1. 2 Days Specialized Training Workshop An emerging niche market
10th & 11th August 2007.
Al-HUDA CIBE
Takaful
An emerging niche market
By:
Capt. M. Jamil Akhtar Khan
ACII, MCIT, Master Mariner
Chief Executive Officer
TAKAFUL PAKISTAN LIMITED

2. Outline of Presentation
Introduction to Takaful
Objections to Conventional Insurance
Difference b/w Conventional Insurance & Takaful
Takaful Through Time
Takaful Models
Takaful Types
BancaTakaful
ReTakaful
Foundations of Takaful in Pakistan
Takaful Prospects in Pakistan
Challenges to Takaful
Introduction to TAKAFUL PAKISTAN LIMITED

3. Introduction to Takaful

4. Meaning of Takaful
Takaful comes from the Arabic root-word ‘kafala’ — guarantee.
Takaful means mutual protection and joint guarantee.
Operationally, takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or loss.

5. Reference — Al Quran:
“Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2).
Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in need / in hardship .

6. Reference – Hadith:
“tie the camel first, then submit (tawakkal) to the will of Allah”
The hadith implied a strategy to mitigate/reduce risk.
Takaful 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.

7. Declaration by Shariah scholars rendering conventional insurance un-Islamic
Fatwa issued in Judicial Conference held in Makkah in Shaban 1398 AH.
Verdict of Supreme Court of Egypt on Dec. 27, 1926.
Unanimous resolutions and fatwa by Ulama in the Muslim League Conference in Cairo in 1965.
Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972.

8. Judicial Opinions and Fatwas confirming validity of Takaful
Fatwa issued by Higher Council of Saudi Arabia in 1397 A.H.
Fatwa Issued by the Fiqh Council of Muslim World League in 1398 A.H.
Fatwa issued by the Fiqh Council of the OIC in 1405 A.H. (1985).

9. Fiqh Academy Resolution 1985
Islamic Fiqh (science of Shariah) Academy, emanating from the Organization of Islamic Conference, meeting in its Second Session in Jeddah, KSA, from 10 to 16 Rabi-ul- Thani, 1405 A.H. (Dec 1985) issued a Resolution which in summary stated the following:
The commercial Insurance contract… is prohibited (Haraam) according to the Shariah.
The alternative Takaful contract which conforms to the principles of Islamic dealings is Halaal, being the contract of cooperative insurance, which is founded on the basis of charitable donation and Shariah compliant dealings.

10. 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.

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

12. Objections to Conventional Insurance

13. Insurance Defined Definition of an Insurance Contract
“An agreement whereby one party, the insurer, in return for a consideration, the premium, undertakes to pay to the other party, the insured, a sum of money or its equivalent in kind on the happening of a specified event, which is contrary to the insured’s financial interest”
Subject-matter of an Insurance Contract
“… what is it that is insured in a fire policy? Not the bricks and materials used in building the house, but the financial interest (i.e. money) of the insured in the subject-matter of insurance …” (Lord Justice Brett in Castellian v. Preston – 1883)

14. Objections to Conventional Insurance
Scholars view the insurance contract as an exchange contract – money is being exchanged for money over time.
This brings about the problem of gharrar (which leads to maisir) and in investments aspect, riba.
Elements of:
Uncertainty – Gharrar
Gambling – Maisir
Interest – Riba
UW + Investment Profit belongs to the Company
Note that the Scholars do not object to insurance per se but only to certain weaknesses in the insurance contract.

15. Uncertainty – Gharrar
Conventional insurance contract is basically a contract of exchange (mu’awadat) i.e. buying and selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration.
The consideration must be certain for exchange contract.
Gharrar in insurance contracts pertains to “deliverability” of subject matter, i.e. uncertainty as to:
Whether the insured will get the compensation promised?
How much the insured will get?
When will the compensation be paid?
Thus, it involves an element of uncertainty in the subject matter of the insurance sales contract, which renders it void under the Islamic law.

16. Gambling – Maisir
“Insurance is a contract upon speculation. Good faith forbids either party from concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing to the contrary” (Lord Mansfield in Carter v. Boehm – 1766).
The insured loses the money paid for the premium when the insured event does not occur.
The company will be in deficit if claims are higher than premium.

17. Interest – Riba
“ …. Allah has permitted trading and forbidden riba” (Al Baqarah 2 : 275).
Insurance funds are invested in financial instruments which contain the element of Riba.

18. Comparing Takaful to Conventional Insurance
Issue
Conventional Insurance
Takaful
Organization Principle
Profit for shareholders
Mutual for participants
Basis
Risk Transfer
Co-operative risk sharing
Value Proposition
Profits maximization
Affordability and spiritual
satisfaction
Laws
Secular/Regulations
Sharia plus regulations
Ownership
Shareholders
Participants
Management status
Company Management
Operator
Form of Contract
Contract of Sale
Cooperative,
Islamic contracts of Wakala or
Mudarbah with Tabar’ru
(contributions)
Investments
Interest based
Sharia compliant, Riba-free
Surplus
Shareholders’ account
Participants’ account

19. Takaful Through Time

20. Takaful through Time Origins in the First Constitution of Madina.
It evolved and continued in one form or the other throughout the Abbaside period and even later during the Ottoman empire.
Serious efforts were made in modern times, in 1970s to come up with an Islamic alternative to the conventional insurance.
The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up in Bahrain.

21. Takaful through Time… (Cont’d.)
There are now 85+ Takaful companies in over 25 countries.
The total insurance premium of OIC countries for 2004 was USD 50 Billion; of this, Takaful contribution accounts for 5% (i.e. USD 2.5 Billion). This is expected to increase to USD 15 Billion by 2015.
Poor Insurance penetration in the Muslim countries (<1% of GDP).
Average growth rate higher than conventional insurance companies (around 25%).
Non–Muslims increasingly opting for Takaful products for commercial benefits.

23. Takaful Models

24. Mudaraba Model
The surplus is shared between the participants with a takaful operator. The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as mutually agreed between the contracting parties. Generally, these risk sharing arrangements allow the takaful operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums.

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

26. Wakala Model
Cooperative risk sharing occurs among participants where a takaful operator earns a fee for services (as a Wakeel or Agent) and does not participate or share in any underwriting results as these belong to participants as surplus or deficit. Under the Al- Wakala model, the operator may also charge a fund management fee and performance incentive fee.

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

28. 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 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.

29. WAQF Wakala-Waqf Model S H A R E H O L D E R S’ F U N D (S.H.F.)
Wakalah Fee
Investment
Income
Mudarib’s Share of PTF’s Investment Income
Management Expense of
the Company
Profit/Loss
Takaful Operator
Investment by
the Company
WAQF
Operational Cost of Takaful / ReTakaful
Investment
Income
Claims &
Reserves
Surplus (Balance)
Participant
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.)

30. Models – The beauty of Islam lies in its
plurality … !

31. Practices & Activities Man-to-Man Activities
ISLAM
AQIDAH
Faith & Belief
SHARIAH
Practices & Activities
AKHLAQ
Moralities & Ethics
IBADAH
Man-to-God Worship
MUAMALAT
Man-to-Man Activities
Social
Activities
Economic
Political
Risk Management
Takaful

32. General Takaful Types
General Takaful – offers all kinds of non-life risk coverage. It is normally divided into following classes:
Property Takaful
Marine Takaful
Motor Takaful
Miscellaneous Takaful

33. Types of Family Takaful
Term Life Takaful
Whole Life Takaful
Endowment Takaful
Universal Takaful
Marriage Plan
Education Plan

34. Takaful Policy Document / Participants’ Membership Document
Preamble:
This is to acknowledge that the applicant (hereinafter called the 'Participant'), as more fully described in the schedule hereto:
i. Is accepted as a member of the Participants' Takaful Fund (hereinafter called the 'Fund') operated by Takaful Pakistan Limited (hereinafter called the 'Company').
ii. Being a member of the Fund, he/she is acknowledged as a beneficiary under the attached Indemnity Policy of the Fund, and of the benefits declared by the Fund from time to time under this policy, in accordance with the Waqf rules governing the Fund.
iii. Subject to the participant continuing as a member of the Fund and complying with his/her undertaking under his/her declaration made in the proposal form, he/she is indemnified by the Fund as one of its beneficiaries against the perils/events described, in the manner and to the extent as stated hereunder.

35. Takaful Policy Document / Participants’ Membership Document
Duration:
Normally policies are issued for the duration of twelve months.
Extended coverage on project policies.
MARINE POLICY : The membership under this document shall be for the period of _________ months. However, the benefits under this document, except Surplus if any, shall cease on the arrival of goods at destination.

36. Takaful Policy Document / Participants’ Membership Document
Cancellation Clause:
This Policy may at any time be terminated at the option of the Company, on 14 days' notice to that effect being given to the Participant at his last known address. In that case, the Participant shall be GIVEN an amount equivalent to a ratable proportion of the contribution for the unexpired Period of Policy from the date of such cancellation. This Policy my also be terminated at any time at the request of the Participant, in which case the Participant will be PAID an amount equivalent to the actual contribution made initially by him/her, less the amount worked as per the following scale applicable to the period during which the policy has been in force:

37. Takaful Policy Document / Participants’ Membership Document
TAKAFUL OPERATOR'S FEE
The Company shall deduct Takaful Operator's fee out of the Contribution received under this Policy. Such fee shall be based on the Wakala principle since the Company hereby acts as a Wakeel on behalf of the Fund.
INVESTMENT MANAGEMENT SHARE
The Company shall act as a Mudarib for the purpose of managing the investment of the Participant's Contribution. As such, the Company stands entitled to a share in the investment income thereof as Mudarib.

38. Takaful Policy Document / Participants’ Membership Document
SURPLUS DISTRIBUTION
If, at the end of the period of Policy stated in the Schedule, there is a surplus in the General Takaful Fund, the same shall be distributed among the Participants. Provided that, in case the Participant has made any claim or received any benefits under this Policy, that claimed amount shall be deducted from the net amount worked out as due to the Participant.

39. BANCATAKAFUL Background Range of Products
Savings → Personal Accident, Homeowners’ Comprehensive, Credit Cards, etc.
Financing, Individuals → Car Ijarah, Housing Musharika, Mortgage Takaful.
Financing, SMEs → Trade Credit Takaful, Business, Office, Equipment, Assets.
E-Commerce

40. BANCATAKAFUL (…Cont’d.)
Advantages of BancaTakaful:
Facilitation Desk / Equipment.
Fast Turnaround Time.
One-Stop shop for Clients.
Concept of Islamic Financial Supermarket.
Value Added Services.
Law of Large Numbers.
Lower Contribution Rates.
Attraction for Depositors.
Synergy.

41. ReTakaful
Currently few ReTakaful companies worldwide offering a relatively small capacity:
Sudan (1979) National Reinsurance.
Sudan (1983) Sheikhan Takaful Company.
Bahamas (1983) Saudi Islamic Takaful and ReTakaful Company.
Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance Company.
Tunisia (1985) B.E.S.T. Re
Malaysia (1997) ASEAN ReTakaful International.
Dubai (2005) TakafulRe by ARIG.
Lloyds of London to have a ReTakaful Syndicate in 2007.
SwissRe has formed a separate ReTakaful Pool
MunichRe to form a separate ReTakaful Pool
Provision in Takaful Rules – 2005.

42. T I M E L I N E – T A K A F U L I N P A K I S T A N
Report by the Council
Takaful Rules
Objectives Resolution
2005
1949
1992
1983
2000
2006
Review by Council of Islamic Ideology
Insurance Ordinance
TAKAFUL PAKISTAN
LIMITED

43. Takaful Prospects in Pakistan
97% Muslim population.
Demand for insurance increasing with increase in per capita income.
Personal lines insurance business (leasing, health, Medicare) growing at a higher rate than other conventional classes.
Islamic banking on sound footing with support of the Govt.

44. TAKAFUL - TARGET MARKET
People who do not insure due to religious reasons.
People who insure and are insensitive to religious reasons.
People who currently do not insure at all.

45. 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.

46. Introduction to TAKAFUL PAKISTAN LIMITED

47. TAKAFUL PAKISTAN LIMITED
Takaful Pakistan is a joint venture of prestigious local & foreign institutions, including:
House Building Finance Corporation.
Emirates Global Islamic Bank.
Arif Habib Securities.
Sitara Chemicals.
Emirates Investment Group (Sharjah).
Al-Buhaira National Insurance Co. (U.A.E.)
Large initial paid-up Capital.

48. TAKAFUL PAKISTAN LIMITED … (Cont’d.)
Managed by dedicated professionals, committed to the cause.
ReTakaful arrangements with a consortium of internationally reputed ReTakaful operators.
Shariah Board comprises of eminent scholars.
BancaTakaful and MicroTakaful products.
We intend to be the trend-setter for excellent Clients’ Servicing, Operational bench marks and prudent Underwriting practices.

49. Conclusion Takaful defined. Comparison with conventional insurance.
Takaful Models
Takaful Types
BancaTakaful
ReTakaful
Takaful Pakistan Limited

50. Thank you for your attention