Dr Azman Mohd Noor

AIoi Nissei Dowa Insurance Endowmend Course

Waseda University
May 17, 2012.

PRESENTATION OUTLINE
1

Introduction to Islamic Finance in

Malaysia and Takaful

Differences between Takaful and

Conventional Insurance

Legal and Regulatory Framework for

Takaful

Types and Models of Takaful

Shariah and Legal Issues

Islamic Finance in Malaysia

Islamic Banking

Takaful

Islamic Money
Market

17 Full fledge Islamic Banks

10 Conventional banks with
Islamic window
4 International Islamic Banks

Takaful
12 Takaful Oprators
4 Retakaful Operators

Islamic Capital
Market

Islamic
Banking

Conventional
Banking

Financial
System in
Malaysia

Insurance

Capital Market

Money Market

Labuan Offshore FSA

Money Market

Capital Market

Money Market for Islamic

Banks
Daily Transactions RM 1 billion
Bursa Suq Al Sila as a platform
for Commodity Murabahah
trading since 2009
International Islamic Liquidity
Management initiated 2011.

88% halal counters/stocks

traded at Bursa Malaysia
57% of private debt securities
are sukuk
14 Islamic Fund Management
institutions
152 Islamic funds
36 Islamic Fund Management
Institutions with Islamic
mandate

Islamic Banking 6 Islamic Banks and 9 Conventional banks with Islamic

window. 3.8% of total banking industry.
Takaful & Retakaful 7 retakaful and 9 conventional reinsurance with
Islamic window

The Growth of Islamic Banking in Malaysia (RM3:1 USD)

Total Asset, Financing & Deposit of Islamic Banks (2001- 2010)

400,000
350,000

Average total asset growth

(2001-2010): 20.3% (asset)

RM 000 million

300,000
250,000
200,000
150,000
100,000
50,000
0
2001

2002

2003
Asset

Asset : 20.8% (RM351b)

Financing : 22.7% (RM223.3b)

Deposit: 22.6% (RM277.5b)

Average Profit of Islamic Banking 15.4%

* Sumber: BNM Sistem Statistik Institusi Kewangan

2004

2005
Financing

2006

2007

Deposit

2008

2009

2010

Growing Financial Market

Immatured Private Debt Securitiies (as of Dec 2010)

Conventional
43%

Islamic
57%

RM 323 b (USD 96b)

* Source: FAST

UAE
4%

Total Immatured Global

Sukuk a
USD 148 bilion

Bahrain
2%

Malaysia
65%

Saudi Arabia
7%

(USD 96 bilion)

Malaysia the largest

sukuk issuer in the
world

Ofshores
17%

others
1%

Indonesia
4%
Singapore
0.1%

Definition of Takaful

Arabic Root-Word

TAKAFUL

KAFALA

Guarantee

TAKAFALA

Joint Guarantee

Participants mutually contribute to the same

fund with the purpose of having mutual
indemnity in the case of peril or harm

Introduction to Takaful
The nature of life uncertain.

People need protection to at least mitigate (or

lessen) the burden of uncertainty of life
This has given rise to the practice of conventional

insurance
Problem with conventional insurance:
Gharar
Maysir
Riba
Hence Conventional Insurance has been declared 7
to be prohibited by Shariah

Gharar
Literally: risk / uncertainty / hazard.
Concept of gharar broadly defined in

two ways:
First: gharar implies uncertainty,
Second: It implies deceit.
Al Sarakhsi : any bargain or transaction
in which the result of it is hidden.

cont
No verse from al-Quran prescribes gharar

explicitly
However, Muslim jurists recognized that

prohibition of devouring others property in

vanity (batil) in many verses of al-Quran
includes the prohibition of gharar

Cont
Nevertheless, prohibition of gharar has been

made conclusive in various hadiths from the

Prophet. E.g: The Companions related that the
Prophet has forbidden gharar in trading
Abu Hurayrah reported that two types of

transactions (because of gharar) were

prohibited by the Prophet : al Mulamasah (by
touching only without looking at good) and al
Munabadhah (throwing something at a number
of goods).

cont
The prohibited gharar (uncertainty) is excessive (gharar

fahish). Unlike Riba whereby its prohibition is absolute,

some degree of gharar is acceptable.

Occurs in contracts of exchange (uqud al-muawadat)

which is bilateral.
Gharar can be tolerated in the gratuitous contract

(tabarru) i.e. donation which is unilateral in nature.

MEANING OF RIBA
Literally: excess, expansion, increase, addition,

growth, extra.
Riba in general is to charge interest in loan or debt.
Riba includes Any unjustified excess above and

over the capital, whether in loans between creditor

and debtor or in exchanging ribawi commodities
with ribawi commodities. Ribawi commodities
include gold, silver, currencies, staple foods.

cont
i)

Riba in loan contract (riba al-duyun) riba

al-nasiah (excess due to delay in payment)
also known as riba in the Quran.

ii) Riba in exchange ribawi commodities (riba

al-buyu), also known as Riba based on al
Sunnah

Maysir
Gambling or maysir or also known as qimar defined
as any activities which involve betting whereby the

winner will take the entire bet and the loser will lose
his bet. It means pure games of chance where any
party might gain at the expense of the loss of the
other party.
The Quran has explicitly condemned and prohibited
gambling in the following verse: O believers, wine
and gambling (maysir), idols and divination by
arrows are but abominations devised by the Satan,
avoid them so that you may prosper.

Rulings
Fatwa by National Council for Islamic Religious Affairs of

Malaysia (1972) that life insurance is not lawful as it

contains gharar, maysir and riba
Resolution of Fiqh Academy (Jeddah (1406 1985).

The Commercial contract of insurance and

reinsurance based on a fix premium is in reality a contract
of exchange. This contract is fraught with element of
gharar. It must be noted that the existence of gharar has
rendered the contract null and void. The alternative valid
contract in Shariah is the co-operative insurance, which is
based on tabarru and co-operation among the
1
5
policyholders

Alternative to conventional insurance

Qardawi:

In my view, insurance against hazard can be modified in

a manner which would bring it closer to the Islamic
principle by means of a contract of donation with a
condition of compensation
A further requirement is that the company must be free
from usurious business
(source: The Lawful and The Prohibited in Islam, p.276)

1
6

Definition of Takaful
Kafala: Guarantee

Takafala (Takaful)

- An Arabic words which means mutual help and

cooperation among a group of people
Mutual Help and Cooperation
and help you one another in righteousness and
piety ..
Al-Quran, al-Maidah 5:2

17

Definition, cont
Joint-guarantee; a pact among a group of

persons to indemnify a member of this group if

he suffers a specified calamity or loss. The
amount comes out of a common pool created
with
the
individual
contributions
of
participating members.

A scheme based on brotherhood, solidarity and

mutual assistance which provides for mutual

financial aid and assistance to the participants in
case of need whereby the participants mutually
agree to contribute for that purpose.

Section 2 of the Malaysian Takaful Act 1984

1
8

Definition, cont.
A scheme based on mutual assistance in compliance

with the provisions of Islamic Shariah, and which provides

for mutual financial aid and assistance to the participants
in case of occurrence of certain contingencies and whereby
the participants mutually agree to contribute to the
common fund for that purpose.
Pakistan Insurance Ordinance 2000

The Simple Flow

Policyholders
(Takaful
Participants)

The Takaful Operator

provides services:
1) Managing the fund
2) Investing the fund

Contributions

Takaful
Fund

Outcome

1) Payment of
claim
2) Distribution of
Surplus

Takaful
Operator
2
0

Essential Salient Features

Major salient features of takaful as compared with
conventional insurance are:

1. Antidotes to the reasons for the prohibition of

conventional insurance
Uncertainty (gharar)

Interest (Riba)
Gambling (Maisir)
Taking peoples money unjustly. (Akl amwal al-nas bi al-

batil)

Cont.. features
2. Shariah compliant investments.
3. Underwriting Shariah compliant risks.
4. Prudent Shariah governance and supervision : In
house and regulatory level.

Essential Features of Takaful model

Based on co-operation, brotherhood, solidarity

and mutual help.

The joint guarantee is essentially agreed and
concluded between a participant and other
participants.
Structured along the tabarru concept
(Gratuitous contract). Gharar is not avoided but
tolerated and shared.
Takaful Operator is not part of this donation
and mutual assistance arrangement, but it is an
agent of the participants to manage the fund
with fee.

23

cont
Iltizam bi al-tabarru (commitment to donate).

Indemnification commitment Providing

compensation for injury as per regulations and
underlying constituent documents

Cont.
AAOIFI STANDARD 5/8
The Takaful operator must strictly adhere to Shariah

principles and rules in its operations, activities,

investment and underwriting, particularly not to
accept risk from non-halal things or any business leads
to haram.
Accounting and Auditing of Islamic Financial Institution (AAOIFI)

which based in Bahrain is a governing

institutions

body for Islamic financial

Cont
Shariah Governance
The establishment of Shariah Advisory Council,

Shariah department/ secretariat to conduct Shariah

advisory, supervisory, control, research and audit
tasks.
Internal Shariah supervision
Regulatory level
Market Demand

Contractual Relationship in Takaful

The policy holders among themselves
Musharakah and Taawun (cooperation) ,
Iltizam bi al-tabarru (commitment to donate),
Indemnification commitment Providing compensation

for injury
as per regulations and underlying
constituent documents
Company and policyholders Wakalah
Managing the fund under Wakalah to manage the fund,
e.g. payment of claim, provisions for reserve, retakaful etc.
Investing the Fund
Mudharabah - Profit sharing ratio
Wakalah bi al-istithmar - Certain fees
27

Model: Commercial Enterprise vis--vis cooperative and mutual insurance

Some believe that takaful which is based on

co-operation, brotherhood, solidarity and

mutual help should not be established for the
purpose of making profit.
Profit Making Model

Co-operative Insurance Model

28

Cont.
Most of Takaful operations are not wholly
cooperative but a hybrid of cooperative and
commercial bussiness. This implies:
The permissibility for the operators to make
profit.
It is suggested that the policy holders as
participants and contributors be given
platform to vote via AGM on business
operations, activities and underwriting policy.

Takaful operators in malaysia

Bank Negara Malaysia, the central bank and insurance

regulator, last week issued the licenses to joint ventures to be

established by i) American International Assurance Berhad (70
percent) and Alliance Bank Malaysia Berhad (30 percent); ii)
AMMB Holdings Berhad (70 percent) and Friends Provident
Group plc, UK (30 percent); iii) ING Management Holdings
(Malaysia) Sdn Bhd (60 percent), Public Bank Berhad (20
percent) and Public Islamic Bank Berhad (20 percent); iv) and
The Great Eastern Life Assurance Company Limited (70
percent) and Koperasi Angkatan Tentera Malaysia Berhad (30
percent).

Cont
This brings the number of Takaful operators in Malaysia

to 12. The other Takaful operators include CIMB Aviva

Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio
Marine Takaful Berhad, HSBC Amanah Takaful
(Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential
BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad
and Takaful Ikhlas Sdn. Bhd.
Arab News, Sep 6, 2010

Takaful Assets
Globally, the takaful industry has been growing

rapidly, appealing to both Muslims and non-Muslims.

The industry is expected to grow by 15-20% annually,
with contributions expected to reach USD7.4 billion
by 2015. Currently, there are more than 110 takaful
operators worldwide.
Central Bank of Malaysia (Bank Negara of Malaysia website),

Legal and Regulatory Framework

In Malaysia, Takaful business is regulated by
the Takaful Act 1983
The Act consists of 68 sections, divided into

4 main sections
Preliminary
Conduct of Takaful Business
Return, investigation, Winding Up and
Transfer of Business
Miscellaneous and General
33

Establishment of takaful company

Restriction on Takaful term
- use of word takaful or any of its derivative in any language, or
any other word indicating that such person carries on Takaful
business in the name, description or title under which it carries
on business in Malaysia is not allowed unless with the consent of
the
Director General of Takaful (DGT)(Section 6)
Director-General of Takaful

DGT is the Governor of Bank Negara Malaysia (BNM)

(Section 54(1))
Registration of Takaful operator
- By DGT, with or without conditions (Section 8)
- May impose conditions of registration for Takaful operators that
are
already registered (Section 8)
34

Criteria for Takaful Operators (Section 4

(2)
Registered under Act in respect of the class of Takaful

business
Maintains a surplus of assets over liabilities not less than
the amount prescribed from time to time
Makes deposit with the Accountant-General not less than
the amount prescribed from time to time (also Section 13;
alternative - banks covenant to deposit under Section 14)
Membership in a Takaful association approved by Minister

35

Security for takaful participants

Similar to deposit insurance scheme for bank deposits
Establishment of takaful guarantee scheme funds by DGT in

respect of family solidarity business and general business carried

out by takaful operators
Income for the takaful guarantee scheme funds derived from
levies imposed and collected from Takaful operators
Sums from the takaful guarantee scheme funds may be
withdrawn/utilized with approval/direction of DGT inter alia to
meet the liabilities of any insolvent operator as may be prescribed
(Section 21)

36

SHARIAH COMPLIANCE FRAMEWORK (1)

Section 8(5) Internal Controls
aims and operations of Takaful operator do not involve

any element not approved by the Shariah

articles of association of the Takaful operator provide
for establishment of Shariah Advisory Body as may be
approved by DGT to ensure operations of its takaful
business are in compliance with the Shariah
Section 53A Advisory powers of SAC BNM
any person involved with Takaful business may seek the

advice of the Syariah Advisory Council (SAC) of BNM

(established under Central Bank of Malaysia Act 1958),
and such person must comply with such advice
provided by the SAC of BNM
37

Shariah compliance framework

SAC BNMs authority over takaful matters
Section 16B Central Bank of Malaysia Act

1958 SAC of BNM shall be the authority

for the ascertainment of Islamic law for
the purposes of takaful business or any
other business which is based on Syariah
principles and is supervised and
regulated by BNM
38

cont
SAC BNMs role in court/arbitration proceedings
involving takaful business
if, in any proceedings relating to takaful

business before any court or arbitrator, a

question arises concerning a Syariah matter, the
court or arbitrator may refer such question to the
SAC BNM for its ruling (Section 16B(8) CBMA)
any ruling made by the SAC BNM pursuant to
such reference shall be taken into consideration
by the court in arriving in its decision/ be
binding on the arbitrator (Section 16B(9)CBMA)

Types and Models of Takaful

General Takaful

Family Takaful

Motor

Family

Fire

Education

(Property)
Engineering
Liability
General Accident

Savings
Investment

-Link
40

Model: Mudarabah, wakalah, waqf

Mudarabah with only sharing of investment profit

Mudarabah with sharing of investment profit and surplus

with operator
Wakalah on the contribution with no profit/surplus
sharing with operator
Wakalah on the contribution with sharing of investment
profit and/or surplus with operator
Waqaf on the first contribution (to set up the fund) and
appointment of company based on wakalah with fees.
41

41

GENERAL TAKAFUL MODELS AND

PRODUCTS
Mudharabah with only sharing of investment profit
Mudharabah with sharing of investment profit and surplus

with operator
Wakalah on the contribution with no profit surplus sharing
with operator
Wakalah with sharing of surplus with operator

42

1) MUDHARABAH WITH ONLY SHARING OF INVESTMENT PROFIT

Y%

Profit
X%
Contributions

Participants

Contributions
+
Profit

Takaful
Operator

Expenses

Surplus
100%

Participants
43

This model is acceptable by AAOIFI Shariah Standard

43

2) MUDHARABAH WITH SHARING OF INVESTMENT PROFIT AND SURPLS

WITH OPERATOR
Y%

Profit

Takaful
Operator

X%
Contributions

Participants

Y%
Contributions
+
Profit

Expenses

Surplus
X%
Participants
44

This Model is not accepted by AAOIFI Shariah Standard

44

3) WAKALAH ON THE CONTRIBUTION WITH NO PROFIT / SURPLUS

SHARING OPERATOR
Profit

Contributions

Participants

Contributions
+
Profit

Expenses

Surplus
100%

Fees
Participants
45

This Model is accepted by AAOIFI Shariah Standard

45

4) WAKALAH WITH SHARING OF SURPLUS WITH OPERATOR

Profit

Takaful
Operator

Contributions

Participants

Y%
Contributions
+
Profit

Expenses

Fees

Surplus
X%
Participants
46

This Model is not accepted by AAOIFI Shariah Standard

46

FAMILY TAKAFUL MODEL AND

PRODUCTS
Mudharabah with only sharing of investment profit
Mudharabah with sharing of investment profit and surplus with operator
Wakalah on the contribution with no profit surplus sharing with operator
Wakalah with sharing of surplus with operator

1) MUDHARABAH WITH ONLY SHARING OF

INVESTMENT PROFIT
Y%

Profit

X%
Contributions

Participants

Saving (PS)
Account

Saving (PS)
Account

Risk (P)
Account

Risk (P)
Account

Expenses

Takaful
Operator

Surplus
100%

Participants
48

48

2) MUDHARABAH WITH SHARING OF

INVESTMENT PROFIT AND SURPLUS
Y%

Profit
X%
Contributions

Participants

Saving (PS)
Account

Saving (PS)
Account

Risk (P)
Account

Risk (P)
Account

Takaful
Operator
Y%

Expenses

Surplus
X%
Participants
49

49

3) WAKALAH ON THE CONTRIBUTION WITH NO

PROFIT/SURPLUS SHARING WITH OPERATOR
Profit
100%

Contributions

Participants

Fees

Saving (PS)
Account

Saving (PS)
Account

Risk (P)
Account

Risk (P)
Account

Expenses

Surplus
100%

Participants
50

Takaful
Operator

50

4) WAKALAH ON THE CONTRIBUTION WITH SHARING OF

SURPLUS WITH OPERATOR

Takaful
Operator

X%
Contributions

Participants

Fees

Saving (PS)
Account

Saving (PS)
Account

Risk (P)
Account

Risk (P)
Account

Y%
Expenses

Surplus
X%
Participants
51

Takaful
Operator

51

Legal and Shariah Issues

Capacity to contract
Insurable interest
Utmost Good faith

Payment to Claimant

Sharing of surplus
Takaful Benefit
Death due to suicide or
prohibited acts

Capacity to contract
Takaful: minimum age for policy holder: 18 years old (Section

64 Takaful Act)
A person under the age of eighteen years shall not have the
capacity to enter into a contract of takaful.
Opinions of jurists on age of majority
Compare to conventional Insurance: Policy holder must be
of minimum age of 16 years old; those between 10-16 years
need to obtain guardians written consent (Section 153
Insurance Act)

53

Insurable Interest
The name given to the financial interest which a person has in

54

the subject matter of the cover.

Generally, it is the particular relationship between the person
taking the insurance policy and subject matter of the
insurance.
Explicitly required in conventional insurance, without which
the contract will be illegal, void or simply unenforceable
(Insurance Act 1996 (sec. 152 (1) & (2)
Does takaful requires the same? Silent in both family and
general takaful
Not required, as it is about mutual assistance?
Covered by sec. 31 of the Contract Act against wagering
agreement. By virtue of this sect., a participant is required to
show sufficient interest in the subject matter, both at the time
54
of inception and at the time of loss.

Utmost Good Faith (Uberrimae Fidei)

Sec 28 of Takaful Act imposes the disclosure of all material facts
Known as the duty of utmost good faith. Defined as: a positive

55

duty to voluntarily disclose, accurately and fully, all facts

material to the risk proposed, whether asked for them or not
Means that the parties to the contract is required to disclose to
each other all the material facts about the risk and cover, fully,
truly and faithfully.
It is imposed upon both, the participants and the operator and
the failure will subject the person to a fine not exceeding twenty
thousand ringgit or imprisonment for a term not exceeding one
year or both
In compliance with the Syariah that requires honesty, sincerity,
transparency and full disclosure in contract.
The effect of non-disclosure as to the takaful contract
55

Payment to the claimant

The payment of claim made by the takaful operator is

similar to compensation made by conventional

insurance. It looks like the premium is exchanged for
the compensation.
Generally held that the payment comes from the
other participants money, not from the claimants
money.
Some advocate the concept of trust, in which the
participants (as settlors) can also benefit (as
beneficiaries) from the trust fund.
56

56

Sharing of Surplus
The excess of the total premium contributions paid by

policyholders during the financial period over the total

indemnities, paid in respect of claims incurred during the
period not of re-takaful and after deducting expenses and
changes in technical provisions

Methods in distributing the surplus

All policyholders
Policyholders that have not claim
Policyholders that do not claim or claim less that their

contribution
Policyholders and takaful operators

Can the takaful operator share the surplus with the

participants, on the concept of mudharabah, wakalah or

jualah?

57
Can the claimants share the surplus or be excluded from

the sharing?

Cont.
Mudharabah:
underwriting surplus cannot be shared.
Takaful operator shares only in the investment
returns.
Wakalah:
The underwriting surplus belongs to the
participants (i.e: Takaful operator does not
share in UW surplus).
Takaful operator shares only in the investment
returns.

Cont (legitimacy)
Rational:
UWS belongs exclusively to the participants.
The shariah issue: ownership issue.
Does the UWS really belong to the participants
after making tabarru (donation) to the Risk Fund?

Cont (legitimacy)
Some other scholars provide the following shariah
evidence:
Hibat al-thawab as a ground for distributing
surplus exclusively to participants.
The hadith of Nahd as a ground for distributing
surplus exclusively to participants.
Sharing in the underwriting surplus is a kind of
taking peoples property unjustly.

Cont (legitimacy)
b. 2nd approach: TO can share in the UWS.
Shariah evidence:
Islamic legal doctrine of shurut (conditions).
Absence of any prohibitive texts from the primary
sources of Shariah, i.e: Quran and Sunnah.
The Islamic legal doctrine of rida (satisfaction in
trade).
The principle of incentive for better risk selection.

Takaful benefit
In case of the death of the participant (in Family Takaful),

how to distribute the takaful benefit (from risk account and

investment account)?
The nominees can be either the sole beneficiary or as a
trustee/ executor where the benefit will be distributed based
on law of faraid?
Sec 65 (1) of Takaful Act: Proper Claimant, No express
provision as administrators or beneficiaries
Insurance Act (Section 166 & 167): express provisions
providing that for:
Muslim

62

policy holders, nominee is treated as executor and not

sole beneficiary, any moneys paid would be treated as part of the
deceaseds estate; i.e. faraid
non-Muslim policy holders, nominee is the absolute
beneficiary and moneys paid are not part of the estate
62

Contd

Insurance Act provides that both accounts be

considered as part of faraid.
Family Takaful consists of two portfolios, i.e risk
account and investment account.
Takaful Act Just to proper claimant. Not part of

faraid? Should provision of Insurance Act be applied

here.
AAOIFI Shariah Standard:
Risk Account: Be given to the nominees, i.e. proper
claimant as it is the contribution of other
participants.
Investment Account (if any), be considered as part
of faraid, so must be distributed to the
beneficiaries according to law of faraid (Standard
no 26 (6/2/
63

Death Due to Suicide or Prohibited

Acts.
Payment from the participant special account
(risk account) will only be made if the death
of the participant is not due to or arising from
suicide and other causes prohibited by
Shariah
Not claimable? Why? Who committed the
sin. Philosophy behind takaful. Mutual
assistance, but to whom?
Closing of the means to an evil act.
64

THANK YOU VERY MUCH FOR YOUR

ATTENTION AND YOUR PATIENCE