An Alternative to Conventional Takaful Transaction – Introducing the Tamweeli Tabarru Model (TTM)

The conventional Takaful model

Introduction

By Takaful, (2005) is founded upon the two fundamental Islamic principles of Ta’awun (mutual cooperation) and Tabarru (voluntary donation). Takaful participants consist of policy holders (PO), make the payment for the premium associated with the policy they have acquired. A takaful operator (TO) is an individual company who has been authorised by a Securities and Exchange Commission to engage in Takaful business. These Takaful companies are not only registered with the Security and Exchange commission but are also licenced under the Company Ordinance. The initial capital is sourced from shareholders' equity, while the ongoing funding is obtained from the TO’s premium. Unlike the banks, a Takaful firm’s main earnings are the premium or contribution against their policies.

There are primarily two types of Takaful operating in the Muslim world. (1) Family Takaful (FT) refers to Takaful that provides coverage for people, groups of individuals, and their families, as specified in the regulations of the Insurance Ordinance (XXXIX of 2000) relating to life insurance business. (2) General Takaful (GT) refers to Takaful policies that are not related to Family Takaful.

Regarding the Takaful charge or payment for policies, the principal contributor to the fund collected by the Takaful Operator (TO) is the Policyholders contributions. These funds can be defined as financial resources that are available for use or investment.

A Takaful operator is required to oversee and manage two funds: the Participants Takaful Fund (PTF) and the Shareholders Fund (SHF). Within the FTF, individuals establish a Participant Investment Account (PIA). PIA is maintained as a distinct fund known as the Participant Investment Fund (PIF).

In the context of Family Takaful business, the PTF (Participant Takaful Fund), PIF (Participant Investment Fund), and PIA (Participant Investment Account) are required to be connected to the Takaful Business Statutory Fund.

Types of Takaful
Takaful is classified into two types: general Takaful (GT) and family Takaful (FT).

General Takaful (GT)

GT plans provide insurance coverage for individuals and organisations against material losses or damage caused by catastrophic events. It provides all kinds of non-life risk coverage, which is divided into the following classes

Types of GT Plans:
Property: This policy compensates for property damage caused by fire, lightning etc. It compensates for losses or damages to cargo or goods on ships, aircraft, or roads.
Motor/Vehicle: It applies to vehicle damage resulting from an accident.
Miscellaneous: This coverage is tailored to the corporate needs.

Family Takaful (FT)

FT is a Taburru contract in which members make non-zakat gifts to the Waqf Fund in regular intervals. Takaful protects against all human-related dangers.

Types of FT plans:

Term Life: If the xxxx dies within a certain time frame, the company only pays out the sum guaranteed.
Whole Life: This contract theoretically covers the insured for the rest of his or her life and requires a sole premium.
Endowment: It offers investment benefits upon retirement. Alternatively, if the insured dies before the policy expires, the proceeds are paid to the dependents.
Universal: It provides lifetime financial security while remaining flexible to the insured's changing needs and aspirations.
Marriage Plan: It is intended to satisfy parents' expectations for their children's marriages.
Educational plan: It is specifically designed to meet a child's future financial needs for education, such as death, disability, and illness, as well as immediate and long-term investment needs.

Three models of Takaful

1. Mudharabah (MT) (2) Wakalah (WT) (3) Wakalah waqaf (WWT) SECP (2023)

In all of these models the takaful company acts as Wakeel or Madarib and the policy holders act as rub-ul-mal. In MT both of them are partner and share the surplus funds. In order to avoid the uncertainty they keep certain portion of the fund as Tabarru (to donate), to pay to their fellow member suffering any losses or accident. This is the combination of

Mudharabah Takaful (MT)

Under this model both the TO and PO are sharing in the direct investment and PO share the 100% of the surplus income. Under the Mudharabah contract the Policy holders (PO) as a fun provider are the Rubb-ul-maal and Takaful operator (TO) act as an investor are termed as Mudharabah or investor. In order to avoid the uncertainty, a separate fund is allocated as Tabarru. The PO with the agreement agree to share certain portion of fund from their contribution as a Tabarru fund (TF). TF is kept for their brothers as a help during the course of any loss or disaster. The Mudharabah is a pure commercial contract and Takaful contract is fulfilled through TF. This is not a pure Takaful model it is the combination of both commercial and welfare/Tabarru.

MT = Tabarru + Mudharabah

Wakalah Takaful (WT) model

Under WT model the PO keeps 100% share of Takaful investment. In WT the PO has 100% share in the investment and TO is wakeel charging the Wakalat fee

WT= Mudharabah + Fee.

Wakalah Waqaf Tamweeli (WWT) Model:

In the WWT model a risk related fund is pooled separately and termed as a Waqaf fund (WF). This WF is separately operated and invested as Mudharabah contracts.

WWT= Wakalah (Mudharabah + Fee) + Waqaf

All contributions received under Family Takaful contracts shall be credited to the Takaful Business Statutory Fund. All such contributions shall be divided into the following components. (a) Investment (Mudharabah) component; (b) risk related component; and (c) Takaful operator’s fees.

Surplus

Surplus is created in the Takaful fund by deducting all the expenses and management fee from the revenue. We see from table 1 that surplus is calculated by adding the (Contribution earned, Re-takaful^[1] rebate earned / commission, Investment income and other income) and subtracting (Contribution deficiency (expense) / income, Direct expenses and Modarib's share). The surplus is the property of the PO, not the Takaful operator (TO). The funds can be allocated to the participants either as cash dividends, or through a decrease in future contributions.

Components of Financial statement

Deficit

In case of a deficit in the PTF, the Takaful operator shall undertake to give Qard-e-Hasna to the PTF to make good of the deficit. The Qard-e-Hasna may be recovered from future surpluses without any excess on the actual amount given to the PTF.

Criticism and alternative Model

Criticism:

It is clear that the Takaful model is an exact duplication of the capitalist insurance model. The use of Islamic terminology hides their sole purpose to conform to the same capitalist insurance framework as do the other capitalist insurance companies. Therefore, it is more complicated than the conventional paradigm of insurance products. Despite what can be observed in the financial reports of the Takaful Company, the fundamental concept of contemporary Takaful is not founded on Ta'awun, which means "mutual cooperation," or Tabarru, which means "voluntary contribution." The policy that was purchased by the PO is built with the intention of generating profit, and the TO is likewise working for the profit of the shareholders. Islami Takaful is not a firm that operates for the purpose of making a profit. As a result of the presence of Gharar (uncertainty), Maisir (gambling), and Riba (interest), commercial Takaful is not permitted according to Islamic law. Gharar and Maisir are involved in the investment of all existing Takaful companies. These concepts are present when investing in shares, bonds, or securities, as well as when earning interest through investments in Ijarah or Marabaha (with a set rate that is regulated by KIBOR^[4] in Pakistan and LIBOR^[5] internationally). The Ta'awun and Tabarru are forms of voluntary contributions that are not mandatory or compulsory claims made by members of the TO. While TO is exclusively responsible for managing the Takaful, PO is responsible for contributing one hundred percent of the funds. Because of this, the TO ought not to be entitled to a portion of the Takaful distribution. Only the precise service costs (SC) are included in the calculation. Even in the WT, insurance policies are sold to the general people not on the premise of Tabarru and Ta'awun, but rather on the basis of increasing profits from investments. Additionally, Takaful companies are aiming to increase profits from their Takaful business.

Tamweeli Tabarru Model (TTM) for IEA

However, the TTM is not a business model; rather, it is a Tabarru model that is designed to alleviate the burden of a catastrophe or loss of business. Within the context of this model, we favour utilising it for business losses; however, general TTM and family TTM are also viable options in certain exceptional circumstances. Under the supervision of the TTM commission, it is managed by the state. This model is primarily driven by the collective efforts of communities or groups. In order to protect the community, whether it be an individual or a business, from a particular catastrophe, this model is appropriate for Islamic communities. TTM is not functioning as a profit-making financial institution TTM serves the Islamic community in the event of any disaster and to assist Takaful operators through Mudharabah investment in the real product market rather than the financial market. This is the distinctive feature that differentiates the TTM from the conventional Takaful/Insurance model.

Mudharabah Wakalah Waqaf (MWW)

The TTM Mudharabah Wakalah Waqaf (MWW) fund will be established as part of this initiative. In this model, the PO represents the Rubbulmal and receives a one hundred percent share of the profits from any business investment. Only the Wakalah fee is charged by the TO, which are the Wakeel. Additionally, the Waqaf Tabarru (WT) is established to provide assistance to the PO in the event of a disaster. One of the conditions that must be met for this model to be considered the Islamic Tamweeli model is that the Mudharabah investments must be made in the production sector rather than in the financial sector. This is done in order to avoid Gharar and Mayser, which are related to gambling and speculation.

Administration

Ameer-ul-Moumineen’s representative serves as the head the TTM administration. One A'alim, one member of the Ministry of Finance, and one member of the Business Community are managing directors of TTM.

Fund sources

While the government is responsible for providing the initial capital, the premium that is paid by the PO is the source of the ongoing funding. The fund resources consist of contributions from the PO, funding from the government, and contributions from Muslim philanthropists. One of the most important sources of funding is the contribution from PO. This contribution is deposited into the time deposit account, and the surplus amount is invested from that account. The income from this investment is then distributed in its entirety to the depositors, after the expenses have been deducted. In the event that the disaster is of a significant magnitude and there is a deficit, then contributions from the government and philanthropists are required.

Deficit

Coverage of the deficit can be obtained from the government or philanthropists through the use of Infaq or Qard-e-Hasna. If there is a surplus in the future, the Qard-e-Hasna can be recovered without there being any excess on the actual amount that was given. 

The Tables 4 and 5 provide the statement of profit and loss of a hypothetical TTM model. In this model we can see that difference between the conventional capitalist Takaful and our TTM model.

Summery

1. The Islamic Emirate Afghanistan (IEA) will replace the conventional Capitalist Takaful Fund with a Tamveeli Tabarru Fund (TTF).
2. TTM is not-for-profit organization, working under state and community.
3. The management of the TTF should be solely under the control of the State (IEA).
4. It is not permissible under Islamic law to develop private sector Takaful corporations.
5. The establishment of TTF ensures that the xxx resources of guaranteed and should be collected from the community.
6. The premium acquired from investing funds should not be in the form of tradable ordinary shares, since this would result in Gharar (uncertainty) and Maisir (gambling), which would lead to the development of the stock market in the IEA.

REFERANCES

1. Richter, Luiz Egon, Augusto Carlos, and De Menezes Beber. 2023. Pak-Qatar Financial Statement. Karachi.
2. SECP. 2023. Takaful Guide.
3. Takaful, oridinance. 2005. Pakistan Insurance and Takaful Act. Vol. 905.

1. Note Re-Takaful is just as reinsurance refers to the concept of “insurance for insurance companies,” re-Takaful refers to “Takaful for Takaful companies.”

   ↑

2. INVESTMENT INCOME = Profit from bank placements (on term deposits) + Profit from debt securities (available for sale (on sukuks)) + Realised gains on (equity securities (mutual funds)) ↑

3. OTHER INCOME = Profit from bank placements (on bank balances) + gain on disposal of operating fixed assets + - exchange gain + administrative income ↑

4. Karachi Interbank Offered Rate ↑

5. London Interbank Offer Rate ↑

6. INVESTMENT INCOME = Profit from Mudharabah investment ↑

7. OTHER INCOME = funds from government and Islamic philanthropist ↑