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Certified Takaful Professional Module II

(Takaful & Risk Mitigation tools in Islamic Finance) CTP: 404: Shariah Elements/Principles in Takaful

CTP: 404: Shari’ah Elements/Principles in Takaful

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Wakalah-Concept and its Application in Takaful1

Islamic Transaction System is a dynamic system and in line with current

needs of the Ummah (people). Although the concept and basic principles

outlined by Islam in its Transaction (Muamalat) system seemed more

'traditional', it can be processed in a very practical and able means to

meet the financial needs of modern and complex community. In fact, the

mechanism of the Islamic financial system today is seen as one of the

best alternatives to the conventional financial system, which in current

condition is equivalent to the Malay proverb “like a crack waiting to

happen." This is the best part of Islam which holds no boundaries not

only in time but also geography.

The Wakalah contract is among the treasures of Islamic Transaction

system that has been popularized and its application tailored in various

facilities in the contemporary Islamic financial system.

The word Wakalah is taken from the Arabic word which means

representative. Literally it means to preserve, to protect, to guarantee, to

submit and to replace. Whereas in terms of syara‘ (law based on Islamic

teaching), understanding it refers to "a party may submit any matter that

may be represented in accordance to syara' to the other party when the

first is still alive".

The fuqaha (jurists' representatives Islamic scholars) have agreed that the

deed must be in accordance with syara' and must be based on is

permissible according to syara’ and has been proved by the Holy Quran,

Sunnah (deeds, sayings and approval of Prophet Muhammad PBUH) and

Ijma' (consensus of opinion). According to Ibn Qudamah, Ijma’ of the

'scholars' accepted the representations received as a declaration because

the declaration of Wakalah is needed by all walks of life in various forms

of activities. The Wakalah contract is made into Islamic laws shows

evidence that human behavior is weak, cannot live alone and require one

another to manage the affairs of life. Islam promotes the use of Wakalah

principles in various fields of activities as long as they do not conflict with

Reference: 1

This article “Wakalah-Concept and its Application in Takaful” is being written by Wan Jemizan Wan Deraman”


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Islamic laws. Among the resource proposition that is a principle of

representation which is required to conform that the principle of

representation is permissible:

Based on the event of Ashabul Kahfi as told in the al-Quran: "…So send

one of you with this silver coin of yours to the town, and let him find out

which is the good lawful food, and bring some of that to you (Al-Kahf: 19)

Let one of you go to the city with this silver coin and find food that is

purest and lawful (that is sold there). Let him bring you provision from it.

(JAKIM translation)

2. In the Sunnah it is narrated that Prophet Muhammad PBUH has

delegated ‘Urwah al-Bariqi to buy a goat for sacrifice. (Narrated by al-

Bukhari, Ahmad, Abu Dawood, at-Tarmizi, Ibn Majah and al-Daruqutni

which is from Urwah’s own)

To ensure that the contract is a binding one, it must meet certain terms

and conditions. They are the Represented/Principal (al-muwakkil), the

Representative (Al-wakil), the affairs which being represented (al-

Muwakkal fihi) and Sighah (Ijab and qabul). A representative The principal

must be a person who has the right to operate the properties

represented. The appointment of a representative would be invalid if it is

made by children who have not reached a certain age when they are

unable to differentiate between the good and the bad (mumayyiz) or by

people who are mentally disturbed. A representative must also have the

ability to make certain decisions in choosing between right and wrong, as

well choosing profits over losses. According to the Hanafi School of

Islamic law, a representative must also be wholehearted in the whole

affair and fully understands the contract represented. The appointed

Keep In Mind

The fuqaha (jurists' representatives Islamic scholars) have agreed that the deed must be in accordance with syara' and must be based on is permissible according to syara’ and has been proved by the Holy Quran, Sunnah (deeds, sayings and approval of Prophet Muhammad PBUH) and Ijma' (consensus of opinion). According to Ibn Qudamah, Ijma’ of the 'scholars' accepted the representations received as a declaration because the declaration of Wakalah is needed by all walks of life in various forms of activities.

A representative, the principal must

be a person who has the right to

operate the properties

represented.

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representative must also be appointed determined. If A calls upon 2

persons without determining the actual representative, the appointment

is invalid. In addition, representatives must also know about the task or

the specified time period given.

The affairs that are delegated must meet certain conditions and if the

conditions are not met the representation becomes invalid. Among the

conditions of affairs that can be represented is that it must be required

permissible by Syara' (law based on the teaching of Islam) and owned by

the owner because the goods that does not belong to the owner cannot

be delegated to others to manage. The whole affair must be clear so that

ambiguity and deception can be avoided. Not every affair can be

delegated though; as this only involves the dealings and operational

matters in relation to properties or material goods. Whereas the physical

worships such as observing prayers, fasting and ablution cannot be

delegated except for representing someone for the hajj pilgrimage.

The declaration of contract or referred as Sighah is also a very important

aspect of a valid contract. The declaration of ijab (offer) from the owner

shall be made bright and clear. For example: "I entrust you to sell this

house" or "I submit this land sale transaction to you" or "You are my

representative in the business of selling this land". Whilst the declaration

of qabul (acceptance) from the representative should not be as

necessarily bright and clear. It is adequately accepted if the

representative does not show any rejection towards the affair submitted

to him.

Keep In Mind

The appointment of a representative would be invalid if it is made by children who have not reached a certain age when they are unable to differentiate between the good and the bad (mumayyiz) or by people who are mentally disturbed. A representative must also have the ability to make certain decisions in choosing between right and wrong, as well choosing profits over losses. According to the Hanafi School of Islamic law, a representative must also be wholehearted in the whole affair and fully understands the contract represented. The appointed representative must also be appointed determined.

Not every affair can be delegated

though; as this only involves the

dealings and operational

matters in relation to properties or material goods.

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Wakalah contract is divided into General Wakalah, Special Wakalah, Paid

Wakalah and Unpaid Wakalah. The General Wakalah is a Wakalah in

matters that are not specified such as a representative in all business

transactions, or being a representative without any prescribed goods to

be sold or purchased. Under the General Wakalah the wakil has a power

to do any business as long as no harm is done to the owner.

Whereas a Special Wakalah is a representative devoted to matters such

as sale and purchase of homes or cars, or rental properties such as land,

houses and buildings. Special Wakalah is bound by the matter or affair

devoted to him.

Paid Wakalah is required permissible by Syara'. The Prophet PBUH had

sent officers (employees) to accept collect charity tithe, and they were

paid for it. Representative of this type must perform those tasks well and

not to neglect them. In the context of takaful, the practice is based on

this type of wakalah.

Unpaid Wakalah is a representative who works voluntarily without any

form of payment. Representation of this type does not necessitate a

representative to continue the work and he can release himself from the

task at any time.

The Wakalah concept is practiced by most of the takaful operators in

Malaysia and this is a necessary tool to market the takaful products to

the society. This task is very much needed by the Takaful operators to

accelerate the distribution of products based on Islamic principles.

Keep In Mind

The declaration of contract or referred as Sighah is also a very important aspect of a valid contract. The declaration of ijab (offer) from the owner shall be made bright and clear. For example: "I entrust you to sell this house" or "I submit this land sale transaction to you" or "You are my representative in the business of selling this land". Whilst the declaration of qabul (acceptance) from the representative should not be as necessarily bright and clear. It is adequately accepted if the representative does not show any rejection towards the affair submitted to him.

Wakalah contract is divided into

General Wakalah, Special Wakalah,

Paid Wakalah and Unpaid Wakalah

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Unpaid Wakalah is a representative

who works voluntarily without

any form of payment.

Representation of this type does not

necessitate a representative to

continue the work and he can release

himself from the task at any time.

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Takaful Ikhlas Sdn. Bhd. (IKHLAS) for example, is using a model named

Wakalah as the basis of its operating business. Using the Wakalah

principles, IKHLAS operates by representing its participants in managing

all their established funds with trust, transparency and professionalism.

For this purpose, IKHLAS has charged management and performance

charges to participants based on the principle of Paid Wakalah (al-

Wakalah bi al-ujrah).

IKHLAS also employs representatives as intermediaries to market the

company products with paid wages. Aqad (declaration contract) between

the representatives and IKHLAS is based on Aqad Wakalah. This concept

is consistent with the principles of Islam as the practice of Prophet

Muhammad PBUH who had sent officers (employees) to accept collect

charity tithe, and the Prophet gave wages to them (al-Talkhis al-habir,

Vol. 1, pg. 176, 251, 271). In the Islamic principles, when a contract

Wakalah contract with wage payment is implemented, then the contract

is firm and binding, and this means that all parties are responsible for

implementing all the matters agreed in the Aqad.

Under the Wakalah system, the representative is necessarily associated

with four characteristics, Siddiq (Honesty), Amanah (Trust), Tabligh

(Passing Preaching) and Fatanah (Wise Wisdom). The four characteristics

must be implanted, comprehended and implemented by the

representatives in each business representation in order to achieve a

valuable life in this world and hereafter.

A Takaful representative is a DAKWAH who works to develop the

products of Islamic Transactions. Takaful is an alternative to the

Keep In Mind

Takaful Ikhlas Sdn. Bhd. (IKHLAS) for example, is using a model named Wakalah as the basis of its operating business. Using the Wakalah principles, IKHLAS operates by representing its participants in managing all their established funds with trust, transparency and professionalism. For this purpose, IKHLAS has charged management and performance charges to participants based on the principle of Paid Wakalah (al-Wakalah bi al-ujrah).

In the Islamic principles, when a contract Wakalah

contract with wage payment is

implemented, then the contract is firm

and binding

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conventional insurance system as concluded by the Task Force to Study

on the Establishment of Islamic Insurance Company in Malaysia 1983. A

Takaful representative also performs JIHAD against the Jahiliyyah system

(conventional insurance). This is because conventional insurance is

considered Haram (unlawful) according to the Fatwa issued by the

National Fatwa Council in 1972. Besides, a representative of Takaful also

IBADAH through his works because it is a manifestation of dedications,

faith and devotion to Allah who ordered to act upon the ma’ruf (good

deeds) and leave the munkar (evil deeds): Al Baqarah-25

A Takaful representative must have the moral restraint creditable

behavior to achieve the mission and vision as the standard bearer of

Islam.

In conclusion, the concept of representation as practiced by most of

Takaful operators creates employment opportunities and one of the

sources of income. The representatives also have the opportunity to

perform responsibilities as da'ie who encourage people to help each

other, do tabarru' and develop Islamic Muamalat system which is a

religious responsibility of every Muslim. As a result, in this world it may

serve as their source of income and in the Hereafter it may serve as a

reward to be presented before Allah.

Keep In Mind

A Takaful representative is a DAKWAH who works to develop the products of Islamic Transactions. Takaful is an alternative to the

conventional insurance system as concluded by the Task Force to Study on the Establishment of Islamic Insurance Company in Malaysia 1983, A Takaful representative also performs JIHAD against the Jahiliyyah system (conventional insurance). This is because conventional insurance is considered Haram (unlawful) according to the Fatwa issued by the National Fatwa Council in 1972.

In the Islamic principles, when a contract Wakalah

contract with wage payment is

implemented, then the contract is firm

and binding

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Revisit the Principle of Tabarru' in Takaful Structure2

It has been widely accepted today that Islamic Insurance, or Takaful,

unlike its conventional counterpart, is based on the fundamental

principles of mutual cooperation (ta’awun) and donation (tabarru`).

Under the Islamic laws of transactions (fiqh muamalah), the existence of

gharar (ambiguity) and maysir (gambling), which normally nullify an

exchange contract (muawadah), are tolerated in a contract of donation

(tabarru`). This corresponds to the Islamic legal maxim:

“uncertainties are tolerable in a gratuitous contract”

This is mainly due to the fact that parties who enter into a tabarru`

contract do not aim to make profit out of the contributed sum, and hence

the potential dispute which normally arises in a profit-making transaction

is deemed to be negligible in a gratuitous-based transaction.

Furthermore, the issue of uncertainty is irrelevant since the contributor

voluntarily gives away his property or right to the recipient without any

consideration.

In contrast, conventional insurance, which is based on the principle of

muawadah (exchange) and aims at making profit out of the insurance

operations, is prohibited from the Shariah's viewpoint since it contains

gharar (ambiguity). This is particularly true since a person who pays the

premium (insurance price) for the insurance policy has actually paid for

‘peace of mind’ which will indemnify him should any mishap occurring in

the future. Being free from uncertainties is never possible in the

insurance industry, because uncertainties are peculiar and integral to

both premium/contribution and claim/compensation.

Reference:2

The article “Revisit the Principle of Tabarru' in Takaful Structure” is written by Dr. Asyraf Wajdi Dusuki


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On the other hand, the Islamic alternative to conventional insurance, also

known as Takaful, reflects a reciprocal relationship and agreement of

mutual help between participating members who undertake to mutually

guarantee and indemnify each other in a particular defined event. The act

of guaranteeing each other implies mutual help and mutual indemnity on

the basis of brotherhood deeply rooted in the tabarru` principle which

tolerate the presence of gharar.

Notwithstanding the above, many contemporary scholars have started to

raise concerns on the current practice of takaful. This concern stems from

the fact that many takaful products and operations are started to

converge closely to the practice of conventional insurance. In particular,

the fundamental structure of takaful which premised on the basic

concept of tabarru' is started to be questioned when many benefits are

offered to the participants in the beginning of the takaful contract in

return for the contributions paid to the tabarru' pool managed by takaful

operators.

Keep In Mind

Conventional insurance, which is based on the principle of muawadah (exchange) and aims at making profit out of the insurance operations, is prohibited from the Shariah's viewpoint since it contains gharar (ambiguity). This is particularly true since a person who pays the premium (insurance price) for the insurance policy has actually paid for ‘peace of mind’ which will indemnify him should any mishap occurring in the future.

Takaful, reflects a reciprocal

relationship and agreement of

mutual help between

participating members

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Keep In Mind

In particular, the fundamental structure of takaful which premised on the basic concept of tabarru' is started to be questioned when many benefits are offered to the participants in the beginning of the takaful contract in return for the contributions paid to the tabarru' pool managed by takaful operators.


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Concept of Tabarru'

Tabarru’ is derived from the word tabarra’a which carries the meaning of

contribution, gift, donation or charity. Tabarru’ technically is a unilateral

declaration of intent, which is a contract with a particular nature in

Islamic commercial law. The purpose of this type of contract is to give a

favour to the recipient without any specific consideration in return.

Unlike the exchange contract, this type of contract is valid and

enforceable in Islamic commercial law even for no consideration.

The basis for tabarru’ is stated in the Qur’an:

“It is not righteousness that ye turn your faces to the East and the West;

but righteous is he who believeth in Allah and the Last Day and the angels

and the Scripture and the prophets; and giveth wealth, for love of Him, to

kinsfolk and to orphans and the needy and the wayfarer and to those

who ask, and to set slaves free; and observe proper worship and pays the

poor-due; and those who keep their treaty when they make one, and the

patient in tribulation and adversity and time of stress. Such are they who

are sincere. Such are the God-fearing.” (2: 177)

It is also supported by many hadiths; for instance, in a hadith Asma’

narrated that the Prophet (P.B.U.H) said:

“Give (in charity) and do not give reluctantly lest Allah should give you in

a limited amount; and do not withhold your money lest Allah should

withhold it from you." (Sahih Bukhari)

Tabarru’ is derived from the

word tabarra’a which carries the

meaning of contribution, gift,

donation or charity.

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Essentially, tabarru’ is a contribution or donation which entails no return

but rather a reward from Allah alone. There are two important pillars of

tabarru’, namely the absence of counter-value and the intention to

perform tabarru’. In the absence of any of the two, it is no longer

considered tabarru’. For instance, if a donor contributes with an

expectation of a counter-value from the donation given, then the whole

transaction will be perceived as an exchange (muawadah) rather than a

tabarru` contract.

Issue of Ownership and Possession in Takaful

This basic structure of takaful premised on the tabarru` principle gives

rise to one of the fundamental Shariah concerns, which is regarding the

absolute ownership transfer. When a participant pays a premium to the

takaful operator, he has effectively donated his contribution as tabarru`,

hence, relinquishing his ownership over the object donated as prescribed

by the rules of tabarru`. Ibn Qudamah in his famous book Al-Mughni

asserts that hibah (which is a form of tabarru` contract) requires the gift

giver to enable the beneficiary to own the object of hibah. It is further

reiterated by Ibn Nujaym in Al-Bahr al-Ra`iq Sharh Kanz al-Daqa`iq that

the most important implication of hibah will be the transfer of the

subject matter to the beneficiary/donee, which entitles him to hold the

title of ownership over the object of hibah (thubut al-milk li`l mawhib

lahu).

Unlike the majority of scholars who deem possession as one of the pillar

of hibah, Hanafi schools on the other hand regard it to be an important

condition for the validity of hibah. According to Al-Utsaimin in Al-Sharh

Keep In Mind

Essentially, tabarru’ is a contribution or donation which entails no return but rather a reward from Allah alone. There are two important pillars of tabarru’, namely the absence of counter-value and the intention to perform tabarru’. In the absence of any of the two, it is no longer considered tabarru’. For instance, if a donor contributes with an expectation of a counter-value from the donation given, then the whole transaction will be perceived as an exchange (muawadah) rather than a tabarru` contract.

This basic structure of

takaful premised on the tabarru`

principle gives rise to one of the fundamental

Shariah concerns, which is regarding

the absolute ownership

transfer.

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al-Mumti’ Kitab al-Waqf wa al-Hibah wa al-Wasiyyah, hibah will only take

effect upon the recipient of the donation taking possession of it. This

corresponds to the Islamic legal maxim "La yatimmu al-tabarru' illa bil

qabdi", which means "Tabarru' will not take effect unless there is a

possession".

This hadith is based on a the saying of the Prophet Muhammad (peace be

upon him):

"Hibah is not permissible unless it (the subject matter of hibah) is

posessed" (Al-Zailaie al-Hanafi, Fakhruddin Uthman Ibn Ali.Tibyan al-

Haqaiq Syarh Kanz al-Daqaiq. Kitab: al-Hibah. Dar al-Kitab al-Islami).

Therefore, hibah is voidable without complete possession. This is further

reiterated by a Maliki's scholar Al-Qarafi in his book Anwar al-Baru’ fi

Anua’ al-Furuq, who mentioned the following:

"If possession does not take effect in hibah, it is void".

Keep In Mind

When a participant pays a premium to the takaful operator, he has effectively donated his contribution as tabarru`, hence, relinquishing his ownership over the object donated as prescribed by the rules of tabarru`. Ibn Qudamah in his famous book Al-Mughni asserts that hibah (which is a form of tabarru` contract) requires the gift giver to enable the beneficiary to own the object of hibah. It is further reiterated by Ibn Nujaym in Al-Bahr al-Ra`iq Sharh Kanz al-Daqa`iq that the most important implication of hibah will be the transfer of the subject matter to the beneficiary/donee, which entitles him to hold the title of ownership over the object of hibah (thubut al-milk li`l mawhib lahu).

Hanafi schools regard possession to be an important

condition for the validity of hibah.

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"Hibah is not permissible unless

it (the subject matter of hibah) is

posessed"

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Shafie scholars also shared the same view with regards to taking

possession as an important pillar for hibah to be valid. They based their

opinion on the famous saying of Imam al-Shafie in his book al-Umm:

"Hibah and sadaqah are all permissible contracts which exclude

compensation and should be completed by possession".

Nevertheless, it is observed that a takaful contract cannot be considered

a pure tabarru’ contract but rather a qualified or conditional tabarru’

contract due to the following reasons: Firstly, the contribution made by a

participant in takaful is with consideration to a right to claim for

compensation in the event of loss or damage of subject matter. Thus, the

tabarru’ is not merely for charity but conditional upon certain

consideration, namely the right to claim takaful benefits in the event of

loss. Without such a right, he will neither participate nor perform the

tabarru’. This is deemed to be a violation of the fundamental objective of

tabarru’.

Secondly, takaful participants are normally obliged to pay different

amounts of contributions depending on the different degree of risk

exposure. This inevitably implies that their participation in the fund is

conditional upon a certain amount of contribution to deserve a certain

amount of compensation. Should the participant disagree with the

amount, he will not be allowed to participate or benefit from the takaful

protection scheme. Again this would be perceived as contradictory to the

nature of tabarru` since the real intention of the contracting parties is not

for donation, but rather to make them eligible for certain benefits under

takaful.

Thirdly, there are some controversial practices in takaful operation which

contravene the pure tabarru’ concept. For example, surrendering of

benefit, survival benefit or even sharing of underwriting surplus among

participants of takaful although they have surrendered all their rights

It is observed that a takaful contract

cannot be considered a pure tabarru’ contract

but rather a qualified or conditional

tabarru’ contract

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over their moneys to the fund. Therefore, it should not return to the

participants upon maturity of the policy or liquidation of the fund.

Alternative Structure

As an alternative to the pure tabarru` concept, Accounting and Auditing

Organization For Islamic Financial Institutions (AAOIFI) suggested the

principle of Iltizam bil tabarru’ or a commitment to donate to underscore

the relationship between the participant and the fund. According to this

concept, a contributor may donate a sum of money for mutual assistance

purposes on condition that the balance, if any, should be returned to

him. This will allow him to retain his ownership right over the initial

contribution he made, with a provision allowing him to waive his right of

ownership over the portion used to indemnify other participants.

This principle was expounded by Maliki jurists, whereby if a person

commits himself to do a good deed without subjecting it to other

conditions, he is obliged to fulfill it as long as he did not die or become

bankrupt (See Al Hattab, Tahrir Al Kalam fi Masa’il Al Iltizam, Beirut: Dar

Al Gharb Al Islami, 1984 at p 71). In takaful, the participants commit

themselves to perform tabarru’ to other participants who sustained

losses. This principle is important as the majority of scholars are of the

opinion that tabarru’ is not complete unless the subject matter is

transferred to the donee, although a commitment to donate has been

given. This is observed in the question of hibah, whereby possession

Keep In Mind

it is observed that a takaful contract cannot be considered a pure tabarru’ contract but rather a qualified or conditional tabarru’ contract due to the following reasons: Firstly, the contribution made by a participant in takaful is with consideration to a right to claim for compensation in the event of loss or damage of subject matter. Thus, the tabarru’ is not merely for charity but conditional upon certain consideration, namely the right to claim takaful benefits in the event of loss. Secondly, takaful participants are normally obliged to pay different amounts of contributions depending on the different degree of risk exposure. Thirdly, there are some controversial practices in takaful operation which contravene the pure tabarru’ concept.


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(qabd) of the subject matter is a condition for a binding hibah; this is the

opinion of many jurists but not Maliki jurists.

However, the Maliki jurists are of the opinion that a commitment to

donate or give is sufficient to create a binding donation, based on the

saying of Saidina Ali and Ibn Mas’ud that:

“A gift, if specifically defined, is binding, whether received or not” and to

prevent the materialization of the saying of the Prophet:

“a person who withdraws his gift or donation is like a dog that withholds

its vomit." (Sahih Bukhari).

This principle is important in the case of takaful whereby upon

participating in a takaful contract, the participants are said to have given

full commitment to pay contributions to the takaful fund; the fund is also

committed to compensate them against any losses experienced by them,

within the period of the policy. Thus, in case a participant delays payment

of his contributions, the company can claim from him the contributions,

Keep In Mind

Accounting and Auditing Organization For Islamic Financial Institutions (AAOIFI) suggested the principle of Iltizam bil tabarru’ or a commitment to donate to underscore the relationship between the participant and the fund. According to this concept, a contributor may donate a sum of money for mutual assistance purposes on condition that the balance, if any, should be returned to him. This will allow him to retain his ownership right over the initial contribution he made, with a provision allowing him to waive his right of ownership over the portion used to indemnify other participants.

In takaful, the participants

commit themselves to

perform tabarru’ to other

participants who sustained losses.

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and it may be considered as his debt to the fund until he officially

withdraws from the policy. Here, the fact that he has not delivered his

donation does not make him not liable to pay them as he has committed

himself to pay it, and it is already a binding contract. So, iltizam bil

tabarru’ here is deemed to be binding and enforceable as iltizam or

pledge alone can create a binding tabarru’ contract. Asserting that takaful

is a binding contract is important as it is the basis for the computation of

the periodical contributions and the amount of compensation payable to

the participant.

On the other hand, the relationship between the fund and the recipient

of the compensation is said to be iltizam bil ta’wid or a commitment to

compensate, which is a form of iltizam bil tabarru’. It is said to be a form

of conditional commitment whereby the performance of the

commitment is subject to the certain need, namely a claim by a takaful

participant due to some loss sustained. Thus, in takaful, the contributions

of the participant may be utilized fully or partially, thus allowing him to

claim any underwriting surplus. This is based on the opinion of Sheikh

Abdul Sattar Abu Ghuddah in Buhuth fil Mu’amalat wal Asalib Al

Masrifiyyah Al Islamiyyah, vol. 6, Jeddah, Majmu’ah Dallah Al Baraka,

2005 at p. 300.

Hibah Bil Thawab

Notwithstanding the above, the question remains whether the counter-

value in such takaful practice tantamounts to an exchange contract? This

is so according to Al Hattab in his book Tahrir Al Kalam fi Masa’il Al

Iltizam; if a commitment is given subject to a condition that when a donor

Keep In Mind

The relationship between the fund and the recipient of the compensation is said to be iltizam bil ta’wid or a commitment to compensate, which is a form of iltizam bil tabarru’. It is said to be a form of conditional commitment whereby the performance of the commitment is subject to the certain need, namely a claim by a takaful participant due to some loss sustained. Thus, in takaful, the contributions of the participant may be utilized fully or partially, thus allowing him to claim any underwriting surplus.


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contributes something, he is expecting a counter-value then it falls under

the category of hibah al thawab, a gift given to the beneficiary on

condition that a reward is given to the donor in exchange. For example, I

give this pen as a gift on condition that you give your book in return.

As indicated earlier, hibah is a form of tabarru' or charitable gift in which

the donor has unilaterally relinquished his right of ownership over the

object of gift to the recipient or donee. The matter is known in classical

jurisprudence as hibah bi al-thawab (gift with expected compensation) or

hibah bi shart al-'iwad (gift with stipulated counter-value). Shafie and

Hambali's scholars disallow such a transaction based on the following

hadith:

“A person who withdraws his gift or donation is like a vomiting person

who withholds his vomits”. This is also supported by another hadith

narrated by Al-Tarmizi:

“A person who withdraws his gift or donation is like a dog that withholds

its vomit.”

On the other hand Maliki schools allow the transaction. However, they perceive hibah bi shart al-iwad is no longer deemed as charitable

(tabarru') contract but rather a muawadah or enchange contract. In the takaful context, the gift is the contribution and the thawab is the

indemnification by the risk fund. It is opined that the ruling of hibah bi al-thawab will take the ruling of an exchange contract. The main issue now,

should takaful is considered as exchange contract, the whole issue of riba, gharar and jahalah will emerge and resemblance the conventional insurance. Therefore the practice of surplus sharing and other benefits derived in takaful is in violation of Shariah principles which prohibit riba

and gharar.

hibah is a form of tabarru' or

charitable gift in which the donor has unilaterally relinquished his

right of ownership over the object of

gift to the recipient or donee.

TIP


18

BRIEF COMPARISON OF CONVENTIONAL INSURANCE AND TAKAFUL

The key structural issues to be examined and understood-

especially to fully appreciate differences between

conventional insurance and Takaful - are the following items:

Regulations, Taxation and Auditing Sources of Capital and Returns to Capital Organizing principle; i.e. Relationship among

participants themselves and between Participants and the Takaful Operator.

Treatment of Expenses and Liability for Claims Zakat and Charitable features - how to cleanse profits Funds management - pooled or unitized Investment of Premiums in accordance to Shari’ah Dissolution - who ends up with any surplus capital

A comparison is made below to highlight the salient differences between conventional insurance (excluding mutual companies3 that share many aspects in common with Takaful companies) and Takaful companies:

Glossary:3

Mutual Company: It is a private company whose ownership base is made

of customers. It is very common in the insurance industry; mutual

companies have account holders who receive distributions based upon

the extent of their exposure and business with the company.

Fund Management: it is the management of the cash flow of a financial

institution. The funds manager ensures that the maturity schedules of the

deposits coincide with the demand for loans.

Investment: In finance, an investment is a monetary asset purchased

with the idea that the asset will provide income in the future or

appreciate and be sold at a higher price.

Auditing: Auditing is a systematic examination of the books and records

of a business or the organization in order to ascertain or verify and to

report upon the facts regarding the financial operation and the result

thereof


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Conventional Insurance Takaful Insurance

Sources of laws & regulations are set by state and man-made.

Sources of laws are based upon Divine revelations (Holy Quran and Hadith)

Profit-motive, maximizing returns to shareholders.

Community well-being optimizing operations for affordable risk protection as well as fair profits for the operator.

Profits and/or Bonus units to be returned ton policyholders as determined by managers and Board of insurer.

Takaful contract specifies in advance how and when profit/surplus and/or Bonus units will be distributed.

Initial capital supplied by shareholders.

Initial capital supplied by Rabb al Mal (Agent) or paid in via premiums from participants.

Separation of policyholder and insurer with differing interests.

Coincidence of interests between policyholder and operator as appointed by participants.

Transfer of losses among insurance pools and from policyholders to shareholders.

Losses retained within classes of business written and sole obligation of Participants.

Right of insurable interest is vested in the Nominee absolutely in Life insurance.

Right of insurable interest is determined by Islamic principles of Faraid (inheritance).

Insured may elect cost or replacement cost valuation and claim accordingly whether or not they chose to rebuild property.

Insured may not "profit" from insurance and entitled to compensation only for repair or rebuild or replacement.


20

Conventional Insurance Takaful Insurance

Agents and Brokers are typically independent from insurer and paid a fee from the premium charged to policyholders that is not disclosed that is not disclosed.

Agents are employees of the Takaful and any sales commission should be disclosed.

Investment of premium conducted by insurer with no involvement by policyholders.

Takaful contract specified under principles of Mudarabah, how premiums will be invested and how results are shared. Under al Wakalah, similar practice plus Participant can direct his investments into a range of unitized funds.

Insurer invests premiums consistent with profit-motive with no moral guidelines; hence co-existence of Al Riba and Al Maisir.

Takaful invests premiums in accordance with Islamic values and Shariah guidelines.

Dissolution – reserves and excess/surplus belong to the shareholders.

Dissolution - reserves and excess/surplus could be returned to Participants, although consensus opinion prefers donation to charity.

Taxes - subject to local, state and federal taxes.

Taxes - subject to local, state and federal taxes (if any) plus obligated to arrange annual tithe (Zakat) donations to charity.

Benefits paid from general insurance account owned by insurer.

Benefits paid from contributions (Al tabarru) made by participants as mutual indemnification.

Accounting consistent with GAAP and prevailing statutory rules of Auditing for uniform application of accounting standards.

Accounting standards consistent with national rules (with may be GAAP) plus prevailing statutory rules. Auditing same standards plus conformance with Islamic rules; typically with Shari’ah Advisory oversight.


21

Islamic Transaction System is a dynamic

system and in line with current needs of

the Ummah (people). Although the

concept and basic principles outlined by

Islam in its Transaction (Muamalat)

system seemed more 'traditional', it can

be processed in a very practical and able

means to meet the financial needs of

modern and complex community.

The word Wakalah is taken from the

Arabic word which means

representative. Literally it means to

preserve, to protect, to guarantee, to

submit and to replace. Whereas in terms

of syara‘ (law based on Islamic teaching),

understanding it refers to "a party may

submit any matter that may be

represented in accordance to syara' to

the other party when the first is still

alive".

Wakalah contract is divided into General

Wakalah, Special Wakalah, Paid Wakalah

and Unpaid Wakalah. The General

Wakalah is a Wakalah in matters that

are not specified such as a

representative in all business

transactions, or being a representative

without any prescribed goods to be sold

or purchased. Under the General

Wakalah the wakil has a power to do any

business as long as no harm is done to

the owner.

Whereas a Special Wakalah is a

representative devoted to matters such

as sale and purchase of homes or cars,

or rental properties such as land, houses

and buildings. Special Wakalah is bound

by the matter or affair devoted to him.

Paid Wakalah is required permissible by

Syara'. The Prophet PBUH had sent

officers (employees) to accept collect

charity tithe, and they were paid for it.

Representative of this type must

perform those tasks well and not to

neglect them. In the context of takaful,

the practice is based on this type of

wakalah.

Unpaid Wakalah is a representative who

works voluntarily without any form of

payment. Representation of this type

does not necessitate a representative to

continue the work and he can release

himself from the task at any time.

Tabarru’ is derived from the word

tabarra’a which carries the meaning of

contribution, gift, donation or charity.

Tabarru’ technically is a unilateral

declaration of intent, which is a contract

with a particular nature in Islamic

commercial law. The purpose of this

type of contract is to give a favour to the

recipient without any specific

consideration in return. Unlike the

exchange contract, this type of contract

is valid and enforceable in Islamic

commercial law even for no

consideration.

Summary


22

Explain the concept of Wakalah?

What is the application of Wakalah in Takaful?

What is the principle of Tabarru' in Takaful Structure?

What are the Issues of Ownership and Possession in Takaful?

How does takaful differ from conventional insurance?

For further study, you can consult our CD or e-library by getting log-in to your account. You would get number of books, presentations, literature and reports on the following topics:

Overview of the Sukuk Market by Professor Rodney Wilson

How does Takaful differ from Insurance by Liaquat Ali Khan

The Islamic Insurance - Theory and Practice By Ahmed Mohammed Sabbagh and Dr. Ahmed

Salem Mulhim

E-Library:

Books

Articles

Presentations

Reports

Discussion Questions

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