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Introduction

Takaful is the word used to describe Shariah compliant insurance.  It stems from the Arabic verb kafala, which means to guarantee.
A number of principles found in conventional contracts of insurance make them impermissible in Islam.
The most well known is that of interest (riba).  The presence of interest in both the contract of insurance and the investment of premiums renders the contract unlawful (haram).
Therefore in Takaful, the contract itself as well as any investment of the fund money would have to be Shariah compliant; investment of fund money should be transparent and monitored by a Shariah supervisory board and funds, banking and investments should be free of interest.
Aspects of gambling (qimar) and uncertainty (gharar) also pose problems in terms of the permissibility of insurance contracts.  Shariah law does allow uncertainty in certain circumstances, for instance in voluntary contracts; therefore the basis for the payment of a member’s contribution in Takaful is that of donation to fellow members.  In contrast to conventional insurance, the contract is one of donation rather than compensation.  (source)

Takaful in South Africa

There is currently no separate regulation dealing specifically with Takaful, which means that it is regulated by the laws governing conventional insurance.
About two percent of South Africa’s population is Muslim, but Takaful’s scope is potentially wider, as the product can be and is offered beyond the Muslim community. South Africa is also well placed as a launch pad for multinationals seeking investment opportunities and penetration into Africa, and around half of the population of Africa is Muslim.
The development of Shariah compliant financing in South Africa positions it as a base from which Takaful products can be developed and sold across Africa. The most developed Takaful markets currently exist in Malaysia and the Middle East, and the global Takaful market is growing.  The book of one of the largest South African Takaful companies (which was underwritten by a European company) was recently acquired by a large South African bank, highlighting the potential for development of the market.
Takaful products need to be developed in Africa and a basic understanding of the principles underlying these contracts is useful also in terms of the wider field of Islamic Finance. The market for “re-takaful” also needs to be developed.  The lack of Shariah compliant reinsurance options means that conventional underwriters are currently used, but Shariah compliant underwriters will be preferable.  
The contract of Takaful has three basic forms, that of Wakalah (agency), Mudarabah (profit-sharing) or a hybrid of the two. The models differ mainly in the way that funds are shared between members and operators.
The basic principles underlying the contract are that of a voluntary donation to facilitate mutual assistance. The members are both the insurers and the insured, as they own the fund – ownership of members’ contributions does not pass to the operator.  Therefore the participants bear the risk of loss and are entitled to a share of surplus. Losses or deficits are covered by an interest free loan granted by the operator, or from additional contributions by the members.   

Wakalah

The Wakalah model is based on the concept of agency.  Members contribute to a general fund which is administered by the operator, which in this case acts as an agent.  The agent administers the fund in return for a fee, which is paid out of the fund or the profits derived from the fund’s investments.  A performance incentive fee may be charged.  The agent does not share in the surplus or profits; this is shared among the members.   
The Takaful operator can also act as trustee of the fund, which can be created as a separate legal entity. Members donate to the fund and become entitled to cover.

Mudarabah

Mudarabah is a type of partnership agreement wherein one partner provides the capital for the other to invest.  The members provide capital by way of their contributions, whereas the operator administers the fund and invests it.  The operator in this form of Takaful is entitled to a fixed percentage of the investment surplus.  The operator is thus not guaranteed a fee, as there could be no surplus.

The Hybrid Model

This form of Takaful draws on aspects of both of the above models. The agency model is used for underwriting activities whereas the partnership model is used for investment activities.  The shareholders manage the fund on behalf of the members.  In exchange, they are entitled to a fixed fee. They may also receive a performance incentive fee.  The operator invests the fund moneys.  In this model the operator receives a basic fee from the fund, but is also entitled to a share of the profits.

Potential for growth

The concepts of Takaful and conventional insurance both ultimately provide cover for risk.  However, the basic principles underlying the two types of insurance are different, and it is these differences which are crucial in determining whether the contract is permissible in terms of Shariah law.  The infrastructure and market for Takaful is currently undeveloped and there is significant potential for growth.

Wakalah

The Wakalah model is based on the concept of agency.  Members contribute to a general fund which is administered by the operator, which in this case acts as an agent.  The agent administers the fund in return for a fee, which is paid out of the fund or the profits derived from the fund’s investments.  A performance incentive fee may be charged.  The agent does not share in the surplus or profits; this is shared among the members.   
The Takaful operator can also act as trustee of the fund, which can be created as a separate legal entity. Members donate to the fund and become entitled to cover.

Mudarabah

Mudarabah is a type of partnership agreement wherein one partner provides the capital for the other to invest.  The members provide capital by way of their contributions, whereas the operator administers the fund and invests it.  The operator in this form of Takaful is entitled to a fixed percentage of the investment surplus.  The operator is thus not guaranteed a fee, as there could be no surplus.

The Hybrid Model

This form of Takaful draws on aspects of both of the above models. The agency model is used for underwriting activities whereas the partnership model is used for investment activities.  The shareholders manage the fund on behalf of the members.  In exchange, they are entitled to a fixed fee. They may also receive a performance incentive fee.  The operator invests the fund moneys.  In this model the operator receives a basic fee from the fund, but is also entitled to a share of the profits.

Potential for growth

The concepts of Takaful and conventional insurance both ultimately provide cover for risk.  However, the basic principles underlying the two types of insurance are different, and it is these differences which are crucial in determining whether the contract is permissible in terms of Shariah law.  The infrastructure and market for Takaful is currently undeveloped and there is significant potential for growth.

Aneesa Bodiat, Candidate attorney
Supervised by Patrick Bracher, Director

Source : http://www.nortonrose.com/knowledge/publications/64635/takaful-an-introduction  - March 20, 2012