Tomorrow's Takaful Products

By Ikram Shakir

Contemporary Western products are considered "unIslamic" as they contravene many of the Islamic principles. For instance, it is considered gambling to lose an insurance premium to an insurance company if the insured event does not take place (and gambling is prohibited by Islam) and the investment of the policyholders' funds may not be based on Riba.

Takafol is the Islamic alternative to contemporary insurance.
Islamic insurance products have existed, in one shape or another, for several years but the real impetus came during the early 1980s when such products appeared in Western Europe mainly due to the efforts of Dar Al-Mall Al-Islami, one of the biggest Islamic financial institutions in the world, through its Takafol subsidiaries. Business conditions for Islamic financial institutions were very favourable at the time and Takafol products were well received by the ethnic Muslim community living in Western European countries. The first generation of emigrant Muslims to Western Europe had established themselves successfully. The prejudices and discriminations of the host communities were coming to surface, Muslims were facing a crisis of identity and this created a chain reaction. These social problems were expressed through the establishment of a number of mosques and Halal meat and Islamic food shops throughout Western Europe. Simultaneously, non-interest bearing bank deposits and Islamic savings funds became more popular within Muslim communities.

The prevailing social and economic environment in Western Europe gave an encouraging start to Takafol operations in Western Europe. The early types of Takafol products were unit-linked savings plans where the benefits of the policy were notionally linked to the value of the underlying assets in the internal funds of the Takafol company. Those products were, in general, complying with Islamic sharia principles regarding the type of investment and risk. In particular, the following principles were observed in the product design:

Riba-free investments

1. No deception (i.e. transparent and clear definition of benefits and charges)
2. No profit to the Takafol company from favour able mortality experience
3. Based on solidarity principles rather than probabilities (principles of gambling)

In order to comply with the above rules, the Takafol policyholders' funds were invested in short term assets without any fixed interest or guarantee of capital and the mortality risk was shared on a solidarity basis so that any loss or profit due to mortality was shared between the policyholders. However, the Takafol savings products only offered a small death cover, which limited their appeal to prospective customers.

It was expected that other Islamic insurance products would be made available to cater for a variety of insurance needs amongst the Muslim community, such as term assurance, mortgage protection or old age annuities, but the process of introducing new Takafol products has been very slow and, to some extent, non existent.

In order to be successful and profitable, it is imperative for a Takafol company to offer a wide range of products and Takafol should not remain to be seen as a very narrowly based product operation. The Muslim communities in Western Europe have very high expectations from Islamic institutions in offering a complete Islamic system for their daily financial and insurance needs. However, until recently, only a part of this Islamic financial system was offered. Just imagine how difficult it would be to explain to a prospective policyholder that he should take out a Takafol savings plan for savings purposes but should rely upon the Western insurance industry for other insurance needs. It is therefore imperative to design and market Islamic products, which can meet wider insurance needs of the Muslim community.

WHAT ARE THE LIKELY PRODUCTS FOR TOMORROW?
The Western insurance products have evolved over the last 2 centuries to meet the social and economic needs of the population. As Muslims in Europe are living in the Western social and financial environment, they have similar social and financial problems and their insurance needs are therefore very similar. In order to identify which products may have a wider appeal for Muslims in future in Western Europe, it may be helpful to first identify the factors which affect the insurance market. Some of the primary factors are as follows:

- Changes in legislation
- Budgetary constraints
- Political Uncertainty
- Ageing population
- Longevity
- Changes in social habits
- Competition
- Available Investment
- Distribution
- Risks Involved

The most important factors affecting the insurance industry are perhaps the ageing population, due to the baby boom/baby bust cycle in the 1950s and 1960s, and longevity due to the improvement in health care and economic living conditions. Other key factors are political and fiscal: the EU Member States are facing State budgetary deficit and constraint due to the introduction of the single European currency and the increasing cost of pensions and health care. This suggests that insurance products for which there will be a higher demand in future are likely to be old age pension, annuity, medical care and long term care products.

Pension and Annuity Products

We are all very familiar with the three pillars of the Western pension system:
- State pension schemes.
- Occupational pension schemes, and
- Personal savings.

In the EU Member States, the State is by far the biggest provider of retirement benefits. However, the system is now being questioned. Studies indicate that a male joining the State scheme at normal age and retiring at normal retirement age will receive on average 62% of his contributions, which may not be considered as a good investment. In addition, the current system is based on "pay-as-you-go", which means that .the State collects contributions form the working population and pays it out to pensioners.

This system works as long as there are more contributors than pensioners but it will come under tremendous pressure as the number of pensioners grows. It is a well-known fact that the population in Western Europe and North America is ageing, i.e. that the ratio of older people to younger people is constantly increasing. Clearly, as a result of the excellent health service provided by the State, people are living longer than ever before (on average life expectancy has increased by 4 years over the last twenty years). However, this is not the only cause of ageing. The other cause is to be found in the sudden increase of fertility rates between 1950 and 1960 (a phenomenon known as the baby boom) and the subsequent drop in those rates (the baby bust). The graph below illustrates fertility rates in Western Europe from the twenties to the eighties-
It can be seen that there was a sharp rise in fertility rates after World War II, followed by a sudden drop in the late 1960s. Some people call this phenomenon a time bomb, but it can be better described as a tidal wave because a time bomb explodes only once whereas this phenomenon has recurrent long-Iasting consequences. As the baby boomers aged it created temporary demand for age-specific products but as the baby boomers were replaced by the baby busters, these areas of temporary high demand immediately contracted. In the 1950s, there was a high demand for kindergartens and schools, which had to close down later on for lack of attendance. In the late 1960s, the demand was in the higher education sector, which was followed by a recession with the consequence that many teachers were made redundant and many schools were closed. In the 1980s it was housing, appliances and commercial office space. In the year 2020, the demand will probably be in the medical, pharmaceutical and old care houses sector.

What will happen when baby boomers reach retirement age? Baby-boomers, who were trying to save the world in the 60s, will find it very hard to save their State retirement income. It is expected that by the year 2020, in Europe, there will be only two workers contributing to the State scheme for every pensioner.

With the State schemes being "pay-as-you-go", it becomes obvious that the State pension system will face serious financial challenges by the year 2020. There will be a systematic reduction in benefits with an increase in contributions and one can expect that the demand for personal pension products and occupational pension schemes will therefore grow dramatically. This will be equally applicable to the Muslims living in Western countries. There will be a real opportunity for Takafol companies and they should be ready to offer private pension plans to their niche market.

In particular, life annuities will be in higher demand, where Takafol companies will be required to cover the longevity and investment risks. However, Takafol companies should bear in mind that, due to the increase in life expectancy, the mortality of pensioners has shown remarkable improvements in recent years and the actual mortality improvements are much higher than the projected improvements used in the pricing of annuity products. An analysis carried out recently shows, in particular, that the improvement in male rates and in the annuity amounts is significant and clearly warrants a health warning. Consideration should therefore be given to those factors when designing pension and annuity contracts.

Long Term Care Products
Due to old age, or as a result of an accident or disease, some people lose some of their mobility and need special assistance to carry out daily activities. In the worst cases, 24-hour assistance may be required. The average length of such assistance normally varies between 6 to 12 years but it can be longer in certain circumstances. In the past, the family used to provide such assistance. However, because of the changing family structure (single parent families, divorces, working women, etc.), it appears that the family is no longer in a position to do so and, therefore, some external assistance is required. This can be quite expensive and, as State pension benefits and disability benefits are usually insufficient, extra cover could be provided through Takafol policies. The current estimate is that about 25% of retired people will require some long-term care at one time or another, which offers big potentials to Takafol companies. Benefits normally cover the cost of any external assistance required to carry out such activities as feeding, bathing, dressing, transferring to and from bed or chair, going to the toilet, etc. The target market for long term care products could be the middle-income group and the distribution could be through Islamic banks, occupational pension schemes and normal Takafol distribution channels.

Medical Care Products
Modern medicine and health care in the European Union has helped to improve the life expectancy but it has not improved the health and quality of life at older ages. In a recent research carried out in the USA, it was found that on average 77% of all health care expenses occur during the last six months of our life.

As a result of the ageing population, one can expect that the demand in the medical care sector will become higher. However, as a result of budgetary constraints, EU States may not be able to finance medical care expenses and there is a risk that the benefits paid out by the sickness fund may be reduced in future. This is already happening in some countries where hospitals are being closed, the availability of hospital beds is being restricted for people above a certain age, and medical subscription charges are being increased.

This indicates that private individuals have to find extra cover from the private industry .As a result, the demand for medical care products is likely to increase and Takafol companies should be ready to provide such products to the Muslim communities. Takafol companies could, for example, offer the following covers:

• Ordinary medical care (where normal medical expenses are paid on an indemnity basis)
• Major medical expenses (where fixed lump sum benefits are provided in respect of defined medical procedures)
• Critical illness products (where the risk of diseases such as heart attack, stroke and cancer is covered)
• Total health care products (where critical illness, medical care, life cover and long term care covers are provided under a single cover).

The word "Takafor' may portray the real meaning of risk sharing on a solidarity basis in the Arabic language, but it is not commonly used and understood by the Muslim community living in Western Europe. It is already difficult for a Takafol salesman to convince somebody that he should take a Takafol policy and having to explain what Takafol is, adds even more difficulties in the selling process. It would perhaps be better to use "Islamic insurance". This method was successfully used by the Islamic banking industry and a similar process could be employed by the Islamic insurance industry.

One of the main difficulties probably experienced by Islamic financial institutions is to design products, which can meet the insurance needs of the Muslim community living in Western Europe without contravening the basic Islamic (sharia) principles.

When designing a new product, considerations should be given not only to its adequacy, but also to its competitiveness. For that purpose, both the investment strategies and the product charging structure need to be carefully defined. For example, it should be noted that funds invested in short-term assets usually provide lower returns than those invested in longer term assets -since the liabilities of a Takafol company towards its policyholders are longer term by nature, it is considered prudent to invest the policyholders' funds in long term assets. As regards the charges, the use of single mortality rates puts some people at a disadvantage, which may reduce the product attractiveness to some prospective policyholders. Takafol should devise systems under which it should be possible to invest in longer-term assets and to use different mortality rates without contravening sharia principles.

Takafol managers are well aware of the insurance needs of their customers but may not be well experienced in the interpretation and application of sharia principles, whereas Sharia experts (religious leaders) may not fully comprehend the commercial requirements of a Takafol company. Therefore, there is a need to educate both sides into the other discipline and to maintain a continuous dialogue between them so as to find pragmatic business solutions under which the Takafol products are acceptable on sharia principles but offer competitive terms to the Muslim community for their insurance needs. Institutions like DMI and the Islamic Institute for Banking and Insurance are already doing an excellent job in the development and promotion of Islamic financial systems. They should try to accelerate this process further by providing a forum where Takafol managers and sharia experts could communicate with each other.

According to some estimates, there are over 6 million Muslims living in Western European countries. That offers a very substantial market size to Islamic financial institutions. The Western insurance industry is facing problems in identifying its market and is going through a phase of consolidation and repositioning. With a defined market in Europe, Takafol companies do not face this problem. They potentially have a very prosperous future ahead of them, provided they can offer efficient Takafol solutions to the Muslim communities.

Islamic Insurance / Takaful

In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The concept of insurance where resources are pooled to help the needy does not contradict Shariah.


The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

Conventional insurance involves the elements of uncertainity (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes.

The Institute receives numerous requests for information about the permissibility, concept and practice of Takaful (Islamic Insurance) and about organisations engaged in Takaful business.

These requests underline important two facts. Firstly, that there is a rapidly increasing interest in it and secondly, there is an acute shortage of information on various aspects of Takaful. Moved by these factors, the Institute decided to include a section on Takaful to fill this important information gap.

The Institute has already published an International Directory of Islamic Insurance (Takaful) Organisations, listing not only the companies in this field and their particulars, but also a number of articles on various aspects of this system.

"I think that you are doing a great service to Islamic banking and insurance and I second your judgment about the importance of Takaful in modern economic life and hope that your Institute will make many contributions to this open area."
Dr. Omar Zubair Hafiz
Deputy Director, Islamic Development Bank, Jeddah.

An Overview of the Takaful Industry

By Dato' Mohd Fadzli Yusof

Chief Executive Officer, Sharikat Takaful, Malaysia

Currently, it is understood that there are around 40 takaful operators worldwide, mostly providing general business. It is at the same time estimated that the combined total assets and contributions (premium) of these operators stand at around USD1 billion and USD500 million respectively. Obviously, this amount is negligible and very insignificant compared with the total number of Muslim population of Islamic countries, estimated at around 800 million people.

According to data compiled by Carpenter Bowring London, a company under the Marsh Mc Lennon Group, the world largest reinsurance broker, insurance penetration particularly for the life sector in premium terms in Muslims countries is less than 1% of GDP. It is therefore clear that takaful has immense potential to be developed with its sheer market size hitherto remained untapped.

For this reason, existing as well as would-be operators must intelligently position themselves in terms of product design that can satisfy the needs of the market. In this regard, products that would help to improve savings among the masses, such as family takaful plans which are essential components for ensuring economic growth should be actively promoted. As for the penetration of life insurance, perhaps Malaysia is relatively ahead among most Islamic and developing countries. At present, Malaysia has attained penetration rate of 28% as against less than 5% for most Muslim countries, compared to the established markets of Singapore, Japan and most European countries with rates ranging from 65% to 150%. The co-relation to the relatively high market penetration is further reflected from the savings rate of Malaysia, considered comparatively high at 39% of GDP.

Countries with high savings rate would generally be able to sustain economic growth and would not have to depend upon assistance or aid from outside. Thus from the economic standpoint, takaful would be useful not only as a means to inculcate good savings habit and cultivate thrift at the individual level, but also help to accelerate investment potential for the ummah as whole. This in turn would be beneficial for the economic development and well being of Muslim countries themselves.

As demonstrated from the small activities undertaken by Takaful Malaysia, Malaysia has taken the lead in bringing takaful to the international playing field. Asides the advancement within the Asean region, Malaysia has helped other parties outside the region to introduce and promote takaful in their respective countries. For this purpose Takaful Malaysia has established joint-venture programmes in Sri Lanka, Saudi Arabia and has also provided technical assistance for takaful operators in Australia. Request for similar assistance has been sought from Lebanon, Bangladesh and Algeria.

In another interesting development, the `Developing-8 (D-8)', at its Second Heads of State Summit in Dhaka, Bangladesh on 1st and 2nd March 1999, issued a declaration which amongst others agreed to introduce, promote and develop takaful in all D-8 countries. In relation to this it was also resolved that Malaysia be given the task to assume the lead role in planning, coordinating and providing technical expertise and other related resources for this purpose.

As a follow-up action, an "International Workshop On Retakaful" was held in Kuala Lumpur on 31st May and 1st June 1999, whereby a similar declaration was issued strengthening the earlier commitment of the D-8 Summit to hasten the pace of the introduction and development of takaful amongst D-8 and other OIC countries. At the same time it was also agreed that the status of ARIL be transformed as the retakaful operator for the D-8, whose capital shall be expanded and to be subscribed by the member countries. In line with this move, ARIL has come out with a five-year strategic plan to increase its paid capital to USD50 million by 2006. Obviously, this development augurs well for takaful as a whole and it opens up new opportunities as well challenges for the takaful operators.

Opportunities and Challenges
The pro-active stance as afore-mentioned obviously presents boundless opportunities for takaful. Coupled with the sheer size of the ummah totalling to more than 1.2 billion people, takaful therefore has no frontiers. Indeed the world is a colossal market for takaful products. With its generally superior features compared with conventional insurance policies, it is almost impossible for takaful to be out of the mainstream. For example, in Malaysia apart from individuals, more and more corporations and multinationals are using takaful products including among the non-Muslims community.

Nevertheless, opportunities do not come by a flick of a finger. A number of crucial issues have to be addressed to ensure credibility and acceptability and hence brighter future for takaful. Some of these issues may be summarised as below:-

Financial Capability
Operators should be adequately capitalised in order to have a meaningful financial strength, so that they would be able to meet the demand of the market conveniently. A relatively weak operator may not only hamper its business development but may have to depend heavily on the support of re-takaful operators, meaning relying presently on the mercy of conventional re-insurers. Without sufficient financial capacity the ability to retain and absorb more of the risks would be virtually impossible. Although adequacy of capital is viewed differently from one country to another, it should however have an acceptable minimum requirement reflecting the minimum level accepted internationally. In Asean, the figure is between USD12 million to USD15 million. In this regard, authorities would have an influence on this matter; as for example in Malaysia, through the enforcement of the Act, the requirement for solvency margin and the compliance of minimum capitalisation can be effectively legislated.

Manpower and Expertise
Being a service industry, the pace of progression for takaful would to a greater extent depend upon its manpower and competency of its human resources. Lacking of trained and experienced manpower would hinder the development of takaful. At present, developing countries in general, of which most of the Islamic countries are in this category, are facing scarcity of qualified and trained personnel in the field of insurance. For this reason, takaful is also affected in view that experienced insurance personnel are at present form the core staff for most takaful operators. Special programmes therefore should be initiated to train the manpower not only on the technical aspect of insurance but also in areas covering finance and investment as well as appreciation of Shariah. Towards this end, Malaysia has begun to play its leading role by organising and conducting special educational programmes for takaful personnel in the Asean region as well as others through the formation of Bank Islam Research and Training Institute (BIRT). It is also felt that bodies like Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB) would be able to assume similar role. Coordination of these various bodies is essential to avoid wastage and overlapping of functions.

Retakaful
The issue of retakaful or reinsurance in accordance with the requirements and practices of Shariah will occupy the takaful operators for sometime. Like insurance, sound retakaful arrangement is a necessity. Although in a situation where retakaful is still inadequate to meet the needs of takaful operators, Shariah allows them to deal with conventional reinsurers.

Nevertheless at the same time, serious efforts ought to be undertaken, in particular by the takaful operators themselves to establish their own retakaful facility. A proper way obviously would be establishing special retakaful operator as in the case of ARIL. But without sufficient number of players, it would perhaps be rather difficult for such retakaful operator to survive in terms of business support. Ideally, retakaful should solely depend on the cessions from takaful operators. Practical commitment of the various Islamic countries and their political willingness are urgently needed to demonstrate their readiness in allowing takaful operators to be incorporated in their respective countries which then would create the necessary playing field for retakaful operation.

Investment
As custodian of public fund, takaful operators must ensure that the takaful funds are not only soundly but more importantly safely managed. The fact that the takaful operation is essentially based on profit sharing, investment of the funds becomes fundamentally important as underwriting. However in the case of takaful, there is another essential dimension to be considered in that avenues of investment must be in accordance with Shariah principles. At present, these avenues are relatively limited. It is therefore highly timely for all relevant parties, such as government authorities in Islamic countries, financiers, bankers including central bankers, takaful operators, economists and Shariah scholars to study, develop and promote the diversity of investment instruments and products acceptable to Shariah.

Legislative Framework
For takaful to thrive in an orderly and proper manner, a necessary infrastructure which would enable the authority to regulate and supervise its operation must be in place. A form of legislative framework is therefore essential for the authority to exercise its supervisory function both in terms of business operation as well as Shariah compliance. In most Islamic countries there exists a dual financial system side by side. What is therefore statutorily required of the conventional financial system such as good governance, compliance of regulations and other provisions should also be applicable to the Islamic financial system.

In the case of takaful for example, the legislative requirement for minimum solvency margin imposed on conventional insurers should also be applied to takaful. Such requirement can only be effected by law. With a proper legislative framework, it would also enable the authority to regulate whole gamut.

The ability to comply with the above issues would ensure a strong and stable footing for takaful. In the wake of open market and globalisation under the WTO agreement, takaful, like other financial sectors would have no alternative but to face competition. At present, the market for takaful thrives essentially in Muslim countries with the expertise still in the hands of the Muslims. But what has happened to Islamic banking may also happen to takaful. Through the process of globalisation and the pressure of competition with expertise can be easily acquired it would be possible that international insurance companies from the Western world will one day introduce takaful to both Muslims and non-Muslims. Therefore to be ready, the performance standard used in the conventional insurance should also be used for takaful. In this respect, the generally accepted key indicators or benchmarks, such as the CAMEL test, normally used in determining such standard for conventional companies ought to be similarly applicable to takaful operators.

Harmonisation of Practice
As generally agreed by Shariah scholars, the form of insurance business acceptable to Islam in essence must contain the virtues of cooperation, solidarity and brotherhood. However, these are mere concepts that cannot simply be equated and therefore cannot be applied as a basis of legal principles in a contract. In fact the scholars further agreed that the contract of takaful must be based on certain `tijari' principles that conform to the basic characteristics of Islamic business transaction. Towards this end, the scholars concluded that the contract may be based either on the principles of Al-Mudharabah or Al-Wakalah.

Although basically under both principles, the sharing of profit between participants and operators is an entitlement embedded in the contract, there is however a structural difference in the way such profit (surplus) is determined. The difference lies in the fact that under the principle of Al-Mudharabah, the operator as the mudharib or entrepreneur, cannot charge its management expenses from the takaful fund. Whereas under the Al-Wakalah, the operator being the agent of the participants, can use part of the fund to cover its management costs. Under the Al-Wakalah too, underwriting surplus of the takaful fund, if any, shall be distributed back to the participants only, based on the premise that the funds, actually belong to the participants.

On the contrary, under the Al-Mudharabah principle, the profit as universally defined by conventional insurance companies, which in the case of general business is taken to mean returns on investment plus underwriting surplus, is then shared according to a mutually agreed ratio, such as 50:50, 60:40 or 70:30 between the participants and the operators. Management expenses of the operator including agency remuneration, if any, shall be borne by the shareholders' fund and not from the takaful funds. Hence, there is a distinct separation between takaful funds and shareholders' fund.

Under the Al-Wakalah principle, the paid-up capital is contributed as donation by the shareholders. Therefore, under this principle the shareholders do not expect and probably do not mind for not receiving any returns on the capital donated. However, it is understood this standpoint has changed in view of opinion expressed by certain scholars that the shareholders (operator) in their capacity as managers should also be entitled to share the profit arising from the takaful business.

From the observation on the performance of takaful operators using the Al-Wakalah principle it was found that their returns to the participants have been comparatively low. On average their rate of profit declared to their participants below 10% p.a. On the other hand, it is also understood that there are even operators, especially newly established ones have not been able to declare any profit to its participants.

Under the Al Mudharabah principle, shareholders as owners of the operator have equal opportunity to enjoy a similarly fair return on their capital. The profit portion attributable to the shareholders is transferred to the shareholders' fund and together with returns on investment of the fund itself shall pay for the management expenses. Any balance therefrom is declared as profit of the operator and dividends are distributed therefrom. Adopting the Al-Mudharabah principle for takaful operation as experienced by Takaful Malaysia would ensure that the cardinal principles of 'al-adl' and 'al-ihsan' under Islamic contractual obligations are constantly upheld as both participants and shareholders are enjoying similar benefits.

As both principles are acceptable to Shariah and currently being used by various operators all over the world, serious efforts should be taken to harmonise the practice. By this harmonisation, there would be unity in diversity, and equally important would remove the confusion, if any, among the ummah of a common system but with two different modes of practice. It also paves for convenient practical cooperation among these operators. Towards this end, moves towards establishing an accounting standard for takaful operators that at the same time will harmonise the two practices initiated and undertaken by the `Accounting & Auditing Organisation For Islamic Financial Institutions (AAOIFI)' should be lauded and strongly supported.

Conclusion
What has been attained so far is comparatively small, but as shown from the performance of takaful operators generally, is growing rapidly. Considering only a tiny percentage of the ummah have some form of life insurance cover, the potential for takaful to penetrate deeper into the market is tremendous. In this context family takaful products would have a strong chance to grow and expand. Therefore takaful is here to stay.

However, the future of takaful would depend on the ummah. Whether takaful would develop into an industry and eventually become the real insurance alternative for the ummah would depend on the commitment and political willingness of the Muslims at the individual, community, national and international levels. What is urgently needed is the practical translation of these commitment and political willingness by all.

The time for polemic is past; it is no more discoursing on the basic issue of `halal' or `haram'. The way forward is on improving, correcting and developing the existing operational structure, which has been generally accepted to be essentially based on either the principles of Al-Mudharabah or Al-Wakalah. It is clearly demonstrated that in countries where there is commitment and strong political willingness plus the application of modern management practices in its approach, countries have seen their takaful operation grow into a viable and profitable business venture.

Takaful

Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years. It originates from Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance.

Islamic References to Takaful

These fundamentals are based on the sayings of the Islamic prophet Mohammed. Based on the hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some of the examples are:

• Basis of Co-operation Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2)^[1]

• Allah will always help His servant for as long as he helps others. (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud)

• Basis of Responsibility The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim)

• One true Muslim (Mu’min) and another true Muslim (Mu’min) is just like a building whereby every part in it strengthens the other part. (Narrated by Imam al-Bukhari and Imam Muslim)

• Basis of Mutual Protection By my life, which is in Allah’s power, nobody will enter Paradise if he does not protect his neighbour who is in distress. (Narrated by Imam Ahmad bin Hanbal)

“The basic fundamentals underlying the Takaful concept are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic Law."