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Takaful models: origin,
progression and future
Hafiz Ali Hassan
Hailey College of Commerce, University of the Punjab, Lahore, Pakistan
Abstract
Purpose –The concept of Takaful has a long history. It is linked with the era of Prophet Muhammad 1,400
years ago. The globalization and development of socio-economic systems have made business activities more
complex in response to emerging human needs and requirements. Similarly, Takaful insurance has fully
commercialized and become an important indicator of the international financial market. The purpose of this
study is to understand the Takaful mechanism and progression of its procedures to date since its inception.
Design/methodology/approach –This study seeks to examine the origin, evolution and historical
developments of Takaful mechanism, operations, models and governing framework with extant literature
review from previous studies and current practices.
Findings –The modern Takaful insurance first began in Sudan back in 1979. The Takaful operations must
abide by the Sharia laws and work under the supervision of the Sharia Supervisory Board. Since its evolution,
Sharia scholars have introduced various Takaful models that are going to be explained in this study.
Moreover, several Islamic organizations, including the “IslamicFinancial Services Board”and the “Accounting
and Auditing Organization for Islamic Financial Institutions,”have provided guidelines and supervision to
develop and strengthen the Takaful industry further. The study acknowledges Takaful as a growing
insurance industry with huge potential and promising future in both Pakistan and the international market.
Practical implications –During the analysis, various deficiencies and loopholes were identified, which
are responsible for the unmatched growth of conventional insurance. They can be eliminated with the joint
efforts of industrial players, Sharia scholars and Takaful insurance companies. Hence, Islamic scholars and
academic researchers are encouraged to develop and modify the current practices of Takaful mechanism
according to current market demands and consumer approach. The research efforts will help Takaful
operators to develop more innovative Takaful products adhering Sharia compliance. Consequently, it will
help to access more consumer market and further enhances the Takaful growth.
Originality/value –This study is an effort to provide a basic understanding of the mechanism of Takaful
models. The study helps to comprehend how Takaful models have evolved and been modified over the course
of time. Moreover, it provides a base for further development and improvement in currentpractices of Takaful
models, which will result in increased progress for the Takaful industry.
Keywords Waqf, Islamic insurance, Sharia,Mudharabah, Takaful models, Wakalah, Takaful
Paper type Research paper
Introduction
Over the years, the development of the human race has made human life more affordable
and complex. Now, people want a healthy, comfortable and affordable lifestyle (Hassan
et al., 2018b,2018c,2018d). This has set the grounds for severe competition among the
people because they are interacting with each other for their common benefits across
borders. Similarly, innovation is becoming the biggest challenge in achieving competitive
advantage and sustainable growth (Hassan et al., 2018b,2018c,2018d). Simultaneously, the
degree of risk has also increased because of more opportunities for fraud. Hence, the concept
of risk management evolved to mitigate the adversaries of uncertain events (Billah, 2003).
This paper is dedicated to Hazrat Moulana Qari Sana Ullah Sahib (Late).
Takaful
models
Received 29 April2018
Revised 2 March 2019
29 June 2019
24 October 2019
Accepted 30 October2019
Journal of Islamic Marketing
© Emerald Publishing Limited
1759-0833
DOI 10.1108/JIMA-04-2018-0078
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1759-0833.htm
As civilization grew: people were always striving to spread risk from one party to
another and subsequently the need for such entities arrived, which could provide financial
assistance to obstruct the deficits of risk factors. Therefore, insurance came into existence
(Hasan et al., 2018). According to Abdulsater (2014), insurance is a method of risk
management in which risk is transferred from one party to another in lieu of some
settlement. Hence, the risk factor is being hedged by another party and will indemnify in
case if uncertainty occurs.
Vaughan (1996), stated the insurance history is very old and started with human
inception. The Chinese and Babylonian traders first practiced insurance agreements in the
second and third Millennia BC. The first written insurance agreement was named
“Hammurabi Code”with a monument of King Hammurabi carved on it; later, Greeks and
Romans introduced life and health insurance agreements. According to Fisher (2009),
modern insurance was started with the enlightening era of Europe back in the seventeenth
century. More categories were developed after the horrible incident of “Great Fire of
London.”Later, the first insurance company “Phoenix Assurance”was established in 1667.
In the meantime, the insurance mechanism was dealing with uncertainty and risk
adversaries but failed to comply with Islamic conventions due to the inclusion of some
unlawful elements like uncertainty, usury and gambling. Therefore, conventional insurance
stands prohibited under Islamic philosophy (Alhumoudi, 2013). Siala (2013), further argued
that the majority of Muslims across the globe having strong religious practices discourage
the adoption of conventional insurance. Later on,the issue was discussed at many levels and
Muslim Jurists made a balanced argument that the cooperative or mutual insurance can be
valid; hence, Takaful insurance has re-emerged (Cheikh, 2013).
The Takaful word extracts from the Arabic word (noun) “kafala,”meaning guaranteeing
each other. The term leads to another notion “Takaful,”meaning to ensure or jointly liable
(Bàalbaki, 2008). Cheikh (2013) noted Islamic insurance system has its origin since
1400 years ago in Mecca and Medina where different insurance agreements were applied to
mitigate risk evasions.The modern Islamic insurance Takaful system started in Sudan back
in 1979 (Billah, 2003). Later, it has progressed with the latest advancements and a more
improved mechanism.
According to Noordin et al. (2014), the best definition explaining Takaful is in Malaysian
Takaful Act, 1984, which is:
Takaful means a scheme based on brotherhood, solidarity and mutual assistance which provides
mutual financial aid and assistance to the participants in case of need whereby the participants
mutually agree to contribute for that purpose.
The definition uses a clear understanding of two aspects. The Takaful fund will provide
financial aid to participants in case of happening of any loss, which is the prime objective of
insurance. The second aspect uses the participants who are entitled to financial benefit from
Takaful fund even there is not uncertainty occurs and any available surplus belongs to
them. The concept is based upon solidarity and mutual cooperation and is a fairly good
example of collectivism among societies, which Islamic philosophy has always emphasized.
Takaful against conventional insurance
Following are the main differences between Takaful and Conventional insurance.
“Takaful insurance”is based on mutual cooperation and works under the “Sharia”
supervisory board. Conventional insurance is based on material benefits and works
under governing laws. The main purpose is maximizing shareholder’s benefits;
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Takaful policyholders contribute to the “Takaful fund”named “Donations,”which
are used further to indemnify in case an unexpected event occurs. In conventional
insurance, members pay a certain premium amount for a specific period in lieu of
indemnity in case an unexpected event occurs;
Takaful entities are members, shareholders’account and Takaful fund. The
premium amount is considered as income in conventional insurance; hence, it
belongs to shareholders;
The surplus amount from the Takaful fund is distributed among members and
profits from investments shared between members and shareholders. The profit
amount from investment and surplus are distributed among shareholders in the
insurance contract;
In case of a deficit in Takaful fund: interest-free loan “Qard Hasnah”is provided by
the “Wakeel”Takaful Operator. If a deficit occurs in traditional insurance, the
insurance entity is solely liable;
Takaful entities get Re-insurance contracts from Re-Takaful or Conventional
insurance companies with adherence to “Sharia laws.”Conventional insurance
entities usually do not engage in Re-insurance;
Takaful insurance shares the risk among members. Conventional insurance is based
on a risk transfer mechanism because it transferred from policyholders to the
insurance company;
Takaful entities make investments in “Riba”free instruments. Conventional
insurance entities invest the premium amount in fixed securities, including bonds,
term finance certificates and fixed bearing securities;
The uncertainty “Gharar”is reduced with voluntary contributions because risk is
shared among members in Takaful. The conventional agreement contains
uncertainty where insurer and policyholder are both unaware of the happening of
uncertainty; and
The contributions “Tabarru”provided in Takaful fund obviated the “Maysir”
element because the risk is shared among people and either party does not lose. If
uncertainty does not occur, the policyholder will lose his premium, whereas, if it
occurs, the insurer might lose despite how many premium amounts have been paid.
Literature review
Takaful insurance is an Islamic counterpart of conventional insurance. It can be termed as
“an Islamic perspective of risk coverage”(Hassan et al., 2018a). Since the inception of the
human race, risk mitigation has always been a crucial challenge for humankind. Chinese
and Babylonian traders practiced conventional insurance contracts in 2
nd
Millennia BC
(Vaughan, 1996). The modern insurance developed its roots back inthe 17
th
century with the
enlightenment era of Europe (Fisher, 2009). However, Faisal et al. (2012) argued that it does
not stand with Islamic conventions. The inclusion of usury, uncertainty and gambling make
it unlawful under Islamic philosophy. Siala (2013) stated that because of the strong Islamic
beliefs and conventions, the majority of Muslims hesitate to participate in conventional
insurance.
Since the development of the “Islamic Finance Industry”and the rapid globalization of
“Islamic Capital Market,”the lack of standardization is the main dilemma in the promotion
of “Islamic Competitive Products”all over the globe (Waris, 2018). The reason behind this is
Takaful
models
each Islamic country has a different interpretation regarding Islamic laws on which their
prevailing “Islamic Jurisprudence”is based. Hence, this result is chaos amongst the
development of uniform “Islamic Competitive Products”(Ali, 2016).
Vogel (2000), stated there are five prominent Islamic laws schools “Hanafi,”“Shafai,”
“Maliki,”“Hanbali”and “Jafri”who progressed methods to devise “Sharia”rulings under a
process named “Ijtihad.”The interpretation phase of Islamic law is known as “Fiqh,”and
another notion in Islamic jurisprudence is known as “Ijma,”which is the scholarly
consensus over law formation (Billah, 2003). Each school has prominent scholars called
“Muftis”who gave their opinion with respect to modern advancements, which is called
“fatwa”. The renowned “Muftis”with expertise in Islamic financial matters later served as
“Sharia Board Members”for Takaful entities.
Obeid and Kaabachi (2016) noted Islamic regions have different “Sharia Laws”because
of the conceptual differences in the interpretation of “Fiqh,”i.e. the “Islamic Jurisprudence”.
Resultantly, various Takaful models have progressed over time. One Takaful model is
practiced in one region and does not practice in another region because of the non-
uniformity of prevailing “Sharia Laws,”and these models have become base for Takaful
agreements (Shabiq and Hassan, 2016).
Moreover, according to Lone and Ahmad (2017), scholars have made constructive and
destructive criticism over the Islamic financial system. Various scholars have considered
Islamic financial products such as Islamic banks are charitable institutions with a primary
focus on social activities rather than commercial activities. However, Islamic banks work as an
intermediary between depositor and lender, i.e. a contract based upon the exchange of currency
with the underlying asset. Another allegation is that Islamic finance is vulnerable to economic
crisis, which is totally wrong. Islamic funds performed better in Malaysia during the “2008-
2013 financial crisis”(Ebrahim et al., 2016). Another accusation is that Islamic finance does not
encourage entrepreneurship compared to the conventional system, although in Turkey Islamic
banks have provided more finance to small- and medium-sized enterprises (Aysan et al.,2015).
Furthermore, non-Muslim customers do believe that Islamic finance is for Muslims;
therefore, they do not invest in Islamic products (Lone and Ahmad, 2017). In contrast, the
Islamic Bank of Britain was first commenced in a non-Muslim country and later on more
new banks started their operations in various countries (Lone and Bhat, 2018). Similarly,
many countries do not allow Islamic financial institutions to work under the tag “Islam,”e.g.
India does not allow the license to Islamic banks because of Islamic philosophy. According
to Lone and Ahmad (2017), it is further suggested that the tag should be replaced with profit
and loss sharing or participatory banking while the key principles remain the same.
Hassan and Abbas (2019) stated that the Islamic financial system is based on a risk-
sharing mechanism with the core principle of equal distribution of wealth. As per Meslier
et al. (2017), Islamic financial institutions focus on Islamic principles, whereas conventional
institutions focused on competition. Resultantly, they set high deposit rates when the
market is low and lower interest rates when they have more market power. Customer
satisfaction in the dual banking system tends to promote positive word of mouth. Therefore,
the name does not help to achieve customer satisfaction (Noordin et al.,2014). Moreover,
various studies proved religion is a key factor when selecting Islamic products (Akhter,
2010;Alam et al.,2011;Lewis and Cruise, 2006).
Lone and Bhat (2018) stated that countries such as UAE, Pakistan, and Malaysia are
successfully running dual banking system, but the Islamic tag is attached to Islamic
financial products. Although Saudi Arabia does not use the Islamic tag with a dual banking
system, various factors such as staff, physical appearance, cost, and accessibility contribute
toward the selection of Islamic financial products.
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Takaful barriers
Since its inception back in 1979 with the establishment of the first Takaful company
“Islamic Insurance Company”in Sudan (Hassan et al., 2018a), the penetration rate of Takaful
insurance is low as compared to conventional insurance in the international market.
Consequently, there is an untapped market existing mostly in Muslim countries (Ahmad
et al.,2013).
According to Hassan et al. (2018b,2018c,2018d), lack of awareness about Takaful is the
main reason behind the low development of Takaful from the conventional insurance
business in Pakistan. Budget constraints are also responsible for the steady growth of
Takaful because its poverty headcount ratio is US$1.90 a day (Hassan et al., 2018b,2018c,
2018d). Additionally, people have biased opinions; they believe Takaful is not purely based
on Islamic methodology; therefore, they do not want to participate (Abdulsater, 2014).
Furthermore, there is a low availability of competitive productscompared with conventional
insurance products.
Islamic finance is booming with the passage of time. Islamic Banks and Takaful
companies are growing their operations rapidly due to the more acceptance from people all
over the globe. The turnover estimated to reach $3.4tn by 2018 year-end (Echchabi and
Ayedh, 2015;Lone and Bhat, 2018). According to Kazranian et al. (2015), Takaful insurance
is growing in the international market and an estimated US$17bn by the end of 2017. Saudi
Arabia is leading the spot followed by Malaysia. Takaful business is concentrated in the
“Gulf Cooperation Council”countries such as Kuwait, Bahrain, Oman, UAE and Saudi
Arabia. Moreover, Indonesia, Bangladesh, and Pakistan are also using Takaful insurance
(Hasan et al.,2018).
Takaful principles
The Takaful concept grounds on mutual cooperation, solidarity and shared responsibility
(Alhumoudi, 2013). Furthermore, it is a fair example of collectivism, which is a fundamental
principle of Islamic philosophy (Dahnoun and Alqudwa, 2018). The Takaful mechanism
shares responsibility among members and stakeholders, while conventional insurance is a
risk transfer mechanism (Abdulsater, 2014). Furthermore, it based on the pure mutual
construct (Jaffer et al., 2010).
Daghi (2006) noted certain basic principles of Takaful insurance:
The Takaful member must have a legitimate financial concern. Each member must contribute his
donation in Takaful fund. The members gather for the common benefit and disclose material
information. A member could only indemnify for his loss which is quantified. After compensating
for the loss, any gain belongs to Takaful Operator. As a result, mutual cooperation and voluntary
contribution remove uncertainty among Takaful agreement.
The mechanism of Takaful works under Islamic Sharia compliance (Daghi, 2006). The term
Sharia refers to God’s divine set of rules and legislations assembled from Islamic
jurisprudence (Esposito, 2014). Masud (2010) stated that the set of rules extracted from the
Quran (The Holy book) and Sunnah (sayings and actions of Prophet Muhammad) is known
as Sharia. The Islamic law had been developed since its inception, but it never constant
regarding interpretation and legislation (Alhumoudi, 2013).
Takaful mechanism
According to Jaffer et al. (2010), Takaful insurance is a hybrid form of conventional
insurance with the principle of the mutual construct. The principles of “Ta’awun”mutual
cooperation and “Tabarru”voluntary contribution shares the risk among Takaful members.
Takaful
models
The policyholders contribute as a form of donations in the Takaful fund, which is
administered by a Takaful operator who works as “Mudarib”in lieu of the “Wakalah fee.”
The funds are invested in “Sharia”compliant ventures and profits are retained in the
Takaful fund. The losses are covered from the Takaful fund and surplus amount is
distributed among members (Akhter, 2010;Alhumoudi, 2013; and Abdulsater, 2014).
Takaful models in practice
At present, the automation process, simplification, task competency and use of the latest
technology are initial motivators leading toward the adoption behavior of new products
(Abbas et al. (2018c)). Similarly, the consumer credit market is expanding its operations with
the introduction of various credit services through banks and risk management institutions
(Abbas et al., 2018b). Furthermore, subjective norms, social influence, peer pressure,
compatibility and religiosity highly influence the adoption behavior of new products (Alam
et al.,2011).
According to Razak et al. (2013), the Takaful insurance mechanism works under the
governance of Islamic Sharia laws. Obeid and Kaabachi (2016), argued that, because of
the conceptual differences and interpretations of Islamic jurisprudence, various regions have
different governing Sharia laws. Therefore, multiple Takaful operating models have
evolved over the course of time (Rahim and Amin, 2011). Shabiq and Hassan (2016) noted
that these models are permitted and practiced under the supervision of Sharia board
members, and they have become pillars of Takaful agreements. Sharia board members
consist of Islamic Scholars and Muftis who are qualified and specialized in the procedures of
Islamic jurisprudence (Sadeghi, 2010). According to (Ali, 2016), the commercialization of
Takaful insurance has produced several Takaful models representing different
mechanisms, approaches and experiences. Currently, the Takaful business is available in
the following business forms.
Bank Aljazeera Ta’awun model (non-Profit model)
According to Pasha and Hussain (2013), the main purpose of Takaful is not generating
profits but rather mutual cooperation and risk-sharing. Moreover, we cannot neglect the
importance of profit for the insurance business. Since the inception of Islamic insurance,
various Sharia-compliant Takaful insurance models were introduced, which are not only
satisfying customers’needs but also providing fruitful investment features.
Ta’awun model was based on the concept of brotherhood, solidarity and mutual
cooperation among Takaful participants (Billah, 2003). The main objective is providing help
to the members when they are in need because of some calamity, disaster, misfortune or
some other reason (Akhter, 2010). This model is aimed to seek the welfare of Takaful
members and communities in the larger context; moreover, it is known as a contract among
participants (Ali, 2016).
Under this model, each participant donates a predefined sum of money to indemnify and
mutually assist each other if loss occurs (Ali, 2016). The donation amount paid by each
participant is based on the principle of Tabarru (Akhter, 2010). According to Jaffer et al.
(2010), the Tabarru concept is a one-way transaction. Once the amount has paid, the
contributor leaves the right for any benefit from it. The donations contributed to the fund
are known as participant risk fund, which is used for indemnification of any loss suffered by
any member during the period of insurance policy (Pasha and Hussain, 2013). Furthermore,
the agreement is not only skewed toward mutual cooperation but also includes savings and
investments. Therefore, another fund, i.e. participant investment fund, is dedicated toward
investment purposes (Ali, 2016).
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Ali (2016) explained that Muslim Jurists believed the concept of Tabarru is a noble one,
but it is not feasible for the Takaful insurance mechanism. The reason is that contributions
made by policyholders are not donations in pure sense but rather conditional donations that
entitle them to future benefit. Moreover, the donation rates are adjusted with risk exposure.
The more the risk is: the rate will be more. This element changes the Takaful concept into a
bilateral contract “mu’awadah.”In that case, the concerns of conventional insurance’s usury,
uncertainty and gambling re-emerge.
The concept further leads to another notion, which is making something that contains
voluntary obligation permissible under the Maliki school of thought. Thenotion is known as
al-iltizam bi al-tabarru (self-commitment to donate). The concept entails donation and
indemnification, although it is rejected by some scholars because the latter is not definite
because it depends on loss occurrence.
The concept further evolved as hibah bi al-thawab (a gift with consideration). Hibah is
known as a charity and mutual assistance instead of seeking benefits under Islamic
jurisprudence. Some jurists argued, if payment of hibah is made with intention of some
consideration: it will be considered to be shifted from unilateral to exchange contract.
However, some jurists still maintained their view that it is a unilateral contract, and not a
sales contract. Moreover, Al-Sharbini stated hibah is considered as a charity and requires
unknown considerations; therefore, the exchange form is not hibah (Ali, 2016).
After that, some scholars introduced the concept of Waqf, an underlying characteristic of
Tabarru for the Takaful mechanism. The concept entails that the participants will make
contributions for their interest. The fund assigned to a committee consisting of
policyholders or some joint stock company having a license of the insurance business. The
company will act as an agent in exchange for remuneration and further invest the funds into
future investments as an investment agency.
Global practice
According to Hanif and Iqbal (2014), the liberalization of Muslim-populated countries in the
twentieth century led the financial planners to redesign the financial system with a blend of
Islamic ideology. The series of efforts responsible for the establishment of “Islamic
Development Bank”and “Islamic Insurance Institution”in 1979 (Jamil, 2016).
The first Takaful insurance company started its operations from Sudan in 1979
(Insurance, 2008). The non-profitTa’awun model has been adopted and practiced since then
by Takaful companies. This model was also adopted by Bank Aljazeera and applied in
Takaful operations across Saudi Arabia (Billah, 2003;Husin and Rahman, 2016). Similarly,
the remodeling practices of risk management further led to better performance of the
financial sector (Abbas et al., 2018d).
The Mudharabah model
The Mudharabah model is a profit-sharing model and based on traditional Islamic
convention (Alhumoudi, 2013). It is a form of agreement between two parties in which one
party, which is called a participant, provides funds and another party, which provides
expertise and services for managing the funds, is called operator. According to Pasha and
Hussain (2013), participants or policyholders pay an initial investment called rab-ul-mall as
donations also named Tabarru for the mutual help of participants in case of uncertainty
occurs. The Takaful operator called mudarib manages the operations of Takaful. They
produce a fund named General Takaful Fund for investment purposes. It is also known as a
“Tijari”(trade) model becuase of its commercial nature.
Takaful
models
According to Akhter (2010), the Mudharabah model works under two categories: general
Takaful and family Takaful models. In general Takaful plan, the participants’contributions
are pooled into general Takaful fund and further invested in Sharia-compliant ventures. The
profits are retained in the fund while underwriting expenses and insurance claims paid from
the fund. The surplus amount is shared between rab-ul-mall and mudarib on predefined
terms.
In the family Takaful plan, the contributions made by participants are pooled into
separate accounts. The major portion goes to Participants’account (PA) while other portions
go to Participants’special account (PSA), which will be used for insurance claims and
underwriting costs. Both accounts’funds are reinvested under Sharia compliance. The
profits from PA are shared among participants and Takaful operator, while profits from
PSA are retained to meet costs and claims. In case the PSA funds are unable to meet the
claims and other costs, the PA fund will provide the required amount as Qard Hasnah
interest-free loan. Furthermore, if the surplus amount is available after meeting up the costs
and claims, it will be distributed among participants and Takaful operators (Wahab and
Rahim, 2006;Akhter, 2010;Ali, 2016).
The Mudarib is not liablefor losses. The loss amount is paid from General Takaful Fund;
if funds are not sufficient for losses, the deficit amount is provided by the participants as
Qard Hasnah (Pasha and Hussain, 2013).
The inclusion of profit-sharing in the Mudharabah model received criticism by various
Sharia scholars. They argued donations cannot work as Mudharabah capital (Wahab and
Rahim, 2006). Furthermore, the provision of Qard Hasnah violates the profit-sharing
Mudarib concept where the Mudarib cannot be a guarantor (Laldin, 2008). Some scholars
further argued that theTakaful operatorworks as a manager and trustee, and his salary and
remuneration are fixed as per the Takaful agreement. Hence, he is not allowed for any share
in either surplus or profit(Akhter, 2010).
Therefore, the risk-sharing Mudharabah approach does not seem to be correct under
these judgments and scholars further moved toward Wakalah and hybrid Mudharabah
&Wakalah models (Hussels et al.,2007)(Figures 1-2).
Global practice
The Mudharabah profit-sharing model first starred in Malaysia with the induction of
Syarikat Takaful insurance company, which was the first-ever and the largest Takaful
insurance company in Malaysia. The Mudharabah model proved itself as feasible and
profitable for businesses and investors, and the model is also practiced in Brunei (Wahab,
2013).
The Wakalah model
According to Akhter (2010), the Wakalah model is an Islamic free driven contract in which
one party provides sources while another party manages. Sadeghi (2010) noted that the
Wakalah model is a contract between participants and Takaful operator where the Takaful
operator acts as a Wakeel or an agent and charges a fixed sum of money as remuneration
(Wakalah fee) and does not hold any share in profit like the Mudharabah model. The model
further incorporates corporate risk-sharing among participants where the operator does not
hold any liability or entitlement for any share from underwriting results that solely belong
to participants either as surplus or deficit (Wahab and Rahim, 2006).
Pasha and Hussain (2013) explained that, in the general Wakalah model, the participants
provide capital in the form of contributions that will be put into the General Takaful fund.
The Takaful operator manages the funds and charges a fixed sum as operator’s Wakalah
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Figure 1.
The Mudharaba
Model General
Figure 2.
The Mudharaba
Model Family
Takaful
Takaful
models
fee. The fund is further invested in Sharia-compliant ventures and profits are retained in the
Takaful fund. The fund will be used to disburse insurance claims, underwriting expenses
and reserve requirements. After subsequent payment of all these, any amount left is surplus
and will be shared among participants. In case a loss or deficit occurs, the operator is obliged
to arrange an interest-free loan as Qard Hasnah, which is payable from future surplus.
Akhter (2010) noted that, in the family Wakalah model, the operator’s Wakalah fee is
deducted upfront after the payment of contributions from participants. The remaining
amount is distributed into two separate accounts: PSA and PA. The funds will be invested
as per Sharia compliance and profits will be retained in both accounts as per their declared
ratio. The amount held in PSA is further used to disburse insurance claims, underwriting
and ReTakaful expenses, and the surplus amount left in PSA goes to PA.
Since the adoption of the Wakalah model, various scholars discussed reservations on its
mechanism. Wahab and Rahim (2006) argued that the status of donations paid by the
participants as Tabarru is conditional where they are entitled to surplus from donations.
Therefore, it violates the condition of Tabarru. Similarly, the underwriting surplus
distribution issue is being deliberated at various levels (Pasha and Hussain, 2013).
Moreover, Akhter (2010) contended that the operator fee should be charged upfront in the
Wakalah model, and participants are allowed to refund their contribution amount whenever
they withdraw from Takaful. Here the question arises that if a participant withdraws from
Takaful in mid-period does the Takaful operator have any right to the unearned Wakalah
fee? If not, then how it will be returned to the participant? (Figures 3-4).
Global practice
Bank Aljazeera, Saudi Arabia, practiced the Wakalah model. The Takaful Berhad and
Ikhlas SDN Berhad also practiced the Wakalah model in Malaysia. Later, the government of
Bahrain also bound its Takaful and ReTakaful companies to adopt this insurance model,
Figure 3.
The Wakalah
Model General
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Figure 4.
The Wakalah Model
Family Takaful
Takaful
models
and the model has been widely popular and acknowledged because of its transparency and
fixed nature of charges (Hussain and Pasha, 2011).
The Hybrid model
The hybrid model, is also known as a mixed model, contains characteristics of both the
Mudharabah and Wakalah model (Masud, 2010). The Wakalah contract is used for
underwriting activities, while the Mudharabah contract is for investment activities (Tolefat,
2006). Ali (2016) noted that this model is normally used for family Takaful products.
In this model, Takaful contributions are pooled and retained in two separate accounts:
PSA PA. The Takaful operator charges for the operator’s Wakalah fee to manage the PSA,
while he holds the right as an investment manager under the Mudharabah contract and
shares profit for managing the PA. The funds invested in Sharia-compliant schemes and
profits are retained as per agreed proportions. The surplus amount from PSA is returned to
PA. Certain Takaful operators still take some portion from the surplus as an incentive from
PSA. The claims, underwriting cost and ReTakaful are paid out of PSA. In case of loss or
deficit, the amount will be taken from PA as Qard Hasnah, which must be paid back from
future surplus (Salman et al.,2015)(Figures 5-6).
Global practice
The hybrid model is the most dominant Takaful model in Middle East and South Asian
Islamic insurance market and is widely practiced across the globe. In Malaysia, Mayban
Takaful Berhad and Takaful national Berhad followed the same model (Tolefat, 2006). The
proponents of the said model argue that it combines the benefits of Mudharabah and
Wakalah models, which further facilitates devising a unified approach to standardized
Takaful business mechanism across theglobe.
Figure 5.
The Hybrid Model
General
JIMA
The Waqf model
The Takaful models were criticized on various grounds, including surplus sharing in the
Mudharabah model and their legal status. Furthermore, there is a need for the development
of a new Takaful model that enhances the credibility of the Takaful operator as a welfare
entity rather than a profit-oriented institution (Akhter, 2010). Thus, Mr Mufti Taqi Usmani a
renowned Sharia Scholar residing in Pakistan presented the Wakalah model with the Waqf
fund. The model is approved by Sharia scholars of Darul Uloom Karachi, a credible and the
most famous Islamic institution in Pakistan (Ali, 2016). The model is successfully working
in both Pakistan and South Africa.
The model incorporates participants to indemnify each other from the Waqf Fund in case
any catastrophic event occurs. According to Pasha and Hussain (2013), the Waqf fund is a
well-recognized entity that has been in existence since the inception of Islam. The Waqf fund
was created with donations placed by the shareholders. Similarly, participants of the
Takaful insurance provide contributions to the Waqf Fund. The Takaful operator charges a
fixed sum rather than the Wakalah fee. The remaining amount s invested in Sharia-
compliant instruments. The amount received as investment profits is divided among
Takaful operator and participants as per agreed ratios. After the deduction of claims,
underwriting costs and ReTakaful expenses, the hundred percent surplus amount belongs
to participants who have no prior claims left and are shared between participants according
to their predefined ratios (Akhter, 2010;Salman et al., 2015;Ali, 2016)(
Figure 7).
Global practice
Presently, the Waqf model is used by the Pakistani Takaful insurance market and the South
African Takaful market (Salman, 2014;Akhter, 2010). It is a modified form of the Wakalah
model with Waqf fund.
Figure 6.
The Hybrid Model
Family Takaful
Takaful
models
Issues in Takaful models
Sharia compliance is always a crucial factor for deciding the Takaful models’mechanism,
implementation and control. There are multiple convictions and reservations addressed by
Sharia scholars that have led to further improvements in the existing Takaful models but
fair compliance is still a great hurdle. These issues were based on competency, consistency,
confidentiality, independence and disclosure.
Moreover, another dilemma is as follows: there is a lack of competent Sharia scholars in
the field of Islamic Financial System. Because they hold key positions in the “Sharia
Supervisory Board”of Takaful companies; this might jeopardize fair disclosure of financial
statements because the companies hold their key information from “Sharia Supervisory
Board”members. Consequently, the companies fail to comply with the prevailing
legislation.
Another prevailing issue is profit-sharing among participants and Takaful operators
with the donation “Tabarru”concept. It is not legal in the Mudharabah model. Similarly,
surplus distribution among participants restricts Takaful operators’earning to Wakalah fee
which is not legal. Another reservation is unearned Wakalah fee if contributions withdrawn
by a participant in the Wakalah model.
The Waqf model came up with a more refined approach to overcome all the previous
deficiencies and convictions. The model is widely acknowledged, yet there is room for
consensus over Takaful matters among Sharia scholars from the various school of thought.
In the following scenario, a formation of the central Sharia board, comprising Sharia
scholars representing different “Fiqh”will be highly desirable for further discussions and
resolve Takaful issues.
Figure 7.
The Wakalah
Waqf model
JIMA
Furthermore, corporate governance issues must adhere to Sharia compliance and abide
by the rules of the Islamic financial system to overcome the company policy of maximizing
shareholders’benefits and ignoring participants’benefits.
Takaful today and tomorrow
According to Kazranian et al. (2015), the Takaful business is growing rapidly in the
worldwide insurance market because of its mechanism and solidarity approach. As per Ali
(2016), the premium contributions of Takaful business were calculated as US$14bn by the
end of 2014. Similarly, it was estimated that the volume would reach US$17bn by the end of
2017. However, Ernst and Young (2012) proposed that the Takaful market might reach the
level of US$20bn by the end of 2015. Moreover, the underdeveloped countries are far behind
in the adoption of risk management measure because of their low-income levels (Abbas
et al., 2018a).
As per the findings of Echchabi and Ayedh (2015),Echchabi and Echchabi (2013) and
Reuters (2016), the Takaful insurance market is clustered in mostly “Gulf Cooperation
Council”countries. Saudi Arabia is at the first place with the highest contribution volume,
followed by Malaysia (Kaunain and Akhtar, 2016). Takaful business operations are also
increasing in countries such as Kuwait, Qatar, Bahrain, Oman, Indonesia and other South
Asian countries.
Presently, 308 Takaful companies are working with 93 operational Takaful windows
across the world (Khan, 2013;Reuters, 2016). Perhaps, Ahmad et al. (2013), stated the
penetration rate of Takaful business is much lower in the international market as compared
to conventional insurance market. Moreover, there are more opportunities available in the
untapped market within Muslim-dominated and other countries.
ReTakaful
The term ReTakaful, referred to the Islamic way of reinsurance (Salman, 2014), is a risk-
sharing mechanism through which the Takaful operator shares its risk with another
ReTakaful entity (Jamaldeen, 2012). The main purpose of ReTakaful insurance is to
minimize the extent of losses and high claims because of a catastrophe or some other
calamity. At present, ReTakaful is very much essential for the stability of Takaful business.
By splitting the risk, Takaful companies are in a better position to manage their Takaful
operations. Therefore, ReTakaful ensures the stability and growth of Takaful companies
(Jamaldeen, 2012).
The ReTakaful operates in the same manner as Takaful insurance. The Takaful operator
signs a contract with the ReTakaful entity. The Takaful operator pays a premium to the
ReTakaful operator from the policyholders fund, which entitles the Takaful operator to
receive any ReTakaful surplus in the coming year. Furthermore, if the Takaful operator
faces any insolvency because of unexpected claims, the ReTakaful operator arranges and
provides Qard Hasnah to overcome the losses that will be payable shortly. The ReTakaful
operator must operate within the guidelines of Sharialaws (Salman, 2014;Jamaldeen, 2012).
Research implications
The advancement of technology, human resource and infrastructure development had
increased the importance of insurance. The conventional insurance business has evolved
over the years but it contains deficiencies such as one-sided advantage. The “Islamic
financial system”is rapidly growing due to its various advantages. It is based on solidarity,
mutual cooperation and risk transfer mechanism. Therefore, Takaful insurance is attracting
more people with the course of time (Akhter, 2010).
Takaful
models
The adoption of Takaful business is directly affected by three main factors such as
subjective norm, attitude and perceived behavioral control (Abdulsater, 2014). Likewise,
many studies have confirmed several factors such as religiosity, consumer knowledge,
accessibility, situational factors and demographic variables, which have driven the adoption
of Takaful insurance products (Hassan and Abbas, 2019;Echchabi and Ayedh, 2015;(Husin
and Rahman, 2016;Salman, 2014). The Takaful operators must devise more innovative
products and arrange awareness programs through training and advertisement channels.
Print media is also helpful because it directly interacts with people who are potential
customers and influential or credible people who may be used for testimonial advertising
(Husin and Rahman, 2016).
The above research is an effort to understand the mechanism of Takaful, which has
evolved over the last four decades. The conceptual differences in Islamic Jurisprudence have
led to multiple Takaful models covering deficiencies of each model. These models are based
on Takaful agreements. It is further proposed that these models can be modified with more
advance measures that may result in increased efficiency and monetary benefit. Currently,
the Takaful business is lagging far behind from conventional insurance because of its
monetary paybacks. There is a need to devise more advanced products that are more
affordable and provide more paybacks in relation to conventional products. Moreover,
Takaful must be promoted and available to more religious people because they would be
inclined to invest more because of the positive association of religion and happiness (Bèzes
and Mercanti-Guérin, 2017;Lewis and Cruise, 2006).
Conclusion
The Takaful insurance is a mutual-cooperation concept that focuses on solidarity and
common benefits among society. The presence of competitive elements makes Takaful
business more desirable, unlike conventional insurance. Therefore, Takaful insurance is
widely spreading across the globe since its inception over the last three decades. The
Takaful mechanism works under the supervision and guidance of prominent Sharia
scholars and legislated under the prevailing Sharia laws of a particular region, which
consolidates its credibility and accompanied the trust of policy members and potential
consumers.
This study shows the origin of Takaful and its application models that are being
developed and practiced since its inception. The Takaful models have evolved over time
while overcoming previous deficiencies and incorporating business requirements.
Finally, Takaful insurance has great potential in Muslim countries. There is a prediction
that it will be the default choice of every citizen in Muslim countries. The operations are
centered in Middle East and South Asian countries and are quickly spreading across Europe
and Australia. It is further proposed that it will penetrate into the international insurance
market because of its unique features. The Takaful market is facing lots of challenges such
as innovation, awareness, risk management issues and financial modeling. Therefore, by
overcoming these challenges, the progress ofTakaful business cansurely be enhanced.
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Corresponding author
Hafiz Ali Hassan can be contacted at: alihasanfarani@gmail.com
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Takaful
models
