Every without risk’ and al-kharaj bil daman or

Every day, we as a human being are expose tovarious types of risks and of course affected our lives. Whether we like it ornot, we must find ways to mitigate risks in order for survival. Risk can bedefined as the uncertainty concerning the occurrence of a loss or uncertaintyregarding loss.

In relation to takaful or conventional insurance, mitigating arisk can be referred as ways to minimise financial losses in the event of thedisasters occur. An understanding of risk is essential due to the takaful conceptis based on “collective risk”. In another word, if risk does not arise, thus noneed for takaful to be in place.  Allah said in Surah Al-Baqarah (2:104); “We will surely test you through some fear,hunger and loss of money, lives and crops. Give good news to the steadfast.”Thus, we will face so many challenges along our journey of life.

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From theperspective of an Islamic, the legal maxim al-ghurmbil ghunm or “no reward without risk’ and al-kharaj bil daman or “the benefit of a thing is a return for theliability for loss from that thing” holds true. In short, we will endure somerisks in our undertakings before achieving success (success in here is coversbroad meaning).  “Help ye one another in righteousness and piety, but help ye not oneanother in sin and rancour,” surah Al-Maidah (5:2). Thus, the Islamic concept of brotherhood and love for one another areencapsulated in this surah.

While human beings are supposed to help oneanother, they should only engage themselves in good and beneficial deeds andnot in sinful and malicious activities. In relation to that, takaful issupporting the above mentioned concept called brotherhood for instance, inorder to help mitigate such risks so that individuals and organisations willnot have to bear the full burden of the hazards themselves. In other words, takafulis about risk shared between various related parties.

The assumption of risk bya person and the transfer of risk from one person to another is also allowed inIslam. This can be referred from the contracts such as kafalah, dhaman and hiwalah.The most important here is to ensure the practice of risk management is alignedwith the Maqasid al-Shariah.  In the beginning of discussion, I highlightedthe definition of risk, the Quranic verses regarding challenges as well asbrotherhood concept, takaful as way to mitigate risk and risk transfer that hadbeen allowed in Islam. In related to these points that have been addressed, itwill act as a basis of next discussion. Next, the explanation will be focusedon Shari’ah principles that are vital in order to govern the takaful contract.Why takaful is based on the Principle ofRisk Sharing and not Risk Transfer?  From the article, it is stated that Takaful involveswith risk sharing while conventional insurance involves with risk transfer. Underthe conventional insurance, the insurance company (insurer) will provideindemnity (sells the policy) and in return, the participant/ policyholder(insured) will have to pay premium (price) based not only on types of risksthat is covered but also the types of risks that are excluded, the period ofcoverage for the indemnity, the limit of compensation that the insured will getand and the level of loss that the company will not be responsible for.

Inother word, the insurance company sell an insurance policy and willing to bearall the risk arises that being transferred from policyholder to them for aprice. Thus, the conventional insurance is a sale and purchase contract.  Sale and purchase contract is not contrast toShari’ah compliant unless it contains elements that are prohibited by Shari’ah.

Based on the above mentioned explanation, from the point of view of Shari’ah, itis something that is unjust / injustice if a price or premium being paid for aconsideration that subject to occurrence of the risk. The sale and purchasecontract must be concluded with a known product for a known and fairconsideration. If people wants to buy an insurance product / policy, he or she needto pay a fair price for that particular policy plus with the understanding ofall terms and conditions. However, if he or she pays for the policy and willonly get the indemnity (or any forms of return) on condition that somethingelse must happen first (for example, accident happens, disease being diagnoseor disaster occurs), then the contract of sale and purchase is considered unfairdue to the consideration is given when something else happen. If it does nothappen, in another words, the insurer takes all the total premium and theinsured gets nothing. The designated condition is considered a source ofambiguity or gharar (one of theelements prohibited in Shari’ah compliant) in the contract and eventually willresult in one of the contracting parties to suffer injustice. Hence, the risktransfer principle adopts under conventional insurance not being allowed byIslamic jurisprudence.

Alternatively, Muslim community as well as ethicalconsumers have an options to choose Takaful that upholds the principle of risksharing.  The second Shari’ah principles being addressedin the article is regarding the ownershipof takaful fund. The Prophet((p.b.

u.h.) made one of the well-known statement on the responsibility ofMuslims to help each other: Allah will always help His servant for as long ashe helps his brother (in need). When people who face the same risk ordanger of incurring losses willingly contribute a certain sum of money whichwill be used to compensate those members of the group who incur such losses,then, there is a need to establish a takaful fund. The purpose of establishmentthe fund must be identified in order to provide what kind of indemnity to thegroup members. Each member will be indemnified only in the case that he or sheis eligible to make claims. Thus, the fundamental principles of takaful fundare as follows:·        Policy holders (members of the group) cooperateamong themselves for their common good;·        Every policy holders pays his or her contributionto help those that need assistance;·        Losses are divided and liabilities spread amongmembers of the group;·        Uncertainty is eliminated in respect of contributionand compensation; and·        Benefits (advantages) are not derived at thecost (loss) of others.

 The takaful fund’sownership belongs to all the participants (policy holders) who have donatedfinancial contributions to the fund. The takaful fund will be managed byTakaful Operator (TO) in either of the three ways depending on the agreementbetween the participants and TO. The selection of ways is (1) the TO will actas an agent (wakeel) for the takafulparticipants or (2) as a manager (mudarib)or (3) also can be both roles as an agent and manager. Therefore, the TO is notowning the takaful fund.

They (TO) only entitled to claim either wakalah fee or profit sharing or bothfrom the fund.  In relations tothat, one of the important aspect of a takaful operation is its financialmanagement. The TO has to ensure that the takaful fund is sufficient to payclaims and benefits when it arise. The TO also must be knowledgeable, capableand efficient in conducting the activities.

The takaful fund need to beproperly managed as the fund is exposed to contingencies includingconsideration regarding assets allocations as well as the liquidity needs.   For generaltakaful, the participants collectively own the takaful fund and have individualrights to the fund according to the terms and conditions of their takafulpolicy. However, for family takaful it is a more complex issue because it hastwo elements that are savings and risk protection. In practice, thecontributions paid by the participants more to be seem as investment ratherthan a donation. This is because the portion of contributions for risk protectionis in small amount only. The investment usually consumes the larger portion ofthe contribution payment and thus, the participants expect to gain returns fromtheir investment.  The article alsosuggested that the takaful fund should be registered as a trust fund andmanaged by the TO as trustee and with the participants as the solebeneficiaries.

Basically, the trust fund is not affected by the bankruptcy ofthe TO, who is legal owner of the fund and the fund is created solely for thebenefit of the beneficiaries (the participants). Its sounded giving more legalprotection for the takaful fund. In my point of view, no matter how the takafulfund is being established, what is more important matters is the roles of TOs (whetherbeing wakeel, mudarib or trustee) that always upholding the professionalism,integrity and accountability in managing the fund on behalf of theparticipants. The actions of TOs must always aligned with Shari’ah compliance,setting the right strategies of investment, minimising the possibilities orhindering other related Shari’ah issues and eventually, ensure the participantsare being treated in fair and just takaful environment. In practice, all the TOs need to follow therules and regulations set by Government of Malaysia and Bank Negara Malaysia.The Islamic Financial Services Act 2013 provided the rules regarding the establishmentand maintenance of takaful funds and also requirement on takaful funds need tobe separate from shareholders’ fund. The Bank Negara Malaysia also developed aguideline on Takaful Operational Framework 2013 specifically covers on operationalprocesses relating to takaful and shareholders’ funds including requirementsrelating to the setting up of funds, management of takaful operations,management of operating costs and income of the takaful operators, managementof assets, liabilities and surplus, and rectification of deficiency of thetakaful funds.



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