CHAPTER 3

Concept, Principles and

Models of Takaful
Outline
 Takaful Concept
 Basic Principles of Takaful
 Takaful Model
 Mudharaba Model
 Wakala Model
 Wakala-waqf Model
 Hybrid: Wakala-Mudharaba Model
 Concept of Takaful
 The takaful concept is in conformity with Syariah and is
based on the Islamic principle of al-Takaful and al-
Mudharabah.
 In order to eliminate the element of uncertainty in takaful
contract, the concept of tabarru’ is incorporated in it.
 Involvement of these two Islamic forms of business
eliminates the elements of Riba from insurance contract and
convert Gharar into tolerable form.
 In Family Takaful each Takaful installment is divided and
credited into two separate Accounts namely,, the
Participants'‘ Account (PA) and the Participant's’ Special
Account (PSA). A substantial proportion of the installments
is credited into the PA solely for the purpose of savings and
investment..
 The balance of the installments is credited into the PSA
as `tabarru' for TO to pay the Takaful benefits to the
heir(s) of any participant who may die before the
maturity of the contract.
 The amount accumulated in the PA is invested in various
business according to Islamic financing techniques, and
the resultant profits are divided between the company and
the participants according to the agreed upon ratio, e.g.,
30-70.
 The participant's share is calculated according to their
individual share in the PA, and credited into their
respective accounts, the PA and the PSA.
 Al-Mudharabah
 The commercial profit sharing contract between
the provider or providers of fund for a business
venture and the entrepreneur.
 The enterpreneur or al-Mudharib (takaful
operator) will accept payment of the takaful
installments or takaful contributions (premium)
termed as Ras-ul-mal from investors or providers
of capital or fund (takaful participants) acting as
Sahib-ul-mal.
Al-Mudharabah (cont.)
 The contract specifies how the profit or surplus
from the operations of takaful managed by the
takaful operator is to be shared, in accordance
with the principle of al-Mudharabah.
 The sharing of profit (surplus) may be in ratio
5:5, 6:4, 7:3, etc. as mutually agreed between the
contracting parties.
 Al-Tabarru’
 Means to donate, to contribute, to give charity.
 Participant agree to relinquish as tabarru’, certain
portion of his takaful installments or takaful
contributions that he agrees or undertakes to pay
thus enabling him to fulfill his obligation of mutual
help and joint guarantee should any of his fellow
participants suffer a defined loss.
Tabarru’
Basic Principles of Takaful
 Mutual assistance
 Making sacrifices to one another
 Guaranteeing one another
 Mutual Assistance
 The principle of mutual assistance, cooperation or
helping one another is always encouraged by Islam.
 Islam expects its followers to helping each other in
matters of good deeds and charity.
 This principle is executed by the agreement of the
participants to give away a portion of their takaful
contribution as tabarru’.
Making Sacrifices to One Another
 The principle of sacrifices is practiced by
Islam through the concept of Jihad.
 Jihad here means the sacrifices of time,
energy, wealth and blood in order to make
sure that others would benefit from the
sacrifices that they make.
Guaranteeing Each Other
Syeikh Muhammad Al-Ghazali and Syeikh Yusuf
Al-Qaradhawi states that the guarantees must
fulfill the following conditions:
 Every member’s contribution must be done with
the intention to help the needy.
 The contributions must be used according to
shariah.
Guaranteeing Each Other (cont.)
 Contributions given is not for the purpose of
profiting from the occurrence of loss but
compensated based on mutual agreement.
 It is unlawful to claim back the takaful
contributions. Everything will be settled
according to shariah.
Takaful Model
 In administering the takaful fund, three general models have been
adopted by Islamic insurance companies.
 The models are basically the methods designed for the purpose of
providing remuneration for the takaful operator.
 Each model is expected to provide funds to cover not only operating
expenses of the operator, but also include profits that will be
distributed to its shareholders if any.
 The existence of three business models:
 Mudharabah (Profit & Loss sharing) - was developed in Malaysia in
1984
 Wakala (agency contract with a performance fee element to replace
surplus sharing) - was developed in the Gulf in 1984
 Wakala with Waqf model -was developed in South Africa in 1996
 The Wakala Mudarabah Model (Hybrid)
Mudaraba Model
 The Mudarabah Model creates a partnership where the
contributors are considered to be the rabb al mal (owners of
the money) and the takaful operator is the mudarib
(manager of the money)
 The contract specifies how the surplus from the takaful
operations is to be shared between the takaful operator and
the participants. Losses are borne by the participants as the
capital providers
 Mudaraba Model
 Generally the risk-sharing arrangements allow the takaful
operator to share in the favourable investment performance
of both the participant’s account (savings account) and the
participant’s special account (tabarru’).
 However, if there are losses in the participant’s special
account, the takaful operator provides an interest-free loan
(qard al-hassan) that has to be repaid when the participant’s
special account returns to profitability and before any future
surplus is distributed.
Family Takaful in Mudharabah Model
1. Participants pay takaful contributions which form a
pool of the participants’fund.
2. Participants’ fund are divided into:
(a) participants’ account for saving; and
(b) participants’ special account – known as
participants’ risk account which is based on the
tabbarru’ concept. The amounts allocated in these
two accounts are based on the agreed percentage
decided upfront in the contract.
3. The fund in both accounts will be invested in assets,
such as government Islamic instruments, Islamic
private debt securities and equities, fixed assets and
fixed deposit accounts.
4. Investment profit, if any, will be shared among
participants and the takaful operator on the basis of
the agreed ratio.
5. Amounts in the participants’ account will be paid to
the participants upon death, or delivery or maturity
of a takaful scheme.
6. Amounts in the participants’ special account will be
used for paying claims,
7. At year end, the surplus will be distributed to the
participants
 Shariah Concerns regarding Mudaraba
Model
 Mudaraba is a commercial contract, hence not suitable for a donation
(Tabarru) based scheme.
 Donation given by the participants can not become capital for Mudaraba
at the same time.
 Distribution of surplus among the participants in proportion of their
contributions is like a conditional gift (Hiba bis-Sawab) which is not
allowed.
 Sharing of surplus in case of General Takaful(instead of profit) makes
the contract essentially the same as conventional insurance contract.
 Provision of Qard-e-Hasan from the Share holders fund in case of
deficit is not correct as Mudarib is not a guarantor.
Wakala Model
 Wakala is a contract of agency. Based on this principle,
participants remain the actual owners of the takaful fund,
and the takaful operator acts as an agent for the participants
to manage the fund for a defined fee.
 As an agent, the operator is entitled to agency fee
(remuneration) and performance fee (as commission). The
surplus of the participants’ fund investments goes to the
participants. The agency fee rate is fixed annually in
advance in consultation with shari’ah committee of the
company.
Wakala Model
Family Takaful in Wakalah Model
1. Participants pay contributions under the takaful
scheme.
2. The contributions are divided into: a) agency fee and
(b) takaful fund.
3. Agency fee which consists of agent’s remuneration and
administration expenses will be channelled to the
takaful operator.
4. Takaful fund is divided into:
a) participants’ investment account for saving, and
(b) participants’ special account –
5. The fund in both accounts will be invested in assets,
such as governmentIslamic instruments, Islamic private
debt securities and equities, fixed assets and fixed
deposit accounts.
6. Investment profit, if any, will be returned to the fund.
7. Amounts in participants’ account will be paid to the
participants upon death,or delivery or maturity of a
takaful scheme.
8. Amounts in participants’ special account will be used
for paying claims, retakaful,reserve and management.
9. At year end, the surplus will be distributed to the
participants
Waqf Model
 In the Waqf Model the shareholders of the takaful operator
are the contributors to a fund which they cede to be used to
compensate persons who suffer loss. A party becomes a
policyholder, not by making a contribution to the fund, but
by filling out a form and taking out a subscription to the
fund.
 The shareholders determine to whom and how much money
should be paid. They also determine investments and use of
surplus.
Wakala -Waqf ModeL
 The Wakala Waqf model implies that the takaful participants contribute
money to the fund which is then considered as a contribution to be used
for charity and could include the provision of compensation for loss of
property by any member.
 The operator is entitled to payment of management fees and a portion of
returns on investment as mudarib
 The relationship of the participants and the operator is directly with the
WAQF fund. The operator is the ‘Wakeel’ of the fund and the
participants pay contribution to the WAQF fund by way of Tabarru.
 The contributions received would also be a part of this fund and he
combined amount will be used for investment and the profits earned
would again be deposited into the same fund which also eliminates the
issue of Gharar.
 Losses to the participant are paid by the company from the same fund.
 Operational expenses that are incurred for providing Takaful services are
also met from the same fund.
Combination of Wakalah and Waqf Model
1. Participants pay takaful contributions which
form a pool of participants’fund.
2. A waqf fund, which receives initial donation
from the shareholders, followed by the
participants, is formed.
3. Agency fee is deducted from the waqf fund. The
fee which consists of agent’s remuneration and
administration expenses will be channelled to the
takaful operator.
4. Waqf fund will be invested in shari’ah-compliant
assets investment.
5. Investment profi t, if any, will be channelled into
the waqf fund, while the takaful operator
(investment agent) will be entitled to a
performance fee on the basis of the agreed ratio.
6. Accumulated amounts in participants’ account
will be paid to the participants upon death, or
delivery or maturity of a takaful scheme.
Amounts in waqf fund will be used to pay claims,
re-takaful and reserve.
7. At year end, the surplus (after deducting claims,
re-takaful and reserve) in waqf fund will be
returned to the same fund again.
Shariah Concerns regarding Wakala
Model
Wakalah model is free from many objections raised against
Mudaraba model but some shariah concerns are still there
which are as follows:
 Distribution of surplus among the participants in
proportion of their contributions is like a conditional
gift(Hiba bis- Sawab) which is not allowed.
 Provision of Qard-e-Hasan from the Share holders fund in
case of deficit is not correct as Wakel is not a guarantor.
 Hybrid of wakalah and mudharabah
 Takaful hybrid model is a combination of the two principles
above.
 Under the model, a relationship between the operator which
combines the role of entrepreneur or Mudarib as well as the
agent or wakil of the participant, whilst the latter in the
capacity as both provider of capital or sahibul-mal and
principal to the agent.
 A combination of al-Mudhārabah and al-Wakalāh model
where al-Wakalāh contract is used for underwriting
activities while al-Mudhārabah contract is adopted for
investment activities
Hybrid Model
Underwriting activities,
The shareholders act as the wakeel (agent) on behalf of participants to
manage their funds whereby the Takāful company (shareholders) receives
contribution, pay claims, arrange Re-takāful and all other necessary actions
related to Takāful business.
In exchange for performing these tasks, the company charges each
participant a fee known as a Wakalāh fee, which is usually a percentage of
the contribution paid by each participant.
Investment activities
The company invests the surplus contributions in Sharī‟ah based
instruments based on Al-Mudhārabah contract, whereby the company acts
as mudarib on behalf of participants (Rab-al-maal or capital providers).
Hybrid Model
Hybrid Mudharabah with Waqf Model
 Mudharabah with waqf plan is designed to enable any individual to save
regularly with the objective of accumulating a fund that can be left as a
donation under the waqf system.
 Under this model, the participants accrue a considerable sum of money
through the accumulation of the contributions, paid regularly over a
certain period of time, which would then be sufficient to be endowed as
waqf.
 Any benefits derived under the plan, either upon the premature period
due to unexpected death of the participant or upon its maturity, are to be
remitted by the takaful operator to the parties named as the waqf
beneficiaries.
Combination of Mudharabah dan Waqf Plan