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Abstrak

Objekti kertas ini adalah untuk membincangkan harmonisasibeberapa isu-isu syariah dan operasi dalam pembangunanperniagaan korporat takaul khususnya terhadap dua isuiaitu pembiayaan pinjaman konvensional dan mekanisme

reinsurans. Kebanyakan aset atau harta bagi pelanggan-pelanggan korporat takaul menggunakan pinjaman sistemperbankan konvensional. Walau bagaimanapun, merekaingin beralih kepada produk takaul dan retakaul yang patuhsyariah sebagai mekanisme perlindungan bagi melindungiaset-aset yang rosak atau hilang akibat bencana. akaulsebagai skim insurans Islam hanya akan lengkap melaluiretakaul. Realitinya, dalam sesetengah keadaan, reinsuranssecara konvensional perlu digunakan dalam takaul berikutankeupayaan kewangan yang terhad pihak syarikat takaul. Olehitu, perbincangan dalam kertas ini akan menjurus kepadapengaplikasian prinsip-prinsip qh dalam pembiayaan hutangkonvensional dan mekanisme reinsurans untuk pembangunanperniagaan korporat takaul.

Operational Issues and Shariah Harmonisation

owards the Development o Corporate akaulBusiness: Conventional Debt Financing and

Reinsurance Mechanism

MOHAMAD BIN ABDUL HAMIDNOR INAYAH BINI YAAKUB

NIK MUASIM BIN NIK AB. RAHMAN

Jurnal Muamalat Bil. 3 2010

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Abstract

Te objective o this paper is to discuss the harmonisation o

some operational and shariah issues towards the development ocorporate takaul business particularly on two issues which areconventional debt nancing and reinsurance mechanism. Mosto the assets or properties o the corporate customers have beenleveraged using conventional debt/banking system, however thecorporate customers want takaul as a tool o insurance to covertheir properties ollowing loss or damage due to any disaster.Besides that, akaul as an Islamic insurance programme cannot

be developed without practicing retakaul mechanism, howeverto some extent reinsurance (conventional) should be used intakaul due to takauls constraint on nancial capacity. Tus,this paper discusses on how and rationale, the principles o qh(al-qawaid al-qhiyyah) have been applied in this two cases orthe development o corporate takaul business.

IntroductionTe word takaulis derived rom the Arabic word kaala which meansto guarantee, look ater or trust. Te noun takaulis derived rom theverb takaala which can be literally translated as helping one anotheror looking ater one another. Section 2 o the akaul Act 1984 oMalaysia denes takaul as a scheme that is based on brotherhood,solidarity and mutual assistance which provides or mutual nancial aidand assistance to the participants in case o need whereby the participants

mutually agree to contribute or that purpose. akaulis also dened as aShariah compliant insurance.It is also clearly mentioned in Section 2 othe akaulAct 1984 that takaulbusiness is a business otakaulwhoseaims and operations do not involve any element which is not approvedby the Shariah.

Mohammad Daud Bakar (2002) asserts that takauldiers romconventional insurance in the sense that the company is not theinsurer insuring the participants. Te persons participating in the

scheme mutually insure one another and this is the very essence o the



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word takaul in Arabic. It means that takaul is a scheme or a socialprogramme or the collection o unds or the aid o participants or

uture contingencies.

Position o conventional insurance in Islam

Te central arguments among the Shariah scholars on the position oconventional insurance in Islam revolve around three major issues. First,the contract between the insurer (insurance company) and the insured(policy holder) contains some degree o the unknown. Tis is termedas gharar. Second, the investment made by the insurance companiesinvolves the element oriba. Tird, the excessive element oghararcanlead to the issue omaysir(gambling). Consequently, the majority o thejuristic scholars come to the agreement that the practices o conventionalinsurance are not in line with the Shariah and are thereore, not permittedin Islam, unless these major elements could be eliminated.

Tus, it is clear to conclude that takaul is very much neededespecially or Muslims due to these non-permissible elements present inconventional insurance.

In Malaysia, a atwa was made by the Fatwa Committee o theNational Council or Islamic Religious Aairs Malaysia, at its meetingon 15 June 1972 which discussed and deliberated on the issue o lieinsurance. It was resolved that lie insurance provided by conventionalinsurance companies is a business transaction which is not valid becauseit contradicts the Islamic business principles beacause the contractcontains the elements ogharar, maysirand riba. A similar atwa on thesame issues was issued by several states o Malaysia, or example, Selangor(1970), Negeri Sembilan (1972), Perak (1974), Kelantan (1975) andMalacca (1980).

Unlawul elements o conventional insurance

It was mentioned earlier that the practices o conventional insurancedo not conorm to the requirements o Shariah because o the threeelements that exist in the contract as well as in the insurance business,

namelygharar, maysirand riba.



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Gharar(uncertainty)

According to Shariah scholars, the business o conventional insurance is

based on a buy and sell contract that does not ull the characteristicso a buy and sell contract according to Islam. A buy and sell contract,according to Islamic principles, has three eatures or characteristics,namely:

a. Parties to the contract, aqid(buyer and seller),

b. Subject matter to the contract, maqud alaih (goods or services),and

c. Oer and acceptance, sighah.

Te arguments on the issue oghararin the context o conventionalinsurance arise in the contract between the policy holder (the insured) andthe insurance company (the insurer). In this contract, the insured pays acertain amount o premium in the expectation o gaining compensationor losses in the event that any accident occurs involving the loss o lieor property. Tis is a kind o contract o exchange o goods or property

which involves maqud alaih (object, service or payment), whereby oneo the conditions omaqud alaih ound in the principle oaqadis clarityo the object. In actual act, in conventional insurance there are elementsoghararin maqud alaih that can lead to cheating or injustice because:

i. It is not certain whether the policy holder may or may not getany benets or the premiums that he/she pays. Te payment othe compensation depends on the outcome (death within theterm in the case o lie insurance and occurrence o an accident

in the general insurance), which may not happen;

ii. Te amount that the policy holder will get in terms o benetsis also unknown. Te amount that he/she will receive mayvary rom zero to the maximum amount as determined by theinsurance company; and

iii. Te time rame in which a risk will occur and when thecompensation will be paid to the policy holders is unknown. In

Islamic commercial law involving an exchange contract as sales



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and purchase agreement, the period involved must be known inorder or goods to be delivered.

Mohammad Hashim Kamali (2000) classies gharar into threecategories: (a) Excessive gharar (al-gharar al-kathir); this would renderthe contract invalid, (b) triinggharar(al-gharar al-yasir); this is toleratedand permissible, (c) averagegharar(al-gharar al-mutawassit) which allsbetween the two. Based on the above arguments, the insurance contractthat exists at present is ound to contain an excessive element ogharar(al-gharar al-kathir). As such, ulama have reached the consensus that the

conventional insurance practice is haram and invalid. Tis is based onthe Hadith o Prophet SAW which prohibited Muslims rom engagingin any kind o transactions involvinggharar.

Verily, the Prophet s.a.w orbids trades involving gharar

(Hadith narated by Muslim)

Maysir(gambling)

Te existence oal-ghararin the contract o insurance as explained abovehas led to the existence o al-maysir in the contract. Te majority oulama have the opinion that there is a certain element o gambling orspeculation in an insurance contract. In gambling, a certain stake is paidor a certain unknown outcome. Tat is also similar in an insurancecontract where the compensation is linked to a certain unknownoutcome. It is a contract o exchange and with an element ogharar,thereore, it is assumed to be speculative or gambling in nature.

Riba(Interest)

Te insurance contract is a riba contract since the insurance contract isan exchange contract between premium and compensation in an unequalexchange o value. Te premium paid by the policy holder is much lowerthan the compensation paid by the insurer. Tis is a riba contract basedon the hadith o the Prophet SAW.



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Te concept otakafulandtabarru

Ulama have agreed that the basis o insurance contract which is anexchange contact (buy and sell) must be changed to another type ocontact in order to eliminate the above three objectionable elements.Tus, the Islamic concepts that can replace the concept o conventionalinsurance are based on those o cooperation, protection and mutualresponsibility (Kamaruddin Shari, 1998). Tese concepts have theirbasis in the Quran and the Sunnah. Allah says to the eect:

Help you one another in righteousness and piety but help not one

another in sin and rancor.(Al-Quran, 5:2)

In order to eliminate the elements o uncertainty (gharar), interest(riba) and gambling (maysir) in the operation o conventional insuranceand hence to make it lawul in Islam, the concept otabarru (donation)is incorporated in it.

In this case, a participant agrees to contribute as tabarru, a certain

proportion or all o his/her takaulcontributions that he/she agrees orundertakes to pay thus enabling him to ulll his obligation o mutual helpand joint guarantee should any o his ellow participants suer a dened

loss (Mohd Fadzli Yuso, 1996). abarruwould enable the participantsto perorm their deeds in sincerely assisting ellow participants who

might suer a loss or damage due to a catastrophe or disaster. Te eectotabarruchanges the basis o the insurance contract rom an exchangecontract to a charitable (donation) contract in takaul. When a contract is

charitable (tabarruat), the unknown (gharar) is tolerated. Te donationcontract is, in act, by nature unknown. For instance, all participantsdo not know when and how they will suer rom loss o lie and lossor damage to their property due to pure risks. What they can do is tocontribute money among themselves to help each other in the event oloss. Tis is totally dierent rom the contract o conventional insurancethat is based on buying and selling protection (subject matter). Tecontributions (premium) contributed by participants are or the purpose

o mutual indemnity and assistance amongst the members. Tus, the



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tabarru element removes the objectionable eatures in conventionalinsurance and makes it Shariah compliant.

Models o general takafulbusiness in Malaysia

An Islamic insurance company (takaul operator) transacts businessin accordance with and subject to the principle o the Shariah. Allthe unctions o conventional insurance companies, i.e. underwriting,claims, reinsurance, marketing, investment, company management,etc. o the Islamic insurance company should ully conorm to theIslamic Shariah Code. Te basic products otakaulare still the same asthose o conventional insurance business but must ull the rules andrequirements o the Shariah. Products under general takaul businessare short-term in nature, usually or a period o one year and may berenewed. Tese schemes are meant to provide cover against material lossor damage to assets such as buildings, houses, motor vehicles, stocks andother related interests.

Te contract otakaulin Malaysia as practiced in takaulindustry

is a combination o the tabarru contract (donation) and either protsharing contract (al-mudharabah) or agency(al-wakalah).



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Al-mudharabah model or general takaful

By this principle, the entrepreneur or al-mudharib (takaul operator)will accept payment o takaul contributions (premiums) termed asrasulmal (capital) rom takaul participants termed as sahibulmal orrabbulmal (capital providers). Te contract species how the protrom the operations otakaulmanaged by the takauloperator is to beshared in accordance with the principle o al-mudharabah, between theparticipants as the providers o capital and the takauloperator as theentrepreneur. Te sharing o such prot may be in a ratio 50:50, 60:40,70:30, etc. as mutually agreed between the contracting parties.

Figure 1: Al-Mudharabah Model or General Takaful.

Source: Bank Negara Malaysia, Annual Report 2005

Participant

Participant

Shareholders Fund

Operating Expenses

Contribution

Less:

Claims,

Investment Profit

General & Administrative

General Takaful Fund(GTF)



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Figure 1 shows the modus operandi o al-mudharabah modelor general takaul. Te participants pay a contribution as a donation

(tabarru) to help each other and the contribution will be put intothe General akaul Fund (GF). Excess in the GF ater deductinggeneral and administrative expenses in managing the operations willbe invested and the investment income will be ploughed back into theund. Surplus at the end o the year ater deducting claims (dependingupon the occurrence o actual losses and damages), retakaul (Islamicreinsurance) and reserves will be distributed to the takauloperator andthe participants based on the pre agreed ratio as stipulated in the contract.

Al-wakalah model or general takaful

Te wakalah concept is essentially an agent-principal relationship, wherethe takauloperator acts as an agent on behal o the participants andearns a ee (wakalah ee) or services rendered. Te ee can be a xedamount or based on an agreed ratio o investment prot or surplus othe takaulunds.

Participant

Wakalah Fee (WF)

Participant

Shareholders Fund

Operating Expenses

Contribution

Less:

Claims,

Investment Profit

General & Administrative

General Takaful Fund

(GTF)

Figure 2: Al-Wakalah Model or General Takaful

Source: Bank Negara Annual Report 2005



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Figure 2 shows the modus operandi o al-wakalah model or general

takaul. Te participants pay a contribution as a donation (tabarru) to

help each other and the contribution will be divided into two typeso accounts i.e. Wakalah Fee (WF) and General akaulFund (GF).Te allocation between WF and GF is based on the pre-agreed ratio

between participant and takauloperator as specied in the contract. TeWF, which consists o commission and management expenses, will bepaid into the shareholders und. Any surplus at the end o the year ater

deducting claims, retakauland reserves will be distributed to the takauloperator and participants based on the pre-agreed ratio as stipulated in

the contract.

Corporate takaful business and principles o fqh (al-qawaid al-fqhiyyah)

In this section, two issues pertaining to corporate takaulbusiness areurther discussed. Te rst is Islamic reinsurance which is known as

retakaul and the second is takaul coverage or asset nancing usingthe conventional loan system. Tis section is very important since it is

related to the study o how takaulcan provide products and servicesto corporate clients despite insufcient nancial capacity to provideamount o coverage and Islamic nancing products oered by Islamic

banking still being at the development stage whereby most corporate

customers use conventional loans to nance their assets.

Retakaful

It is important to highlight that takaulservices cannot move orwardwithout the concept o reinsurance due to nancial capacity limitingits coverage to the policy holders or participants. For example, i letssay there are 100 corporate takaulparticipants o re takaul (undergeneral takaulschemes) with one particular takauloperator. Te totalvalue o their property being covered (sum covered) is 100 properties RM5,000,000 each = RM500 million. Te total contribution (premium)which was collected rom the risks is RM500 million 10% = RM50

million. Tis means that the takauloperator is willing to pay claims due



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to any dened loss and damages up to 10 properties only. Tat is one othe reasons or takaulservices needing to have the retakaularrangement

i.e. to expand its coverage and sharing o risk among takauloperators.Ater collecting the contributions (premiums), the eorts are then

ocused on ensuring the prudent management o the takaul und,including the use o retakaul. Retakaulis one o the risk managementtools used bytakauloperators to share part o the risk under the takaulund with another takauloperator or retakaulcompany. Te amounto risk retained by the takauloperator or its own account is called theretention limit. Mohammed Obaidullah (2005) denes retakaulas a

second arrangement between a takauloperator and a larger operator asthe ormer may not have the capacity to absorb all possible losses out oits own resources, given the large sums that are insured. Fathi Lashin, amember o the Shariah Supervisory Board o the Dubai Islamic Bankstated that Retakauldoes not, in principle, dier rom takauloperations.Te shariah principles applying to takaulapply to retakauloperationsas well. Te dierence, i any, is that in the retakauloperations, theparticipants are takaul operators instead o individual participants.

It is argued that the current practice o insurance business has shownthat a takaulceding company cannot do without the retakaulacility.Tereore, there is a need or takauloperators to split risks by way oestablishing retakauloperators. In doing so, they share their risks withretakaulcompanies. Te retakauloperator, on the other hand, assumesthe responsibility o managing and investing the premiums o takauloperators on the basis o prot loss sharing.

Figure 3 overlea shows the operational mechanism otakauland

retakaulwhere a part o the risk is shared between the takauloperatorand the retakauloperator.

Participant Takaful OperatorRetakafulOperator

Premier Shore Premier

Figure 3: Mechanism o Retakaful



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However, there are very ew retakaulcompanies in operation; withgrowing numbers o takaulcompanies the existing retakaulcapacity

is not sufcient to meet the demand. Te only route available let ortakaul companies is to reinsure on a conventional basis, contrary tothe customers preerence o seeking cover based on Islamic principles.Shariah scholars have allowed takaul operators to reinsure on aconventional basis so long as there is no retakaulalternative available. Ithere is a need to turn to the conventional reinsurance market, then thetakauloperator should rst try to obtain coverage rom the cooperativeand mutual insurance sector. akaul reinsurance or retakaul requires

clearly dened joint responsibility which means that it is likely to bearranged under quota share or surplus treaties.

In this case, the Shariah Advisory Council o Syarikat akaulMalaysia has ound with a solution by applying the principle o qh asstated below:

Necessity renders prohibited things permissible.

However, the necessity must be limited and the ollowing principleis applied in the arrangement o retakaulusing conventional insurance:

Necessity is determined by the extent thereo.

Tus, the arrangement o retakaulmust be given and according

to the priority o retakauloperators and ollowed by the conventionalinsurers in the nal stage o retakaularrangement. Figure 4.



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Participant

Takaful Operator

Conventional Insurer/Reinsurer

International Retakaful Operator

Local Retakaful Operator

Assets fnancing/loan rom the conventional banking system

Another issue concerning the corporate takaulbusiness is the corporate

demand or takaulcoverage rom the corporate sector or which theirassets nancing or loans derive rom the conventional or interest-basedbanking system. Banks have required their debtors to buy propertyinsurance policies to cover the assets being nanced by them irrespectiveo whether in Islamic or conventional insurance system. Tus, takauloperators should have concrete reasons or accepting or rejecting thistype o risk which is nanced by conventional banking. Tere is no issueabout the risk accepted by the takauloperators on assets being nancedby Islamic banks or Islamic banking system. According to the ShariahAdvisory Council o Syarikat akaulMalaysia, it is permissible or thetakaulto accept the risk being nanced by conventional banking sincethe coverage provided is not or the loan but or the mutual indemnityo the assets owned by the participant i.e. in this case, the debtor o thebank. Tis decision is according to the ollowing principle o qh:

Latitude should be aorded in the case o difculty. In other

words, when a matter is narrow, it is made wider. Tere are several reasons



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or permitting this risk based on the above practical qh principle:

a. o prevent Muslims being involved in the conventional insurance

contracts.

b. o minimize non-Muslim business activity.

c. Islamic banking is still at its inancy or development stage.

Conclusion

Te purpose o introducing takaul is to ensure that the operation

o insurance is totally ree rom the three objectionable elements inconventional insurance i.e. gharar (uncertainty), maysir (gambling) andriba (interest). In order to achieve this purpose, a contract o tabarruis incorporated. Currently, there are two types o model or takaulbusiness either based on the principle o al-mudharabah or the principleo al-wakalah. wo issues pertaining to corporate takaulbusiness areurther discussed. Te rst is Islamic reinsurance which is known asretakaul and the second is takaul coverage or asset nancing usingthe conventional loan system. It is very important since it is related tothe study o howtakaulcan provide products and services to corporateclients despite insufcient nancial capacity to provide amount ocoverage and Islamic nancing products oered by Islamic bankingstill being at the development stage whereby most corporate customersuse conventional loans to nance their assets. It shows that takaulbusiness can be expanded and developed through the harmonization ooperational and shariah issues through the application o the principleso qh with specic justications.



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End Notes

1. Mohammad Daud Bakar, Te Problem o Risk and Insurable Interest

in akaul: A Jurisprudential Analysis; A paper presented at the4th International Conerence on Islamic Economics and Banking,Loughborough University, UK, August 13-15, 2000. pp 179-193.

2. Bank Negara Malaysia, 20 years Experience o Malaysian akaulIndustry(2005) p. 2.

3. Te insurance contract is categorized as a riba al buyu: the riba in excesswhich occurs in trading transactions involving the exchange o riba bearing

commodities without observing the required rules. wo types o riba al

buyu, namely riba al-adhl and riba al-nasiah.

4. Hadith narrated by Muslim, Al-imidhi and Al-NasaI, Gold or gold,silver or silver, wheat or wheat, barley or barley, dates or dates, salt or

salt like or like, equal or equal, hand to hand (spot); i the commoditiesdier, then you may sell as you wish, provided that the exchange is hand tohand or spot transaction

5. Assoc. Pro. Dr. Engku Rabiah Adawiah Engku Ali in Shariah Principles inakaul, presented at the workshop on akaul (Islamic Insurance), 16-17

August 2005 at Istana Hotel, Kuala Lumpur.

6. Mohd Fadzli Yuso (1996), Introduction to takaul p. 51.

7. Lashin, Fathi, Sigha Muqaddama li-al-Sharikat amin wa Iadat al-

amin al-Islam, Bayt al-amwil al Kuwaiti. Amal al-Nadwa al-qhiyyaal-Taniya, 28-31 May, pp. 95-122. Quoted rom Mohammed Burhan

Arbouna, Te Operation o Retakaul(Islamic Reinsurance) Protection,Journal IIUM, p.336



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economy, a paper presented at Labuan International Summit on akaul(Islamic Insurance) held at Hotel Sheraton, Labuan, 19-20 June.

Engku Rabiah Adawiah Engku Ali. (2005) Shariah Principles in akaul, apresented at workshop on takaul(Islamic Insurance), 16-17 August 2005at Istana Hotel, K. Lumpur.

Bank Negara Malaysia. (2001). Te Financial Sector Master Plan.

Bank Negara Malaysia. (2005). 20 Years Experience o Malaysian akaul

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Mohd. Masum Billah. (2000). Quantum o Damages in akaul: TePossibilities o Adaptation o the Doctrines o Al-Diyah and Al-Daman:A Reappraisal.Journal o Islamic Banking and Finance, Vol. 17, No. 1, pp:25-52.

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