Takaful - Value-Based Intermediation (VBI) and Value-Based Intermediation for Takaful (VBIT)

• Malaysia introduced important value-based frameworks to strengthen the role of Islamic finance and Takaful.
• These frameworks are:
• Value-Based Intermediation (VBI) – introduced in 2017
• Value-Based Intermediation for Takaful (VBIT) – introduced in 2021
• Both frameworks are guided by the objectives of Maqasid al-Shari’ah.
• They aim to create positive and sustainable outcomes for:
• The economy
• Society
• The environment
• Financial stakeholders

1. Value-Based Intermediation (VBI)

• VBI is a broader framework mainly associated with Islamic financial institutions, especially Islamic banks.
• It encourages financial institutions to move beyond simply earning profit and meeting minimum Shari’ah requirements.
• The institution should also consider whether its activities create a positive and sustainable impact.

Main Objectives of VBI

• Support economic development
• Improve social well-being
• Protect the environment
• Promote responsible financial practices
• Generate sustainable financial returns
• Support the objectives of Maqasid al-Shari’ah

Simple Idea

VBI = Shari’ah-compliant finance + Positive economic, social and environmental impact

2. Example of VBI

• An Islamic bank provides financing for a solar energy project instead of financing an environmentally harmful project.
• The project:
• Generates renewable energy
• Creates employment
• Supports economic development
• Reduces environmental damage
• The bank also earns a Shari’ah-compliant financial return.

Simple Process

Islamic financing → Renewable energy project → Financial return + Economic benefit + Environmental benefit

3. Value-Based Intermediation for Takaful (VBIT)

• VBIT applies the value-based principles specifically to the Takaful industry.
• It provides guidance for Takaful operators on how to implement value-based practices in their products and operations.
• It applies to:
• Family Takaful operators
• General Takaful operators
• Retakaful operators

Simple Idea

VBIT = Applying VBI principles specifically to Takaful

4. Main Objectives of VBIT

• Develop Takaful products that provide wider benefits to society.
• Improve financial inclusion.
• Encourage sustainable business practices.
• Protect vulnerable groups.
• Promote responsible investment.
• Create long-term value for participants and other stakeholders.
• Ensure Takaful operations remain consistent with Maqasid al-Shari’ah.

5. Example of VBIT

• A Takaful operator develops Micro-Takaful for low-income families.
• Participants pay a small affordable contribution.
• The product provides basic protection against:
• Death
• Accident
• Disability
• The operator still manages the product sustainably while helping underserved communities.

Why This Is VBIT

• It is Shari’ah-compliant.
• It creates positive social impact.
• It improves financial inclusion.
• It can still provide sustainable financial returns for stakeholders.

Simple Process

Affordable Takaful → Low-income families protected → Social impact + Sustainable business

6. VBI and VBIT Are Driven by Maqasid al-Shari’ah

• Both VBI and VBIT are influenced by the broader objectives of Shari’ah.
• These objectives include protecting:
• Life
• Wealth
• Intellect
• Family/progeny
• Religion
• Therefore, financial institutions should consider not only whether a transaction is technically permissible, but also whether it contributes positively to society.

Simple Idea

Shari’ah compliance tells us whether something is permissible.

Maqasid al-Shari’ah also asks whether it creates beneficial outcomes.

7. Three Main Elements of VBI and VBIT

Shari’ah Compliance

• Products and operations must comply with Shari’ah principles.
• They must avoid prohibited elements such as:
• Riba
• Gharar
• Maysir
• Prohibited business activities

Positive Impact

• Financial activities should provide benefits to:
• Customers
• Communities
• Society
• Environment
• Economy

Sustainable Financial Return

• The institution must still remain financially viable.
• It should generate sufficient returns to:
• Continue operating
• Pay expenses
• Maintain financial stability
• Reward relevant stakeholders

Simple Formula

Shari’ah Compliance + Positive Impact + Sustainable Financial Return = VBI / VBIT

8. Why Sustainable Financial Return Is Important

• VBI and VBIT do not mean that Islamic financial institutions should ignore profitability.
• A bank or Takaful operator must remain financially strong.
• Without sustainable financial returns:
• It may not survive
• It cannot continue serving customers
• It cannot expand its positive social impact

Example

• A Takaful operator provides Micro-Takaful at an affordable price.
• At the same time, it uses digital technology to reduce operating costs.
• This allows the operator to:
• Help low-income customers
• Keep contributions affordable
• Remain financially sustainable

Simple Idea

Social benefit must be balanced with financial sustainability.

9. VBI vs VBIT

VBI

• Broader framework.
• Mainly focuses on Islamic financial institutions.
• Encourages sustainable impact on:
• Economy
• Community
• Environment

Example

Islamic bank finances renewable-energy project

VBIT

• Specifically designed for the Takaful industry.
• Provides guidance for:
• Family Takaful
• General Takaful
• Retakaful
• Focuses on how Takaful can create value beyond simply paying claims.

Example

Takaful operator provides affordable Crop Takaful to small farmers

10. Overall Purpose

• VBI and VBIT aim to create a more sustainable Islamic financial ecosystem.
• Islamic banks and Takaful operators are encouraged to:
• Remain Shari’ah-compliant
• Generate financial returns
• Create positive social impact
• Support economic development
• Protect the environment
• Serve wider stakeholder interests

Easy Way to Remember

VBI = Value-based approach for Islamic finance

VBIT = Value-based approach specifically for Takaful

Simple Formula

VBI / VBIT

→ Shari’ah Compliance

→ Positive Economic Impact

→ Positive Social Impact

→ Positive Environmental Impact

→ Sustainable Financial Return

Final Simple Idea

VBI and VBIT encourage Islamic finance and Takaful to go beyond “Is it Shari’ah-compliant?” and also ask “Does it create sustainable value for society, the economy and the environment?”

Takaful - VBI, VBIT and Moving Beyond Shari’ah Compliance

• Initiatives such as Value-Based Intermediation (VBI) and Value-Based Intermediation for Takaful (VBIT) can strengthen the role and impact of Islamic Financial Institutions (IFIs).
• These initiatives encourage Islamic finance and Takaful institutions to move beyond simply meeting the minimum requirements of Shari’ah compliance.
• Instead, institutions are encouraged to create positive and sustainable outcomes for:
• Customers
• Investors
• Businesses
• Communities
• Society
• The wider economy

1. Strengthening the Role of Islamic Financial Institutions

• VBI and VBIT encourage IFIs to consider the wider impact of their financial activities.
• Islamic financial institutions should not focus only on:
• Profitability
• Legal requirements
• Basic Shari’ah compliance
• They should also consider whether their activities contribute positively to:
• Society
• Economic development
• Environmental sustainability
• Financial inclusion

Example

• A Takaful operator could develop affordable Micro-Takaful for lower-income households.
• The product remains Shari’ah-compliant while also providing social benefits to underserved communities.

Simple Idea

Shari’ah compliance + Positive social impact = Stronger Islamic financial institution

2. Strengthening the Sustainability of the Financial Ecosystem

• VBI and VBIT can help create a more sustainable Islamic financial system.
• Sustainability means considering long-term effects rather than focusing only on short-term profits.
• Islamic financial institutions can support:
• Responsible businesses
• Sustainable projects
• Socially beneficial activities
• Environmentally responsible investments

Example

• A Takaful operator invests its funds in Shari’ah-compliant green Sukuk.
• The Sukuk finances renewable-energy projects.
• The operator earns a Shari’ah-compliant return while supporting environmental sustainability.

Simple Process

Takaful funds → Green Sukuk → Sustainable project → Financial return + Positive environmental impact

3. Transforming the Islamic Finance Industry

• VBI and VBIT can help transform Islamic finance from being viewed merely as an alternative to conventional finance.
• Islamic financial institutions can instead become institutions that actively create:
• Economic value
• Social value
• Environmental value
• Long-term stakeholder benefits

Simple Idea

Islamic finance should not only ask:

“Is this transaction Shari’ah-compliant?”

It should also ask:

“Does this transaction create beneficial and sustainable outcomes?”

4. Moving Beyond Compliance

• Shari’ah compliance remains essential.
• Moving beyond compliance does not mean reducing Shari’ah requirements.
• Instead, it means adding broader objectives on top of Shari’ah compliance.

Basic Approach

Shari’ah-compliant? → Yes

Then also consider:

• Does it benefit customers?
• Does it support society?
• Is it environmentally responsible?
• Is it economically sustainable?
• Does it contribute to the objectives of Shari’ah?

Simple Idea

Compliance is the foundation, not necessarily the final objective.

5. Creating More Business Opportunities

• A broader value-based approach can create new opportunities for Islamic banks and Takaful operators.
• Institutions can develop products for customers and markets that may previously have been underserved.

Examples

• Micro-Takaful for lower-income households
• Crop Takaful for farmers
• Green Takaful products
• Digital Takaful
• Protection for small businesses
• Sustainable investment products

Simple Idea

Wider social needs → New products → New business opportunities

6. Benefits Beyond Financial Consumers

• VBI and VBIT do not focus only on the direct customer.
• They consider a wider group of stakeholders.

Stakeholders May Include

• Participants
• Employees
• Investors
• Businesses
• Suppliers
• Communities
• Governments
• Future generations
• The environment

Example

• A Takaful operator finances environmentally sustainable projects.
• The benefits are not limited to the operator or participants.
• The wider community may benefit from:
• Cleaner energy
• Employment opportunities
• Better environmental conditions

Simple Idea

Islamic finance should create value for customers AND wider society.

7. Making Islamic Finance and Takaful More Proactive

• By combining:
• VBI
• VBIT
• Shari’ah compliance

Islamic financial institutions can become more proactive rather than reactive.

• Instead of waiting for customers to experience financial problems, institutions can develop products that help:
• Prevent hardship
• Improve resilience
• Support sustainable development
• Protect vulnerable communities

Example

• Instead of only compensating farmers after a disaster, a Takaful operator could combine:
• Crop Takaful
• Weather technology
• Risk-prevention education
• Digital monitoring

This can reduce losses before they occur.

Simple Idea

Proactive Takaful = Protection + Prevention + Sustainable support

8. Larger Investor Base

• A stronger emphasis on sustainability and social impact may attract more investors.
• Potential investors may include:
• Islamic investors
• Ethical investors
• Sustainability-focused investors
• Institutional investors
• International investors

Example

• A Takaful operator demonstrates:
• Strong Shari’ah governance
• Good financial performance
• Responsible investments
• Positive environmental and social impact
• This may attract investors who are interested in both financial returns and responsible investment.

Simple Idea

Shari’ah compliance + Sustainability + Strong performance → Wider investor interest

9. Greater Mainstream Relevance

• Islamic finance and Takaful should not only appeal to Muslim customers.
• Products based on:
• Ethical finance
• Mutual assistance
• Sustainability
• Social responsibility
• Financial inclusion

may also appeal to non-Muslim customers and investors.

Example

• A non-Muslim customer may choose a Takaful product because:
• It is competitively priced
• It is transparent
• It invests responsibly
• It promotes mutual assistance

Simple Idea

Takaful can appeal beyond the Muslim market.

Overall Relationship

Shari’ah Compliance

→ Ensures Islamic principles are followed

VBI

→ Encourages Islamic financial institutions to create wider positive value

VBIT

→ Applies similar value-based principles specifically to the Takaful industry

Together:

Shari’ah Compliance + VBI + VBIT

→ More sustainable institutions

→ More innovative products

→ Greater social and economic impact

→ Wider investor base

→ Greater mainstream relevance

Easy Way to Remember

Traditional Focus

“Is the product Shari’ah-compliant?”

Value-Based Approach

“Is it Shari’ah-compliant AND does it create positive value for society, the economy and the environment?”

Simple Formula

Shari’ah Compliance + Value Creation + Sustainability + Social Impact = Stronger Future for Islamic Finance and Takaful

Takaful - What Is a Subsidy?

A subsidy is financial support given by another party to help reduce the cost of a product or service.

In Takaful, a subsidy may come from:

• Government
• NGO
• Charity
• Development organisation
• Other supporting institution

Example

Suppose the real cost of Crop Takaful is:

RM100 per month

But a low-income farmer can only afford:

RM40 per month

The government may pay the remaining:

RM60

So:

Farmer pays RM40 + Government subsidy RM60 = RM100 total cost

Why Subsidies Are Used

• Make Takaful more affordable
• Help lower-income people obtain protection
• Support farmers and vulnerable communities
• Encourage more people to participate

Main Problem

• If the scheme depends too much on subsidies, it may become difficult to continue if the government or NGO stops providing the money.

Simple Idea

Subsidy = Someone else helps pay part of the cost so the customer pays less.

Takaful - Role of Micro-Takaful, Crop Takaful and Livestock Takaful

• Takaful can play an important role outside traditional trade and financial activities.
• One important area is providing affordable protection to lower-income communities.
• This can be done through:
• Micro-Takaful
• Crop Takaful
• Livestock Takaful
• These forms of protection are especially useful because lower-income households may have limited savings and may struggle to recover after a major financial loss.

1. Micro-Takaful

• Micro-Takaful is a low-cost, simple form of Takaful designed mainly for:
• Lower-income individuals
• Vulnerable households
• Small informal businesses
• It provides small-scale or “bite-sized” protection at an affordable contribution level.
• The objective is to provide basic financial protection rather than large benefits.

Example

• Ahmad is a low-income worker and the main breadwinner for his family.
• He joins a Micro-Takaful plan with a small monthly contribution.
• Ahmad dies unexpectedly.
• His family receives a Takaful benefit.

Why It Is Important

• Without protection, Ahmad’s family may suddenly lose its main source of income.
• They may struggle to pay for:
• Food
• Rent
• Education
• Medical expenses
• Daily living costs

Simple Idea

Small affordable contribution → Basic financial protection for low-income households

2. Crop Takaful

• Crop Takaful protects farmers against financial losses affecting their crops.
• Farmers are exposed to risks such as:
• Flood
• Drought
• Storm
• Excessive rainfall
• Pest damage
• Other adverse weather events
• A poor harvest can destroy a farmer’s main source of income.

Example

• Fatimah is a small rice farmer.
• She spends RM20,000 preparing and planting her crop.
• A severe flood destroys most of the rice before harvest.
• Without protection, she may lose almost all of her investment.
• Under Crop Takaful, she may receive financial assistance for the covered loss.

How It Helps

The benefit may help her:

• Buy seeds for the next season
• Repair damaged farming equipment
• Pay household expenses
• Restart farming activities

Simple Idea

Bad weather destroys crop → Farmer loses income → Crop Takaful helps farmer recover

3. Livestock Takaful

• Livestock Takaful protects farmers or livestock owners against losses involving animals.
• Possible risks include:
• Disease
• Accident
• Natural disaster
• Death of livestock
• Certain other covered losses

Example

• Hassan owns 20 cows.
• The cows are an important source of:
• Milk
• Meat
• Income
• A disease outbreak kills several of the animals.
• Hassan suffers a major financial loss.
• Livestock Takaful may provide compensation for the covered loss.

How It Helps

The benefit may allow Hassan to:

• Replace livestock
• Restart production
• Maintain his income
• Avoid falling into serious financial difficulty

Simple Idea

Livestock lost → Farmer loses valuable productive assets → Takaful helps restore financial capacity

4. Why These Groups Need Takaful More

• Lower-income individuals usually have:
• Less savings
• Fewer financial assets
• Limited access to credit
• Less ability to absorb unexpected losses
• Therefore, even a relatively small financial disaster can have a serious effect.

Example

For a wealthy household:

• RM10,000 loss may be difficult but manageable.

For a poor household:

• RM10,000 loss may mean:
• Loss of livelihood
• Debt
• Inability to pay rent
• Inability to buy food
• Children leaving school

Simple Idea

The less financial cushion a household has, the more damaging an unexpected loss can be.

5. Importance of Shari’ah-Compliant Protection

• Many lower-income communities in Muslim-majority areas may prefer financial protection that complies with Shari’ah.
• Takaful can therefore provide an alternative to conventional microinsurance.
• The arrangement can combine:
• Mutual assistance
• Affordable protection
• Shari’ah compliance

Simple Idea

Financial protection + Mutual assistance + Shari’ah compliance

6. Main Challenge – High Operating Costs

• One major difficulty is that these products may not be very attractive commercially to Takaful operators.
• The contributions collected from low-income participants are usually small.
• However, the cost of providing the service can still be high.

Costs May Include

• Setting up branches or local service points
• Employing staff
• Marketing
• Collecting contributions
• Processing claims
• Providing customer education
• Using technology
• Monitoring farms or livestock

Example

Suppose:

• 10,000 Micro-Takaful participants each contribute RM10 per month.
• Total monthly contributions = RM100,000.

But the operator may still need to pay for:

• Staff
• Administration
• Technology
• Claims processing
• Distribution

If these costs are too high, the scheme may not be commercially sustainable.

Simple Idea

Small contributions + High administration cost = Profitability challenge

7. Philosophical Challenge – Should Takaful Operators Profit From the Poor?

• There is also an ethical or philosophical concern.
• Some argue that Takaful operators should not make excessive profit from low-income participants.
• This creates a difficult balance.

The operator needs enough income to:

• Pay staff
• Maintain systems
• Process claims
• Remain financially sustainable

But at the same time:

• Contributions must remain affordable.
• The operator should avoid exploiting financially vulnerable participants.

Simple Idea

Takaful must balance commercial sustainability with social responsibility.

8. Learning From Microinsurance

• Micro-Takaful can learn from conventional microinsurance programmes.
• Many microinsurance schemes rely heavily on external financial support.
• Support may come from:
• Governments
• Charities
• NGOs
• International development organisations

Example

• Actual cost of providing coverage = RM30 per month
• Participant can only afford = RM10 per month
• Government or NGO pays the remaining RM20

This makes the product affordable.

However, the problem is:

What happens if the subsidy stops?

9. Crop and Livestock Schemes Often Depend on Subsidies

• Crop and livestock insurance schemes are frequently expensive because:
• Many farmers may be affected by the same event at the same time.
• A major drought or flood can create very large claims.
• Therefore, governments often subsidise the schemes.

Example

A drought affects an entire agricultural region.

• Thousands of farmers suffer losses simultaneously.
• Claims may become extremely large.
• Participant contributions alone may not be enough.

Government support may be needed to keep the scheme operating.

Simple Idea

Large correlated agricultural losses → High claims → Subsidies may be necessary

10. Sustainability Problem

• Heavy dependence on government or NGO subsidies creates a long-term sustainability concern.
• If the scheme only survives because a benefactor continuously provides money, it may fail if that financial support ends.

Example

For five years:

Government subsidy → Crop Takaful remains affordable

Then:

Government stops subsidy

The operator may have to:

• Increase contributions
• Reduce benefits
• Stop the scheme

Simple Idea

Subsidised today does not always mean financially sustainable tomorrow.

Main Challenges

• Low contribution amounts
• High operating and distribution costs
• Difficulty reaching rural communities
• Lack of awareness about Takaful
• High claim exposure in agriculture
• Ethical concern about profiting from vulnerable groups
• Dependence on government or NGO subsidies
• Long-term sustainability

Possible Ways Forward

• Use technology to reduce distribution costs.
• Offer products through:
• Mobile applications
• Banks
• Cooperatives
• Mosques
• Community organisations
• Use simple and standardised products.
• Partner with governments and NGOs.
• Develop more sustainable subsidy structures.
• Improve risk assessment and agricultural data.
• Use Retakaful to help absorb very large agricultural losses.

Simple Idea

Lower costs + Better technology + Strong partnerships + Retakaful support = More sustainable Micro-Takaful

Easy Way to Remember

Micro-Takaful

Protects low-income households

Example:

Breadwinner dies → Family receives financial assistance

Crop Takaful

Protects farmers’ crops

Example:

Flood destroys rice crop → Farmer receives compensation

Livestock Takaful

Protects farmers’ animals

Example:

Disease kills cattle → Farmer receives financial assistance

Main Challenge

People need affordable protection, but providing that protection can be expensive.

Simple Formula

Low-income participants + High vulnerability + Affordable Takaful = Strong social benefit

but

Low contributions + High operating costs + Dependence on subsidies = Sustainability challenge

Takaful - Can Takaful Entirely Replace Conventional Insurance?

• Takaful is designed as a Shari’ah-compliant alternative to conventional insurance.
• However, Takaful may not be able to replace conventional insurance in every situation.
• There are two main limitations:
• Risks involving non-Shari’ah-compliant activities
• Very large or catastrophic risks that may exceed the capacity of a Takaful fund

1. Takaful Cannot Cover Non-Shari’ah-Compliant Activities

• Takaful protection must itself comply with Shari’ah.
• Therefore, Takaful generally cannot provide protection for businesses, products or premises whose main activities are prohibited under Shari’ah.

Examples

• Brewery
• Produces alcohol.
• The core business activity is not Shari’ah-compliant.
• Therefore, the brewery itself would generally not be eligible for Takaful protection.
• Conventional interest-based mortgage business
• Operates on riba-based financing.
• Takaful should not be structured to support or protect the prohibited activity itself.
• Casino
• Operates through gambling or maysir.
• Therefore, the casino business would not normally qualify for Takaful protection.

Simple Idea

Shari’ah-compliant risk/activity → May be covered by Takaful

Non-Shari’ah-compliant activity → Generally not covered by Takaful

2. Some Permissible Risks Are Still Difficult for Takaful to Cover

• Some risks are Shari’ah-compliant and can theoretically be covered by Takaful.
• However, they may be difficult to cover because the possible claim amount is extremely large.
• These are often called large risks or catastrophic risks.

Examples

• Aviation risks
• Marine risks
• Large industrial plants
• Major infrastructure projects

3. Aviation Risk Example

• A Takaful operator provides protection for a commercial aircraft.
• The aircraft may be worth hundreds of millions of ringgit.
• Accidents are relatively rare.
• But if a major accident occurs:
• The aircraft may be completely destroyed.
• Passenger liabilities may arise.
• Third-party liabilities may also arise.
• A single claim could therefore be enormous.

Example

Suppose:

• Aircraft value = RM400 million
• Potential passenger and liability claims = RM300 million
• Total potential exposure = RM700 million

Even if the probability of an accident is low, one accident could require a payment of hundreds of millions of ringgit.

Simple Idea

Low probability → Very high possible loss

4. Marine Risk Example

• A cargo ship may carry:
• Expensive machinery
• Oil
• Electronics
• Large quantities of commercial goods
• A serious accident could result in:
• Loss of the ship
• Loss of cargo
• Environmental damage
• Third-party liability

Example

A vessel carries cargo worth:

RM800 million

If the ship sinks, the resulting claims could be extremely large.

Simple Idea

Marine accident may be uncommon → But one loss can be huge

5. Claim Frequency vs Claim Severity

Two concepts are important:

Claim Frequency

• Means how often claims are expected to happen.

Example

Motor accidents occur relatively frequently.

Therefore:

Motor Takaful → Higher claim frequency

Claim Severity / Quantum

• Means how large the claim may be when it occurs.

Example

A commercial aircraft crash may be rare, but the amount payable can be extremely high.

Therefore:

Aviation → Lower claim frequency + Very high claim severity

6. Where Takaful Works More Comfortably

• Takaful tends to work more easily where:
• Claims occur with a reasonably predictable frequency.
• The amount of each claim is manageable.
• Losses can be spread across a sufficiently large group of participants.
• One individual claim is unlikely to exhaust the participants’ risk fund.

Example – Motor Takaful

Suppose:

• 100,000 participants join a Motor Takaful fund.
• Many small and medium-sized accidents occur during the year.
• Most claims are manageable relative to the total size of the fund.

Because claims are spread across many participants, the Takaful fund can plan for them more effectively.

Simple Idea

Many predictable, manageable losses → Easier for Takaful fund to absorb

7. Why Very Large Risks Are Difficult

• Takaful relies on a common pool of participants’ contributions.
• If one single claim is extremely large, it could seriously weaken or even exhaust the fund.
• This creates a capacity problem.

Example

Participants’ Risk Fund = RM500 million

One aviation claim = RM450 million

If the fund had to bear the entire claim itself:

• Most of the fund could be used for one event.
• Less money would remain for other participants’ claims.
• The financial stability of the fund could be threatened.

8. Role of Retakaful

• Retakaful helps solve this problem.
• A Takaful operator does not have to retain the entire large risk.
• It can share part of the risk with a Retakaful operator.

Example

Suppose a Takaful operator provides coverage for an aircraft with potential exposure of:

RM700 million

The Takaful operator may decide:

• Retain RM100 million itself
• Transfer/share RM600 million with one or more Retakaful operators

Therefore, if a large claim occurs, the financial burden is shared.

Simple Process

Participant → Takaful Operator → Part of large risk → Retakaful Operator

Simple Idea

Retakaful increases the capacity of Takaful operators to cover very large risks.

9. Why Retakaful Is Important for Industry Growth

• Without sufficient Retakaful capacity, Takaful operators may be unable to cover:
• Aircraft
• Ships
• Large factories
• Power plants
• Major infrastructure projects
• Retakaful allows the Takaful industry to participate in larger and more complex risks.

Example

Without Retakaful:

Takaful operator capacity = RM100 million

With Retakaful:

Takaful operator + Retakaful support = May cover risks worth several hundred million ringgit

Easy Way to Remember

Takaful Cannot Cover

• Activities that are fundamentally non-Shari’ah-compliant
• Examples:
• Casinos
• Breweries
• Riba-based businesses

Takaful Can Cover but May Struggle With

• Very large permissible risks
• Examples:
• Aviation
• Marine
• Large infrastructure

Why?

• Claims may occur rarely, but when they occur, the amount can be enormous.

Solution

Takaful + Retakaful → Larger risk-sharing capacity

Simple Formula

Manageable risks → Takaful can normally handle

Huge risks → Takaful + Retakaful needed

So, Takaful can replace conventional insurance in many areas, but its ability to do so depends on Shari’ah permissibility and sufficient financial/risk-sharing capacity.

Takaful - Bancatakaful

• Bancatakaful refers to the distribution and marketing of Takaful products through banks.
• The bank may be:
• An Islamic bank, or
• A conventional bank
• However, the Bancatakaful arrangement itself must be conducted in accordance with Shari’ah principles.
• Bancatakaful allows banks and Takaful operators to cooperate in offering Takaful protection to customers.

Simple Idea

Bank = Distribution Channel

Takaful Operator = Provides the Takaful Product

1. How Bancatakaful Works

• A Takaful operator enters into an arrangement with a licensed bank or approved financial institution.
• The bank markets or distributes the Takaful products to its customers.
• The Takaful operator remains responsible for the Takaful product and its administration.
• Bancatakaful may involve:
• Individual Takaful products
• Group Takaful products
• Family Takaful
• General Takaful

Example

• Ahmad visits an Islamic bank to obtain home financing.
• The bank also offers him:
• Houseowner Takaful
• Family Takaful
• Financing protection
• The Takaful product is provided by a Takaful operator, while the bank acts as the distribution channel.

Simple Process

Customer visits bank → Bank introduces Takaful product → Customer participates → Takaful operator provides protection

2. Benefits of Bancatakaful to Banks

Wider Product Range

• Bancatakaful allows banks to offer more than just:
• Deposits
• Financing
• Investment products
• The bank can also provide Takaful protection.

Example

A bank may offer:

• Home financing
• Motor financing
• Savings account
• Family Takaful
• Motor Takaful

Simple Idea

More products = More complete financial service

Additional Income

• Banks may earn additional income from distributing Takaful products.
• Depending on the arrangement, the bank may receive:
• Commission
• Distribution fee
• Other approved remuneration

Example

• A bank sells 5,000 Takaful certificates.
• The bank receives an agreed distribution fee from the Takaful operator.
• This creates another source of income for the bank.

Simple Idea

Takaful distribution → Additional income for bank

3. Stronger Customer Relationships

• Bancatakaful allows the bank to meet more of the customer’s financial needs.
• This can create a:
• Deeper relationship
• Wider relationship
• Stronger relationship
• Customers may become more likely to remain with the bank because they receive several services from one institution.

Example

Ahmad obtains from the same bank:

• Salary account
• Home financing
• Family Takaful
• Houseowner Takaful
• Investment account

Because many of his financial needs are handled through the same bank, he may be less likely to move to another institution.

Simple Idea

More services from one bank → Stronger customer relationship → Better customer retention

4. Better Customer Retention

• Customer retention means keeping existing customers for a longer period.
• Bancatakaful can improve retention because the customer becomes connected to the bank through several products.

Example

• Sarah has only a savings account with Bank A.
• She can easily move to another bank.
• But if she has:
• Savings
• Home financing
• Family Takaful
• Investment products
• through the same bank, her relationship becomes stronger.

Simple Idea

More products used by customer → Greater likelihood customer stays with bank

5. Product Bundling

• Bancatakaful allows banks to combine banking products with Takaful products.
• This is known as product bundling.
• Bundling provides customers with a more complete financial solution.

Example – Home Financing Package

A bank may offer:

• Islamic home financing
• Houseowner Takaful
• Family Takaful related to the financing

Example – Car Financing Package

A bank may offer:

• Islamic vehicle financing
• Motor Takaful
• Personal accident protection

Simple Idea

Banking product + Takaful product = Bundled financial solution

6. Better Customer Lifecycle Management

• Customer lifecycle management means serving customers at different stages of their lives.
• Banks can use Bancatakaful to offer suitable protection as customers’ needs change.

Example

A customer may need:

• Young adult → Personal accident Takaful
• Married → Family Takaful
• Buying house → Houseowner Takaful
• Having children → Education-related protection
• Starting business → Business Takaful
• Retirement → Long-term savings and protection

Simple Idea

Different life stages → Different financial needs → Different Takaful products

7. Leveraging the Bank’s Brand Name

• Banks often already have:
• Established reputation
• Large customer base
• Branch networks
• Online banking platforms
• Customer trust
• Takaful operators can benefit from the bank’s strong brand and customer relationships.

Example

• A new Takaful operator may not be well known.
• It partners with a large, trusted bank.
• Customers may be more willing to consider the Takaful product because it is offered through a bank they already trust.

Simple Idea

Strong bank reputation → Greater customer confidence in distributed Takaful products

8. Benefits of Bancatakaful to Takaful Operators

Wider Distribution Network

• A Takaful operator may have only a limited number of branches or agents.
• Through Bancatakaful, it gains access to the bank’s:
• Branch network
• Online platform
• Mobile banking
• Customer database
• Relationship managers

Example

• Takaful operator has 40 branches.
• Partner bank has 300 branches.
• Through Bancatakaful, the operator can reach customers through all 300 bank branches.

Simple Idea

Bank network → Wider Takaful distribution

9. Wider Market Coverage

• Bancatakaful allows Takaful operators to reach customers they might otherwise not reach.
• This may include:
• Existing bank customers
• Financing customers
• Corporate clients
• High-net-worth customers
• Small businesses

Example

• A Takaful operator mainly sells through agents.
• By partnering with a bank, it can now offer Takaful to thousands of the bank’s home-financing customers.

Simple Idea

More distribution channels → More potential participants

10. Cost Savings

• Bancatakaful can reduce distribution costs for Takaful operators.
• The operator does not necessarily need to build as many:
• Branches
• Sales offices
• Agent networks
• It can use the bank’s existing infrastructure.

Example

Instead of opening 100 new branches, the Takaful operator partners with a bank that already has 100 branches.

This may reduce:

• Rental costs
• Staff costs
• Marketing costs
• Administrative costs

Simple Idea

Use existing bank network → Lower distribution cost

11. Improved Distribution Efficiency

• Bancatakaful can make the sale and delivery of Takaful products more efficient.
• Customers are already visiting banks for:
• Financing
• Deposits
• Investment
• Takaful can therefore be offered at the same time.

Example

• Ahmad applies for car financing.
• During the same application process, the bank offers Motor Takaful.
• Ahmad does not need to separately search for a Takaful provider.

Simple Idea

Banking need + Takaful need handled together → Faster and more efficient distribution

12. Improved Competitiveness of Takaful Operators

• Wider distribution and lower costs can improve the competitiveness of Takaful operators.
• They may be able to:
• Reach more customers
• Reduce selling costs
• Increase contribution income
• Compete more effectively with conventional insurers

Simple Idea

More customers + Lower distribution cost + Better efficiency = Stronger Takaful operator

Example Bringing Everything Together

Suppose Bank A partners with XYZ Takaful.

Ahmad goes to Bank A to obtain:

RM500,000 Islamic home financing

The bank offers him:

• Islamic home financing
• Houseowner Takaful
• Family Takaful

For the Bank

• Earns financing income
• Earns Takaful distribution income
• Offers more products
• Strengthens relationship with Ahmad
• Improves customer retention

For the Takaful Operator

• Gains access to Bank A’s customer
• Does not need its own branch to reach Ahmad
• Reduces distribution cost
• Expands market coverage

For Ahmad

• Obtains:
• Financing
• Property protection
• Family protection
• through one convenient channel

Simple Process

Bank + Takaful Operator → Bancatakaful → Customer receives banking + Takaful services

Easy Way to Remember

Benefits to Banks

• Wider product range
• Additional income
• Stronger customer relationships
• Better customer retention
• Better product bundling
• Improved customer lifecycle management
• Use of strong bank brand

Benefits to Takaful Operators

• Wider distribution
• Broader market coverage
• Lower distribution costs
• Better efficiency
• Access to bank customers
• Improved competitiveness

Simple Formula

Bank’s Customers + Bank’s Distribution Network + Takaful Operator’s Products = Bancatakaful

Takaful - Challenges and Development of the Retakaful Industry

• The current Retakaful industry is still not large enough to fully meet the needs of Takaful operators.
• As the Takaful industry grows, demand for Retakaful protection also increases.
• Therefore, more Retakaful operators with strong financial capacity are needed to support the industry.

1. Inadequate Retakaful Capacity

• Existing Retakaful providers may not have enough capacity to absorb all the risks transferred by Takaful operators.
• This becomes a problem especially for:
• Large industrial risks
• Infrastructure projects
• Aviation risks
• Marine risks
• Catastrophe risks
• If Retakaful capacity is insufficient, Takaful operators may have difficulty protecting themselves against very large claims.

Example

• A Takaful operator covers a factory worth RM1 billion.
• The operator does not want the Participants’ Risk Fund to bear the entire risk.
• It wants to transfer RM700 million of the exposure to Retakaful operators.
• However, existing Retakaful companies can only accept RM400 million.

This creates a:

RM300 million Retakaful capacity gap

Simple Idea

Growing Takaful risks → Greater need for Retakaful → Existing capacity may be insufficient

2. Need for More Retakaful Operators

• More Retakaful companies should be established.
• These operators need sufficient capital and financial resources.
• Stronger Retakaful capacity can:
• Support more Takaful operators
• Absorb larger risks
• Reduce dependence on conventional reinsurance
• Strengthen the Islamic insurance industry

Example

• If several new well-capitalised Retakaful companies enter the market, Takaful operators will have more options for sharing large risks.
• This improves the overall stability of the Takaful industry.

Simple Idea

More Retakaful operators + More capital = Greater risk-sharing capacity

3. Need for National Support and Commitment

• The development of Retakaful may require national-level effort and support.
• Governments, regulators and industry participants may need to work together.
• Support may include:
• Appropriate regulation
• Encouraging investment
• Developing Islamic financial markets
• Promoting professional education
• Supporting new Retakaful institutions

Simple Idea

Strong Retakaful industry requires cooperation between government, regulators and industry players.

4. Shortage of Skilled Professionals

• Another major challenge is the lack of experienced and qualified staff in the Retakaful industry.
• Weaknesses may exist in areas such as:
• Asset management
• Underwriting
• Accounting
• Marketing
• Retakaful is a specialised business, so staff need both:
• Technical insurance knowledge
• Understanding of Shari’ah-compliant operations

5. Weakness in Asset Management

• Retakaful operators receive and manage significant amounts of funds.
• These funds need to be invested carefully in Shari’ah-compliant assets.
• Poor asset management can:
• Reduce investment returns
• Increase financial risk
• Create liquidity problems
• Weaken the operator’s ability to meet obligations

Example

• A Retakaful operator receives large contributions but invests too much in illiquid assets.
• A major catastrophe occurs and several Takaful operators make claims.
• The Retakaful company may struggle to quickly convert investments into cash.

Simple Idea

Good asset management = sufficient return + safety + liquidity

6. Weakness in Underwriting

• Underwriting is the process of:
• Evaluating risks
• Estimating possible losses
• Deciding how much risk to accept
• Determining appropriate pricing and terms
• Poor underwriting can cause the Retakaful operator to accept too much risk for too little contribution.

Example

• A Retakaful operator accepts RM500 million of flood risk.
• It underestimates the probability of flooding.
• It charges only RM2 million for the protection.
• A severe flood causes RM100 million in claims.
• Poor pricing may result in a major underwriting loss.

Simple Idea

Weak underwriting → Poor risk selection → Higher possibility of losses

7. Weakness in Accounting

• Retakaful operators need accurate accounting systems to monitor:
• Contributions
• Claims
• Reserves
• Investments
• Expenses
• Surplus or deficit
• Poor accounting may make it difficult to determine the true financial condition of the operator.

Example

• A Retakaful company fails to properly estimate future claim obligations.
• It appears profitable today, but later discovers that large outstanding claims must still be paid.

Simple Idea

Good accounting helps show the real financial position of the Retakaful operator.

8. Weakness in Marketing

• Retakaful operators also need effective marketing and relationship-management skills.
• They must explain their services to:
• Takaful operators
• Brokers
• Regulators
• Institutional clients
• Weak marketing can prevent a Retakaful operator from attracting sufficient business even if it has strong technical capabilities.

Simple Idea

Good products are not enough; operators must also reach and convince potential clients.

9. Need for Education and Continuous Staff Training

• Retakaful providers should develop proper educational and professional training programmes.
• Staff training should be continuous because risks, regulations and technology are always changing.

Training Areas May Include

• Underwriting
• Risk management
• Shari’ah principles
• Actuarial analysis
• Investment management
• Accounting
• Claims management
• Marketing
• Technology and data analytics

Example

• A Retakaful operator regularly trains its underwriters in:
• Climate-risk modelling
• Catastrophe analysis
• Shari’ah-compliant contract structures

This improves the quality of risk assessment.

Simple Idea

Better training → Better staff → Better Retakaful operations

10. Strengthening Financial Condition

• Retakaful operators need a strong financial position.
• This includes:
• Adequate capital
• Sufficient reserves
• Strong liquidity
• Sound investments
• Effective risk management
• Strong financial capacity allows the operator to absorb large unexpected claims.

Example

Two Retakaful companies each face a RM100 million catastrophe claim.

• Company A has strong capital and reserves.
• Company B has weak capital and limited liquidity.

Company A is more capable of paying the claim without threatening its survival.

Simple Idea

Strong capital + reserves + liquidity = Greater ability to pay claims

11. Improving Underwriting Practices

• Retakaful operators should improve the quality of their underwriting.
• Better underwriting helps ensure that:
• Risks are properly understood
• Contributions are priced correctly
• Excessive risks are avoided
• Portfolios are properly diversified

Example

Before accepting earthquake risk, the operator may examine:

• Location
• Building quality
• Historical earthquake data
• Maximum possible loss
• Concentration of similar risks

This allows the operator to decide:

Accept the risk? → How much? → At what price?

12. Improving Competitive Advantage

• Better financial strength and underwriting practices can improve a Retakaful operator’s competitive advantage.
• A strong Retakaful operator may attract more Takaful companies because it can offer:
• Greater financial security
• Better pricing
• Higher claim-paying ability
• Strong technical expertise
• Reliable Shari’ah-compliant services

Simple Idea

Strong finances + Skilled staff + Good underwriting = Stronger competitive position

Overall Challenges and Solutions

Main Challenges

• Insufficient Retakaful capacity
• Too few well-capitalised Retakaful operators
• Shortage of skilled professionals
• Weak asset management
• Weak underwriting
• Weak accounting
• Weak marketing
• Limited financial strength

Main Solutions

• Establish more Retakaful operators
• Increase financial and capital capacity
• Improve underwriting practices
• Develop stronger asset management
• Improve accounting and reporting
• Strengthen marketing capabilities
• Provide continuous education and professional training

Easy Way to Remember

More Capacity + More Capital + Better Staff + Better Underwriting + Stronger Financial Management = Stronger Retakaful Industry

Takaful - Where Does the Money to Pay Claims Come From?

The main source of money used to pay Takaful claims is the Participants’ Risk Fund (PRF). This fund is built mainly from the participants’ contributions, particularly the Tabarru‘ portion.

1. Participants’ Contributions – Main Source

• Participants pay Takaful contributions.
• Part of each contribution is allocated as Tabarru‘ (donation).
• These Tabarru‘ amounts are pooled together in the Participants’ Risk Fund.
• When a participant suffers a covered loss, the claim is paid from this fund.

Example

Suppose:

• 10,000 participants contribute.
• Each contributes RM1,000.
• RM700 from each contribution is allocated to the risk fund.

Therefore:

10,000 × RM700 = RM7 million Participants’ Risk Fund

If claims during the year total RM4 million:

RM7m Risk Fund → RM4m claims paid

So the most important answer is:

Claims are primarily funded by the participants themselves through their pooled Tabarru‘ contributions.

2. What About Investments?

Yes. Part of the Participants’ Risk Fund may be invested in Shari’ah-compliant investments while it is not immediately needed.

For example:

• Participants’ Risk Fund = RM7 million
• RM5 million is invested
• Investment return = RM250,000

The fund now benefits from that investment income.

So resources available to support claims can include:

Participants’ contributions + Investment income earned by the fund

However, the investment itself is still an asset belonging to the Participants’ Risk Fund.

It may be converted into cash when necessary to meet claims.

Simple Idea

Contributions → Risk Fund → Part invested → Investment return added to fund → Claims paid from fund

3. What About Assets?

The word assets refers to everything the fund owns that has financial value.

The Participants’ Risk Fund may hold assets such as:

• Cash
• Islamic deposits
• Sukuk
• Shari’ah-compliant investments
• Other permitted financial assets

Therefore, technically, claims are paid using the assets of the Participants’ Risk Fund.

For example:

The fund has:

• RM2m cash
• RM4m Sukuk
• RM1m Islamic deposits

Total assets = RM7m

If a RM3m claim needs to be paid, the operator may use available cash and liquidate investments if necessary.

So:

Participants’ contributions create the fund → the fund holds assets → those assets are used to meet claims.

4. What About Surplus?

A surplus is not normally the original source of claims.

Surplus is what remains after claims, reserves, expenses and other obligations have been accounted for.

For example:

• Contributions and investment income = RM10m
• Claims = RM5m
• Expenses/reserves = RM3m

Remaining:

RM10m − RM5m − RM3m = RM2m surplus

That RM2 million may remain in the Participants’ Risk Fund, depending on the Takaful model.

If retained, it strengthens the fund and can help support future claims.

So:

Surplus = money left after current obligations

It can strengthen the fund for the future, but it is not a separate payment made by participants specifically to settle a claim.

5. What If the Participants’ Risk Fund Does Not Have Enough Money?

This is where the Takaful operator/shareholders’ fund can become important.

Suppose:

• Participants’ Risk Fund assets = RM7m
• Claims and obligations unexpectedly reach RM8m

There is a:

RM1m deficit

The Takaful operator may provide an interest-free loan called Qard from the shareholders’ fund.

Flow

Participants’ Fund has RM7m

→ Claims require RM8m

→ RM1m shortfall

→ Operator provides RM1m Qard

→ Claims can be met

The Qard is generally expected to be repaid from future surpluses of the participants’ fund according to the applicable structure.

Put Everything Together

The claim fund basically develops like this:

Participants pay contributions

→ Tabarru‘ portion enters Participants’ Risk Fund

→ Risk Fund holds cash and other assets

→ Part of the fund may be invested

→ Investment income increases the fund

→ Claims are paid from the Participants’ Risk Fund

→ If money remains after claims and obligations, there may be a surplus

→ If there is a shortage, the operator may provide Qard from the shareholders’ fund

Easy Way to Remember

Main source: Participants’ Tabarru‘ contributions

Additional growth: Shari’ah-compliant investment income

What actually pays claims: Assets/cash of the Participants’ Risk Fund

Surplus: What remains after obligations; can strengthen future claim capacity

If there is a deficit: Qard from the shareholders’ fund

So, in one sentence:

The participants fund the claims collectively; investments help grow the fund, surplus strengthens it, and shareholder Qard provides temporary support when the fund is insufficient.

Takaful - Takaful Operator

• A Takaful operator is the party responsible for managing the Takaful business and the Takaful fund on behalf of the participants.
• The operator does not simply act as a conventional insurer taking ownership of participants’ risks.
• Instead, it administers the Takaful arrangement according to the relevant:
• Shari’ah principles
• Legal requirements
• Regulatory requirements
• Contractual terms

Simple Idea

Participants provide contributions → Takaful operator manages the scheme and fund → Eligible claims are administered according to the Takaful contract

1. Contractual Capacity

• The Takaful operator must have the legal capacity to enter into commercial contracts.
• This means the operator must be legally recognised and capable of:
• Entering into agreements
• Assuming contractual obligations
• Managing participants’ funds
• Enforcing contractual rights

Example

• ABC Takaful wants to offer Motor Takaful.
• Before entering into contracts with participants, ABC Takaful must legally exist as an entity capable of entering into binding contracts.

Simple Idea

Operator must be legally capable of making valid contracts.

2. Registration with Relevant Authorities

• A Takaful operator must be properly registered with the relevant authorities before commencing operations.
• It cannot simply start collecting contributions and offering Takaful products without regulatory approval.
• Registration helps ensure that the operator is:
• Legally recognised
• Properly supervised
• Accountable to regulators

Example

• A company wants to establish a Family Takaful business.
• It must first register and obtain the necessary regulatory approvals before offering products to customers.

Simple Idea

No registration → No legal Takaful operation

3. Assets Must Exceed Liabilities

• The operator must demonstrate that it is financially capable of meeting its obligations.
• It should maintain a surplus of assets over liabilities.

Assets

May include:

• Cash
• Investments
• Receivables
• Property
• Other financial resources

Liabilities

May include:

• Claims payable
• Expenses
• Amounts owed
• Other financial obligations

Example

Suppose the operator has:

• Total assets = RM200 million
• Total liabilities = RM150 million

Therefore:

RM200m assets − RM150m liabilities = RM50m excess of assets over liabilities

• This shows that the operator has a stronger financial position.

Why Is This Important?

• It increases the operator’s ability to:
• Continue operating
• Meet financial obligations
• Support the Takaful fund if necessary
• Protect participants against financial instability

Simple Idea

Assets should be greater than liabilities → Operator remains financially sound

4. Minimum Capital Requirement

• Before receiving a licence, a Takaful operator must meet a minimum capital requirement.
• Capital is generally provided by the shareholders or owners of the Takaful operator.
• This capital provides financial support to the business.

Purpose of Capital

• Establish the company
• Finance operational infrastructure
• Meet regulatory requirements
• Absorb unexpected losses
• Provide financial stability
• Support the Takaful business when required

Example

Suppose the regulator requires a minimum capital of:

RM100 million

• A company only has RM60 million.
• It may not qualify for a licence until it raises the additional RM40 million.

Simple Idea

Required capital must be available before the operator can be licensed.

5. Legal Documentation Must Be Valid and Shari’ah-Compliant

• The operator must ensure that the terms and conditions of its Takaful products are:
• Clear
• Legally enforceable
• Consistent with the Shari’ah contracts used
• The legal documents must accurately reflect the structure of the Takaful product.

Shari’ah Contracts May Include

• Tabarru‘ – donation
• Wakalah – agency
• Mudarabah – profit sharing
• Qard – interest-free loan

Example

Suppose a Takaful operator uses a Wakalah model.

• The certificate should clearly explain:
• That the operator acts as an agent
• The Wakalah fee charged
• How contributions are allocated
• How claims are paid
• How any surplus is treated

Simple Idea

The written contract must match the actual Shari’ah structure being used.

6. Effective Shari’ah Governance

• The operator must establish and effectively implement a proper Shari’ah governance framework.
• Shari’ah compliance should not exist only on paper.
• It must be integrated into:
• Product development
• Investments
• Claims
• Operations
• Documentation
• Financial management

Shari’ah Governance May Include

• Shari’ah Committee
• Shari’ah review
• Shari’ah audit
• Shari’ah risk management
• Internal compliance procedures

Example

• A Takaful operator proposes to invest participants’ funds in a conventional interest-bearing bond.
• The Shari’ah governance process should identify the investment as non-compliant.
• The operator should then avoid or replace the investment.

Simple Idea

Every important part of the Takaful operation must comply with Shari’ah.

7. Operational Infrastructure

• The operator must also have adequate systems and resources to run the Takaful business effectively.

This May Include

• Qualified employees
• Claims-processing systems
• Accounting systems
• Risk-management systems
• Investment-management systems
• Customer-service systems
• Information technology
• Internal controls

Example

• A Takaful operator receives 10,000 Motor Takaful claims.
• It needs:
• Proper staff
• Claims systems
• Assessment procedures
• Payment systems
• Fraud controls

to process those claims efficiently.

Simple Idea

A Takaful operator needs both Shari’ah compliance and strong business infrastructure.

Takaful Window

• Some conventional insurance companies may also offer Takaful products through a separate arrangement known as a Takaful window.
• A Takaful window allows a conventional insurer to provide Shari’ah-compliant Takaful services alongside its conventional insurance business.

Simple Example

XYZ Insurance operates:

• Conventional Motor Insurance
• Conventional Life Insurance

It then establishes a separate Takaful window offering:

• Motor Takaful
• Family Takaful

The Takaful activities must be managed according to the applicable Shari’ah and regulatory requirements.

Important Concern

• The conventional and Takaful activities should be properly separated.
• Otherwise, problems may arise involving:
• Mixing of funds
• Shari’ah non-compliant investments
• Governance conflicts
• Lack of transparency

Simple Idea

Takaful Window = Conventional insurer also offers Takaful through a specially structured Shari’ah-compliant operation

Main Responsibilities of a Takaful Operator

The Takaful operator must:

• Have legal contractual capacity
• Be properly registered
• Maintain financial strength
• Meet minimum capital requirements
• Ensure contracts are legally valid
• Ensure contracts comply with Shari’ah
• Maintain effective Shari’ah governance
• Maintain adequate operational infrastructure
• Properly manage participants’ funds
• Administer eligible claims
• Invest funds in accordance with Shari’ah principles

Easy Way to Remember

Takaful Operator = Manager + Administrator + Shari’ah-compliant Fund Operator

For the operator to function properly, it needs:

Legal capacity + Registration + Financial strength + Capital + Valid contracts + Shari’ah governance + Operational systems

Takaful - Beneficiary vs Nominee

A beneficiary and a nominee are related, but they are not necessarily the same person or role.

1. Beneficiary

• A beneficiary is the person who is legally entitled to benefit from the Takaful payment.
• The beneficiary ultimately receives the money for his or her own benefit, subject to the applicable Takaful arrangement and law.
• Beneficiaries are especially important in Family Takaful.

Example

• Ahmad participates in a Family Takaful plan.
• The Takaful benefit upon death is RM500,000.
• His wife, Fatimah, is entitled to receive the RM500,000 as the beneficiary.

Simple Idea

Beneficiary = Person who ultimately benefits from the money

2. Nominee

• A nominee is a person formally named by the participant to receive or administer the Takaful benefit when the participant dies.
• However, being a nominee does not always mean that person is entitled to keep the money for himself or herself.
• The nominee’s exact role depends on:
• The type of nomination
• The Takaful certificate
• Applicable law

A nominee may sometimes act simply as a person who receives the money first and distributes it to the rightful beneficiaries.

Example

• Ahmad nominates his brother, Ali.
• Ahmad dies.
• The Takaful operator pays the benefit to Ali as the nominee.
• If Ali’s role is only to administer the benefit, Ali cannot simply keep the RM500,000.
• He must distribute it to the persons legally entitled to it.

Simple Idea

Nominee = Person named to receive/manage the payment

Main Difference

Beneficiary

• Has the right to benefit from the Takaful payment.
• May ultimately keep the amount allocated to him or her.

Nominee

• Is the person named by the participant.
• May receive the payment first.
• May either:
• Be entitled to the money as a beneficiary, or
• Merely administer/distribute the money to the rightful beneficiaries.

Simple Example

Ahmad has a Family Takaful benefit of RM500,000.

He names Ali as the nominee, but Ahmad’s wife and children are the persons entitled to the benefit.

When Ahmad dies:

Takaful Operator → RM500,000 → Ali as nominee → Ali distributes to wife and children

Therefore:

Ali = Nominee

Wife and children = Beneficiaries

But in another arrangement, Ahmad may nominate his wife in a way that makes her both:

Nominee + Beneficiary

So the easiest way to remember is:

Nominee = “Who is named to receive/deal with the money?”

Beneficiary = “Who is actually entitled to benefit from the money?”

The exact legal effect of a nomination can differ by jurisdiction and by the type of Takaful nomination.