Chapter 3

contract and its essential components

contract and its essential
components
Types of Contract in Takaful

Shariah provides various types of contracts to suit the needs of

contracting parties. Each contract has unique features and rules which
are in line with the objective of the respective contract
contract and its essential
components
’Contract among Takaful Participants - Tabarru -1
Tabarru’ is an agreement by a participant to relinquish, as a donation, a
sum of contribution that he or she agrees to pay into a takaful fund.
Participants give certain portions of their contribution as a donation
with the purpose of providing mutual indemnity to takaful participants,
where the donation acts as a mutual help joint guarantee should any
.fellow participants to suffer from a defined loss
contract and its essential
components
1- Contract among Takaful Participants - Tabarru’

The current practice does not specify the exact donations, whether it is
an outright gift (hibah) or endowment (waqf). According to the
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) the practice is known as iltizam bit tabarru’
Contracts between Participants and Takaful
Operator
There is no insurer-insured relationship between participants
and the takaful operator because the participants are insuring
themselves. The takaful operator is engaged by participants (in
a group) to manage the takaful scheme for them. The parties
can adopt any of the following contracts depending on their
needs; namely, mudarabah, wakalah, ju’ala, waqf, or a
combination of the earlier contracts (hybrid).
Contracts between Participants and Takaful
Operator
1- Mudarabah :-
means the giving of capital to another person who will trade with it for
the purpose of sharing the profits according to a pre-agreed ratio.
Investment is a side activity to optimize the fund. In takaful, the capital
providers (rabbul mal) are the participants and the investment manager
(mudarib) is the takaful operator. The investment manager (operator)
must invest in a Shariah-compliant manner and in accordance to the
terms in the takaful contract. Profit, if any will be shared based on a
pre-agreed ratio. If there is a loss, it will be borne by the capital
provider. However, if the loss is due to the manager’s negligence, then
the manager must be jointly responsible for the loss.
Contracts between Participants and Takaful
Operator
-: Wakalah -1
is a contract of agency, whereby participants remain the actual owners
of the takaful fund. In this arrangement, the principal is the participant
while the agent (wakil) is the takaful operator. The principal appoints or
authorizes the agent to manage the takaful fund for two main duties,
namely, takaful activities (underwriting, paying claims, etc) and
investments. As an agent, the operator is entitled to an agency fee
.(agent’s remuneration) and performance fee (agent’s commission)
Contracts between Participants and Takaful
Operator
1- Ju’alah:-
refers to a commitment to pay a specified amount of reward for the
performance of a prescribed task. On the basis of this contract, the
participants collectively appoint the operator to manage the takaful
fund, in a prescribed manner, for a specified reward if done accordingly.
Payment is based on actual output and performance.
Contracts between Participants and Takaful
Operator
1- Waqf :-
means a unilateral contract to relinquish a right over property and
allocate it for general enjoyment of the usufruct by the specified
beneficiaries. It can be made applicable in the treatment of a takaful
fund, while management and operational aspects of the takaful fund
may still use wakalah and mudarabah contracts. Participants will give
contributions into a waqf fund, and thus completely lose the right over
their contributions. The takaful operator acts as a trustee to the waqf
fund.
Contracts between Participants and Takaful
Operator
While the hybrid of wakalah and mudarabah models combines some
features in both models. The wakalah principle is applied in
underwriting activities while a mudarabah contract is used in the
investment of the takaful funds. Thus, the takaful operator is entitled to
agency fee for managing the fund as a wakil and share a profit for
managing the investment of the fund as a mudarib.
Chapter 4
• Definition and concept of Takaful insurance
 Definition of Takaful insurance
• Compensating for the loss which may befall one member by means of
subscribing cash money from which compensation is paid to any
subscriber when he or she suffers from the loss insured against."
• Mutual Takaful Insurance can also be defined as, "a collective
Insurance contract by which each member is committed to pay an
amount of money as donation to compensate for the damages which
may befall any of them when the loss insured against occurs.
 Concept of Islamic Takaful
Insurance
• The purposes for Takaful Insurance in its advanced form are that
the number of the Insured in Mutual Takaful Insurance will be limited,
and that each person will know one another. If their number increases and
the insured risks become of several types, then another body or Company
should run the Insurance operations as an agency for fixed fees.
This body should be The Insurance Companies. Because the contracts
which constitute Takaful Insurance are of several types and intertwined,
it is justly called Islamic Takaful Insurance
• Accordingly, Islamic Takaful Insurance can be defined as "A Collective
Insurance contract, whereby its subscribers are committed to pay
a specific amount of money as a donation to indemnify the victims
on the basis of Cooperation and Takaful, when the risk actually
occurs. Its Insurance operations are run by a specialized Company,
in their capacity as Agents ( Wakala Model ) on behalf of the policy
Holders for a fixed fees."
• The Subject of the contract involves the commitment of all the
Insured to bear the consequences of the risk that may befall any of
them and pay the premiums required on the basis of donations.
Therefore, it is
a contract or agreement based on Takaful and solidarity to distribute
the risks and restore the loss.
• The Role of The Insurance Company in Islamic Takaful Insurance is ton
run Insurance operations by underwriting and management because
the Insured themselves cannot do that due to their large number.
• The Insurance Company makes contracts with the Insured and collects
the premiums. Then it indemnifies the victims with what is due to
them according to specific rules and criteria. It also carries out all the
necessary work required by the Insurance operations. The Company
does all of that as an agency for the Insured for fixed fees.
• It writes individual contracts with each person insured, and thus commits
itself to indemnifying them, either in full or in a large percentage, for
the damages which befall them. It does that on behalf of as well as for the Insured.
The Insurance Premiums collected from the Insured's should be sufficient
to cover the operational costs, to pay indemnities, and to establish
the different kinds of reserves needed.
If premiums collected from the insured parties are not sufficient, then
the deficit will be covered from the shareholders' money on the basis
of a free interest loan. If the Company has a reserve balance from
the surplus profits of the premiums, then the deficit will be covered from it.
Chapter 5
The features and objectives of Takaful insurance
Features of Takaful Insurance
1. It is a consensual contract, which includes obligations and
acceptance. Each policyholder has two qualities: as a policyholder
and as an insurer to his colleagues in The Cooperative Insurance
Fund. He is an insurer to others through the amount of money he
pays when he participates in the insurance. He is a partner and
a shareholder in the amount of money from which indemnity is
paid. He himself is a policyholder because by participating in
the insurance, he becomes a beneficiary. Thus, he has the right to
receive an indemnity for the loss he incurs.
2. The Insured's themselves manage Takaful Insurance and not an
independent party .
3 . It is a contract of donation of a special kind, and it is one form of
Takaful. Takaful Insurance, in its Mutual form, does not aim at
generating profit for the policyholders. Its aim is to establish
cooperation among policyholders to mitigate the impact of losses
they incur. Therefore, its aim is not profit either under hidden or
declared intention.
4. Premiums which the policyholders pay remain as their own
property. Indemnities to the victims are paid from this fund.
any surplus will be repaid to the policyholders (the Insured).
5. The Scope of its application in practical life is little because
the losses it covers are limited, and the groups exposed to them are
also limited, such as traders and merchants.
objectives of Takaful insurance
• Wealth preservation using takaful aims to safeguard wealth against
financial risks and threats, protect assets and physical property
against unpredictable occurrences and potential loss. It also protects
personal health and energy against hardships from illness, prolonged
sickness, injury or disability
• Takaful contract must be based on principles of co-operation,
protection and mutual responsibility and must avoid acts of interest
(riba), gambling (al-maisir) and uncertainty (al-gharar)