Islamic insurance 2014 topic 5 & 6

التكافل اإلسالمىIslamic Insurance

(Takaful)

Dr. Kamaru Salam YusofLecturer, FBMS, Unissa

Negara Brunei Darussalam

TOPIC 5CONTRACTS IN TAKAFUL

Faculty of Business & Management Sciences, UNISSA, Brunei Darussalam

Definition of contract ‘Aqad’ (1)

• Contract comes from the Arabic 'aqada means binding or cemented.

• In language understanding is the bond, bind. It said bond (al-rabath) intention is to gather or collect two ends of the rope and tied one on the other.

• In the Qur'an al-aqdu words contained in the letter of Al-Maidah paragraph 1, that humans are asked to meet aqad.


Definition of contract ‘Aqad’ (2)

• Technically - engagement contract, agreement and consensus (ittifaq).

• In this connection the role Ijab (statement to the bond) and qabul (declaration accepting the bond) is very influential on the object.

• According to Mustafa Az-Zarka a legally binding contract is performed by two or more parties who are equally eager to attach itself. The will of nature hidden in the heart, therefore declaring each must disclose in a statement called Ijab and qabul.


Definition of contract ‘Aqad’ (3) final

“Legal relationship created by the conjunction of two declarations,

from which flow legal consequences with regard to the

subject matter”


Contents of aqad

Definition defines the essential elements of an ‘aqad:

1. The contracting parties;2. The offer (ijab) and acceptance (qabul);3. The subject matter of ‘aqad.



Contracting parties (examples)


Type of contracts - brief

In relation to Sharia banking practices and in according of their intent - can

be classified to two types namely:1. Tabarru’ (تبرع)2. Tijari (تجارى)


Type contracts (details)

Those contracts that are permitted can be divided into three broad categories as follows

(according to it’s benefits):1. Trading Contracts (تجارى)2. Contracts of Profit Sharing ( الفوائد (تبادل3. Supporting Contracts (التأييد)


Trading Contracts (تجارى)

(A) Cash Sales1. Normal cash sales2. Sarf (foreign currency exchanges)3. Exchanges between ribawi materials of different kinds and of the same basis

(gold with money or wheat with palm oil)4. Bai Al-Dayn (debt trading as in Bills of Exchange)

(B) Deferred payment sales (debt financing)5. Bai Murabahah (cost plus)6. Bai Tawliyah (novation)7. Bai Wadhiah8. Bai Salam9. Bai Istisna’a (sale by order)10. Bai Bithaman Ajil (deferred payment sale)11. Bai Istijrar (supply or whole sale financing)12. Bai Inah13. Ijarah (leasing)14. Kiraa’ Waqtinaa’ (leasing then procurement)


Contracts of participation (equity financing/ profit sharing) تبادل الفوائد

1. Musharakah (joint venture profit sharing)2. Mudharabah (trustee profit sharing)3. Muzara’ah (leasing of land for

agriculture)4. Musaaqat (watering of orchard)


Supporting contracts (تأييد)

1. Rahnu (mortgage) (الرهن)2. Kafalah (guarantee) (كفالة)3. Wakalah (agency) (وكالة)4. Wadi’ah (safe custody) (وديعة)5. Qardh Hasan (benevolent loan) ( حسن (قرض6. Hiwalah/ Hawalah (transfer of debt) (حوالة)7. Tabarru’(donation) (تبرع)8. Hibah (gift) (هبة)9. Waqf (endowment) (وقف)10. Ibraa’ (rebate) (ابراء)11. Muqasah (set-off) (مقاصة)


Type of contracts (according to their purposes)


Contracts in takaful

Company (operator)

ParticipantParticipant


2 type of contracts in takaful

• Amongst participants• Between participants and operator

Mudharabah

Wakalah

Ju’alahhibah

waqaf


tabarru‘ in takaful

• by participants• agree to pay to takaful fund• not specify form of donation– hibah– waqf


Tabarru’ (تبرع)

• Tabarru contract is the contract that is – intended to help others and simply hope pure

pleasure and reward from Allah. – Absolutely no element of seeking the return, or a

motive.

Contract that includes this type include Hibah, Ibra’, Wakalah, Kafalah, Rahn and

Qiradh


Mudarabah (مضاربة)

Mudharabah is a contract where –the owner of capital ( المال (صاحب

entrusts his funds to an entrepreneur –who (entrepreneur) contributes skills

in a business, and –the profits generated is to be shared

between them.


Mudharabah: Elements and necessary conditions: (1)

1. Contract- Absolute and in definite and

decisive language.

2. Owner of capital3. Entrepreneur


Mudharabah: Elements and the necessary conditions (2)

4. Capital(i) In money only(ii) Not debt(iii) Specific amount(iv) Paid to entrepreneur(v) From owner of capital only

5. Business(i) Halal(ii) Managed by entrepreneur only.

6. Profit sharing(i) Profit shared according to agreement in fraction, ratio or percentage, not in

absolute amount.(ii) Loss borne by owner of capital only.


Practice mudarabah in takaful

1. Give capital to others - trade it - sharing profit.

2. Participant - provider3. Operator - mudharib4. Profit - will share5. Loss - borne by capital except due to

operator negligence


Mudarabah in takaful (2)• Basically, Mudarabah is defined as a profit-and-loss sharing

principle applied normally to a business or commercial contract between the party that provides the fund or capital and the party that manages the business.

• For takaful, this would mean:– the contract of profit sharing between the takaful participants and the

operator from the profit, if any, of the takaful business. – Under this arrangement, a profit sharing contract is signed between

the operator, as the entrepreneur or termed Mudharib who is entrusted with managing the takaful business and the participant(s) as the provider of capital, called sahib al-mal who is obliged to pay the takaful contribution as the capital.


Mudarabah in takaful (3)

• The contract will define the profit of the takaful business and the ratio to be shared between the two parties such as 50:50, 60:40 or 70:30 between the participant and operator respectively.

• In essence, profit in takaful is defined as returns on the investment and surplus from the underwriting in respect of the takaful funds only. Therefore this does not include profit posted by the Shareholders’ Fund.

• However, unlike the Mudarabah contract for Islamic banking product, profit sharing in takaful will be undertaken only after all the obligations of takaful have been accounted for: the biggest factor is claim.

• In the event of a loss or deficit of the takaful fund, the loss will be borne wholly by the participant(s) as provider of capital.


Mudarabah in takaful (4)• It is the responsibility of the operator to safeguard the

interest of the participants in order to ensure the business will not be seriously affected by the loss that might jeopardize the credibility and confidence of takaful as a whole.

• For this reason, proper governance, prudence and professionalism in managing the business on the part of the operator is imperative.

• An important feature to note is that under the Mudarabah model, management expenditure is not charge on the takaful fund instead it is borne by the shareholders’ fund.


wakalah

1.Agency2.Participant - actual owner3.Operator – agent


Wakalah in takaful (1)

• The term wakalah (وكالة) in Arabic means agency. • Therefore under the structure, an agency

relationship is agreed between two parties to conduct a certain business undertaking.

• Based on this premise, the model describes an agency agreement between the operators, acting as the agent or “wakil” to the participant as the principal to manage the participation of the latter in a variety of takaful products provided by the operator.


Wakalah in takaful (2)• In return for rendering the agency services, the operator

is permitted to charge a fee under the agreement. The fee is payable from the takaful contribution paid by the participant. Management expenditure can be charged to the takaful fund as upfront charges.

• The operator earns its revenue from the agency fee described in the aforementioned as well as returns on the investment of its shareholders’ fund.

• However, there are also operators practising the above model who charged performance fees on its roles and services of managing the investment of the takaful fund.


Ju’alah (جعالة) Contract

• Ju’alah is a contract in which one of the parties (the Ja’il) offers specified compensation (the Ju’l) to anyone (the ‘Amil) who will achieve a determined result in a known or unknown period.

• Ju’alah is permitted deeming the determination of the end result to be realised through it as sufficient.

• It is for this reason that Ju’alah is suitable for activities for which Ijaarah, which requires that the desired work be clearly specified, is not.


Ju’alah is distinguished from Ijara on the following grounds:

1. Ju’alah is valid despite uncertainty of work deeming the determination of the required result by the offer or as sufficient.

2. Ju’alah does not require acceptance.3. Entitlement to compensation depends on

completion of work and delivery of result.4. Ju’alah is valid even if the other party is not known.5. As a rule, Ju’alah is terminable, while ljarah is

binding.


Ju’alah in takaful

1. Commitment to pay - reward for performance of task

2. Participants appoint operator to manage

3. Payment based on actual performance


Waqf (الوقف)

• Literally means "confinement and prohibition" or causing a thing to stop or stand still.

• The legal meaning : the detention of specific thing in the ownership of waqf and the devoting of its profit or products "in charity of poors or other good objects“.


Waqf in nas (shariah’s text)

• No direct injunction of the Qur'an regarding Waqf, • Number of hadiths: One says, "Ibn Umar reported, Umer-Ibn-

Al-Khitab got land in khyber, so he came to the prophet Muhammad (peace be upon him) and asked him to advise him about it. The Prophet said, "If you like, make the property inalienable and give the profit from it to charity." It goes on to say that Umar gave it away as alms, that the land itself would not be sold, inherited or donated. He gave it away for the poor, the relatives, the slaves, the jihad , the travelers and the guests.

• In another hadith, The Prophet saw said, "When a man dies, only three deeds will survive him: continuing alms, profitable knowledge and a child praying for him."


Waqf in takaful

1. relinquish a right over property for general enjoyment

2. in takaful fund only, management still tru wakalah or mudarabah

3. participant lose the right over their contribution

4. operator as trustee


Waqf in takaful (detail – 1)

• The term waqf explains the contract of takaful that underlines the agreement or consent of the participant that the takaful contribution paid in return for participating in the takaful product to be credited by the operator into the takaful fund in accordance with the principle of waqf or endowment.

• To begin with, a waqf account has to be established by the operator within the takaful fund. To this effect the operator is required to relinquish some kind of “seed” money as waqf to generate the said waqf account.

• This waqf account of the takaful fund will be invested similar to the three business models hereinbefore. The Waqf fund shall work to achieve the following objectives:1. To extend financial assistance to its members in the event of losses.2. To extend benefits to its members strictly in accordance with the Waqf Deed.


Waqf in takaful (detail – 2)

• All the expenses related to the underwriting and operational cost of takaful shall be charged to the Waqf fund.

• As manager, the takaful operator will perform all functions necessary for the operations of the Waqf against a Wakala fee to be deducted from the contribution paid by the participants.

• As Mudharib, the operator will manage the investment of the takaful fund including its Waqf account in Shariah-compliant investment avenues and will share its returns on the investment at an agreed ratio similar to the profit sharing structure under the Mudharabah contract.

Islamic insurance 2014 topic 5 & 6

Economy & Finance