Preliminary Remarks
Under Islamic law, the contemporary takaful practices in fact, originated from the ancient Arab tribal custom of al-’aqilah.[1] The doctrine of al-’aqilah used to be practiced based on a mutual agreement among the ancient Arab tribes. It was a common practice among the tribes that, if any member of a particular tribe would have been killed unintentionally by a member of a different tribe, the heirs of the deceased would have to be paid by the paternal relatives of the accused with an amount of blood-money (diyah) as a pecuniary remedy. Those paternal relatives used to be known as al-’aqilah.[2]
The central idea of the doctrine of al-’Aqilah is that, the members of the accused’s tribe used to be mutually agreed to a financial contribution for the purpose of protecting him (the accused) from financial liability arising out of causing a culpable homicide. This form of contribution has the resemblance with the contribution paid in today’s takaful practices. Meanwhile the compensation paid under the doctrine of al-’Aqilah has also the resemblance with today’s takaful indemnity (benefits) paid to the victim or his heirs. The idea of takaful therefore, developed through the contractual understanding and today no exception, as the scheme of takaful is practiced based on the contractual relation. The rights and obligations arose herein are resulting from the contractual undertaking.
Today's Takaful is basically based on the contract of profit and loss sharing (aqd al-mudharabah) and unilateral contract of donation (aqd al-tabarru'), but, a closer look reveals that some other categories of contracts (uqud) are also involved in the takaful operations, both directly and indirectly. This paper, attempt to discover such contracts (uqud) which may be involved in takaful.
Central Idea of Takaful Contract
The doctrine of al-takaful is an alternative to the conventional insurance. The concept of insurance in the shari’ah is based on the concept of shared responsibility, mutual co-operation and solidarity,[3] so as to safeguard against unforeseen risks.
The term takaful is an infinitive noun which is derived from the root word kafl which means guarantee or responsibility. As the chief characteristic of Takaful contract is al-musharakah, it means sharing of a risk or calamity forms the basis of takaful. Thus, the word takaful means shared responsibility, shared-guarantee, collective assurance, mutual undertaking.[4] Technically, takaful in its legal sense means, guarantee or assurance created by the aqd (contract) signed by a group of persons living in the same society to protect themselves against a defined-risk or catastrophe. Hence, takaful is but co-operative insurance, based on mutual agreement.[5]
The nature of takaful is that, any body who has the legal capacity to enter into a contract may contribute a sum of money to a co-operative fund in view of ensuring material security for one against a defined-risk probably encountered by another’s life or property. Thus, those who contribute to the mutual fund are known as participants while those who among the participants face the risk and are assisted by the fund are known as insured. Those who actually benefit from the fund are known as the beneficiaries to the cooperative fund. The monetary contribution made by the participants to the fund is known as mutual contribution. The fund, managed by a registered or licensed body or corporation[6] is known as a takaful operator, who binds himself bilaterally to manage the fund according to shari’ah principles and also to provide a reasonable financial security for those who genuinely deserve it against the loss or damage suffered by them resulting from a defined-risk. Furthermore, the contribution made by the participants is put into two funds; one of them is investment fund according to the principles of al-Mudharabah (profit and loss sharing) while the other is treated as charity according to the principles of al-tabarru.[7] Both funds are termed in Malaysia
To a further illustration on the central idea of takaful, in which much emphasis is vested on the issues of ‘joint benefit’, ‘ shared responsibility’ and ‘shared guarantee’. Relatively, the distinct character of this form of mutual scheme is that, the contract is based on the Divine Virtues of co-operation, mutual help, shared responsibility and benefit, brotherhood and solidarity, while all aspects of the contract (‘Aqd) should be transparent to all parties involved herein.[8] The basic motive for takaful under the contemporary Islamic Economy, is to bring equity (‘Adl) to all parties involved and the profit earning should not be the prime objective, rather helping other policy holders who encounter catastrophe, sharing the misfortune while sharing the profits, if any, is the actual goal. The management of takaful funds, therefore, are to exercise prudence when making investment decisions and must not subject such funds to higher return with high risk phenomena.[9]
To grasp the nature of takaful industry, one short consider the element of al-tabaru’ in accordance with the principle of the joint guarantee to help others. In which each certificate holder willingly agrees to give a portion of his paid contribution in favor of other policy holders who are struck by a mishap and may in need of financial aids. This includes taking on the responsibility for safeguarding a deceased’s (participant) dependents from unexpected but defined risk – the basis of family takaful @ Islamic life insurance as justified by Sharia’h principles.[10] The beneficiaries, in turn, must abide by the true spirit of tabaru’ and should realize that, the amount paid to them has, necessarily, come from fellow participants. As such they should try not to indulge in any material gain, self-profiting activities with potentially may be detrimental to the benefit of other participants.
In the case of family takaful certificate the participant normally appoints a person as a nominee who shall act as a mere trustee, would distribute the benefit among the legal heirs of the deceased participant. The distribution in this situation, shall take place in accordance with the principles of Faraidh (inheritance).[11]
The claim of benefit in a family takaful certificate only a proof of the death of the certificate holder is required. The cause of death weather natural or accidental or even unlawful, does not matter, as it is the will of Allah (swt) who determines the death of all creatures. This had been clarified by Allah (swt) in the following verse of the Holy Qura’n.
“Nor can a soul die except by Allah’s leave, the term being fixed as by writing”[12]
In the event of suicide or death due to a crime, for example, the deceased participant is solely accountable to Allah (swt) for his own act.[13] So, the beneficiaries in this situation should not be deprived from their legitimate claim over the certificate as a result of the participant’s criminal act.
In the event that the participant is still alive upon the maturity of his certificate, it is his right to claim from the operator the total amount of paid-contributions together with a share of the profits made over the contributions. In addition, he will also receive bonus pay out and dividend according to the company’s policy. Should the participant die before the maturity of the certificate, the nominee shall have the right to claim the total paid-contributions and the share of the profits made, bonus and dividend that he will also receive according to the company’s policy and also a donation from the company’s tabarru’ fund .
The concept of the contract of al-Mudharabah, also inherent in Takaful, prescribes that, all participants must agree to share the profits from the undertaking and must be certain that profits, if any, are not ill-gotten money. Each concerned party in the takaful contract- the operator, the participants, marketing officers or agents and management-will take a share from the profit of the business which is partly run by the participants’ paid contributions. The marketing officer who or agent who markets a family takaful certificate will not be paid a commission but should receive a salary as agreed upon between the marketing officer and the operator on the basis of either contract of al-Ijarah or al-Wakalah. In addition to that, They may also have the right to share of profits made by the company as well as dividends in accordance with the company’s policy and so does the management. Knowing that, the management shares out the profit should be reassuring to policyholders, and therefore creates more confidence in the fund.
Contracts (Uqud) Possibly Involved In the Global Takful Practices- An Analytical Survey
Even though al-Mudharabah and al- tabarru' are the contracts which directly involve in today's takaful (Islamic Insurance) operations, there are some other types of Sahri'ah
justified contracts (uqud) which may also expressly or impliedly facilitate takaful operations in the contemporary world. The following could be such sontrasts:
al - ’Aqd (Contract)
In takaful practice the parties involved herein are mainly the participants and the operator who bind themselves with a mutual consent to encounter a defined risk. Parties bind themselves is relying on the principles of al-‘Aqd (contract) through of an Ijab (offer) and a Qabul (acceptance). For example, the participants offer to contribute a particular sum of money to the takaful fund while the takaful operator accepts the offer in view of managing the fund properly and provide a reasonable coverage for the insured against a defined-risk. Thus in the takaful operation the operator binds itself unilaterally to manage the fund properly.[14]
The nature of al-Mudharabah (profit and loss sharing) practices is that it is a financial contract where by one party called Rabbul mal who provides fund for the other party called Darib who undertakes manage the fund through investment or trade and generates profits in which both the Rabbul mal and also the Darib share in the profit in a pre agreed proportion. al-Mudharabah is the primary doctrine which is adopted by the takaful operator as an alternative to the doctrine of al-Riba.
For example,[16] the participant in the takaful operation contribute a sum of money to the takaful fund in which the participants are like Rabbul mal while the takaful operator is like Darib who agrees to manage the fund in view of making profit in which both the participants and also the operator share the profit proportionately, no matter a defined risk has run on the subject matter or not.[17]
al – Musharakah (Partnership)
al-Musharakah is probably a new term originated from the idea of shirkah (partnership) which has been adopted by the contemporary Islamic financial institutions. al-Musharakah is an agreement between two or more parties to operate a particular business in which all parties contribute to the capital in view of legitimate profit. In other word, in al-Musharakah dealing, the parties involved here in share the liability, profit, and also lost according to their agreement.[18]
Involvement of the contract of al-Musharakah in takaful operations is quite clear. In a takaful operation both the participant and the takaful operator are mutual partners in the takaful fund in which both partners’ chief objective is to contribute (contribution and providing a management skill) towards ensuring a financial security against a defined risk. In takaful operation both partners (participants and operator) also share the agreed benefit over the takaful fund.
al - Bay’ Bithaman al – Ajil (Sale
Practical scenario of the doctrine of Bay’ Bithaman Ajil (BBA) is that, it is a sale of deferred payment in which one party buys an asset or property and sell it to the costumer at an agreed cost plus mark up price to be paid in the future either in lump sum or by installments.[19] The doctrine of Bay’ Bithaman Ajil is therefore, practised based on a mutual contract between the seller and the customer.
Takaful is a doctrine which also involves the contract like Bay’ Bithaman Ajil. For example, in Takaful operation the participants buy the risk from the Takaful operator by paying the agreed contributions and selling it back again to the takaful operator (upon the occurrence of the defined risk) with cost plus a mark up price which means the operator will ultimately pay to the insured or beneficiaries the cost (paid - contributions) plus mark up (profit or bonus from the Mudharabah fund and additional amount from the charitable account). The payment by participants for the risk could either be lump sum (in the short-term policies or general policies) or by installments (in life or long term policies).
al – Salam (Sale
al-Salam is a kind of sale which is practised based on general principles of contract of sale in which the buyer pays for the goods in advance while the goods are to be delivered later. For a valid contract of Salam, it is an essential that the subject matter (goods) must be existence at the time of bargain.[20]
There is also relevancy of a contract of Salam in a takaful operation. For instance, the participants in a takaful operation pay regular agreed contributions to the operator for the security a protection against a defined risk in which the operator receives the money in advance but he will deliver the object (benefits or protection or security) against a defined risk in the future. Furthermore, once the risk is defined (existence of the idea of risk) during the agreement between the participants and the operator makes a contract of takaful resemblance to of a valid Salam contract which requires the object or the goods to be exist at the time of the contract. Therefore, there is no element of Gharar (uncertainty) involves in a takaful operation.
al - Bay’ - (Sale
Bay’ is a contract of sale in which a person sells a defined goods or property with a free consent of another party for a definite price. Both the buyer and the seller in the contract of sale are bound by their promises by way of Ijab (offer) and Qabul (acceptance).[21]
The takaful operation involves the principles of Bay’. This is because, in a takaful practice the participants and the operator mutually agree that the participants will buy (through paying the contributions) the financial securities against the defined risk from the takaful operator once the risk runs over the subject matter. Thus in a takaful practice the participant like the buyer while the operator is resemblance to that of the seller in a contract of sale (Buy’).
al - Tabarru’ (Donation, charity, gift)
Tabarru’ means gift or donation which is given by one in favor of someone without seeking any consideration. A Tabarru’ is made based on the general principles of contract in which the person makes it binds himself unilaterally by offering something valuable for the noble cause of welfare of others.[22]
In a takaful operation the element of contract of al-Tabarru’ is directly involved. For example, participants’ contributions are credited mainly into two accounts; participant’s account (PA) and participants’ special account (PSA).
The amount credited into the PSA is regarded as Tabarru’ which is managed by the takaful operator to provide a security for others who deserve. In other word, the participants are unilaterally bound to pay the amount into the PSA from which they are not entitled to seek any benefit from the PSA for their own benefit.
al – Wadia’h (Deposit)
al-Wadiya’h is a kind of contract where by a person leaves his valuable in the custody of others as a trust for safe keeping.[23] The elements of al-Wadiyah involve the practices of takaful as the participants pay regular contributions to the fund is like a deposit entrusted to the operator for safe keeping in view of better management of the fund and also to provide a security against the defined risk. Therefore, in a takaful operation both the participants (as depositors) and operator (as the trustee) are also bound by the contract of al-Wadiyah.
al – Amanah (Trust)
al-Amanah means ‘trust’ which is also a kind of contract whereby a person offers something valuable to someone else for safe keeping as a trust. It could sometimes be by express contract or by an implied contract in which the trustee is unilaterally bound to keep the trust according to the terms and conditions agreed upon by the owner and also the trustee.
Doctrine of al-takaful involves the elements of contract of al-Amanah. This is because the participants pay regular contributions to the operator is like the trust which is managed by the operator (as a trustee) according to the terms and conditions. The management by the operator includes provision to provide a financial security in favour of the insured. Therefore, both the participants and the operator are like parties to a contract of al-’Amanah (trust).
al - Ju’alah (Reward for Service)
al-Ju’alah is a kind of contract of hiring for services in which one party undertakes to pay a specified amount of money for rendering a defined service in accordance with the terms negotiated between them. Example of a contract of al-Ju’alah is that a person offers to another to pay some amount of money if the other can offer a particular service for the former benefit.
takaful operation certainly involves the element of the contract of al-Ju’alah. As an evidence, the participants in the operation make an offer to the operator that they will pay a sum amount of contributions to the takaful fund in view of making the operator obliged for rendering the service to the insured through providing a financial security against the defined risk. Once the operator accepts the offer of the participants it will bind itself (operator) to provide the services according to the terms and conditions.
al – Kafalah (Guarantee)
al-Kafalah is a contract of Suretyship, Bailment, or guarantee. By virtue of Article. 612 of the Mejelle, a contract of al-kafalah in which a person adds to him a responsibility or liability on behalf of another person in respect of demand for something. In this provision adding the liability or responsibility means a guarantee which is determined by the principles of contract relating to kafalah.
al-Kafalah operation is a kind of doctrine, which also involves the element of contract of al-takaful. Because in a takaful practice the participants contribute to the takaful fund by a mutual agreement with the operator that it will undertake to manage the fund properly and will provide a financial security against a defined risk once it is (financial security) demanded by the insured. Therefore, the operator is like a guarantor in a contract of kafalah which adds to its responsibility or liability to the management of the fund and also to provide the security once it is demanded by the insured according to the terms and conditions.
al-Wala’ (Clientage)
al-Wala’ means a contract of clientage between a stranger whose descent is unknown and another person in which by the stranger offers the other that you are my guardian and will be liable to pay any form of compensation in case I commit any wrongful act in consideration of which, you will be entitled to inherit my property upon my death.[24] If however the later agrees to the offer made by the stranger the contract will be binding upon both of them.
There are some similarities between the contract of al-takaful and also the contract of al-Wala’. For example, in a takaful operation the participants are like strangers who make an offer to the operator that the operator will be liable or responsible against the defined risk faced by the insured to provide a financial security for the insured while the operator will receive the contribution from the participants which is like receiving the inheritance over the property of the participants[25]. Therefore, there is close relationship between the takaful contract and a contract of al-Wala’.
al – Ijarah (Hiring @ Employment)
al- Ijarah is a contract of hiring where by one person hires someone for definite services in which the hirer is under the duty to provide a reword for the services rendered to him.[26] A takaful contract involves around the element of contract of al-Ijarah. For example, takaful participants hire the operator by paying regular contribution where by the operator undertakes the responsibility to provide the services to the participants through management of the fund and also providing the financial security for the insured against the defined risk.
al – Wakalah (Agency)
al-Wakalah is a contract of agency in which a person delegates his business to another and substitutes the other in his place.[27] The person delegated is called wakil (agent) whose fundamental obligation is to provide his skill towards the betterment of assigned job. Thus both the principal and the agent are equally bound by each other under contract of al-Wakalah.
In a takaful operation those who work for the promotion or development of the products they are working like an agent appointed by the operator to offer their skills on behalf of the operator not only under law of contract but also under contract of al-Wakalah. Therefore, a takaful operation is not far from the idea of contract of al-Wakalah.
al – Daman (Guarantee , Surety)
al-Daman is also a type of contract of responsibility, guarantee, warranty, and surety against any form of insurable risk as well as uncertainly.[28] In a contract of Daman both the guarantor and also the guaranteed are bound by the same terms and conditions. The nature of a contract of al-Daman is that, a person who will undertake to provide a security for another against a defined risk encountered by the subject matter of the contract.
A contract of takaful has got a resemblance with the contract of Daman . For example, the participants are guaranteed by the operator against a defined risk to provide a financial security for the insured in considerations of the contribution paid by the participants. Thus the operator is like a guarantor while the insured is like a guaranteed in a contract of al-Daman.
Final Remarks
Although the contemporary takaful operators in the Global Economy adopt in their operations mainly the contracts of al-Mudharabah, al-Wakala, al- Tabarru’ and the principle of contract (al-‘Aqd) in general, but based on the hypothetical discovery as made in this paper, it is submitted that, there are many other types of Sharia’h justified nominate contracts or rather contractual elements which facilitate takaful operations in reality. Finally, It is hoped that, the takaful industry will have a broader justification with a multiple ranges of contractual elements in its operations in the 21st century’s advanced economic environment.
[1]See, ‘Aqilah’, in Hughes, Thomas Patrick, Dictionary of Islam, Cosmo Publication, New Delhi , India
[2] Ibid.
[3] Ikram Shakir; “Tomorrow’s Takaful Products”, in New Horizon, 66: 1997, p. 5.
[4] This idea is based on an interview with Dr. Abu Said Majid, Department of Arabic, Kulliyyah of IRKH, IIUM.
[5] The idea has been developed based on interview with Mr. Ahmad Mazlan Zulkifli, Takaful Consultant, BIRT, Malaysia
[6] It is practised in Malaysia Sudan
[7] From a discussion with Mr. Ahmad Mazlan, op. cit.
[8] See al-Qura’n, Surah al-Maidah, 5:2; also the Takaful Act 1984, at S. 2
[9] “Islamic Insurance in Asia: activities, problems and prospects”, in Insurance journal, Vol. 50, 1999, page 89 at 92.
[10] See generally Mohd. Ma’sum Billah., “A Model of life Insurance in the contemporary Islamic Economy”, in Arab Law quarterly, Vol.12, part 3, 1997 at Pp. 287 ff
[11] This ruling was confirmed by the fatwah issued by The National Council for Muslim Religious Affairs of Malaysia in 1974, in [1974] 1 MLJ at x.
[12] Surah al-Imran, 3:145
[13] See for example, al-Qura’n 2:134
[14] This is based on the discussion with Mr. Ahmad Mazlan Zulkifli, takaful Consultant, BIRT, Kuala Lumpur
[15] See generally in Yusuf Talal Delorenzo(ed.), A Compendium of Legal opinions on the Operations of Islamic Banks, IIBI, London
[19] Ahmad Ibrahim “Legal Frame Work of Islamic Banking”, in IKIM Law Journal, 1:1 July - Dec. 1997, p. 1, at 4.; It is further noted that although at present, the doctrine of Bay’ Bithaman Ajil is practiced in Malaysia by installment only. But of course there is no restriction so far in the shariah for the buyer in a Bay’ Bithaman Ajil transaction to chose whether to settle the payment in lump sum or by installment.
[20] Muhammad Akram Khan, op.cit. p. 20.
[23] Al-Zabyidi Mohammad, Tajul Aroos, Vol. 2, Kuwait
[25] This argument may only be applicable in a life policy upon the occurrence of death to the insured.
[26] Wahbah Zuhaily, Al-Fiqh Al-Islamy Wa Adillatuh, Vol. 4, Dar El-Fikr, Qahirah, 1996, p. 729.
[27] Muhammad Akram Khan, op.cit., p. 140.
[28] Ibid., p. 29.
