Introduction to Takaful

Outline of Presentation   Islamic Evidences   Basic Elements of Takaful   Difference b/w Conventional Insurance & Takaful   Takaful Models   Takaful Types   ReTakaful   Sales and Marketing of Takaful Products   Takaful Prospects in Pakistan   Challenges to Takaful   Mission Statement of Window Takaful

Meaning of Takaful Takaful comes from the Arabic root-word ‘kafala’ — guarantee. It is a system of Islamic insurance based on the principle of TA-AWUN (mutual assistance) and Tabarru (Voluntarily) where the risk is shared collectively by the group Voluntarily. Operationally, Takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of loss.

Islamic Evidences of Insurance Roshd (Rationality) Roshd (Rationality) Cooperation Cooperation Zakat Zakat Deya Deya Further Evidences Further Evidences

1.Roshd (Rationality): 1.Roshd (Rationality): A person who has Roshd is right minded person. Roshd comes in Quran at more than one places. In Sura 2:256 : Ability to select the right path(believe or disbelieve). In Sura 4:6 : Means sound Judgment. Roshd means rational behavior within the framework of Islamic creed. According to the Quranic verse persons who do not have sound judgment are incapable of using their own resources wisely or efficiently.

A rich companion of the Prophet peace be upon him who was suffering great illness and fearing death because of that, asked if it was better for him, as he had no children but one daughter, to give up his wealth, the Prophet (pbuh) said “no and you may give up only one third of your wealth, though one third is still much” it is better to leave your inheritants wealthy rather than leaving them poor and asking people for charity” This hadith of the Prophet (pbuh) strongly supports rational behavior which is relevant to the concept of insurance.

2. Cooperation 2. Cooperation   Concept of Insurance/Takaful is based on the awareness of the individuals to the necessity and importance of co-operation among them.  : Co-operate in al-Birr and al-Taqwa but never in sin and transgression”. “Al-Birr and al-Taqwa” literally mean virtue, righteousness, and piety  In Sura 5:2: Co-operate in al-Birr and al-Taqwa but never in sin and transgression”. “Al-Birr and al-Taqwa” literally mean virtue, righteousness, and piety  Co-operation among group of people, for the sake of taking care of any one of them who may be subject to an accident, loss of wealth or any other misfortune results in insurance/Takaful.

3. Zakat   Zakat is also spent to help those who may become heavily indebted because of accidents or sudden misfortune.   According to the Prophet Pbuh: “The true believers in their mutual feeling of affection and mercy prevailing among them resembles just like one body, whenever any part of this body is afflicted with pain, all other parts will share and feel this pain”. (Narrated by Imam al-Bukhari and Imam Muslim).

  The Prophet Pbuh also said: “The example of one believer to another believer is just like a building whereby every part in it strengthens the other parts”. (Narrated by Imam al-Bukhari and Imam Muslim).   And “Allah SW will always help His servant for as long as he helps others”. (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud). ________________________

4.Deya   To be paid by the person who has committed the crime of killing by mistake or causing serious physical body injury to another person   When Deya is collected only from family or tribe people it is called Acqela.   In case the person who has committed the killing crime is not known, the extended family or tribe members would divide the amount of Deya among them and pay it to the nearest relative(s) of the deceased person. This is called Qasama.

5. Further Evidences 5. Further Evidences “ ” “ tie the camel first, then submit (tawakkal) to the will of Allah” The hadith implied a strategy to mitigate/reduce risk. Takaful/Insurance provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to a large number of participants. This mitigates the otherwise very damaging losses, if borne individually. Shari’ah has no objections as to the concept of insurance ; it only has reservations with the way it is carried out i.e. the process of insurance Shari’ah has no objections as to the concept of insurance ; it only has reservations with the way it is carried out i.e. the process of insurance

Comparing Takaful to Conventional InsuranceIssue Conventional Insurance Takaful Organization PrincipleProfit for shareholdersMutual for participants BasisRisk TransferCo-operative risk sharing Value PropositionProfits maximizationAffordability and spiritual satisfaction LawsSecular/RegulationsSharia plus regulations OwnershipShareholdersParticipants Management statusCompany ManagementOperator Form of ContractContract of SaleCooperative, Islamic contracts of Wakala or Mudarbah with Tabar’ru (contributions) InvestmentsInterest basedSharia compliant, Riba-free SurplusShareholders’ accountParticipants’ account

Basic Elements of Takaful Mutuality and cooperation. Takaful contract pertains to Tabarru’at as against mu’awadat in case of conventional insurance. Payments made with the intention of Tabarru (contribution) Eliminates the elements of Gharrar, Maisir and Riba. Wakalah/Modarabah basis of operations. Joint Guarantee / Indemnity amongst participants – shared responsibility. Constitution of separate “Participants’ Takaful Fund”. Constitution of “Shariah Supervisory Board.” Investments as per Shariah.

Main drivers of Takaful  Piety (individual purification)  Brotherhood (mutual assistance)  Charity (Tabarru or contribution)  Mutual Guarantee  Community well-being as opposed to profit maximization.

Takaful Models

Profits attributable to Shareholders Company’s Admin. & Mangt. Expenses Takaful Contributio n paid by Participant General Takaful Fund General Takaful Fund Operational Cost of Takaful Surplus (Profit) Participant’s Share from Surplus Company’s Share from Surplus Investment By Company Profit From Investments Company Participant Mudaraba Model

General Takaful Fund Operational Cost of Takaful/ ReTakaful Surplus (Profit) Surplus Distribution to Participants Participants’ Takaful Fund Wakala Model Takaful Contribution paid by Participant Company (Capital) Mudarib's’ Share of PTF’s Investment Income Management Expense of the Company Profit/Loss attributable to Shareholders Wakala Fee (30% to 35%) Profit From Investments Investment Income Reserves Investment by the Company Investment Income Sharing on Mudaraba Basis

Wakala -Waqf Model It is a WAKALAH model with a separate legal entity of WAQF in-between.  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 the combined amount will be used for investment and the profits earned would again be deposited into the same fund.

 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.  Our brand name is “Alfalah Takaful”  Waqf fund bank account should not go below waqf amount (by the operator) at any time, otherwise, waqf fund will be dissolved. ___________________________

Investment Income Operational Cost of Takaful / ReTakaful Claims & ReservesSurplus (Balance) P A R T I C I P A N T S’ T A K A F U L F U N D (P.T.F.) Mudarib’s Share of PTF’s Investment Income Wakalah Fee Investmen t Income Management Expense of the Company Profit/Loss S H A R E H O L D E R S’ F U N D (S.H.F.) Participant WAQF Takaful Operator Share Holder Wakala-Waqf Model Investment by the Company

Sales and Marketing of Takaful Products Sales and Marketing of Takaful Products   The marketing characteristics of Islamic Insurance are the same as conventional insurance   The main marketing challenge is to create general awareness of the concept and explain to the public “what is the concept” and “what are its advantages?”   Niche position due to sharia compatibility but this alone can not guarantee successful marketing strategy without competitive rates and excellent service before and after sale.

Takaful Prospects in Pakistan   97% Muslim population.   Suitable and acceptable to anyone.   Large network of Bank Alfalah Islamic Branches   Demand for insurance increasing with increase in per capita income.   Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other classes.   Tremendous potential considering uninsured muslim population.

Challenges to Takaful   Skepticism.   Lack of uniformity in Shariah decisions.   ‘Windows’ issue.   Regulatory issues.   Capacity constraints due to inadequate ReTakaful.   Limited Investment avenues.   H.R. issues.

For conventional insurance companies with Islamic windows, the main challenge is to prove the Shariah compliance of products (in that case we can get the help of Sharia Adviser and Sharia Compliance Officer to satisfy them) _______________________