Takaful - Parties Involved in Takaful

• A Takaful arrangement involves several parties who work together to ensure the scheme operates properly.
• The main parties are:
• Takaful operator
• Participants
• Other important stakeholders include:
• Beneficiaries
• Nominees
• These parties are interconnected and each has a different role in the Takaful arrangement.

1. Takaful Operator

• The Takaful operator is the company responsible for managing and administering the Takaful scheme.
• It does not normally act as the conventional insurer that owns and bears all the participants’ risks.
• Instead, it manages the participants’ funds on their behalf.

Main Responsibilities

• Collect participants’ contributions
• Manage the Participants’ Risk Fund
• Assess and process claims
• Pay eligible Takaful benefits from the appropriate fund
• Invest funds in Shari’ah-compliant investments
• Maintain records and administration
• Ensure the operation follows Shari’ah requirements

Example

• Ahmad joins ABC Takaful.
• ABC Takaful collects Ahmad’s contribution.
• Part of the contribution enters the Participants’ Risk Fund.
• Ahmad later suffers a covered loss.
• ABC Takaful assesses the claim and arranges payment from the fund.

Simple Idea

Takaful Operator = Manager of the Takaful arrangement

2. Participants

• Participants are the individuals or businesses that join the Takaful scheme.
• They make contributions to obtain protection and at the same time agree to mutually assist other participants.
• Participants collectively share the risks through the common fund.

Main Responsibilities

• Pay the agreed Takaful contributions
• Provide accurate information when joining the scheme
• Follow the terms and conditions of the Takaful certificate
• Participate in the mutual assistance arrangement

Example

• 10,000 people participate in a Motor Takaful scheme.
• Each contributes to the common risk fund.
• If Sarah suffers a covered accident, her eligible claim is paid from that fund.

Simple Idea

Participants = People who contribute and mutually protect one another

3. Beneficiaries

• A beneficiary is a person who is entitled to receive a Takaful benefit when a specified event occurs.
• Beneficiaries are particularly relevant in Family Takaful.

Example

• Ahmad participates in a Family Takaful plan.
• His wife and children are entitled to certain benefits if Ahmad dies.
• Ahmad dies during the coverage period.
• The appropriate Takaful benefit is paid according to the certificate and applicable rules.

Simple Idea

Beneficiary = Person entitled to receive the Takaful benefit

4. Nominees

• A nominee is a person named by the participant in connection with the payment or administration of Takaful benefits after the participant’s death.
• The exact legal role of the nominee can depend on:
• The type of Takaful arrangement
• Applicable law
• The nomination made by the participant
• A nominee is therefore not always automatically the ultimate beneficial owner of the money.

Example

• Ahmad names his wife, Fatimah, as nominee under his Family Takaful certificate.
• Ahmad later dies.
• Fatimah may receive or administer the Takaful benefit according to the nomination and applicable legal rules.

Simple Idea

Nominee = Person formally named by the participant to receive or deal with the benefit according to the applicable arrangement

Relationship Between the Parties

Participant → Takaful Operator

• Participant makes contributions.
• Operator manages the Takaful arrangement.

Participants → Other Participants

• Participants mutually share risk.
• Their contributions form the common fund used to help members who suffer covered losses.

Takaful Operator → Beneficiary/Nominee

• When a covered event occurs, the operator processes the claim.
• The appropriate benefit is then paid or administered according to the Takaful certificate and nomination arrangements.

Simple Process

Participant contributes → Takaful Operator manages fund → Covered event occurs → Claim is processed → Beneficiary/Nominee receives or administers the applicable benefit

Easy Way to Remember

Takaful Operator → manages the scheme

Participant → contributes and shares risk

Beneficiary → entitled to the benefit

Nominee → person named to receive/administer the benefit according to the applicable rules

Takaful - Differences Between Takaful and Conventional Insurance

Below is a detailed explanation of each difference shown in the table, together with examples.

1. Contract Type

Takaful

• Takaful is not based on a pure sale-and-purchase contract of risk.
• It is usually structured using a combination of:
• Tabarru‘ (charitable/donation contract)
• Wakalah (agency contract)
• Mudarabah (profit-sharing contract) in some models
• This means participants contribute to help one another, while the Takaful operator manages the scheme according to agreed contractual terms.

Example

• Ahmad joins a Family Takaful plan.
• Part of his contribution is treated as Tabarru‘ and goes into the participants’ risk fund.
• The Takaful operator manages the fund as wakil and may receive a fee.
• If investments are managed under mudarabah, profits may be shared according to an agreed ratio.

Conventional Insurance

• Conventional insurance is mainly an exchange contract.
• The policyholder pays a premium.
• In return, the insurer agrees to provide compensation if the insured event occurs.
• So it is essentially a commercial exchange between the insured and the insurer.

Example

• Sarah pays RM1,200 for motor insurance.
• In return, the insurer agrees to compensate her or a third party according to the policy terms if a covered event occurs.

Simple Difference

• Takaful → mutual help + agency/profit-sharing structure
• Conventional insurance → commercial exchange contract

2. Obligation of the Participants / Policyholders

Takaful

• Participants are required to make contributions to the Takaful scheme.
• These contributions help build the common fund used to assist members who suffer covered losses.
• The contribution is not simply a price paid to buy risk coverage from the operator.

Example

• 5,000 participants each contribute RM500 to a General Takaful scheme.
• These contributions are pooled in the participants’ fund.
• If some participants suffer covered losses, claims are paid from that pool.

Conventional Insurance

• Policyholders are required to pay premiums to the insurer.
• These premiums are paid in return for insurance protection under the policy.

Example

• John pays RM800 yearly for fire insurance.
• This is his contractual obligation to keep the policy in force.

Simple Difference

• Takaful → participants make contributions
• Conventional insurance → policyholders pay premiums

3. Obligation of the Operator / Insurer

Takaful

• The Takaful operator manages and administers the Takaful fund.
• It does not act in the same way as a conventional insurer that simply takes over the risk as owner of the contract.
• Claims or Takaful benefits are paid from the participants’ risk fund.
• If the fund faces a shortfall, the operator may provide an interest-free loan (qard) from the shareholders’ fund to the Takaful fund.

Example

• The participants’ risk fund has RM2 million.
• Claims for the year unexpectedly rise to RM2.3 million.
• There is a shortfall of RM300,000.
• The Takaful operator may provide qard of RM300,000 from the shareholders’ fund so the claims can still be paid.

Conventional Insurance

• In conventional insurance, the insurer is responsible for paying the claims it has undertaken under the insurance contract.
• There may or may not be separate funds depending on regulatory rules, but the insurer itself is liable for the claims.

Example

• An insurance company issues a fire insurance policy.
• A factory insured under the policy is damaged by fire.
• The insurer is responsible for paying the covered claim.

Simple Difference

• Takaful operator → manages the fund and may provide qard if needed
• Conventional insurer → directly liable for claims under the policy

4. Return of the Operator / Insurer

Takaful

• The Takaful operator earns a return for managing the Takaful business.
• This return may come through:
• Wakalah fee (agency fee)
• Mudarabah profit share (if applicable)
• So the operator earns income for its management services, not by owning the participants’ risk fund itself.

Example

• Ahmad contributes RM1,000 to a Takaful scheme.
• The operator charges a Wakalah fee of RM150 for managing the scheme.
• If there is an investment profit under a mudarabah arrangement, the operator may receive an agreed share of that profit.

Conventional Insurance

• The insurance company makes profit when there is an underwriting surplus, meaning premiums and other earnings exceed claims and expenses.
• The insurer also may earn profits from investment returns.

Example

• Premiums collected = RM10 million
• Claims paid = RM6 million
• Expenses = RM2 million
• Remaining amount = RM2 million underwriting surplus

Simple Difference

• Takaful operator → earns fee and/or profit share for management
• Conventional insurer → profits from underwriting surplus and investments

5. Insurer–Insured Relationship

Takaful

• There is no direct insurer-insured relationship between the Takaful operator and the participants in the same conventional sense.
• Participants effectively act as both:
• persons seeking protection, and
• persons collectively providing protection to one another
• The operator manages the arrangement.

Example

• Ahmad, Ali, and Fatimah all join a Takaful scheme.
• If Ahmad suffers a covered loss, the claim is paid from the common fund formed by all participants’ contributions.
• So the other participants are indirectly helping Ahmad.

Conventional Insurance

• There is a clear relationship between:
• insurer
• insured/policyholder
• The insurer promises to indemnify the insured in return for the premium.

Example

• Sarah buys motor insurance from XYZ Insurance.
• XYZ Insurance is the insurer.
• Sarah is the insured/policyholder.

Simple Difference

• Takaful → participants mutually protect one another
• Conventional insurance → insurer protects insured

6. Indemnification

Takaful

• Compensation in Takaful is based on:
• mutual contribution
• solidarity
• collective assistance
• A participant who suffers a covered loss receives help from the common fund.

Example

• 10,000 participants contribute to a Takaful fund.
• One participant’s shop burns down.
• The fund pays the eligible claim using the pooled contributions.

Conventional Insurance

• Indemnification is based on a commercial contractual relationship.
• The insurer pays according to the insurance contract in return for the premium paid.

Example

• A business pays property insurance premiums.
• A fire occurs.
• The insurer compensates the business according to the policy wording.

Simple Difference

• Takaful → indemnification through mutual assistance
• Conventional insurance → indemnification through commercial contract

7. Investment of Fund

Takaful

• Takaful funds must be invested only in Shari’ah-compliant instruments.
• This means the investments must avoid:
• Riba
• prohibited businesses
• other non-Shari’ah-compliant activities

Examples of suitable investments

• Sukuk
• Shari’ah-compliant shares
• Islamic money market instruments
• Islamic investment funds

Example

• A Takaful operator has RM50 million available for investment.
• It invests in Sukuk and Shari’ah-compliant equities.
• It cannot invest in conventional interest-bearing bonds.

Conventional Insurance

• Conventional insurers are not restricted by Shari’ah investment rules.
• They may invest in instruments permitted by ordinary law and regulation, including interest-bearing instruments.

Example

• A conventional insurer may invest in:
• conventional bonds
• fixed deposits
• interest-bearing securities
• shares of companies that may not meet Shari’ah screening standards

Simple Difference

• Takaful → only Shari’ah-compliant investments
• Conventional insurance → investments are not limited by Shari’ah rules

8. Terms Used

Takaful

Common terms include:

• Contributions instead of premiums
• Participants instead of policyholders
• Family Takaful instead of life insurance

Example

• Ahmad joins a Family Takaful plan and makes monthly contributions as a participant.

Conventional Insurance

Common terms include:

• Premiums
• Policyholders
• Life insurance

Example

• Sarah buys a life insurance policy and pays monthly premiums as the policyholder.

Simple Difference

• Takaful language reflects mutual assistance
• Conventional insurance language reflects commercial insurance structure

Easy Summary

Takaful

• Based on mutual help
• Participants make contributions
• Operator manages the fund
• Claims paid from participants’ risk fund
• If shortfall occurs, operator may give qard
• Funds invested in Shari’ah-compliant assets
• Participants help protect one another

Conventional Insurance

• Based on commercial exchange
• Policyholders pay premiums
• Insurer is directly liable for claims
• Insurer earns profit from underwriting and investments
• Funds are not restricted by Shari’ah rules
• Clear insurer-insured relationship

Takaful - What Is Takaful?

Meaning of Takaful

• The word Takaful comes from the Arabic root kafalah, which means:
• Responsibility
• Guarantee
• Suretyship
• Literally, Takaful conveys the ideas of:
• Joint guarantee
• Shared responsibility
• Collective assurance
• Mutual undertaking
• Takaful therefore represents an arrangement where members of a group agree to help and protect one another.
• It reflects the Islamic principle of cooperation stated in the Qur’an:
• “Help one another to do what is right and good; do not help one another towards sin and hostility.”
• (Qur’an 5:2)

1. Takaful Is Based on Mutual Cooperation

• Takaful is not a sale and purchase of risk.
• One participant is not buying indemnity from another party at a particular price.
• Instead, participants who face similar risks agree to mutually support one another.

How It Works

• Participants contribute money into a common pool of funds.
• If one participant suffers a covered loss, compensation is paid from that common fund.
• Therefore, each participant is:
• Protecting himself, and
• Helping to protect other participants

Simple Process

Participants contribute → Common risk fund → Participant suffers covered loss → Fund provides assistance

Simple Idea

Takaful = People helping one another against common risks

2. Takaful Is Not an Exchange Contract

• Conventional insurance is generally structured as an exchange contract.
• The policyholder pays a premium in exchange for the insurer accepting the risk.

Conventional Insurance

Policyholder → Pays premium → Insurer accepts risk

• Takaful is different.
• Participants do not simply transfer their risks to the Takaful operator.
• They agree to share risks collectively.

Takaful

Participant + Participant + Participant → Common fund → Risks shared collectively

• The Takaful operator mainly manages the arrangement.

3. Mutual Guarantee Among Participants

• Participants usually face similar types of risks.
• Each person contributes an agreed amount to the fund.
• The contributions are pooled together.
• When a participant experiences a covered loss, the fund provides financial assistance.

Example

Suppose:

• 1,000 participants join a Motor Takaful scheme.
• Each contributes RM1,000 to the relevant Takaful arrangement.
• A common risk fund is established.
• During the year, 50 participants suffer covered accidents.
• Eligible claims are paid from the common fund.

Simple Idea

Everyone contributes → Only those who suffer covered losses receive assistance

The objective is not that every participant must receive exactly what they contributed.

The objective is mutual protection and cooperation.

4. Brotherhood and Solidarity

• Takaful promotes:
• Brotherhood
• Mutual responsibility
• Solidarity
• Cooperation
• Assistance during hardship
• A person joining Takaful does not participate only for personal benefit.
• The participant also agrees to help other members who may suffer losses.

Simple Idea

“I help you when you suffer a loss, and you help me when I suffer a loss.”

5. Historical Foundation – ‘Aqilah

• Although modern Takaful developed mainly from the 1980s, the underlying concept of mutual assistance existed much earlier in Islamic history.
• One important example is the system of ‘Aqilah.

What Was ‘Aqilah?

• Under ancient Arab tribal practice, if a person accidentally caused the death of another person, financial compensation known as blood money (diyah) could become payable.
• The accused person’s paternal relatives would collectively contribute toward the payment.
• The burden was therefore not placed entirely on one individual.

Example

• A member of Tribe A unintentionally causes the death of a member of Tribe B.
• Compensation must be paid to the victim’s family.
• Instead of the responsible person paying everything alone:
• His paternal relatives contribute together.
• The collected money is paid to the victim’s family.

Simple Process

Individual causes accidental harm → Family/tribe contributes collectively → Victim’s family receives compensation

Connection to Takaful

• Both involve:
• Collective responsibility
• Pooling contributions
• Mutual assistance
• Helping a member facing financial difficulty

6. ‘Aqilah Was Non-Commercial

• The ‘Aqilah arrangement was not designed to generate commercial profit.
• Members contributed because of:
• Brotherhood
• Social responsibility
• Mutual assistance
• The purpose was to help a member facing a financial burden.

Simple Idea

‘Aqilah = Mutual assistance, not buying and selling risk

7. Historical Foundation – The Ash‘aris

• Another example comes from the hadith concerning the Ash‘ari community.
• When members experienced shortages of food:
• They gathered whatever food they had.
• Combined it together.
• Redistributed it equally among themselves.
• The Prophet ﷺ praised this practice.

Connection to Takaful

The principle is similar:

Everyone contributes what they can → Resources are pooled → Members in need receive assistance

Simple Idea

Individual resources → Common pool → Mutual assistance

8. Modern-Day Examples of the Same Spirit

The same principle can still be seen in communities today.

Examples

• Friends helping prepare a large community feast
• Neighbours helping repair someone’s damaged house
• Community members helping a family move to a new home
• Mosque members contributing to assist a bereaved family
• Community members contributing to emergency assistance funds

All of these demonstrate:

Cooperation + Mutual assistance + Shared responsibility

9. Nihd – Collective Contribution

• Another concept similar to Takaful is Nihd.
• Nihd refers to a group of people contributing resources such as:
• Food
• Money
• Other items
• The resources are pooled for collective use and assistance.

Important Point

• The amount contributed by each person does not have to equal the benefit that person eventually receives.
• This is because the objective is not commercial exchange.
• The purpose is mutual cooperation and solidarity.

Example

Five families contribute:

• Family A → RM500
• Family B → RM300
• Family C → RM700
• Family D → RM400
• Family E → RM600

Later, Family B experiences an emergency and receives RM2,000 from the common fund.

Family B contributed only RM300 but receives RM2,000.

This is acceptable within the mutual-assistance concept because:

Contribution ≠ Purchase price

Instead:

Contribution = Assistance to the group

10. The Three Elements of Mutuality in Takaful

Takaful contains three important forms of mutuality:

Mutual Help

• Participants help one another financially when a covered loss occurs.

Mutual Responsibility

• Participants collectively accept responsibility for supporting members facing covered losses.

Mutual Protection

• Participants collectively provide protection against specified risks.

Easy Formula

Mutual Help + Mutual Responsibility + Mutual Protection = Takaful

11. Tabarru‘ – Donation

• A very important concept in Takaful is Tabarru‘.
• Tabarru‘ means a donation or contribution made for mutual assistance.
• Participants agree that part of their Takaful contribution will be treated as Tabarru‘.
• This amount goes into the Participants’ Risk Fund.

Purpose of Tabarru‘

• To provide money for eligible claims.
• To enable participants to fulfil their obligation of helping one another.
• To support the principle of Ta‘awun, or mutual cooperation.

Simple Process

Participant contributes → Tabarru‘ portion enters Risk Fund → Covered loss occurs → Fund assists participant

12. Example of Tabarru‘

Suppose Ahmad contributes:

RM1,200 per year

to a Takaful plan.

A portion, for example:

RM700

may be allocated as Tabarru‘ into the Participants’ Risk Fund, depending on the product structure.

That RM700 is used collectively with contributions from other participants to pay eligible claims.

If Sarah, another participant, suffers a covered loss:

Ahmad’s contribution + Sarah’s contribution + Other participants’ contributions → Common fund → Sarah’s claim

Later, if Ahmad suffers a covered loss:

Same common fund → Helps Ahmad

Simple Idea

Tabarru‘ turns individual contributions into mutual assistance.

13. Ta‘awun – Mutual Assistance

• Ta‘awun means cooperation or mutual assistance.
• It is one of the central objectives of Takaful.
• Participants agree to compensate and assist one another for losses arising from defined risks.

Simple Relationship

Tabarru‘ = Mechanism

Ta‘awun = Objective

In other words:

Participants make Tabarru‘ contributions → This allows Ta‘awun to take place

14. Why Gharar Is Treated Differently in Takaful

• Conventional insurance is generally considered an exchange contract (‘aqd mu‘awadah).
• Excessive gharar in an exchange contract raises a Shari’ah problem.
• Takaful, however, uses a charitable contract (‘aqd tabarru‘) for the mutual-risk component.
• Shari’ah is more tolerant of uncertainty in charitable arrangements than in commercial exchange contracts.

Example

Ahmad contributes RM1,000 as Tabarru‘.

He does not know:

• Whether he will suffer a loss
• Whether he will receive a claim
• How much he may eventually receive

There is still uncertainty.

However, Ahmad’s RM1,000 is not treated as a purchase price for a guaranteed return.

It is a contribution for mutual assistance.

Therefore, the gharar is treated differently.

Simple Comparison

Conventional Insurance

Premium → Bought in exchange for uncertain compensation → Gharar problem

Takaful

Tabarru‘ contribution → Mutual assistance → Uncertainty tolerated in charitable arrangement

15. Separation of Funds

• In a stock-company Takaful structure, an important feature is the separation between:
• Participants’ Risk Fund
• Shareholders’ Fund

Participants’ Risk Fund

• Created from participants’ contributions.
• Used to:
• Pay eligible claims
• Maintain reserves
• Meet relevant risk-fund obligations
• Any underwriting surplus generally remains associated with the participants’ fund according to the applicable Takaful model.

Shareholders’ Fund

• Belongs to the shareholders of the Takaful operator.
• Used to operate and support the Takaful company.
• It is separate from the participants’ mutual-risk fund.

Simple Idea

Participants’ money ≠ Shareholders’ money

16. Greater Transparency in Takaful

• Takaful aims to provide greater transparency regarding:
• How participants’ contributions are allocated
• How the Takaful operator is paid
• How investment profits are shared
• How surplus is treated
• Participants should understand the fees and contractual relationships involved.

Two important models mentioned are:

• Wakalah
• Mudarabah

17. Wakalah Fee

• Under a Wakalah model, the Takaful operator acts as an agent (wakil).
• The operator manages the Takaful arrangement on behalf of participants.
• In return, the operator receives an agreed Wakalah fee.

Example

Ahmad contributes:

RM1,000

The agreed Wakalah fee is:

RM200

The remaining amount is allocated according to the Takaful structure.

Simple Idea

Participants appoint operator as agent → Operator manages fund → Operator receives disclosed fee

18. Mudarabah Profit Sharing

• Under a Mudarabah arrangement, the operator may manage investments.
• Investment profits are shared according to a pre-agreed ratio.

Example

• Investment profit = RM1 million
• Agreed sharing ratio:
• Participants = 70%
• Operator = 30%

Therefore:

• Participants’ share = RM700,000
• Operator’s share = RM300,000

Important Point

• The sharing ratio must be agreed in advance.
• This provides transparency about how the operator earns its return.

19. Underwriting Surplus

• If the Participants’ Risk Fund has more resources than necessary after:
• Paying claims
• Maintaining reserves
• Paying relevant expenses
• Meeting other obligations

an underwriting surplus may arise.

• The surplus is associated with the participants’ risk-sharing arrangement.
• Its treatment depends on:
• The particular Takaful model
• The contractual terms
• Applicable Shari’ah and regulatory requirements

Simple Idea

Participants’ Risk Fund → Claims and obligations paid → Amount remains → Underwriting surplus

20. Role of the Shari’ah Committee

• Another important feature of Takaful is the presence of a Shari’ah Committee or Shari’ah Board.
• Its role is to ensure that the Takaful operator complies with Shari’ah.

Responsibilities Include

• Reviewing Takaful products
• Reviewing contracts and documentation
• Assessing business activities
• Reviewing investments
• Identifying Shari’ah non-compliance risks
• Recommending corrective actions
• Ensuring operations remain consistent with Shari’ah principles

Example

Suppose a Takaful operator wants to invest participants’ money in a conventional interest-bearing bond.

The Shari’ah Committee would identify the investment as involving riba and require the operator to avoid or correct it.

Simple Process

Product/Investment proposed → Shari’ah Committee reviews → Shari’ah issue identified → Corrective action recommended

Overall Structure of Takaful

Participants

• Face similar risks.
• Agree to mutually protect one another.
• Make Takaful contributions.

Tabarru‘

• Part of the contribution is donated for mutual assistance.

Participants’ Risk Fund

• Pools the Tabarru‘ contributions.
• Pays eligible claims.

Takaful Operator

• Manages the arrangement.
• May receive:
• Wakalah fees
• Mudarabah profit share
• Other Shari’ah-approved remuneration depending on the model

Shari’ah Committee

• Supervises Shari’ah compliance.

Easy Way to Remember

Takaful is not:

“I pay you to take my risk.”

Instead, it is:

“We contribute together so that we can help whichever one of us suffers a covered loss.”

Simple Formula

Participants + Tabarru‘ + Common Risk Fund + Mutual Risk Sharing + Takaful Operator + Shari’ah Supervision = Takaful

Three Core Principles

Mutual Help

Mutual Responsibility

Mutual Protection

Together, these form the foundation of Takaful.

Takaful - Detailed Relationship with Islamic Banking and the Islamic Capital Market

The relationship works in both directions. Takaful does not operate independently; it needs Islamic banks and the Islamic capital market, while those institutions also benefit from the protection and investment capacity provided by Takaful.

1. Islamic Capital Market → Takaful

What does this mean?

• The Islamic capital market provides Shari’ah-compliant investment instruments that Takaful operators can use to invest their available funds.
• Takaful operators receive contributions from participants.
• Not all of these contributions are required immediately to pay claims.
• Therefore, part of the available funds can be invested.
• However, because Takaful must comply with Shari’ah, it cannot simply invest in:
• Conventional interest-bearing bonds
• Interest-based deposits
• Shares of prohibited businesses
• It therefore needs the Islamic capital market to provide suitable investments.

Examples of investments

A Takaful operator may invest in:

• Sukuk
• Shari’ah-compliant shares
• Islamic investment funds
• Shari’ah-compliant money-market instruments

Why is this important?

• Investment allows the Takaful fund to generate additional income.
• Investment returns can:
• Strengthen the participants’ fund
• Help build reserves
• Improve the financial capacity to pay future claims
• Potentially contribute to surplus
• Generate returns for shareholders where shareholder funds are invested separately

Example

Suppose a Takaful operator has:

• Participants’ funds available for investment = RM100 million

It invests:

• RM60 million in Sukuk
• RM20 million in Shari’ah-compliant equities
• RM20 million in Islamic money-market instruments

Suppose these investments generate:

RM5 million investment return

The investment return strengthens the relevant Takaful funds according to the structure of the Takaful arrangement.

Simple Flow

Islamic Capital Market

→ Provides Sukuk and other Shari’ah-compliant investments

→ Takaful operator invests available funds

→ Investment income is generated

Easy Idea

Islamic Capital Market gives Takaful somewhere Shari’ah-compliant to invest its money.

⸻

2. Takaful → Islamic Capital Market

This is the opposite direction.

What does this mean?

• The Islamic capital market provides investments to Takaful operators.
• But Takaful operators also provide money to the Islamic capital market by purchasing those investments.
• Therefore, Takaful operators are important institutional investors.

Example: Sukuk

Suppose an Islamic infrastructure company wants to build a new highway.

It needs:

RM1 billion

Instead of borrowing through a conventional interest-bearing bond, it issues Sukuk.

Different investors purchase the Sukuk, including:

• Islamic banks
• Islamic investment funds
• Pension funds
• Takaful operators

Suppose a Takaful operator purchases:

RM100 million of the Sukuk

The effect is:

• The company receives RM100 million of financing from the Takaful operator.
• The Takaful operator receives a Shari’ah-compliant investment asset.
• The Takaful operator earns returns according to the Sukuk structure.

Why medium- and long-term financing?

• Takaful operators may hold funds for many years, particularly in Family Takaful.
• Therefore, they may be able to invest in longer-term instruments such as Sukuk.
• This gives businesses and governments access to funds for:
• Infrastructure
• Property development
• Energy projects
• Business expansion
• Other long-term projects

Simple Flow

Takaful contributions/funds

→ Takaful operator invests

→ Purchases Sukuk

→ Sukuk issuer receives financing

→ Islamic capital market develops

Easy Idea

Islamic Capital Market gives investments to Takaful, while Takaful gives investment money back to the Islamic Capital Market.

So the relationship is:

Islamic Capital Market → Investment opportunities → Takaful

and

Takaful → Investment funds → Islamic Capital Market

⸻

3. Islamic Banking → Takaful

What does this mean?

• Islamic banks provide financing to:
• Individuals
• Families
• Businesses
• These financing arrangements often involve assets or people exposed to various risks.
• Those risks create a need for Takaful protection.

Example: Home Financing

Suppose Ahmad obtains:

RM500,000 Islamic home financing

from an Islamic bank.

The bank finances Ahmad’s house.

Now several risks exist:

• House could be damaged by fire.
• House could be damaged by flood.
• Ahmad could die before the financing is fully repaid.
• Ahmad could become permanently disabled.

These risks create opportunities for Takaful products.

Ahmad may obtain:

• Houseowner Takaful → protects the house
• Mortgage/Financing Takaful → provides protection if Ahmad dies or suffers a covered disability

Why does the bank create demand for Takaful?

Because when an Islamic bank finances assets such as:

• Houses
• Cars
• Machinery
• Factories
• Commercial buildings

those assets need protection.

Therefore:

More Islamic financing → More assets requiring Takaful → Greater demand for Takaful products

Another Example: Business Financing

An Islamic bank provides a company:

RM5 million financing

to purchase factory machinery.

The bank may require the machinery to be protected by Takaful.

The company obtains:

Property/Machinery Takaful

If the machinery is destroyed by fire:

• The business receives protection.
• The bank’s financial interest in the financed asset is also protected.

Simple Flow

Islamic Bank provides financing

→ Customer purchases asset

→ Asset faces risks

→ Takaful protection is needed

Easy Idea

Islamic banks create assets and financing relationships that need Takaful protection.

⸻

4. Takaful → Islamic Banking

Now look at the relationship from the opposite direction.

What does this mean?

• Islamic banks provide financing.
• Takaful helps protect the bank and its customers against financial losses arising from unexpected events.
• Therefore, Takaful makes Islamic financing more secure and sustainable.

Example: House Destroyed by Fire

Ahmad obtains Islamic home financing:

Outstanding financing = RM400,000

His house is protected by Takaful.

A major fire destroys the house.

Without Takaful:

• Ahmad may lose the house.
• Ahmad may still owe money to the bank.
• The bank may lose the value of its financed security.
• Ahmad may not have enough money to rebuild.

With Takaful:

• The covered loss may be compensated.
• The property may be repaired or rebuilt.
• The value of the bank’s financed asset is protected.
• Ahmad avoids bearing the entire financial loss personally.

Therefore, Takaful protects both sides

Customer

• Helps recover from the loss.
• Reduces financial hardship.
• Helps replace or repair the financed asset.

Islamic Bank

• Protects the value of its financed asset.
• Reduces the possibility that a major loss causes financing difficulties.
• Helps manage the financial risks associated with its financing portfolio.

Another Example: Death of Borrower

Suppose Ahmad owes:

RM300,000 on Islamic home financing

He has appropriate Family Takaful connected with the financing.

Ahmad unexpectedly dies.

The Takaful benefit may be used, according to the arrangement, to settle or reduce the outstanding financing.

This helps:

• Ahmad’s family
• The Islamic bank

The family may avoid being left with a large financing obligation, while the bank receives repayment of the covered outstanding amount.

Simple Flow

Islamic financing exists

→ Unexpected event occurs

→ Takaful pays eligible benefit

→ Financial impact on customer and bank is reduced

Easy Idea

Islamic Banking creates the need for protection; Takaful provides that protection.

⸻

5. Islamic Banks + Takaful Operators → Bancatakaful

What is Bancatakaful?

• Bancatakaful is cooperation between:
• An Islamic bank
• A Takaful operator
• The bank acts as a distribution channel for Takaful products.
• Customers can obtain Takaful through the bank instead of dealing only with a Takaful agent or branch.

Example

Ahmad visits an Islamic bank to obtain:

Islamic home financing

The bank can also introduce him to suitable:

• Houseowner Takaful
• Family Takaful
• Financing protection Takaful

Therefore, instead of Ahmad separately searching for a Takaful company, the bank provides access to the Takaful product as part of the financing process.

Simple Flow

Customer visits Islamic Bank

→ Obtains financing

→ Bank offers Takaful product from Takaful operator

→ Customer obtains financing + protection

⸻

6. Why Bancatakaful Benefits the Takaful Operator

• Islamic banks already have large numbers of customers.
• Takaful operators can use the bank’s network to reach those customers.
• This reduces dependence solely on traditional agents.

Example

Suppose:

• Takaful operator has 30 branches.
• Islamic bank has 250 branches and millions of customers.

Through Bancatakaful, the Takaful operator can access the bank’s much wider customer network.

Benefit

Bank customer base → More potential Takaful participants

⸻

7. Why Bancatakaful Benefits the Islamic Bank

• The bank can offer customers a more complete Islamic financial solution.
• Instead of providing only financing, it can also facilitate financial protection.
• This improves convenience for customers.

Example

A business approaches an Islamic bank for:

RM10 million machinery financing

The bank may help arrange:

• Islamic financing
• Machinery Takaful
• Fire Takaful
• Other appropriate business protection

The customer receives several related financial services through one relationship.

⸻

8. Product Bundling

What does product bundling mean?

• Product bundling means combining several related Islamic financial products into one financial solution.
• Islamic banks and Takaful operators cooperate to design products that address several customer needs at once.

Example: Home Package

Ahmad buys a house.

The package may include:

• Islamic home financing
• Houseowner Takaful
• Family Takaful
• Financing protection

Instead of viewing each product separately, they form one overall solution for Ahmad’s home ownership needs.

Example: Car Package

A customer may receive:

• Islamic vehicle financing
• Motor Takaful
• Personal accident protection

Example: Business Package

A company may receive:

• Islamic business financing
• Property Takaful
• Machinery Takaful
• Marine Cargo Takaful
• Employee Takaful

Easy Idea

Islamic Bank provides financing + Takaful operator provides protection = Complete Islamic financial solution

⸻

Overall Interdependency

Islamic Capital Market → Takaful

• Provides Shari’ah-compliant investments.
• Takaful funds can earn investment returns.

Example: Takaful operator invests in Sukuk.

⸻

Takaful → Islamic Capital Market

• Takaful operators provide investment funds.
• Their purchases help finance businesses and projects.

Example: Takaful operator purchases RM100 million of infrastructure Sukuk.

⸻

Islamic Banking → Takaful

• Islamic financing creates assets and customers that need protection.

Example: Islamic home financing creates demand for Houseowner and Family Takaful.

⸻

Takaful → Islamic Banking

• Takaful protects financed assets and customers.
• It reduces the financial effects of unexpected losses.

Example: Fire Takaful helps rebuild a house financed by an Islamic bank.

⸻

Islamic Banks + Takaful Operators

• Cooperate through Bancatakaful.
• Banks distribute Takaful products.
• Takaful operators gain access to a larger customer base.
• Customers obtain more complete Islamic financial solutions.

Example: Islamic home financing + Houseowner Takaful + Family Takaful offered through the same bank.

⸻

Easy Way to Remember the Whole Relationship

Islamic Capital Market = Where Takaful invests

Takaful = Provides protection and investment funds

Islamic Bank = Provides financing and customers

Bancatakaful = Connects Islamic banks and Takaful operators

So the three components support one another:

Islamic Banking → Creates financing needs

Takaful → Protects those financing needs

Islamic Capital Market → Invests the accumulated Takaful funds

Takaful → Returns funds to the capital market by purchasing Islamic financial instruments

Together, they form an interdependent Islamic financial system.

Takaful - Interdependency Between Takaful and Other Components of the Islamic Financial System

The figure shows that Takaful, Islamic banking, and the Islamic capital market are interconnected. Each component supports the others in developing the Islamic financial system.

1. Takaful and the Islamic Capital Market

• The Islamic capital market provides Shari’ah-compliant financial instruments in which Takaful operators can invest.
• Examples may include:
• Sukuk
• Shari’ah-compliant shares
• Islamic investment funds
• An adequate supply of high-quality Islamic financial instruments allows Takaful operators to:
• Invest participants’ and shareholders’ funds
• Generate investment income
• Improve returns for relevant stakeholders
• Match investments with longer-term obligations

Simple Process

Islamic Capital Market → Provides Shari’ah-compliant investments → Takaful operator invests funds → Investment returns generated

2. Takaful Supports the Islamic Capital Market

• The relationship also works in the opposite direction.
• Takaful operators are important institutional investors in the Islamic capital market.
• They invest or subscribe to Islamic financial instruments.
• Their investments provide funds to issuers that require:
• Medium-term financing
• Long-term financing
• Therefore, Takaful helps increase demand for Islamic capital market products.

Example

• A company issues Sukuk to raise RM500 million.
• A Takaful operator purchases some of the Sukuk as part of its investment portfolio.
• The company receives financing.
• The Takaful operator receives Shari’ah-compliant investment returns.

Simple Process

Takaful funds → Invested in Sukuk → Capital provided to issuer → Takaful earns Shari’ah-compliant return

3. Takaful and Islamic Banking

• Islamic banks provide financing to individuals and businesses.
• These financed assets may face risks such as:
• Fire
• Accident
• Theft
• Damage
• Death or disability of the customer
• Takaful operators provide Shari’ah-compliant protection for these risks.
• Therefore, Takaful helps protect:
• Islamic bank customers
• Financed assets
• The financial interests of Islamic banks

Example

• Ahmad obtains Islamic home financing from an Islamic bank.
• The house is protected through a Houseowner Takaful plan.
• A fire damages the house.
• The Takaful protection helps meet the covered loss.

Simple Process

Islamic Bank provides financing → Asset faces risk → Takaful provides protection → Financial loss is reduced

4. Bancatakaful

• Islamic banks and Takaful operators can cooperate through Bancatakaful.
• Bancatakaful means Takaful products are distributed through the bank’s distribution channels.
• This allows Takaful operators to reach customers who may not be reached through traditional Takaful agents.
• It also allows banks to offer customers both:
• Islamic banking products
• Takaful protection

Example

• Ahmad applies for home financing at an Islamic bank.
• At the same bank, he is offered suitable Family or General Takaful protection connected with the financing.
• He therefore receives financing and protection through one distribution channel.

Simple Process

Islamic Bank + Takaful Operator → Bancatakaful → Bank customers receive Takaful products

5. Product Bundling

• Takaful operators, Islamic banks, and Islamic capital-market institutions may work together to develop bundled financial products.
• Product bundling combines different financial services to meet customers’ specific needs.
• This can make Islamic financial products:
• More convenient
• More attractive
• More comprehensive
• Better suited to different customer needs

Example

A customer purchasing a house may receive a package containing:

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

Instead of purchasing each product separately, they may be offered as part of an integrated financial solution.

Overall Relationship

Islamic Capital Market → Takaful

• Provides Shari’ah-compliant investment opportunities.
• Helps Takaful operators generate investment returns.

Takaful → Islamic Capital Market

• Takaful operators invest in Islamic financial instruments such as Sukuk.
• Provides funds for medium- and long-term financing.

Islamic Banking → Takaful

• Provides customers and financed assets that require protection.
• Creates opportunities for Takaful products.

Takaful → Islamic Banking

• Provides Shari’ah-compliant protection for Islamic financing arrangements.
• Helps reduce the financial consequences of risks affecting financed assets and customers.

Islamic Banks + Takaful Operators

• Cooperate through Bancatakaful.
• Reach a wider range of customers.
• Develop bundled products to meet different financial needs.

Easy Way to Remember

Islamic Banks = Provide financing

Islamic Capital Market = Provides investment and financing instruments

Takaful = Provides Shari’ah-compliant protection and also invests funds

Together:

Islamic Banking + Islamic Capital Market + Takaful → Support and strengthen the Islamic financial system

Takaful - Difference Between Saudi and Iranian Islamic Insurance

Both Saudi Arabia and Iran operate Shari’ah-compliant insurance systems, but neither necessarily follows the traditional Takaful risk-sharing model described earlier.

1. Iranian Islamic Insurance

• Iran operates an Islamic insurance model.
• Insurance investments are made in Shari’ah-compliant assets.
• However, the model still involves risk transfer.
• The policyholder transfers the insured risk to the insurance company.
• The insurance company accepts responsibility for covered claims.
• If insurance losses are greater than expected, those losses are ultimately borne by the shareholders.

Simple Process

Policyholder pays premium → Risk transferred to insurer → Insurer pays covered claims → Shareholders bear insurance losses

Main Feature

Iran = Shari’ah-compliant investments + Risk transfer + Shareholders bear losses

2. Saudi Cooperative Insurance

• Saudi Arabia operates a cooperative insurance model.
• The insurance company is generally owned by shareholders.
• Policyholders purchase insurance protection from the company.
• The model also contains an element of risk transfer.
• The insurance company accepts responsibility for covered claims.

Simple Process

Policyholder pays premium → Risk transferred to insurance company → Covered loss occurs → Insurance company pays claim

3. Surplus in Saudi Cooperative Insurance

• A major feature of the Saudi model described in the text is the sharing of insurance surplus.
• If a surplus arises:
• 10% is allocated to policyholders/participants
• 90% is allocated to shareholders

Example

Suppose the insurance operation produces a surplus of:

SAR 10 million

Then:

• SAR 1 million → Policyholders
• SAR 9 million → Shareholders

Main Feature

Saudi = Cooperative insurance + Risk transfer + Surplus shared between policyholders and shareholders

Main Difference Between Iran and Saudi Arabia

Iran

• Uses an Islamic insurance model.
• Investments must be Shari’ah-compliant.
• Risk is transferred to the insurer.
• Shareholders ultimately bear insurance losses.
• The text does not describe a fixed arrangement where policyholders automatically receive part of the insurance surplus.

Easy Idea

Iran → Shareholders bear the risk

Saudi Arabia

• Uses a cooperative insurance model.
• Risk transfer is also present.
• The insurance company is owned by shareholders.
• Policyholders are entitled to a portion of the insurance surplus.
• Under the model described:
• 10% of surplus → Policyholders
• 90% of surplus → Shareholders

Easy Idea

Saudi → Shareholders own company + Policyholders receive part of surplus

Simple Example Comparing Both

Suppose both an Iranian insurer and a Saudi insurer collect premiums and later make a surplus of RM10 million.

Iran

• The insurance company operates using Shari’ah-compliant investments.
• Shareholders bear the insurance risk.
• The financial result ultimately belongs to the shareholder-owned insurance company according to its structure.

Simple Flow

Policyholder → Premium → Insurer → Shareholders ultimately bear risk

Saudi Arabia

• The insurance company accepts the policyholder’s risk.
• A surplus of RM10 million arises.
• According to the model described:

RM1 million → Policyholders

RM9 million → Shareholders

Simple Flow

Policyholder → Premium → Insurance Company → Surplus arises → Part shared with policyholders

Similarities Between Saudi and Iranian Insurance

• Both are regarded as Shari’ah-compliant within their respective jurisdictions.
• Both may involve risk transfer rather than pure mutual risk sharing.
• Both have insurance companies owned by shareholders.
• Both differ from the traditional Takaful model where participants mutually share risk through a common participants’ fund.
• Both must operate according to the Shari’ah framework accepted in their respective countries.

Easy Way to Remember

Iran

Risk Transfer → Insurer → Shareholders bear losses

Saudi Arabia

Risk Transfer → Insurer → Surplus shared 10% policyholders + 90% shareholders

Traditional Takaful

Risk Sharing → Participants → Common Participants’ Risk Fund

Most Important Difference

Iran focuses on Shari’ah-compliant insurance and investments while shareholders ultimately bear the insurance risk.

Saudi Arabia uses a cooperative insurance structure where risk transfer remains present, but policyholders also receive a defined share of the insurance surplus.

Takaful - Saudi Cooperative Insurance Model vs Takaful

The Saudi cooperative insurance model and Takaful both aim to provide Shari’ah-acceptable insurance protection, but they are structured differently.

1. Saudi Cooperative Insurance Model

• Saudi insurance companies operate under a cooperative insurance framework.
• The insurance company itself may be a shareholder-owned joint-stock company. Saudi Arabia’s Insurance Authority currently recognises joint-stock companies as an accepted legal structure for insurance businesses. [IA\.gov\.sa](https://www.ia.gov.sa/en/help-and-supports/faqs?utm_source=chatgpt.com)
• Therefore, there are:
• Policyholders who purchase insurance
• Shareholders who own the insurance company

How It Works

• Policyholders pay insurance premiums to the insurance company.
• The insurance company accepts the insured risks.
• If an insured event occurs, the company pays the eligible claim according to the insurance policy.
• Under the model described , there remains an element of risk transfer:
• The policyholder transfers the insured risk to the insurance company.
• The insurance company bears responsibility for eligible claims.

Simple Process

Policyholder pays premium → Insurance company accepts risk → Covered loss occurs → Insurance company pays claim

2. Example of the Saudi Cooperative Model

Suppose Ahmad buys motor insurance.

• Ahmad pays an annual premium of SAR 2,000.
• Ahmad causes an accident.
• The covered third-party loss is SAR 50,000.
• The insurance company pays the eligible claim according to Ahmad’s policy.

Therefore:

Ahmad pays premium → Risk transferred to insurance company → Accident occurs → Insurance company pays covered claim

• Ahmad is a policyholder.
• He is not necessarily an owner of the company.
• The company’s shareholders are its owners.

3. Surplus in the Saudi Cooperative Model

• If insurance operations perform well, a net insurance surplus may arise.
• Under the Saudi surplus-distribution rules referred :
• 10% of the net surplus is distributed to eligible policyholders.
• It may be paid directly or provided as a reduction in future premiums.
• The remaining 90% is transferred to the shareholders’ income statement. [IA\.gov\.sa](https://www.ia.gov.sa/Regulations/1%D8%B3%D9%8A%D8%A7%D8%B3%D8%A9%20%D8%AA%D9%88%D8%B2%D9%8A%D8%B9%20%D9%81%D8%A7%D8%A6%D8%B6%20%D8%B9%D9%85%D9%84%D9%8A%D8%A7%D8%AA%20%D8%A7%D9%84%D8%AA%D8%A7%D9%85%D9%8A%D9%86.pdf)

Example

Suppose the insurance operations produce a net surplus of:

SAR 10 million

Then:

• 10% = SAR 1 million
• allocated to eligible policyholders
• 90% = SAR 9 million
• transferred to the shareholders’ income statement

Simple Idea

Saudi Cooperative Surplus → 10% Policyholders + 90% Shareholders

The official Saudi surplus policy confirms that the policyholder portion may be distributed directly or used to reduce the following year’s premium. [IA\.gov\.sa](https://www.ia.gov.sa/Regulations/1%D8%B3%D9%8A%D8%A7%D8%B3%D8%A9%20%D8%AA%D9%88%D8%B2%D9%8A%D8%B9%20%D9%81%D8%A7%D8%A6%D8%B6%20%D8%B9%D9%85%D9%84%D9%8A%D8%A7%D8%AA%20%D8%A7%D9%84%D8%AA%D8%A7%D9%85%D9%8A%D9%86.pdf)

4. Traditional Takaful Model

• In Takaful, participants are not simply transferring their risks to the Takaful operator.
• Instead, participants agree to mutually share their risks.
• Each participant contributes money into a Participants’ Risk Fund.
• The participants collectively provide protection to one another.
• Eligible claims are paid from this common fund.

Simple Process

Participants contribute → Participants’ Risk Fund → Risks shared among participants → Claims paid from the fund

5. Role of the Takaful Operator

• The Takaful operator normally manages the Takaful arrangement.
• The operator is not intended to be the conventional insurer that purchases the participant’s risk.
• Its role may include:
• Collecting contributions
• Managing the participants’ fund
• Assessing claims
• Paying eligible claims from the participants’ fund
• Managing investments
• Managing administration and underwriting
• The operator receives compensation according to the particular Takaful model.

Simple Idea

Participants = Risk sharers

Takaful operator = Fund manager/operator

6. Example of Takaful

Suppose 10,000 participants join a Motor Takaful scheme.

• Each participant contributes RM1,000.
• Total contributions = RM10 million.
• The appropriate portion is placed into the participants’ risk fund.
• During the year, some participants suffer covered accidents.
• Eligible claims are paid from the common participants’ fund.

Therefore:

Participants contribute together → Some participants suffer losses → Common fund assists those participants

The important idea is:

Participants mutually protect one another.

The operator manages the arrangement rather than simply acting as the party purchasing all of the participants’ risks.

7. Risk Transfer vs Risk Sharing

Saudi Cooperative Insurance Model

• In the model described , risk transfer remains present.
• The policyholder purchases insurance protection.
• The insurance company accepts responsibility for covered claims.
• The shareholders ultimately own the insurance company.

Simple Idea

Policyholder → transfers risk → Insurance company

Takaful

• Takaful is principally based on risk sharing.
• Participants contribute to a common risk fund.
• The risks are collectively shared among participants.
• The Takaful operator manages the arrangement.

Simple Idea

Participant ↔ Participant ↔ Participant

All mutually share the risk through the common fund

8. Who Owns the Company?

Saudi Cooperative Insurance

• The insurance company is generally owned by its shareholders.
• Policyholders purchase insurance but are not automatically shareholders.
• Saudi regulations recognise shareholder-owned joint-stock companies as an insurance-company structure. [IA\.gov\.sa](https://www.ia.gov.sa/en/help-and-supports/faqs?utm_source=chatgpt.com)

Simple Idea

Shareholders = Owners

Policyholders = Customers / insured persons

Takaful

• A Takaful operator may also have shareholders.
• However, an important distinction is made between:
• Shareholders’ Fund
• Participants’ Risk Fund
• The participants’ risk fund exists for the mutual protection of participants.
• The shareholders’ fund belongs to the operator/shareholders.

Simple Idea

Participants’ Risk Fund = For participants’ mutual protection

Shareholders’ Fund = Belongs to shareholders/operator

9. Who Pays the Claims?

Saudi Cooperative Insurance

• The insurance company is responsible for settling eligible claims according to the insurance contract.
• The policyholder has transferred the covered insurance risk to the company under the model described.

Simple Process

Premium → Insurance company → Claim arises → Insurance company pays

Takaful

• Eligible claims are normally paid from the Participants’ Risk Fund.
• Participants have collectively contributed to that fund.

Simple Process

Contributions → Participants’ Risk Fund → Claim arises → Fund pays eligible claim

10. What Happens to the Surplus?

Saudi Cooperative Insurance

• Under the surplus-distribution framework discussed above:
• 10% of net surplus → eligible policyholders
• 90% → shareholders’ income statement [IA\.gov\.sa](https://www.ia.gov.sa/Regulations/1%D8%B3%D9%8A%D8%A7%D8%B3%D8%A9%20%D8%AA%D9%88%D8%B2%D9%8A%D8%B9%20%D9%81%D8%A7%D8%A6%D8%B6%20%D8%B9%D9%85%D9%84%D9%8A%D8%A7%D8%AA%20%D8%A7%D9%84%D8%AA%D8%A7%D9%85%D9%8A%D9%86.pdf)

Example

SAR 10m surplus

→ SAR 1m to policyholders

→ SAR 9m to shareholders’ income statement

Takaful

• An underwriting surplus arises when the participants’ risk fund has more available resources than required for:
• Claims
• Reserves
• Relevant expenses and obligations
• The treatment of the surplus depends on the particular Takaful model and applicable Shari’ah rules.
• It may:
• Remain in the participants’ fund as reserves
• Be distributed partly or fully to eligible participants
• Be dealt with according to another approved surplus-sharing arrangement
• It is therefore not automatically divided 10% to participants and 90% to shareholders.

Simple Idea

Takaful surplus originates from the participants’ risk-sharing arrangement and is dealt with according to the Takaful contract and Shari’ah-approved model.

11. Main Difference in Purpose of Contributions

Saudi Cooperative Insurance

• Policyholder pays a premium.
• The premium purchases insurance protection from the insurance company.
• The insurer accepts the covered risk.

Simple Idea

Premium → Buy insurance protection

Takaful

• Participants make Takaful contributions.
• Part of the contribution is generally provided for mutual assistance through the participants’ risk fund.
• Participants agree to help compensate one another when covered losses occur.

Simple Idea

Contribution → Mutual assistance and risk sharing

12. Simple Scenario Comparing Both

Suppose Ahmad needs motor protection.

Saudi Cooperative Insurance

• Ahmad pays SAR 2,000 premium.
• The insurance company accepts Ahmad’s insured risk.
• Ahmad causes a covered accident.
• Claim = SAR 50,000.
• The insurance company settles the eligible claim.
• At the end of the year, if the insurance operations generate a surplus, Ahmad may qualify for a share of the 10% policyholder allocation.

Flow

Ahmad → Premium → Insurance Company

Insurance Company → Accepts risk

Accident → Insurance Company → Pays claim

Takaful

• Ahmad contributes RM2,000 to a Motor Takaful arrangement.
• The relevant portion goes into the participants’ risk fund.
• Thousands of other participants also contribute.
• Ahmad suffers a covered loss.
• The eligible claim is paid from the participants’ risk fund.

Flow

Ahmad + Other Participants → Contributions → Common Risk Fund

Covered loss occurs → Common Risk Fund → Pays eligible claim

Therefore:

Saudi Cooperative Model → Insurance company accepts the risk

Takaful → Participants mutually share the risk

Easy Way to Remember

Saudi Cooperative Insurance

• Policyholders purchase insurance.
• Company is owned by shareholders.
• Risk transfer remains present in the model described in the textbook.
• Company pays covered claims.
• Net surplus under the cited framework:
• 10% → Policyholders
• 90% → Shareholders’ income statement
• It is regarded as cooperative insurance under the Saudi regulatory framework. [SAMA Rulebook](https://rulebook.sama.gov.sa/en/entiresection/1364)

Takaful

• Participants make contributions.
• Participants mutually share risks.
• Claims come from the participants’ risk fund.
• Takaful operator manages the fund.
• Participants’ fund is distinguished from the shareholders’ fund.
• Surplus treatment depends on the particular Shari’ah-approved Takaful model.

Most Important Difference

Saudi Cooperative Insurance:

Policyholder → Risk Transfer → Insurance Company

Traditional Takaful:

Participants → Risk Sharing → Participants’ Common Risk Fund

So, although both may be regarded as Shari’ah-compliant within their respective frameworks, the underlying mechanism is different: the Saudi cooperative model described in your text retains risk transfer, while traditional Takaful is structured around mutual risk sharing among participants.

Takaful - Islamic Alternative to Conventional Insurance

• Conventional insurance is generally considered not Shari’ah-compliant because of concerns such as:
• Riba – interest
• Gharar – excessive uncertainty
• Maysir – gambling-like elements
• However, there is still a genuine need for insurance protection in society.
• Muslim jurists therefore approved alternative forms of insurance based on:
• Mutuality
• Cooperation
• Mutual assistance
• Risk sharing
• The terms commonly used for these alternatives include:
• Islamic insurance
• Takaful
• However, an important point is:

Not all Islamic insurance operates according to the same Takaful model.

1. Basic Idea of Takaful

• Takaful is designed as a Shari’ah-compliant alternative to conventional insurance.
• Instead of participants simply transferring their risks to an insurance company, Takaful is generally based on participants mutually sharing risks.
• Participants contribute money into a common fund.
• The fund is used to assist participants who suffer covered losses.
• The Takaful operator manages the arrangement according to Shari’ah principles.

Simple Structure

Participants contribute → Common fund created → Risks shared among participants → Eligible claims paid from the fund

Simple Idea

Conventional Insurance = Risk Transfer

Takaful = Mutual Risk Sharing and Cooperation

2. Islamic Insurance Is Not Always the Same as Takaful

• The term Islamic insurance is broader than Takaful.
• Some countries operate Shari’ah-compliant insurance structures that do not fully follow the traditional Takaful models.
• Therefore:

All Takaful is intended to be Islamic insurance, but not every form of Islamic insurance necessarily follows the same Takaful structure.

3. Example – Iran

• Iran is one of the major Shari’ah-compliant insurance markets.
• However, its Islamic insurance system does not necessarily follow the mutual risk-sharing Takaful model described above.
• Insurance funds are invested in Shari’ah-compliant assets.
• However, the structure still contains an element of risk transfer.
• The insurance company accepts the insured risks.
• If losses are greater than expected, those losses are ultimately borne by the shareholders.

Simple Process

Policyholder pays premium → Risk transferred to insurer → Insurer pays claims → Shareholders ultimately bear insurance losses

• Therefore, the model is regarded as Islamic because its overall structure and investments are accepted by the relevant Shari’ah authorities, even though it still contains risk transfer.

Simple Idea

Iranian Islamic Insurance → Shari’ah-compliant investments + Risk transfer to shareholders

4. Example – Saudi Arabia

• Saudi Arabia also has a major Shari’ah-compliant insurance market.
• It operates what is generally described as a cooperative insurance model.
• The model is considered Shari’ah-compliant within the Saudi regulatory and Shari’ah framework.
• However, it may also contain an element of risk transfer.

Distribution of Surplus

• Under the model described in the text:
• Policyholders/participants are entitled to 10% of the insurance surplus.
• Shareholders are entitled to the remaining 90%.

Example

Suppose the insurance operation produces a surplus of:

RM10 million

Then:

• 10% to participants = RM1 million
• 90% to shareholders = RM9 million

Simple Process

Insurance surplus arises → 10% allocated to participants → 90% allocated to shareholders

Simple Idea

Saudi Cooperative Insurance → Participants receive part of surplus + Shareholders receive the larger portion

5. Why Can Different Islamic Insurance Models Exist?

• Shari’ah compliance is determined by the relevant Shari’ah scholars and authorities in each jurisdiction.
• Scholars may interpret Islamic commercial law differently.
• These differences arise within the field of:

Fiqh al-Mu‘amalat = Islamic commercial jurisprudence

• As a result, one group of Shari’ah scholars may accept a particular insurance structure while another group may prefer or require a different structure.
• Therefore, there is not always complete uniformity between countries.

6. Differences in Shari’ah Interpretation

• Shari’ah scholars may disagree on issues such as:
• Whether risk transfer is acceptable in a particular structure
• How surplus should be distributed
• Who should bear insurance deficits or losses
• How participants’ funds should be structured
• How shareholders may earn returns
• Which contractual relationships should be used
• These differences do not necessarily mean one jurisdiction ignores Shari’ah.
• Rather, different scholars may reach different conclusions based on their interpretation of Shari’ah principles.

Simple Idea

Same Shari’ah principles → Different scholarly interpretations → Different Islamic insurance models

7. Important Distinction Between the Models

Traditional Takaful Concept

• Participants contribute to a common fund.
• Participants mutually share risks.
• Claims are paid from the participants’ risk fund.
• The Takaful operator manages the arrangement.
• Risk is primarily shared among participants.

Simple Idea

Participants share the risk

Iranian Islamic Insurance Model

• Insurance investments are Shari’ah-compliant.
• Risk is transferred to the insurance company.
• Insurance losses are ultimately borne by shareholders.

Simple Idea

Shareholders bear the insurance risk

Saudi Cooperative Insurance Model

• Operates under a cooperative insurance framework.
• Policyholders/participants may receive part of the surplus.
• Under the model described:
• 10% of surplus → Participants
• 90% of surplus → Shareholders
• Risk transfer may still be present.

Simple Idea

Cooperative structure + Surplus sharing + Shareholder participation

8. Key Lesson

• Takaful developed because Muslims still require financial protection even though conventional insurance raises Shari’ah concerns.
• The main objective is to provide protection in a manner consistent with Shari’ah.
• However, there are different approaches to achieving Shari’ah-compliant insurance.
• The exact structure accepted may differ from one country to another.
• Therefore, the term Shari’ah-compliant insurance should not automatically be assumed to mean that every country uses exactly the same Takaful model.

Easy Way to Remember

Conventional Insurance

Policyholder → Transfers risk → Insurer accepts risk

Traditional Takaful

Participants → Share risks mutually → Common fund pays claims

Iran

Shari’ah-compliant investments → Risk transferred to insurer/shareholders

Saudi Arabia

Cooperative insurance → Participants share in surplus → Shareholders also receive surplus

Simple Summary

Need for insurance + Prohibition of conventional insurance → Development of Islamic insurance and Takaful

However:

Islamic Insurance ≠ Always Traditional Takaful

Different countries may adopt different Shari’ah-compliant insurance structures because:

Different Shari’ah authorities → Different interpretations of Fiqh al-Mu‘amalat → Different accepted insurance models

Takaful - Permissibility of Conventional Insurance in Exceptional Cases

• Conventional insurance generally contains Shari’ah-prohibited elements such as:
• Riba – interest
• Gharar – excessive uncertainty
• Maysir – gambling-like elements
• However, a Shari’ah authority may permit conventional insurance in exceptional circumstances.
• Such permission is normally based on:
• Necessity (darurah)
• Serious need (hajah)
• Absence of a suitable Takaful alternative
• Legal requirements
• The broader objectives of Shari’ah (Maqasid al-Shari’ah)

1. Maqasid al-Shari’ah

• When considering whether conventional insurance may be permitted, Shari’ah scholars may consider the objectives of Shari’ah.
• Shari’ah seeks to protect five essential interests:

Protection of Religion – Din

• Protection and preservation of religious faith and practice.

Protection of Life – Nafs

• Protecting human life and personal safety.

Protection of Intellect – ‘Aql

• Protecting the human mind and intellectual well-being.

Protection of Progeny – Nasl

• Protecting families, descendants and future generations.

Protection of Wealth – Mal

• Protecting property and financial interests.
• Insurance can sometimes contribute to the protection of:
• Life
• Health
• Family
• Property
• Wealth
• Therefore, where Takaful is unavailable and there is a genuine need, conventional insurance may sometimes be permitted to achieve these broader Shari’ah objectives.

Simple Idea

Normally prohibited → But genuine necessity/need exists → Shari’ah may permit it within limits

2. Absence of a Takaful Alternative

• One important reason for permitting conventional insurance is when appropriate Takaful protection is unavailable.
• A person should generally seek a Shari’ah-compliant alternative first.
• If no suitable Takaful product exists, conventional insurance may be considered because the person still needs protection against serious financial risks.

Example

• A company owns specialised equipment.
• No Takaful operator offers coverage for that particular type of equipment.
• Conventional insurance is available.
• Because the company requires protection against a major loss, conventional insurance may be permitted due to the absence of a Takaful alternative.

Simple Process

Need protection → Search for Takaful → No suitable Takaful available → Conventional insurance may be permitted

3. Takaful Application Is Rejected

• Conventional insurance may also be considered where:
• Takaful products exist, but
• All relevant Takaful operators refuse to provide the required protection.

Example

• A business operates in a particularly high-risk industry.
• It approaches several Takaful operators.
• Every Takaful operator rejects the application.
• A conventional insurer is willing to provide the necessary coverage.
• In such circumstances, conventional insurance may be considered because the business has no practical Takaful option.

Simple Idea

Takaful available in theory → Applicant rejected by all operators → Conventional insurance may be allowed

4. Significant Difference in Cost

• Bank Negara Malaysia’s policy guidance referred to in the text also recognises circumstances where the cost of conventional insurance is significantly more competitive than Takaful protection.
• This does not mean that a very small price difference automatically justifies choosing conventional insurance.
• The difference would need to be sufficiently significant within the applicable Shari’ah and regulatory framework.

Example

• Takaful protection for a leased asset costs RM100,000 per year.
• Comparable conventional insurance costs RM40,000 per year.
• If the difference creates a significant financial burden, conventional insurance may potentially be considered under the applicable Shari’ah rules.

Simple Idea

Takaful available → But cost creates substantial difficulty → Conventional insurance may potentially be permitted

5. Conventional Insurance Required by Law

• A person may sometimes have no legal choice but to obtain a particular form of insurance.
• Shari’ah authorities may permit conventional insurance where it is legally compulsory and no suitable Takaful alternative is available.

Example

• A country requires a business to maintain a particular liability insurance policy.
• No Takaful provider offers the legally required coverage.
• The business must obtain conventional insurance to continue operating legally.

Simple Process

Law requires insurance → No Takaful alternative → Conventional insurance may be permitted

6. Severe Need or Hardship

• Conventional insurance may also be permitted where not having insurance would create:
• Serious hardship
• Significant financial difficulty
• Major personal or business risk
• This may include areas such as:
• Health insurance
• Certain liability insurance
• Other protection considered seriously necessary

Example – Health Insurance

• Ahmad lives in a country where medical treatment is extremely expensive.
• His employer does not provide Takaful.
• No suitable health Takaful product is available.
• Without health coverage, a serious illness could create overwhelming medical expenses.
• Conventional health insurance may therefore be permitted based on serious need.

7. AAOIFI Position

• AAOIFI Shari’ah standards referred to in the text recognise limited circumstances in which conventional insurance may be used.

Conventional Insurance

• Conventional insurance may be used where Takaful is unavailable, subject to the relevant Shari’ah conditions.

Conventional Reinsurance

• Conventional reinsurance may also be permitted as a temporary or transitional arrangement where Islamic re-Takaful alternatives are insufficient or unavailable.
• The justification is based on public need that may reach the level of necessity.

Simple Idea

Takaful/Re-Takaful unavailable → Temporary conventional alternative may be tolerated due to necessity

8. European Council for Fatwa and Research – ECFR

• The ECFR recognised that conventional insurance contains prohibited Shari’ah elements.
• However, it permitted conventional insurance where:
• Islamic insurance is unavailable, and
• There is a genuine need to obtain insurance.

Examples

• Insurance required by law
• Insurance required to avoid serious hardship

Simple Idea

No Islamic insurance + Genuine need = Possible exceptional permission

9. Assembly of Muslim Jurists of America – AMJA

• AMJA similarly permitted certain forms of conventional insurance where there is necessity or serious need.
• Examples referred to include:
• Legally required insurance
• Health insurance where strongly needed
• Certain forms of liability insurance
• However, this permission does not mean conventional insurance becomes generally Shari’ah-compliant.
• It is an exception based on the circumstances.

Important Principle – Permission Is Limited

• Exceptional permission should not be understood as unrestricted approval of conventional insurance.
• The basic Shari’ah concerns of:
• Riba
• Gharar
• Maysir

still remain.

• The permission exists because necessity or serious need may temporarily override the normal prohibition.
• Where a suitable Takaful alternative becomes available, the justification for using conventional insurance may no longer exist.

Simple Idea

Exception does not remove the original prohibition.

Instead:

Prohibition remains → Necessity creates limited permission

Example Bringing Everything Together

Suppose Ahmad needs medical protection.

Situation 1 – Suitable Takaful Available

• Family/Medical Takaful is available.
• Coverage is suitable.
• Cost is reasonable.

Ahmad should use Takaful.

Situation 2 – No Takaful Available

• Ahmad needs health coverage.
• Medical costs are very high.
• No health Takaful provider operates in his country.

Conventional health insurance may be permitted due to genuine need.

Situation 3 – Takaful Later Becomes Available

• A suitable Shari’ah-compliant health Takaful product becomes available.

Ahmad should generally move toward the Shari’ah-compliant alternative when reasonably possible.

Easy Way to Remember

Conventional insurance may be exceptionally permitted when there is:

1. No Takaful available

2. Takaful application rejected

3. Significant hardship or serious need

4. Legal obligation

5. Necessity

6. Certain exceptional cost considerations recognised by the applicable Shari’ah/regulatory framework

Simple Formula

Conventional Insurance = Normally prohibited

but

Necessity / Serious Need + No Suitable Takaful Alternative → Exceptional Permission May Be Given

The ultimate objective remains to encourage the development and use of Takaful as the Shari’ah-compliant alternative whenever reasonably available.

Takaful - Scientific Premium Calculation and Information Asymmetry

This statement means that although conventional insurers calculate premiums using statistics, actuarial science, and probability, the use of these methods does not necessarily remove the Shari’ah concern relating to maysir.

• The insurer has access to large amounts of information, such as:
• Historical accident rates
• Claims statistics
• Mortality rates
• Average size of claims
• Risk profiles of customers
• Expected future losses
• An individual policyholder normally does not have the same level of information.
• This difference in knowledge is called information asymmetry.

Example

Suppose an insurer studies 100,000 drivers and discovers that:

• Expected average claims per driver = RM700
• Expected expenses per driver = RM200
• The insurer wants an additional margin for profit and unexpected losses.

The insurer may therefore charge:

Premium = RM1,200

The policyholder, Ahmad, only knows:

• He pays RM1,200.
• He does not know whether he will have an accident.
• He does not know whether he will ever make a claim.

But the insurer has statistical information showing that, across thousands of customers, it expects the premiums collected to exceed the expected claims and expenses.

Why does the statement say the insurer may “disproportionately profit”?

Because the insurer is in a stronger informational position.

For example:

10,000 policyholders × RM1,200 premium = RM12 million collected

Based on its statistical calculations, the insurer may expect:

• Claims = RM7 million
• Expenses = RM2 million
• Remaining expected amount = RM3 million

The insurer cannot predict which particular person will have an accident, but it can estimate quite accurately how many claims will occur across the whole group.

Therefore:

Individual policyholder → faces considerable uncertainty about his own outcome

while

Insurer → uses large-scale data to predict the overall outcome and price premiums accordingly

This is the information asymmetry referred to in the statement.

Connection to Maysir

The argument is that scientific calculation does not completely remove the underlying uncertainty:

Policyholder pays a certain premium

→ Individual claim remains uncertain

→ Insurer uses probability to price the uncertainty

→ Insurer seeks to earn a commercial profit from managing that uncertainty

So the text is essentially saying:

Actuarial science makes the insurer better at predicting and pricing uncertain events, but it does not make those events certain.

Important Point

This does not mean the insurer is guaranteed to make a profit.

A flood, earthquake, unusually high number of accidents, or other unexpected event could cause claims to exceed expectations and result in losses.

Rather, the argument is:

Scientific premium calculation increases the insurer’s probability of making a profit over a large portfolio because the insurer has superior statistical information and risk-pricing capability.

Easy Way to Remember

Information asymmetry = Insurer knows much more about the statistical risk than the individual policyholder.

Scientific pricing = Insurer uses that information to set premiums above its expected claims and costs.

Shari’ah concern in the passage = The insurer commercially profits from an uncertain event that the individual policyholder cannot predict as effectively.