GROUP NO: 05

GROUP MEMBERS: FATIMA TAHIR 016

ZOYA BATOOL 025
AMINA MUZAMIL 033
SYEDA HAIQA 035
SESSION: 2020-2024
SEMESTER: BBA MORNING 5TH
COURSE: I SLAMIC FINANCE
PRESENTED TO: Dr. NASEEM BUKHARI
 CONTENTS

Types of Risk and Risk

Origin of Takaful and
01 Takaful Meaning 05 Management in Takaful
Operation
Basic Elements of Objections to Conventional
02 Takaful
06 Insurance

Different Fatwas on
03 Conventional 07
Difference Between
Conventional Insurance and
Insurance
Takaful
Process of Takaful
04 08 Types of Takaful
 CONTENTS

Challenges to Takaful
09 Models of Takaful 12

Takaful Prospects in Suggestions For Further

10 Pakistan 13 Improvement

Takaful Pakistan
11 Limited 14 Conclusion
 ORIGIN OF TAKAFUL

The concept of takaful, or Islamic insurance, has been familiar for

centuries and was practiced by the Muhajirin of Mecca and the Ansar of
Medina following the Hijra of the Prophet Muhammad over 1400 years
ago Takaful derived from the ‘aqilah(mutual assistance) and diyah(the
traditional compensation due for the shedding of blood). In pre-
Islāmic times, the compensation required for taking a life was 10 she-
camels. systems, whereby people of a given tribe would come to the
financial rescue of one of its members he should face an unexpected
liability, such as paying for blood money (diyah)
WHAT IS TAKAFUL?
Takaful comes from the Arabic root-
word ‘ kafala ’ — guarantee
Takaful means mutual protection
and joint guarantee.
Operationally, takaful refers to
participants mutually contributing to
a common fund with the purpose of
having mutual indemnity in the case
of peril or loss.
Takaful exists primarily to spread a
risk and to alleviate a financial loss
suffered by somebody.
REFERENCE — AL QURAN:

“Help (ta’awun) one another in

furthering virtue (birr) and Allah
consciousness (taqwa) and do not
help one another in furthering evil
and enmity”.
Al Maidah: verse2(5:2)

Takaful is a form of mutual help (ta’awun)

in furthering good/virtue by helping
others who are in need / in hardship .
REFERENCE – HADITH:

“tie the camel first, then submit

(tawakkal) to the will of Allah”

The hadith implied a strategy to

mitigate/reduce risk.

Takaful provides a strategy of risk mitigation/reduction by

virtue of collective risk taking that distributes risks and
losses to a large number of participants. This mitigates the
otherwise very damaging losses, if borne individually.
 EVOLVEMENT OF TAKAFUL
 the first takaful company - the Islamic Insurance Company of Sudan
was founded in Sudan by the Faisal Islamic Bank in January, 1979
 A Special Task Force was established by the Government in 1982 to
study the viability of the setting up of an Islamic insurance company.
Following the recommendations of the Task Force, the Takaful Act
was enacted in 1984 and the first takaful operator was incorporated in
Malaysia in November 1984
 In 1985, the Council of Islamic Scholars in Mecca approved takaful as
a Shari’ah-approved alternative to the conventional insurance system.
This led to mutual takaful companies being established in different
Muslim countries, including Dubai, Bahrain, and Malaysia
 In the Middle East, takaful has developed in Saudi Arabia, Bahrain,
Iran, and Qatar, with new operations recently opening in Egypt, the
United Arab Emirates, and Kuwait. Steps have also been taken in
Europe and the US to establish similar companies.
Currently, Malaysia has the most mature takaful businesses operating
alongside conventional banking and insurers
 Basic Elements of Takaful

01 Mutuality and cooperation

02 Takaful contract pertains to donation (Tabarru) against

compensation (mu’awadah) case of conventional insurance

03 Investments as per
Shariah
Joint Guarantee / Indemnity amongst participants – shared
04 responsibility

05 Eliminates the elements of Gharrar, Maisir and Riba

06 Wakalah/Mudarabah basis of operations

 DIFFERENT FATWA’S ON
CONVENTIONAL INSURANCE
A range of Fatwas and opinions have been issued about
conventional insurance, between absolute allowance and
absolute prohibition or detailing in it. Some Fatwas were
built on the idea of necessity of insurance in some cases,
so temporary Fatwas related to these cases were issued
 Fatwa issued in Judicial Conference held in
Makkah in Shaban 1398 AH.
 Verdict of Supreme Court of Egypt on Dec.27,
1926.
 Unanimous resolutions and fatwa by Ulama in the
Muslim League Conference in Cairo in 1965.
 DIFFERENT FATWA’S ON
CONVENTIONAL INSURANCE
 Unanimous decision by Muslim Scholars in seminar held in
Morocco on May 6, 1972.
 Fatwa issued by Higher Council of Saudi Arabia in 1397 A.H.
 Fatwa Issued by the Fiqh Council of Muslim World League in
1398 A.H.
 Fatwa issued by the Fiqh Council of the OIC in 1405 A.H.
(1985).
The commercial insurance contract which is commonly used by
commercial insurance companies is a contract, which contains major
element of risk, which voids the contract and, therefore, is prohibited
according to Shariah”.
 PROCESS OF TAKAFUL

 Takaful operators creates the Waqf Fund or the

“Taburru Funds”.
 Participants contribute their premium/contributions on
the basis of “Taburru” into Waqf Fund.
 The Waqf Fund pays the claim
 KEY POINTS ON TAKAFUL PROCESS

 Contibution are made on the basis of Taburru.

In shariah such contracts are called Aqd
Taburru.

 Contributions are credited to the Waqf Fund:

Operator acts as Wakeel.

 The Waqf Fund pays the claim.

 Contributions are invested only in the Shariah

compliant investment avenues.

 An independent Shariah Board supervises

business activities for Shariah compliance
 RISK
MANAGEMEN
T IN TAKAFUL
OPERATION
 Types of Risks in Takaful
Operation
1 2 3

UNDERWRITIN OPERATIONAL CREDIT

G RISKS RISKS RISKS

4 5

LIQUIDITY MARKET
RISKS RISKS
 UNDERWRITING RISKS

 Occurs due to adverse selection of

applicants or due to Re-Takaful risk.
 The risk of adverse selection arises when
applicants with higher than average chance
of loss succeed in obtaining Takaful
coverage at standard rates.
 Example: farsightedness driver
 Underwriting Risk Management
 Establishing standard selection procedure consistent with the
company's objectives.
 Most of the Takaful operators require physical inspection or
medical reports of the applicants that have serious health
problems or prone to higher than average risk.
 Introduced computerized underwriting system to standardized
underwriting procedure and minimizing the chance of adverse
selection.
 Example : Takaful Ikhlas Sdn. Bhd. Of Malaysia uses
computerized underwriting procedure for motor Takaful.
 OPERATIONAL RISKS

The loss that occurs as a result of insufficient or failed internal

processes, people, technology or from external events.
 Insufficient or failed internal processes
Inaccurate processing of transactions, inefficient record
keeping.
 People Risk
Incompetence of employees.
 Technology Risk
Telecommunication system or computer network breakdown.
 External Events
Unenforceability of regulatory policies, legislation and
regulations that affect the fulfillment of contracts and transactions.
 Operational Risk Management

 Senior management and board of directors of Takaful

company should devise policies and develop strategies
to manage and reduce operational risks.
 Recruiting talented professionals in the field of
informational technology, so that they could develop
software to meet peculiar needs of Takaful industry.
 Auditors play an important role in justifying operational
risk as they point out flaws in internal processes of the
organization.
 CREDIT RISKS
Result of default of counterparty when it fails to meet its obligations in
time and in accordance with agreed terms.
 Default Risk
Takaful operator does not receive or partially receive cash flows or
assets to which it entitled because the other party fails to meet the
obligations of the contract.
 Migration Risk
Probability of a future default of an obligator adversely affect the
contract today.
 Speed Risk
Market perception of increased risk on either micro or macro basis.
 Concentration Risk
Increased exposure to losses due to concentration of investments
in a particular geographical area or economic or industrial sector.
 Credit Risk Management
 Limit on maturity of credit facility( prefer short
term credit over long term credit).
 Limit on maximum investment amount or a
certain percentage of investment exposure to a
single issuer, industry, geographical region or
some other risk classification.
 The non- availability of Islamic derivatives
ensures the credit risk exposures are maintained
within limits of Prudential standards defined by
internal controls.
 LIQUIDITY RISKS
The risk resulting from Takaful company's inability to meet its
obligations when they fall due.
Liquidity risks include liquidation risk, affiliation investment risk
and capital funding risk.
 Liquidation Risk
Risk under circumstance when assets are liquidate below
their real (market) value.
 Affiliation Investment Risk
The risk that investment in an affiliated or member company
might result in drain of financial or operating resources.
 Capital Funding Risk
The risk that insurance company will not be able to
outsource funds in case of large claims.
 Liquidity Risk Management

 Cash flow Modeling

• Assess the amount of deficit, surpluses or liquidation
value risk in order to meet the needs of Takaful industry.
• Make sure that it has sufficient liquid assets in order to meet
the liquidity risk and unexpected liquidity requirements.
 Liquidity Ratios
• Liquidity ratios will help Takaful operator to set the
amount of liquid assets required to meet demands of liability
portfolio.
• Determining Takaful operator's investment policies .
 MARKET RISKS

Market risk is the volatility of prices in instruments and assets of

Takaful company in the market.
It can be classified as equity price risk, interest rate risk and
currency risk.
 Equity Price Risk
The risk of loss resulting from changes in market price of
equities or other assets.
 Interest Rate Risk
The risk of loss resulting from changes in interest rates that
adversely affect the cash flows of the insurance company.
 Currency Risk
Loss resulting from volatility of exchange rates that adversely
affect the operations of insurance company.
 Market Risk Management

 In conventional insurance, management of market risk

includes devising strategies to manage interest rate risk,
exchange rate and commodity price risk.
 KIBOR can be used as benchmark for markup in Islamic
financial institutions.
 Takaful operators face difficulty in managing market risk as
these financial derivatives are not compatible with Shariah.
 Cooperative hedging and bi-lateral mutual adjustment are
acceptable instruments under shariah to mitigate currency risk
and interest rate risk respectively.
OBJECTIONS
TO
CONVENTIO
NAL
INSURANCE
 INSURANCE CONTRACT
“An agreement whereby one party, the insurer, in
return for a consideration, the premium, undertakes to pay
to the other party, the insured, a sum of money or it's
equivalent in kind on the happening of a specified event,
which is contrary to the insured's financial interest.”
Subject Matter of an Insurance Contract:
“... what is it that is insured in a fire policy? Not the
bricks and materials used in building the house, but the
financial interest (i.e. money) of the insured in the subject
matter of insurance... "
 Objections to Conventional Insurance
 Scholars view the insurance contract as an exchange contract -
money is being exchanged for money over time.
 This brings about the problems of gharar ( which leads to
maysir) and in investment aspect, riba.
 Elements of:
• Uncertainty- Gharar
• Gambling- Maysir
• Interest – Riba
The scholars do not object to the insurance but only to certain
weaknesses in the insurance contract.
 Objections to Conventional Insurance
 Gharar in insurance contracts pertain to "deliverability" of subject matter, i.e,
uncertainty as to:
• Whether the insured will get the compensation promised?
• How much the insured will get?
• When will the compensation be paid?
Thus, it involves an element of uncertainty in the subject matter of the insurance
sales contract , which renders it void under the Islamic law.
 Insurance is a contract upon speculation. Good faith forbids either party from
concealing what he privately knows, to draw the other into a bargain, from his
ignorance of that fact , and his believing to the contrary.
• The insured losses the money paid for the premium when the insured event does
not occur.
• The company will be in deficit if claims are higher than premium.
 " Allah has permitted trading and forbidden riba.”
Insurance funds are invested in financial instruments which contains the elements
of Riba.
DIFFERENCE BETWEEN TAKAFUL AND
CONVENTIONAL INSURANCE
 Comparing Takaful to Conventional
ISSUE
Insurance
CONVENTIONAL TAKAFUL
INSURANCE
Organization Principle Profit for Shareholders Mutual for Participants
Basis Risk Transfer Co-operative risk sharing
Value Proposition Profits Maximization Affordability and spiritual
satisfaction
Laws Secular / Regulations Shariah plus regulations
Ownership Shareholders Participants
Riba, Gharar and Maysir May have elements of riba, Free from riba, gharar and maysir.
gharar and maysir.
Form of Contract Contract of Sale Cooperative, Islamic contracts of
Wakala or Mudarabah with
Tabar’ru ( contributions )

Investments Interest based Shariah compliant , Riba- free

Surplus Shareholder’s account Participant’s Account

TYPES OF TAKAFUL
MODALS OF
TAKAFUL
PROSPECTS OF
TAKAFUL IN
PAKISTAN
 TYPES OF TAKAFUL

FAMILY GENERAL
TAKAFUL TAKAFUL
It is a contract of Taburru
where the non-zakat gift is General Takaful plans are intended to
made in customary interims to meet the insurance needs of people and
the Waqf Fund by the corporate bodies in connection to
members.  materialistic loss or damage done due to
any catastrophic condition.
 FAMILY TAKAFUL

TERM LIFE ENDOWMENT MARRIAGE

TAKAFUL TAKAFUL PLAN

WHOLE LIFE UNIVERSAL EDUCATION

TAKAFUL TAKAFUL PLAN
 GENERAL TAKAFUL

MOTOR MARINE PROPERTY MISCELLANE

OUS

It is applicable to It compensates losses This policy provides This coverage is

damage to the or damages to cargo compensation in an personalized and tailor-
vehicle, incurred or freight on Vessels, event of damage to made, to the corporate
as a result of any Aircraft, or roads. the property  requirements.
accident.
 RETAKAFUL
TAKAFUL
• Re-takaful is a form of mutual assistance among participating takaful
operators in which the operators pay a certain amount of contribution
into the re-takaful fund in order to share a certain defined risk in a
specified category if these exceed prudent underwriting limits.

• According to ISRA, there are only a few re-takaful operators and they
only operate at national and regional markets
 BANCA TAKAFUL

• Bancatakaful refers to the distribution of takaful products through

banks, be it Islamic or conventional, provided that the conduct of
bancatakaful activities is in line with the principles of Islam 
MODES OF
TAKAFUL
 MUDARABAH MODEL

 The surplus is shared between the participants with a

takaful operator . The sharing of such profit surplus may
be in a ratio 5:5 , 6:4 etc. as mutually agreed between
the contracting parties.
 Generally, these risks sharing arrangements allow the
takaful operator to share in the underwriting results from
operations as well as the favourable performance
performance returns on invested premiums
 WAKALA MODEL

 Cooperative risk sharing occurs among participants where a

takaful operator earns a fee for services (as a Wakeel or
Agent) and does not participate or share in any underwriting
results as these belong to participants as surplus or deficit .
 Under the Al - Wakala model, the operator may also charge
a fund management fee and performance incentive fee .
 WAKALA-WAQF MODEL
 It is a WAKALAH model with a separate legal entity of WAQF in
between. The relationship of the participants and the operator is
directly with the WAQF fund. The operator is the ‘Wakeel’ of the
fund and the participants pay contribution to the WAQF fund by
way of Tabarru.
 The contributions received would also be a part of this fund and the
combined amount will be used for investment and the profits
earned would again deposited into the same fund which also
eliminates the issue of Ghar.
 Losses to the participant are paid by the company from the
same fund. Operational expenses expenses that are
incurred for providing Takaful services are also met from the
same fund.
 PROSPECT OF TAKAFUL IN PAKISTAN

• Pakistan comes 7th on the list of most populous countries in the

world. Pakistan is based on the ideology of Islam thus 97% of its
people are Muslims. Takaful industry is still expanding in Pakistan
with a growth expectation of 15-20% in the coming years.
• The matter of growth is subject to many challenges such as low per
capita income of the people of Pakistan, Inflation, terrorism etc.
• According to the market experts, the economy of Pakistan has a
great potential for Takaful services due to which a good Islamic
Insurance system could be developed in the country which can
further result in a developed system of Takaful services and play an
active role in economic development and job creation.
 PROSPECT OF TAKAFUL IN PAKISTAN
TAKAFUL COMPANIES
General
Family takaful
According to the current applicable takaful
companies
companies
laws in Pakistan, Takaful Companies
(Takaful Operators) are the financial Pak Qatar
Pak Kuwait
takaful general
institutions incorporated as Limited family ltd
company ltd

Companies registered with the SECP

Pak Qatar
and licensed from Insurance Division Dawood family
takaful general
takaful ltd
ltd
of SECP They are granted permission
to conduct General and Family
Takaful
Takaful (Islamic insurance) business Pakistan ltd
in Pakistan for Non-life and Life
 Challenges to Takaful

 Many of the consumers are tempted towards Takaful due to

religious reasons which provide great opportunities to this
industry in Pakistan
 As roots of conventional insurance are very deep in the country,
it is very difficult for Takaful companies to penetrate in the
market
 A vast majority of consumers also keep in mind the products
and benefits being offered by these companies
 Challenges to Takaful
Lack of Awareness

 Very low literacy rate plays vital role in the creation of this
problem
 According to the respondents, consumers are fully aware about
the mechanism, products and benefits of conventional insurance
 Therefore, there is a very big knowledge gap in the country
Advertisements
 Challenges to Takaful
Unclear Practices by Takaful Companies

 The operational staff of Takaful companies is also not able to answer

the practicality of their respective company
 This is the responsibility of Takaful companies that they should
provide proper information about the mechanism and practices which
they are following
 Similarly, the products of conventional and Islamic insurance are
almost same; questions arise about the practicality of these products of
Takaful companies
 Challenges to Takaful
Business Volume

 Respondents were also very keen about the comparison of business

volume in between conventional insurance companies and Takaful
companies
 Business volume of insurance companies is measured by total
premium revenue
 In this total business volume, the proportion of Takaful companies is
Pak Rupees 8 billion which is only 4.2% of the total insurance
industry
 Challenges to Takaful
Tough Market Competition

 As conventional insurance is the major share holder of insurance industry

in Pakistan, it is giving tough competition to Takaful industry
 Being a small part of this huge industry (only 4.2%), Takaful companies
are facing large number of challenges to overcome the monopolistic
position of conventional insurance in the country
 In their opinion, new product development, establishment of new
companies
 Challenges to Takaful
Re-Investments

 Conventional insurance companies reinvest their funds in every type

of business sectors whether they are Sharia'h compliant or not
 Whereas, this is an ethical, moral and legal obligation for Takaful
companies to invest only in those business sectors which are Sharia'h
compliant
 Consumers suggested that Takaful companies should make it clear that
in which business sectors they are reinvesting so that they could be
satisfied.
 Suggestions For
Further Improvement
Suggestions For Further Improvement

 Takaful operators should follow best

practices with great commitment
 Awareness among general public is
required because of following
reasons
 low literacy rate
Suggestions For Further Improvement

 It should be promoted as the tool of

first choice for risk mitigating. This
can only be achieved through better
product offerings and top class quality
services
Suggestions For Further Improvement

 Alternate distribution channels

should be utilized e.g. Bankatakaful.
Conclusion
 Conclusion

 If Takaful companies would succeed to overcome these challenges,

there will be a revolutionary development in Pakistan as there are
unlimited opportunities and huge potential for Takaful industry in this
market
 These can be overcome by providing awareness about Islamic
Insurance to the vast majority of consumers, developing new and
Sharia'h compliant products, aggressive marketing of services,
establishment of new Takaful companies, increasing branch network
of existing companies and by satisfying the consumers by all means
 Conclusion

 Lack of awareness, unclear practices by these companies, business

volume, re-investments, claims settlements and tough market competition
are the major problems being faced by Takaful companies
 There are several challenges which are negatively impacting the progress,
development and growth of this industry
 But, due to several limitations, they are not performing as per the
expectations of the market and consumers