About the Author:

The article has been penned down by Mr. M. Vaqaruddin who is our alumnus of 1976. He is currently the Head of Window Takaful at EFU General Insurance Ltd. Window Takaful Operations.

The Real Concept of Takaful Arrangement

Author: M Vaqaruddin

This article is being written to bring forth the real concept of takaful.
Normally, takaful is seen as an alternative to conventional insurance. Commonly, it is also called Islamic Insurance. In my personal understanding takaful is altogether different from Insurance. It is a Shariah based solution to bring in the same result as that of insurance.

Niyat or intention is the fundamental difference between Insurance & Takaful.
In insurance the insurance company gives promise and it assumes the risk onto itself while giving a guarantee to the client that if anything happens to them which causes financial loss as per terms & conditions of the policy they will compensate the client for the loss amount based on indemnity principle i.e. putting the client back in the same position in which he was prior to the mishap. For this promise the insurance company receives certain amount of premium.

Under Takaful arrangement there is no transfer of risk i.e. the risk remains with the owner (participant). The intention behind takaful arrangement is that all monies in form of contributions are collected from participants and is pooled in one place and the claim, if any, will be paid out of this pool as per terms and conditions of the membership document. In other words, the participants give surety to co-participants of the pool of money. Under Takaful the client is accepted as a member of the pool. The company, itself, do not give any guarantee to pay claims. Claims are paid from this pool. The name of this pool is Participants' Takaful Fund (PTF). The PTF is not owned by the company, rather, it is an independent fund which compensates the loss from the takaful pool. The pool (PTF) is a Waqf Fund. A waqf fund is created in the name of Allah SWT and nobody can ever claim its ownership. By paying in the waqf fund the participants lose their right of ownership on their money. The pool is, however, managed by the company that has provided this platform to participants and has a right to charge an amount for the services rendered to the pool in form of Wakala Fee.

Since the money in this waqf pool do not belong to the company or the operator of this fund the operator of this fund cannot use this fund with his discretion. All payments from this pool will be made as per the Waqf Deed. The cheques received towards contribution are deposited directly into this waqf fund.

In order to abide by the above concept, the wording of the Participants' Membership Document (PMD) is totally different from the policy wording prevailing in conventional insurance. Under conventional the company guarantees compensation in line with the terms and conditions of the policy document. Under the Takaful PMD the participant is accepted as a member of the fund and he or other members of the fund may get compensated from this fund as per terms of the PMD which have been agreed before start of any cover.

It may, therefore, be understood that under takaful arrangement, you have to follow PMD wordings in letter & spirit. Special terms may be agreed before the issuance of PMD, but once issued, they may not be changed & claim will be honored strictly as per terms and conditions of the PMD.

It is, therefore, an advice to the potential Takaful Participants to enter into a takaful arrangement after really accepting Takaful at heart. Reasons like "we are taking the policy under takaful because we are getting financed through an Islamic Bank and they are asking for Takaful cover" should not be the prime motivator. You have gone to Islamic Bank not because it is one of the source from where you can get finances, but because the finance is available in Shariah Compliant manner without involvement of any Riba (Interest). In order to complete the Islamic Mode of financing cycle you opt for Takaful Coverage.
It is the Niyat (Intention) which matters.

M Vaqaruddin
Head of Window Takaful
EFU General Insurance Ltd. Window Takaful Operations

Concept of Waqf in Takaful:

Before we go in to discuss the functional aspects of Waqf under Takaful arrangement we need to understand what waqf is?

By definition a "waqf" is a trust or public endowment which is operated generally on a non-profit basis as a custodian of funds for members or "participants" of the waqf fund.

Waqf can be made of Property, Money or any other asset.

Waqif ( person putting in his assets in Waqf) should be Sain, Adult, Owner of the asset or ma be any company or entity.

It is not necessary for a Waqif to be a muslim; he can belong to any religion, but the condition is that the asset will be used for the benefit of common people.

At the time of putting one's assets in Waqf, the Waqif ( Person who gives his assets to Waqf Fund) may do so with some conditions.

The waqf trustee will create a fund and can then spend it as per Waqf Deed. The principal ceding amount will always remain in the Waqf fund.

Waqf is created in the name of Allah SWT which means that nobody is the owner of the waqf and waqf fund can only be used as stated in the Waqf Deed.

This Waqf Fund in Takaful is known as Participants' Takaful Fund (PTF).

Having understood the concept of Waqf we look for the reason of having a Waqf Fund under Takaful:

In the absence of Waqf Fund, the participant will be paying contributions to a common pool. Without Waqf the pool is without any legal entity. As such participants will continue to have the ownership in the fund. As they still have their ownership the takaful operator every year will have to generate statements for each PMD holder to inform him of the un-earned contribution which has to be added to the amount on which he pays zakat. This problem will also crop up at the time of participants death as the un-earned contribution must be included in his assets to be distributed to his legal heirs. One can imagine how difficult it will be to prepare these statements for thousands of participants. To avoid this situation the concept of Waqf was introduced. By contributing money in the waqf fund (PTF) the participants lose their ownership on the contributed amount. The money that goes into PTF will only be taken out to meet fund's obligations and amount paid as charity or refund to participants in case of surplus fund depending up on operator's discretion.

Any person by signing the proposal form and subscribing to the membership document will become the member of the waqf fund. The membership document will define terms and conditions of operations based up on which this amount of donation has been accepted.

Now, the question arises how much the participants need to contribute in this fund. Since this is a voluntary contribution one may think that every participant should be allowed to contribute as much as he wants. In this case the operator will have no control on the amount of money a person donates. Obviously everybody will have a desire to contribute bare minimum amount to become a member of this fund and expect to get compensation for his loss assets. This will lead to a chaotic situation. The takaful operators must decide on the amount to be contributed keeping in view the following:

  • Size of the risk
  • Type of the risk i.e. Non-hazardous, Hazardous or extra hazardous.
  • Precautionary measures adopted i.e. Fire fighting arrangements, Construction of the building, etc., Tracker installed in a car, Precautionary measures taken for moving cash from one place to another, etc

On payment of the contribution determined by the takaful operators the amount will be paid to the PTF (Participants' Takaful Fund) and the proposer will be accepted as a participant of this fund. The parent company or the sponsors who have provided this platform will not have any ownership of this fund which is participants' money given as tabarru (gift) to the fund.

If a mishap takes place which leads to a claim, it will be compensated in order to bring back the person in a condition in which he was prior to the accident. This is called the indemnity principle. The assessment of a claim will be done by a government certified surveyor. Claim will be settled from the PTF based up on the recommendations of the surveyor under the terms and conditions of the PMD.

In case PTF does not have enough funds to meet its liabilities, the parent company or share holders, as the case may be are bound by law to extend Qard-e-Hasana to the PTF to meet its obligations. This Qard-e-Hasana will be paid back from the future surplus in the PTF without any interest or profit.

M Vaqaruddin
Head of Window Takaful
EFU General Insurance Ltd. Window Takaful Operations