1.1 Introduction
Takaful (Islamic insurance) is a financial transaction of mutual co-operation between two parties with the aim of providing financial security for one of them against unexpected material risk. In a Takaful transaction, the party called the participant (insured) pays a particular amount of money known as a contribution (premium) to another, who is known as the Takaful operator (insurer), with mutual agreement that the operator is under legal obligation to provide the participant with financial security against unexpected loss or damage caused to the subject of the policy should such arise within the agreed period of the policy. However, in Takaful life policies, where the loss does not occur to the subject in question within the specified period, the participant is entitled to the entirety of any contributions paid to the participantâs account together with the share of profits made out of the cumulated paid contributions from that same, based on the principles of Al-Mudharabah financing technique. In this transaction, both the Takaful operator and the participant help each other for the sake of financial protection.
Such co-operation is in line with the Qurâanic doctrine of mutual co-operation as Allah (swt) commanded:
co-operate you one another in righteousness and piety. (Qurâan, 5:3)
Under Shariâah, the commandment to practice mutual co-operation is not an absolute. There is, in other words, a limitation to it, as Allah (swt) has further prohibited mankind from co-operating in any manner that involves sinful elements:
and do not co-operate in sin and rancor. (Ibid.)
Based on the above verse of the Qurâan, it is submitted that the practice of Takaful contract and business will only be in harmony with the Islamic concept of mutual co-operation should the transaction be based on the principles of Al-Mudharabah, which is permissible in the eyes of Allah (swt) and is carried out with the noble and sincere intention to ensure the participant with financial security against unexpected future material risk. Hence, in order for a Takaful transaction to be valid and enforceable, it should be free from unlawful elements, such as usury, fraud and so on (Billah 1993).
This research, however, seeks to provide a conceptual framework for Islamic insurance and also the scenario of governing principles that regulate Takaful and Re-takaful products on the ground today.
1.2 The Takaful Niche
- Islamic insurance differs from conventional insurance. This is because an Islamic insurance policy must operate based on the concept of Al-Mudharabah, a profit-sharing scheme, and must be free from elements illegal under Shariâah. Scholars who are not in favour of legalising this sort of insurance must have based their opinions and judgments on conventional insurance practices, which certainly involve a few unlawful elements in the eyes of the Shariâah.
- A Takaful contract binds the insurer only on a unilateral basis, so that the insurer is under obligation to provide compensation against the loss to the subject of the policy, while the insured will not be forced if he does not want to continue payment of the premiums. Yet it is necessary for the insured to continue payment of premiums in order to claim any benefits from the policy. If the insured discontinues payments, the paid premium should not be forfeited.
- An Islamic model of insurance is based on the fundamental principles of mutual co-operation and solidarity, as ordained by Allah (swt) to this effect:
- âSustain a mutual co-operation among yourselves in the righteousness and pietyâ (Qurâan, at 5:2).
- A Shariâah-based insurance policy does not involve the unlawful element of usury (Riba), but is based on the profit-sharing financing technique of Al-Mudharabah, whereby the insured pays premiums to the insurer (insurance company) who will run a business with such accumulated monies, while the profits arising from such transactions will be shared by both the insurer and the insured (Rashid 1993).
- In the case of an Islamic life insurance policy, some claim that such practice is prohibited in Islam, relying on the fact that the insurer and the insured, in this case, are trying to determine life or death, as claimed by the Muslim Brotherhood in 1941 (Klingmuller n.d.). However, such criticism was proven to be groundless.
- In an Islamic model of life insurance, however, the nominee(s) is not an absolute beneficiary(s), but a mere trustee who is under obligation to receive the benefits over the policy and distribute them among the legal heirs of the deceased in accordance with the principles of Mirath (inheritance) and Wasiyah (bequest) (Billah 1993).
- In an Islamic insurance transaction, an agent is working for the company. Hence, it is posited here that an agent should also have a certain share in profits of the business carried out by the company as their salary. The agent, therefore, should not be paid out of the insured premiums.
- In an Islamic life insurance policy, if the insured passes away any time before the maturity then the beneficiary(s) is expected to claim from the policy the total paid premiums, a share of the profits and any dividends made over the paid premiums, which are all based on Al-Mudharabah financing technique, plus an additional sum of donation from the company taken out of its charitable fund upon considering the financial status of the beneficiary(s) (Billah n.d.). But if the insured sustains his life upon maturity of the policy, the insured is entitled to claim from the insurer the total paid premiums and also a share of the profits and dividends accordingly.
- In the case of general Takaful, it is to be mutually understood by both the insurer and the insured that the insuredâs payment of premiums will be given out as a donation based on the principle of Tabarruâ (Rashid n.d.) (donation or contribution) whereby the insured cannot legally claim back the premium if there is no loss on the agreed subject. However, if loss or damage occurs to the subject within the policy period, the insurer is unilaterally bound to pay the agreed compensation to the insured for that particular loss or damage.
- The person who claims the benefits over a policy must have an insurable interest on the subject matter.
- The parties involved in a Takaful policy must have legal capacity to enter into contract.
1.3 Socio-economic Foundation of Takaful
Takaful possesses certain fundamental characteristics upon which an insurance contract is to be validated. Those fundamental characteristics can mainly be classified into four categories, as follows.
1.3.1 Sincerity (Ikhlas)
Every transaction and dealing should always be done with sincerity and pure intention in order to achieve the desired result from Allah (swt). He (swt) says:
And they have been commanded no more than this, to worship Allah (swt), offering him sincere devotion. (Qurâan, at 98:5)
This has been enhanced by the tradition of the Prophet (saw) as follows:
Narrated by Omar Ibn Khattab (R) the Holy Prophet (saw) said: The validity of the actions depend on intention and therefore every man shall have but that which he intended. (Bukhari and Muslim)
Moreover, the parties to the insurance contact must have the sincerity not simply for gain, but to be bound by that transaction based on the principles of mutual co-operation, solidarity and brotherhood with the intention of rescuing one of them from unexpected losses and damages. This is because Allah (swt) never looks at any material gains but rather at the sincerity of the heart. The Holy Prophet (saw) stated words to this effect:
Narrated by Abu Huraira (R) the Holy Prophet (saw) said: Verily Allah (swt) never look at your physical shape nor at your appearance but considers sincerity in your hearts. (Ali, Maulana Syed Muhammad et al. 1990)
What is more, in an insurance transaction the parties must undertake to put their trust and faith in Allah (swt) (Shafi, Mawlana Mufti Mohd n.d.) in order to get His (swt) protection from any unpredicted loss. This is because an insurer formally undertakes only to compensate the insured against a loss or damage, though he (i.e. the insurer) is not liable to guarantee ultimate protection. This is because Allah (swt) is the one who has power of protection over all in the universe. He (swt) indicates this as follows:
To Him belongs the domination of the heaven and the earth: to give life and death: and He has power over all things. (Qurâan at 57:2)
1.3.2 Shariâah Principles
A Takaful business in the eyes of Islamic discipline will not be valid should any aspect of it contravene Shariâah principles. The Takaful Act (Malaysia) 1984 (and the Islamic Financi...