Every affected our lives. Whether we like it or

Every day, we as a human being are expose to
various types of risks and of course affected our lives. Whether we like it or
not, we must find ways to mitigate risks in order for survival. Risk can be
defined as the uncertainty concerning the occurrence of a loss or uncertainty
regarding loss. In relation to takaful or conventional insurance, mitigating a
risk can be referred as ways to minimise financial losses in the event of the
disasters occur. An understanding of risk is essential due to the takaful concept
is based on “collective risk”. In another word, if risk does not arise, thus no
need 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. From the
perspective of an Islamic, the legal maxim al-ghurm
bil ghunm or “no reward without risk’ and al-kharaj bil daman or “the benefit of a thing is a return for the
liability for loss from that thing” holds true. In short, we will endure some
risks in our undertakings before achieving success (success in here is covers
broad meaning).

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now


“Help ye one another in righteousness and piety, but help ye not one
another in sin and rancour,” surah Al-Maidah (5:2). Thus, the Islamic concept of brotherhood and love for one another are
encapsulated in this surah. While human beings are supposed to help one
another, they should only engage themselves in good and beneficial deeds and
not in sinful and malicious activities. In relation to that, takaful is
supporting the above mentioned concept called brotherhood for instance, in
order to help mitigate such risks so that individuals and organisations will
not have to bear the full burden of the hazards themselves. In other words, takaful
is about risk shared between various related parties. The assumption of risk by
a person and the transfer of risk from one person to another is also allowed in
Islam. 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 aligned
with the Maqasid al-Shariah.


In the beginning of discussion, I highlighted
the definition of risk, the Quranic verses regarding challenges as well as
brotherhood concept, takaful as way to mitigate risk and risk transfer that had
been allowed in Islam. In related to these points that have been addressed, it
will act as a basis of next discussion. Next, the explanation will be focused
on Shari’ah principles that are vital in order to govern the takaful contract.
Why takaful is based on the Principle of
Risk Sharing and not Risk Transfer?


From the article, it is stated that Takaful involves
with risk sharing while conventional insurance involves with risk transfer. Under
the conventional insurance, the insurance company (insurer) will provide
indemnity (sells the policy) and in return, the participant/ policyholder
(insured) will have to pay premium (price) based not only on types of risks
that is covered but also the types of risks that are excluded, the period of
coverage for the indemnity, the limit of compensation that the insured will get
and and the level of loss that the company will not be responsible for. In
other word, the insurance company sell an insurance policy and willing to bear
all the risk arises that being transferred from policyholder to them for a
price. Thus, the conventional insurance is a sale and purchase contract.


Sale and purchase contract is not contrast to
Shari’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, it
is something that is unjust / injustice if a price or premium being paid for a
consideration that subject to occurrence of the risk. The sale and purchase
contract must be concluded with a known product for a known and fair
consideration. If people wants to buy an insurance product / policy, he or she need
to pay a fair price for that particular policy plus with the understanding of
all terms and conditions. However, if he or she pays for the policy and will
only get the indemnity (or any forms of return) on condition that something
else must happen first (for example, accident happens, disease being diagnose
or disaster occurs), then the contract of sale and purchase is considered unfair
due to the consideration is given when something else happen. If it does not
happen, in another words, the insurer takes all the total premium and the
insured gets nothing. The designated condition is considered a source of
ambiguity or gharar (one of the
elements prohibited in Shari’ah compliant) in the contract and eventually will
result in one of the contracting parties to suffer injustice. Hence, the risk
transfer principle adopts under conventional insurance not being allowed by
Islamic jurisprudence. Alternatively, Muslim community as well as ethical
consumers have an options to choose Takaful that upholds the principle of risk


The second Shari’ah principles being addressed
in the article is regarding the ownership
of takaful fund. The Prophet
((p.b.u.h.) made one of the well-known statement on the responsibility of
Muslims to help each other: Allah will always help His servant for as long as
he helps his brother (in need). When people who face the same risk or
danger of incurring losses willingly contribute a certain sum of money which
will 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 establishment
the fund must be identified in order to provide what kind of indemnity to the
group members. Each member will be indemnified only in the case that he or she
is eligible to make claims. Thus, the fundamental principles of takaful fund
are as follows:

Policy holders (members of the group) cooperate
among themselves for their common good;

Every policy holders pays his or her contribution
to help those that need assistance;

Losses are divided and liabilities spread among
members of the group;

Uncertainty is eliminated in respect of contribution
and compensation; and

Benefits (advantages) are not derived at the
cost (loss) of others.


The takaful fund’s
ownership belongs to all the participants (policy holders) who have donated
financial contributions to the fund. The takaful fund will be managed by
Takaful Operator (TO) in either of the three ways depending on the agreement
between the participants and TO. The selection of ways is (1) the TO will act
as an agent (wakeel) for the takaful
participants or (2) as a manager (mudarib)
or (3) also can be both roles as an agent and manager. Therefore, the TO is not
owning the takaful fund. They (TO) only entitled to claim either wakalah fee or profit sharing or both
from the fund.


In relations to
that, one of the important aspect of a takaful operation is its financial
management. The TO has to ensure that the takaful fund is sufficient to pay
claims and benefits when it arise. The TO also must be knowledgeable, capable
and efficient in conducting the activities. The takaful fund need to be
properly managed as the fund is exposed to contingencies including
consideration regarding assets allocations as well as the liquidity needs. 


For general
takaful, the participants collectively own the takaful fund and have individual
rights to the fund according to the terms and conditions of their takaful
policy. However, for family takaful it is a more complex issue because it has
two elements that are savings and risk protection. In practice, the
contributions paid by the participants more to be seem as investment rather
than a donation. This is because the portion of contributions for risk protection
is in small amount only. The investment usually consumes the larger portion of
the contribution payment and thus, the participants expect to gain returns from
their investment.


The article also
suggested that the takaful fund should be registered as a trust fund and
managed by the TO as trustee and with the participants as the sole
beneficiaries. Basically, the trust fund is not affected by the bankruptcy of
the TO, who is legal owner of the fund and the fund is created solely for the
benefit of the beneficiaries (the participants). Its sounded giving more legal
protection for the takaful fund. In my point of view, no matter how the takaful
fund is being established, what is more important matters is the roles of TOs (whether
being wakeel, mudarib or trustee) that always upholding the professionalism,
integrity and accountability in managing the fund on behalf of the
participants. The actions of TOs must always aligned with Shari’ah compliance,
setting the right strategies of investment, minimising the possibilities or
hindering other related Shari’ah issues and eventually, ensure the participants
are being treated in fair and just takaful environment.


In practice, all the TOs need to follow the
rules and regulations set by Government of Malaysia and Bank Negara Malaysia.
The Islamic Financial Services Act 2013 provided the rules regarding the establishment
and maintenance of takaful funds and also requirement on takaful funds need to
be separate from shareholders’ fund. The Bank Negara Malaysia also developed a
guideline on Takaful Operational Framework 2013 specifically covers on operational
processes relating to takaful and shareholders’ funds including requirements
relating to the setting up of funds, management of takaful operations,
management of operating costs and income of the takaful operators, management
of assets, liabilities and surplus, and rectification of deficiency of the
takaful funds.



I'm Owen!

Would you like to get a custom essay? How about receiving a customized one?

Check it out