Islamic wealth management

Assignment

Written by: Mariam Hassan Rashid

Lecturer: Mr. Ali

 Introduction

TAKAFUL is a form of Islamic insurance, adhering to sharia principles,

where participants pool their contributions to provide mutual protection
against loss or damage, offering coverage for health, life, and general
insurance requirements.

TAKAFUL is an insurance system that is compatible with the

provisions of Sharia, based on the principle of cooperation between
community members sharing the same hazards as well as their
material consequences together, according to the rules set out by the
company system, and the conditions of the insurance policies,
without violation of the provisions of Sharia.

INSURANCE is a contract, represented by a policy, in which a

policyholder receives financial protection or reimbursement against
losses from an insurance company. The company pools clients’ risks to
make payments more affordable for the insured. Most people have some
insurance: for their car, their house, their healthcare, or their life.

INSURANCE is a legal agreement between an insurer (insurance

company) and an insured (individual), in which an insured receives
financial protection from an insurer for the losses he may suffer under
specific circumstances.
Difference between TAKAFUL and INSURANCE
Shared responsibility: The shared responsibility aspect of takaful is
rooted in the principles of mutuality and cooperation. By pooling
resources together, policyholders are able to share the risk of a loss and
provide financial support to each other in the event of a claim. This
creates a sense of community among policyholders, as they are all
working together to protect each other. In contrast, conventional
insurance operates on the principle of individual risk transfer, where
policyholders pay premiums to an insurance company, which assumes
the risk and is responsible for paying claims.
Profit and loss sharing: The profit and loss sharing model of takaful is
designed to align the interests of policyholders and the takaful provider.
By sharing in the surplus or shortfall, policyholders are able to benefit
from the success of the takaful provider and also bear the consequences
of its losses. This creates a sense of accountability, as the takaful
provider must operate efficiently and effectively in order to generate a
surplus and share the profits with policyholders. In contrast,
conventional insurance operates on the principle of profit maximization,
where the insurance company retains any surplus as profit.
Investment ethics: The investment ethics of takaful are governed by
Shariah law, which prohibits investment in certain industries and
activities that are considered unethical or harmful. This includes
industries such as gambling, alcohol, and tobacco, as well as activities
that involve interest-based transactions. The restrictions on investments
imposed by Shariah law can limit the types of benefits that takaful
providers can offer, but it also provides a framework for ethical
investment and helps to promote responsible behavior. Conventional
insurance, on the other hand, is not subject to these restrictions and may
invest in a wider range of industries and activities.
Social purpose: The social purpose of takaful is to provide protection
and support to policyholders in their time of need, and to promote a
sense of community and mutual support. This is in line with the
principles of mutuality and cooperation that underpin the takaful model.
In contrast, conventional insurance is primarily focused on generating
profits for shareholders, although many insurance companies also
engage in philanthropic activities or support social causes in other ways.

Objectives of takaful

1. Risk-sharing: Participants pool their resources to support one

another financially in case of loss or damage.

2. Cooperation: Takaful operates on the principle of mutual

cooperation and joint responsibility among participants.
 3. Solidarity: It fosters a sense of community and solidarity by
helping individuals and groups cope with unexpected events.
4. Ethical investment: Takaful funds are invested in Sharia-compliant
assets, promoting ethical and socially responsible investments.

5. Profit-sharing: Surplus generated from Takaful operations is shared

among participants according to predefined ratios, fostering
equitable distribution of returns.

6. Ensuring compliance: Takaful adheres to Islamic principles,

ensuring that insurance activities are conducted in accordance with
Sharia law.

Objectives of insurance

1. Risk Management: Insurance helps individuals and

businesses mitigate financial losses due to unexpected events,
such as accidents, natural disasters, or illnesses.

2. Financial Protection: It provides financial security by

compensating policyholders for covered losses, reducing the
impact of unforeseen expenses on their financial well-being.
 3. Promoting Savings: Certain insurance policies, such as life
insurance or annuities, encourage saving and long-term
financial planning by providing benefits or payouts at
specific intervals or upon certain events.

4. Promoting Economic Growth: Insurance facilitates economic

stability by spreading risks across a large pool of
policyholders, which enables businesses to invest, expand,
and innovate without the fear of catastrophic losses.

Importance of takaful

1. Sharia Compliance: Takaful adheres to Islamic principles,

ensuring transactions are compliant with Sharia law.

2. Risk Sharing: It promotes mutual cooperation and shared

responsibility among participants, which aligns with Islamic
values of community support and solidarity.

3. Ethical Investments: Takaful funds are invested in Sharia-

compliant assets, fostering ethical and socially responsible
investments.
 4. Protection: Like conventional insurance, takaful provides
financial protection against unforeseen events, offering peace
of mind to participants and their families.

5. Wealth Distribution: Surplus generated from takaful

operations is distributed among participants according to
predefined ratios, promoting equitable wealth distribution.

Importance of insurance

1. Risk Management: Insurance helps individuals and

businesses manage various risks, such as property damage,
accidents, illness, and loss of income. By transferring the risk
to an insurance company, policyholders can protect
themselves from financial hardship in case of unexpected
events.

2. Financial Protection: Insurance provides financial

protection by compensating policyholders for covered losses.
This protection can help individuals and businesses recover
from setbacks and avoid financial ruin.
 3. Promoting Stability: Insurance contributes to economic
stability by spreading risk across a large pool of
policyholders. This reduces the impact of individual losses on
the overall economy and helps maintain financial stability.

Conclusion

Both takaful and insurance serve the essential function of risk

management, albeit through different mechanisms and principles.
Whether based on mutual cooperation or risk transfer, these tools offer
individuals and businesses the security they need to navigate life’s
uncertainties.
Important takaful act 1984 in malaysia

The Takaful Act 1984 in Malaysia is crucial for regulating the takaful
industry, which operates on Islamic principles. Here are several
important aspects of the act:

1.Establishment of Takaful Operations: The act provides a legal

framework for the establishment and operation of takaful companies in
Malaysia, ensuring they comply with Islamic principles and regulations.

2. Shariah Compliance: It mandates that takaful operations must adhere

to Shariah principles in all aspects of their operations, including
investment, underwriting, and distribution of surplus.

3. Capital Requirements: The act sets out minimum capital requirements

for takaful operators to ensure their financial stability and ability to meet
obligations to policyholders.

4. Governance and Management: It outlines governance and

management requirements for takaful companies, including the
appointment of Shariah advisors and the establishment of a Shariah
supervisory board to ensure compliance with Islamic law.

5. Disclosure and Transparency: The act requires takaful operators to

provide clear and transparent information to policyholders regarding the
terms, conditions, and benefits of takaful products.

6. Surplus Distribution: It regulates the distribution of surplus generated

from takaful operations, ensuring fairness and equity among participants
based on Shariah principles.

Important insurance act 1996 in Malaysia

The Insurance Act 1996 in Malaysia introduced several key regulations

to govern the insurance industry, including:

1. Licensing of insurers and intermediaries: The act outlines the

requirements and procedures for obtaining licenses for insurance
companies and intermediaries such as agents and brokers.
2. Solvency requirements: It mandates that insurance companies
maintain adequate financial reserves to ensure they can meet their
obligations to policyholders.

3. Consumer protection: The act includes provisions to safeguard the

interests of policyholders, such as requirements for clear and fair
disclosure of policy terms and conditions.

4. Supervision and regulation: It establishes the framework for the

supervision and regulation of the insurance industry by the regulatory
authority, Bank Negara Malaysia (BNM).

5. Corporate governance: The act sets out principles of corporate

governance that insurance companies must adhere to, including
requirements for board composition and transparency.