00:00Welcome to AIMS, an internationally accredited and globally recognized institution for Islamic
00:08finance education.
00:10Meaning of Takaful Takaful means mutual protection and joint guarantee.
00:16It is defined as a system where participants contribute to a common fund to provide mutual
00:22financial protection against loss or damage.
00:29Example of Takaful
00:30In Takaful, all participants agreed to help each other in times of need.
00:35For example, Ali, Ahmed, and Fatima each contribute $100 into a Takaful fund, making a total of
00:43$300.
00:45This fund is managed by a Takaful operator.
00:47A few months later, Ahmed's house is damaged by a flood.
00:50The Takaful operator uses $250 from the common fund to help Ahmed repair his house.
00:57This is the spirit of mutual cooperation and shared responsibility which defines Takaful.
01:05In chapter 5, verse 2 of Qur'an, Allah says,
01:09بِسْمِ اللَّهِ الرَّحْمَنِ الرَّحِيمِ وَتَعَاوَنُوا عَلَى الْبِرِّ وَالتَّقْوَى وَلَا تَعَاوَنُوا عَلَى الْإِثْمِ وَالْعُدْوَانِ
01:26Help one another in furthering virtue and a luck consciousness, and do not help one
01:31another in furthering evil and enmity.
01:36Key Differences Between Conventional Insurance and Takaful
01:39The core distinction between insurance and Takaful lies in fund investment and profit sharing.
01:45They include investment approach, profit distribution, and pricing transparency.
01:56Investment approach Conventional insurers invest in interest-based avenues without
02:00halal or haram restrictions, whereas Takaful operators invest only in Sharia-compliant ventures.
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02:37Profit Distribution Conventional insurance profits go to shareholders,
02:42whereas Takaful surplus is shared with participants per pre-agreed ratios.
02:51Pricing Transparency Conventional insurance retains surpluses as profit for shareholders,
02:57and prices are driven by market forces, whereas Takaful avoids overpricing,
03:03any surplus returns to participants, not shareholders.
03:06Key Components of Takaful Framework
03:11The Takaful Framework consists of the following key components.
03:15Taboru
03:16Contributions are made as a donation to help fellow participants, not-for-profit.
03:21Sharia Compliance
03:23The system avoids Rur, Masur, and Ribah operational models.
03:28It operates under either the Wakala or Madaraba model.
03:32Joint Guarantee
03:34Participants mutually share risks and support one another in case of loss.
03:39Dedicated Fund
03:40A separate Takaful fund is maintained exclusively for participants' benefits.
03:45Sharia Oversight
03:46Sharia Oversight
03:47A Sharia Supervisory Board ensures full compliance with Islamic principles.
03:52Ethical Investments
03:54All funds are invested only in Sharia-approved and ethical ventures.
03:58Core Principles of Takaful
04:03Takaful's purpose is solidarity, not profit, to share burdens collectively.
04:08It is based on the principles of
04:11Mutual Responsibility, where participants guarantee each other against losses.
04:17And ethical redistribution, where surplus return to participants not exploited for profit.
04:24Unlike conventional insurance, Takaful rejects shareholder profit motives in favor of community
04:29protection.
04:32Ethical Framework of Takaful
04:35Takaful is built on collective welfare, not individual profit.
04:39Here are the five pillars of Takaful.
04:411. Cooperation
04:44Participants unite for mutual benefit, not competition.
04:482. Shared Funding
04:51Subscriptions fund community assistance, not corporate profits.
04:553. Risk Pooling
04:57Losses distributed by a pooling system
05:00No one bears undue burden
05:024. Certainty
05:04No GUR or uncertainty in costs or payouts
05:075. Fairness
05:09Takaful offers zero exploitation
05:12Gains are fair and reciprocal.
05:16Understanding Takaful Models
05:18Takaful operates through three Sharia-compliant structures
05:21Mudarabha Model
05:23Wakala Model
05:24and Wakala Wakfa Model
05:26Types of Takaful
05:30Takaful is broadly classified into two categories
05:33General Takaful
05:35Covers non-life risks
05:38and Family Takaful
05:40Covers life-related risks
05:44General Takaful
05:45It covers non-life risks
05:47and it includes
05:48Property Takaful
05:50Marine Takaful
05:51Motor Takaful
05:52and Miscellaneous Takaful
05:54Family Takaful
05:56It provides protection against risks related to human life
06:01such as death, disability and illness
06:04Family Takaful also combines protection with long-term savings
06:08and it includes
06:10Term Life Takaful
06:12Whole Life Takaful
06:13Endowment Takaful
06:15Universal Takaful
06:16Marriage Plan
06:18Education Plan
06:19Objections of Sharia Scholars on Conventional Insurance
06:26Conventional Insurance is generally defined as
06:29An arrangement where a company or state guarantees compensation for a specified loss, damage, illness or death in return for a fixed premium.
06:38Why Scholars Reject Conventional Insurance
06:41Sharia Scholars view Conventional Insurance as an exchange contract, money exchanged for money over time, which raises several ethical and religious concerns.
06:54Here are the key Sharia objections on insurance.
06:59Garar or uncertainty
07:01The contract's outcome is unknown at the time of agreement.
07:05May sear or gambling
07:07Policyholders may gain or lose based on uncertain events, resembling betting, REBA or interest.
07:14Involvement of interest based investments and returns
07:18Underwriting profits
07:20Profits are retained by shareholders, not the insured participants.
07:24Investment profits
07:26Earnings from premiums belong to the company, not shared with policyholders
07:31Let's now explore the top three concerns and how Takaful provides Sharia compliant solutions.
07:42Sharia Validity of Takaful
07:45Takaful is compliant with Islamic principles because it is based on
07:50Risk sharing model, which is permissible under Sharia
07:54And saving for the future with the intention of future financial support.
08:00Number of parties in insurance and Takaful
08:05In conventional insurance, there are two parties in conventional insurance
08:08Insurer as company and policyholder
08:12Whereas in Takaful, there are three parties
08:15Takaful operator as trustee
08:18Participant as policyholder
08:20And Takaful fund or risk pool
08:23Duties of a Takaful operator
08:26Duties of a Takaful operator
08:27The Takaful company acts on behalf of the pool
08:30And has two primary responsibilities
08:32Number one, risk management
08:35The Takaful operator manage and cover risks through the shared pool
08:39Number two, Sharia compliant investment
08:42The Takaful operator invest funds via Murabaha or other approved modes
08:46Profit distribution process in Takaful
08:49Profit distribution process in Takaful
08:51In Takaful, profit is first shared between the Takaful company and the pool
08:56Then, the pool's share is further distributed among the policyholders
09:01Let us calculate profit and loss for the participant's Takaful fund
09:12Credits
09:13Participant's contributions is $1 million
09:16Less Vakala
09:17Fee 35%
09:19That is $350,000
09:22Net contributions remaining in fund is $650,000
09:27Add investment profit $100,000
09:30Total amount credited to the fund is $750,000
09:36Debits
09:37Claims and operational expenses is $450,000
09:41Calculation of participants surplus
09:44Surplus available for distribution
09:47$750,000 minus $450,000 equals $300,000
09:54This amount is distributed to participants based on the proportion of their individual contributions
09:59How Sharia compliant contracts structure Takaful?
10:11Takaful operates through four key Sharia compliant contracts
10:15They are Contract of Trust or Amanah
10:18Contract of Arrangement
10:20Marabaha Contract
10:21Marabaha Contract
10:22And Circa Contract
10:23Marabaha Contract
10:24Marabaha Contract
10:25Marabaha subscription
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