fire Takaful
- Employer Liability Takaful
- Fire consequential Loss Takaful
- Burglary Takaful
- Workmen Compensation Takaful
- Machinery Breakdown Takaful
- Health Takaful
Available takaful covers are categorised into motor
takaful and non-motor takaful
31
32. Main Takaful Products
Family Takaful
Family takaful is a long-term policy (may span
between 10 to 30 years) where people come
together to mutually indemnify one another
against disasters that may occur such as sudden
death or permanent disability
Examples of family takaful include
accidental death
savings and education plans for one’s dependants
waqf plans
retirement plans
disability plans
32
33. Main Takaful Products
Types of Family Takaful
Ordinary collaboration
Collaboration with savings
Collaboration based on specific groups
33
34. Main Takaful Products
Three Types of Family Takaful
First: Ordinary Collaboration
The participants mutually agree to contribute to a
common pool of funds through donations (concept
of tabarru’)
Premiums used for underwriting activities in case of
calamity or disaster for any of the members of the
group
Payment made directly to participant or his/her
beneficiaries in accordance with the underlying
takaful contract
34
35. Main Takaful Products
Second: Collaboration with Savings
The parties contribute through donations into a
common pool of funds from which the underwriting
activities are carried out
The second pool of funds constitutes savings of
individual participants which may be demanded by
respective owners at maturity of certain period of
time
The two pools of funds are strategically segregated
The participants benefit individually as well as
collectively form the collaboration with savings
35
36. Main Takaful Products
Third: Collaboration Based on Specific Groups
Type of family plan usually structured reflecting
communal, ethnic, or organisational needs
Participants from the same community, district or
social group come together to establish a common
pool of funds for a specific purpose
Membership to collaboration is limited to those
who come from the same group
Contributions to the fund may be made jointly or
severally by the organisation and the participants
Benefits from the common pool of funds can only be
enjoyed by the participants or their beneficiaries
36
37. Underwriting Surplus and Technical
Provisions
Underwriting Surplus
Insurance or underwriting surplus is the excess of
the total premium contributions paid by policyholders
during the financial period over the total indemnities
paid in respect of claims incurred during the period,
net of reinsurance and after deducting expenses and
changes in technical provisions”
(AAOIFI, 2010, p. 409)
37
38. Underwriting Surplus and Technical
Provisions
Regulating the Underwriting Surplus Process
The underwriting surplus calculated for specific
financial year
Indemnities paid for deserving claims, the retakaful
policy and changes in technical provisions must be
deducted from the total premium contributions of the
participants
Net of reinsurance implies that all retakaful
operations must be considered while computing the
underwriting surplus
All changes in technical provisions (mainly relate to
the method of accounting and balancing the financial
statement) including unpaid claims and unearned
38
39. Underwriting Surplus and Technical
Provisions
Right of Policyholders to Surplus
Policyholders or takaful participants collectively
have right to surplus originated from policyholders
who made the financial contributions
Should be a clear segregation between assets,
obligations and results of operations of
policyholders and shareholders
Shareholders are not entitled to the takaful surplus
but will get reimbursed from the profit realised from
the investment activities of the takaful undertaking
Some rulings by Sharī‘ah boards permit the
shareholders to share the surplus with the
policyholders
39
40. Underwriting Surplus and Technical
Provisions
Allocating the Takaful Surplus
AAOFI identifies the following methods (alternatives) of
allocating takaful surplus
(a) Allocation of surplus to policyholders, regardless of
whether they have made claims on policy during the
financial period
(b) Allocation of surplus only among policyholders who have
not made any claims during the financial period
(c) Allocation of surplus among those why (conditions apply)
(d) Allocation of surplus between policyholders and
shareholders
(e) Allocation of surplus by using other methods
40
41. Underwriting Surplus and Technical
Provisions
Covering the Takaful Deficit
AAOIFI proposes the following methods for covering
the takaful deficit:
To settle the deficit from the reserves of
policyholders, if any
To borrow from the shareholders’ funds or from
others the amount of deficit that should be paid back
from future surpluses.
To ask the policyholders to meet the deficit pro
rata.
To increase the future premium contribution of
policyholders on a pro-rata basis.
41
42. Underwriting Surplus and Technical
Provisions
Deficit in Participants’ Risk Funds (PRF)
Deficit occurs when assets of PRF are insufficient to
meet liabilities
Duty of the takaful operator to rectify deficiency and
loss in PRF initially through qard hasan
Must be a sound repayment mechanism managed
by takaful operator ensuring loan will be repaid
through future surpluses of the PRF
42
43. Underwriting Surplus and Technical
Provisions
Deficit in Participants’ Investment Fund (PIF)
Recorded losses in Participants’ Investment Fund
(PIF) shall be absorbed by the capital providers
(the participants)
The takaful operator as the entrepreneur cannot
rectify deficit through qard hasan
When it is proved that the deficit occurred as a result
of the professional negligence or mismanagement of
takaful operator, deficiency shall be rectified through
necessary transfer from the shareholders’ fund
43
44. Reinsurance and Retakaful
The Islamic alternative to reinsurance is retakaful, which
has been structured in a Shariah-compliant model, i.e.
reinsurance of takaful business on the basis of Islamic
principles is known as retakaful
Within the conventional framework of insurance:
- Insurance operators collectively share the risks
they have undertaken to underwrite
- Large insurance companies underwrite the risks of
smaller insurance companies
- Reinsurance is a mechanism of the mitigation of
such great risks by transferring the risks to a large
insurer known as reinsurer
44
45. Reinsurance and Retakaful
Retakaful
Structured in a Shariah-compliant model; the Islamic
alternative to conventional reinsurance
The risk aversion method of Retakaful is structured
in a way where:
- Takaful operators are participants in a takaful
undertaking with a large takaful company
- An agreed amount is paid periodically from the
takaful fund of the operators as premiums to the
Retakaful company
- All the underwriting risks of the takaful operators
are insured by the Retakaful company
45
46. Reinsurance and Retakaful
The Retakaful companies play a significant role
when the takaful operators record deficits or losses
Capital of many Retakaful companies not so large to
attain an “A” rating which is mostly required for
reinsurance purposes
Shariah scholars allow takfaul operators to reinsure
with conventional insurance companies under
certain conditions
46
47. Islamic Microfinance: Providing
Credit to the Entrepreneurial
Poor
47
• Microfinance is the provision of small-scale
financial services to the poor (usually excluded
from the formal financial services)
• Islamic microfinance is the process of providing
small-scale financial services, based on Sharī‘ah
concepts, to the poor who may be excluded from
formal financial services
• Islamic microfinance aims to provide necessary
credit facilities to the poor and/or low-income
individuals who may not have enough finance to
engage in normal financial transactions in formal
financial institutions
48. Credit to the Entrepreneurial
Poor
48
The History of Islamic Microfinance Institutions
The early initiatives to alleviate poverty and promote
security in the Muslim communities include:
- The institution of zakat (compulsory alms)
- Waqf (charitable endowment)
- The praiseworthy qard hasan (benevolent loans)
The informal savings clubs introduced by conventional
microfinance initiatives in the 16th century in Europe
through cooperative projects were tinted with interest,
hence did not serve the real objective of microfinance as a
means of assisting the entrepreneurial poor
As an alternative, the revival of Islamic financial services
brought about the proper structuring of the Islamic models
on microfinance to assist the entrepreneurial poor
49. Islamic Microfinance: Providing
Credit to the Entrepreneurial Poor
49
The History of Islamic Microfinance Institutions
The history of modern Islamic finance started in rural
Islamic microfinance in the remote village of Mit Ghamr in
Egypt back in 1960s
Number of financial institutions offering Islamic products
were established across the Muslim world in the 70s and
80s
The 1990s and the new millennium ushered in a period of consolidation of
Islamic finance products
The joint partnership initiative of Grameen-Jameel opened the Gulf
Cooperation Council (GCC) countries to microfinance initiatives
The Islamic microfinance model
- excludes exploitative tendencies e.g. charging interest
- empowers able entrepreneurs whom only contribution
to the business venture is their expertise
50. Islamic Microfinance: Providing
Credit to the Entrepreneurial Poor
50
Components of Islamic Microfinance
Islamic microfinance is an umbrella concept that consists of:
Micro-lending
Micro-saving
Micro-insurance (preferably known as micro-takaful)
Micro-lending
Micro-lending (also called micro-credit)
Involves the provision of credit facilities in the form of
interest-free loans based on the principle of qard hasan
Flexibility in terms of repayment of the loan
Micro-lending is provided for:
- the entrepreneurial poor, to assist them to grow their
income
- the low-income individuals in order to assist them to
grow their physical asset base
51. Islamic Microfinance: Providing
Credit to the Entrepreneurial Poor
51
Micro-savings
Micro-savings based on the concept of wadi’ah (safekeeping) in
Islamic finance, which is the underlying concept of savings account
(deposits) in the formal banking system
Micro-savings allow low-income individuals to secure capital or profits
realised in a savings account, thus enabling saving and management of
finances
Clients accumulate capital and profits in the micro-savings account
which allows them to plan for the repayment of any micro-lending from
which they might benefit
Micro-takaful
Where members of a specified group of low-income individuals mutually
protect one another from risk through collaborative takaful
The mutual risk transfer arrangement within the group will ultimately
benefit all members of the group plus dependants
Micro-takaful is relevant for certain risks that are beyond the financial
capacity of the members of the group individually
53. Islamic Microfinance: Providing
Credit to the Entrepreneurial Poor
53
‘Microfinance’ and ‘Micro-credit’
The two terms are different in terms of meaning, scope and application
‘Microfinance’ The whole range of small-scale financial services
provided for the benefit of the poor or low-income individuals (micro-
lending, micro-saving, and micro-takaful)
‘Micro-credit’ Small loans or financial assistance extended to poor
families practically excluded from formal financial services (micro-credit
is part of the parcel of microfinance)
Prohibition of Riba in Islamic Microfinance
One major difference between conventional microfinance and Islamic
microfinance framework is prohibition of interest-bearing credit
facilities and interest-yielding deposits
Modern conventional microfinance schemes dominated by interest-
based products that can further impoverish low-income individuals
Likely impact of high interest rates on microfinance schemes is
counter-productive
High interest rates exclude low-income households unable to afford
micro-credit facilities
54. Islamic Microfinance: Providing
Credit to the Entrepreneurial Poor
54
Prohibition of Riba in Islamic Microfinance
Islamic microfinance offers multiple sources of income through
partnership and entrepreneurial commercial activities between the
financial institution and the clients
Islamic approach to poverty alleviation is a holistic framework that
excludes counter-productive element e.g. riba and gharar
Interest rates violate fundamental basis of Islamic commercial law
regardless whether high or low, so are prohibited
The prohibition of riba safeguards against financial exploitation and
oppression by the few rich
The Islamic approach to the management of micro-credit schemes is
highly sensitive to clients who are unable to redeem their loans within the
contractual period:
- be given additional time
- in some extreme cases, the loans may be written off completely
- in some other extreme situations, remittal of credit facilities may
be considered
55. Islamic Microfinance Products
55
The Most Commonly Used Modes of Islamic
Microfinance:
Salam as a mode of financing agriculture
Mudarabah mode of combating unemployment
Bai Muajjal-Murabahah mode of providing
working capital
Diminishing Partnership for Housing Microfinance
Non-for-Profit Modes of Islamic Microfinance
56. Islamic Microfinance Products
56
Salam as a Mode of Financing Agriculture
Salam regarded as the most viable tool for financing agriculture
Salam a contract where the bank is the buyer of the commodity and the
farmer is the seller who undertakes to embark on future delivery
Bai salam a contract where the seller undertakes to supply specific
goods to the buyer at a future date in exchange of advance price which
is fully paid on the spot
Parallel salam a separate contract distinct from the initial bai salam
where the Islamic bank is the seller of the commodity based on deferred
payment
The two contracts must be distinguishable from each other
The Applicability of the Salam Contract
Salam contract is used in Islamic commercial transactions
- To meet liquidity needs of traders for import/export business
- To meet financial needs of small farmers
Salam contract is important in the financing of micro-farming, small-
scale farming where farmers require funding to grow crops and feed
their family up to the harvest time
57. Islamic Microfinance Products
57
Mudarabah Financing for Combating Unemployment
Mudarabah is an Islamic finance contract where:
- an Islamic bank as an investor exclusively provides capital for a
business project - an entrepreneur provides the
management expertise
Mudarabah a trust partnership finance mechanism structured as a tool
to combat unemployment and create jobs
Mudarabah can be a good product for entrepreneurial activities,
especially when there is a large amount of skilled unemployed labour
Types of Mudarabah Contractual Arrangements
The two types of Mudarabah contractual arrangements are:
Mudarabah al-Mutlaqah (Unrestricted Trust Financing): where the
particular business in which the micro-entrepreneur will invest the
capital finance is not specified or restricted
Mudarabah al-Muqayyadah (Restricted Trust Financing): where the
bank or Islamic microfinance institution (the capital provider) specifies
or restricts the business in which the capital finance may be invested
58. Islamic Microfinance Products
58
Bai al-Mu’ajjal-Murabahah Model of Providing Working Capital
Bai Muajjal or Bai-bithaman ajil (BBA) a sale where parties agree to
deferment of payment to a future date – meaning that there is already
an element of Murabahah
When Murabahah is combined with Bai Muajjal, it becomes a
microfinance product which is one of the most commonly used
instruments by the Islamic MFIs
The mark-up price in the Murabahah contract is settled as a deferred
payment based on Bai Muajjal
The parties must know the cost price and the profit or mark-up in
Murabahah transactions
In Bai Muajjal, cost price and the profit or mark-up is the deferment of
the payment of the price regardless of whether the parties are aware of
the cost and mark-up
The parties must fix price of commodity and the terms of payment at
the time of concluding the contract to prevent any element of gharar in
the contract
59. Islamic Microfinance Products
59
Diminishing Partnership for Housing Microfinance
Housing microfinance is a means of providing shelter for low-income
individuals
A diminishing partnership is known as musharakah mutanaqisah, an
Islamic financial product structured to strategically provide access to
housing for the poorest
The Islamic MFI and the client form a partnership contract where they
purchase a property and lease it out for a specified term
The client buys a specified number of units every month out of the
shares of the Islamic MFI which automatically decreases the capital
ownership of the MFI
The capital ownership of the Islamic MFI diminishes gradually until the
client buys the total capital share in the property (out of the profit
distributed over a period of time)
The title passes to the client and he/she owns the property
In situations where the poor clients do not have funds to buy a small
portion of the capital share, qard hasan, zakat or waqf funds may be
provided for such purpose
- If qard hasan is given, the client only needs to repay the capital
amount
60. Islamic Microfinance Products
60
Non-for-Profit Modes of Islamic Microfinance
The non-for-profit modes of Islamic microfinance are
(i) zakat, (ii) waqf and (iii) qard hasan
Islam institutionalised a number of mechanisms
including zakat, waqf, qard hasan and sadaqah to
ensure that wealth circulates among all the
members of the society between the rich and the
poor
A hybrid framework for these mechanisms will
drastically alleviate poverty in the society
Despite the non-for-profit nature of the hybrid model,
it can be easily modified to accommodate the
profit-oriented modes
61. Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
61
The revival of Islamic finance services in the 20th century in a formalised form
brought with it the Islamic microfinance schemes
The Islamic finance products have been structured to suit the requirements of
the modern microenterprises and microcredit schemes
There are a number of operational and functional differences between the
Islamic microfinance institutions and the conventional MFIs
Islamic banking and finance, with its microfinance framework, is inclusive in its
approach to reach out to the disadvantaged and poor and embed true social
justice in society
Major Differences between Islamic MFIs and Conventional MFIs
Sources of Fund:
The conventional MFIs get their funds from:
Interest-bearing loans
Foreign donors
Central Banks
Government
The Islamic MFIs get their funds (with the exception of interest-bearing loans)
from: - Equity finance products applied in the
finance of microenterprises - Islamic
charitable sources such as waqf, zakat and sadaqah
62. Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
62
Modes of Financing
Conventional MFIs utilise interest-based modes of
financing
Islamic MFIs utilise Islamic financial instruments
which are either equity-based or debt-based
Various financial instruments can be used to finance
different kinds of enterprises:
- A profit-sharing mode could be used for a
microenterprise where the microentrepreneur and the
MFI share the profit
- Salam and Parallel Salam may be more appropriate
for micro-farming
- Mudarabah trust financing may be utilised in order
to combat the curse of unemployment
63. Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
63
Financing the Poorest
The framework of the conventional MFIs completely excludes the
poorest from the microfinance net
Islamic microfinancing scheme ensures that no segment of the
population is excluded
- Zakat involves the provision of grants to the poor for consumption
- Qard hasan involves the provision of benevolent loans to the poor for
their entrepreneurial needs
- The mechanism of zakat and sadaqah may be combined with the
microfinance activities to manage default of repayment that might be
occasion by extreme poverty
In the conventional MFIs, once a loan has been approved:
- A part of the principal is deducted by the institution for different
funds - The beneficiary pays
interest on the total amount approved
- The beneficiary may divert the funds to non-productive means
Alternatively, the Islamic MFIs
- Prevent the diversion of the funds to non-productive means since
no cash is handed out to the beneficiaries
- Do not make any deductions
64. Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
64
Guarantee and Group Dynamics
In the conventional MFIs, the repayment of the loan remains the sole
responsibility of the borrower
In the Islamic MFIs, group guarantee in the repayment of the loans
takes the form of kafalah (guarantee)
- Any of the group members can stand in as a guarantor for the
repayment of the loan
- In the event of any default in the repayment of the loan, the group
members might agree to give such a member qard hasan to pay
his or her instalments
Objective of Targeting Women
The conventional MFIs consider women seeking microcredit as a
means of women empowerment
Recent research suggests that:
- Men more often encourage women to take credit facilities
- Men spend the borrowed money while the women are held
responsible for the repayment of the instalments since they got the
credit facilities
65. Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
65
Major Differences between Islamic MFIs and Conventional MFIs
In the Islamic MFIs
- The objective of targeting women differs from that of the
conventional MFIs
- The target group is the family
- Women and their spouses are made to sign the contract as the
target is the family and not the women alone
- Both parties are liable for the repayment of the instalments
Work Incentives of Staff Members
The work incentive of the staff of the conventional MFIs is mainly
monetary gains from salary
The work incentives of the staff of Islamic MFIs are both monetary and
religious
- In addition to earning a living, the staffs of Islamic MFIs also
perform a socio- religious duty of alleviating poverty within
the society
- Such an incentive gives the staff more zeal to work efficiently
towards the realization of the vision of the Islamic MFIs
66. Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
66
Social Development Programme
The Social Development Programme of the conventional MFIs is secular and in
some cases goes against the ideals of Islam
The Islamic MFIs put in place a social development programme where the
ethical, social, behavioural aspects of Islamic ideals are brought to the fore
- The Islamic MFIs programme helps in promoting the idea of brotherhood
and partnership among beneficiaries who are morally compelled to repay their
instalments regularly as at when due
Dealing with Default
In the conventional MFIs
- Group and centre pressure used to deal with arrears and default
- In the event that this pressure does not work, the MFIs result to threats
and sale of assets
The Islamic MFIs have more sustainable and reasonable ways to deal with
defaults and arrears
- Members in a group guarantee one another through kafalah (spirit of
brotherhood)
- The group may provide qard hasan to defaulting member which may be
used to settle the arrears
- Members will do their utmost to pay back their loans in order to fulfil their
religious obligations