Dr Azman Mohd Noor

AIoi Nissei Dowa Insurance Endowmend Course

Waseda University

May 17, 2012.

PRESENTATION OUTLINE

1

Introduction to Islamic Finance in Malaysia and Takaful

2

Differences between Takaful and Conventional Insurance

3

Legal and Regulatory Framework for Takaful

4 Types and Models of Takaful

5 Shariah and Legal Issues

17 Full fledge Islamic Banks

10 Conventional banks with Islamic window

4 International Islamic Banks

Islamic Finance in Malaysia

Financial System in Malaysia Conventional

Banking

Islamic Banking

Takaful Islamic Money

Market

Islamic Capital Market

Insurance Money Market

Capital Market

Islamic Banking Takaful

12 Takaful Oprators

4 Retakaful Operators

Money Market for Islamic Banks

Daily Transactions RM 1 billion Bursa Suq Al Sila as a platform

for Commodity Murabahah trading since 2009

International Islamic Liquidity Management initiated 2011.

Money Market Capital Market

88% halal counters/stocks traded at Bursa Malaysia

57% of private debt securities are sukuk

14 Islamic Fund Management institutions

152 Islamic funds 36 Islamic Fund Management

Institutions with Islamic mandate

Labuan Offshore FSA

Islamic Banking 6 Islamic Banks and 9 Conventional banks with Islamic window. 3.8% of total banking industry.

Takaful & Retakaful 7 retakaful and 9 conventional reinsurance with Islamic window

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average total asset growth (2001-2010): 20.3% (asset)

The Growth of Islamic Banking in Malaysia (RM3:1 USD)

Asset : 20.8% (RM351b)

Financing : 22.7% (RM223.3b)

Deposit: 22.6% (RM277.5b)

Average Profit of Islamic Banking 15.4%

* Sumber: BNM Sistem Statistik Institusi Kewangan

RM

0

00

mill

ion

Asset Financing Deposit

Total Asset, Financing & Deposit of Islamic Banks (2001- 2010)

Singapore

0.1%

UAE

4%

Bahrain

2%

Saudi Arabia

7%

others

1%

Ofshores

17%

Indonesia

4%

Malaysia

65%

(USD 96 bilion)

Growing Financial Market

Malaysia the largest

sukuk issuer in the

world

Total Immatured Global Sukuk a

USD 148 bilion

Immatured Private Debt Securitiies (as of Dec 2010)

Islamic

57%

Conventional

43%

* Source: FAST

RM 323 b (USD 96b)

Definition of Takaful

Arabic Root-Word KAFALA Guarantee

TAKAFALA Joint Guarantee

=

=

Participants mutually contribute to the same fund with the purpose of having mutual indemnity in the case of peril or harm

TAKAFUL

2

Introduction to Takaful The nature of life uncertain.

People need protection to at least mitigate (or lessen) the burden of uncertainty of life

This has given rise to the practice of conventional insurance

Problem with conventional insurance:

Gharar

Maysir

Riba

Hence Conventional Insurance has been declared to be prohibited by Shariah

7

Gharar Literally: risk / uncertainty / hazard.

Concept of gharar broadly defined in two ways:

First: gharar implies uncertainty, Second: It implies deceit.

Al Sarakhsi : any bargain or transaction in which the result of it is hidden.

cont No verse from al-Quran prescribes gharar

explicitly

However, Muslim jurists recognized that prohibition of devouring others property in vanity (batil) in many verses of al-Quran includes the prohibition of gharar

Cont

Nevertheless, prohibition of gharar has been

made conclusive in various hadiths from the

Prophet. E.g: The Companions related that the

Prophet has forbidden gharar in trading

Abu Hurayrah reported that two types of

transactions (because of gharar) were

prohibited by the Prophet : al Mulamasah (by

touching only without looking at good) and al

Munabadhah (throwing something at a number

of goods).

cont The prohibited gharar (uncertainty) is excessive (gharar

fahish). Unlike Riba whereby its prohibition is absolute,

some degree of gharar is acceptable.

Occurs in contracts of exchange (uqud al-muawadat)

which is bilateral.

Gharar can be tolerated in the gratuitous contract

(tabarru) i.e. donation which is unilateral in nature.

MEANING OF RIBA

Literally: excess, expansion, increase, addition,

growth, extra.

Riba in general is to charge interest in loan or debt.

Riba includes Any unjustified excess above and

over the capital, whether in loans between creditor

and debtor or in exchanging ribawi commodities

with ribawi commodities. Ribawi commodities

include gold, silver, currencies, staple foods.

cont i) Riba in loan contract (riba al-duyun) riba

al-nasiah (excess due to delay in payment) also known as riba in the Quran.

ii) Riba in exchange ribawi commodities (riba al-buyu), also known as Riba based on al Sunnah

Maysir Gambling or maysir or also known as qimar defined

as any activities which involve betting whereby the winner will take the entire bet and the loser will lose his bet. It means pure games of chance where any party might gain at the expense of the loss of the other party.

The Quran has explicitly condemned and prohibited gambling in the following verse: O believers, wine and gambling (maysir), idols and divination by arrows are but abominations devised by the Satan, avoid them so that you may prosper.

Rulings Fatwa by National Council for Islamic Religious Affairs of

Malaysia (1972) that life insurance is not lawful as it contains gharar, maysir and riba

Resolution of Fiqh Academy (Jeddah (1406 1985).

The Commercial contract of insurance and reinsurance based on a fix premium is in reality a contract of exchange. This contract is fraught with element of gharar. It must be noted that the existence of gharar has rendered the contract null and void. The alternative valid contract in Shariah is the co-operative insurance, which is based on tabarru and co-operation among the policyholders

1

5

Alternative to conventional insurance

Qardawi:

In my view, insurance against hazard can be modified in a manner which would bring it closer to the Islamic principle by means of a contract of donation with a condition of compensation

A further requirement is that the company must be free from usurious business

(source: The Lawful and The Prohibited in Islam, p.276)

1

6

Definition of Takaful Kafala: Guarantee

Takafala (Takaful)

- An Arabic words which means mutual help and cooperation among a group of people

Mutual Help and Cooperation

and help you one another in righteousness and piety ..

Al-Quran, al-Maidah 5:2

17

Definition, cont Joint-guarantee; a pact among a group of

persons to indemnify a member of this group if he suffers a specified calamity or loss. The amount comes out of a common pool created with the individual contributions of participating members.

A scheme based on brotherhood, solidarity and

mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose.

Section 2 of the Malaysian Takaful Act 1984 1

8

Definition, cont.

A scheme based on mutual assistance in compliance with the provisions of Islamic Shariah, and which provides for mutual financial aid and assistance to the participants in case of occurrence of certain contingencies and whereby the participants mutually agree to contribute to the common fund for that purpose.

Pakistan Insurance Ordinance 2000

The Simple Flow

2

0

Policyholders (Takaful

Participants)

1) Payment of claim

2) Distribution of Surplus

Takaful Fund

Takaful Operator

Contributions

The Takaful Operator provides services: 1) Managing the fund 2) Investing the fund

Outcome

Essential Salient Features Major salient features of takaful as compared with

conventional insurance are:

1. Antidotes to the reasons for the prohibition of conventional insurance

Uncertainty (gharar)

Interest (Riba)

Gambling (Maisir)

Taking peoples money unjustly. (Akl amwal al-nas bi al-batil)

Cont.. features 2. Shariah compliant investments.

3. Underwriting Shariah compliant risks.

4. Prudent Shariah governance and supervision : In house and regulatory level.

Essential Features of Takaful model

Based on co-operation, brotherhood, solidarity and mutual help.

The joint guarantee is essentially agreed and concluded between a participant and other participants.

Structured along the tabarru concept (Gratuitous contract). Gharar is not avoided but tolerated and shared.

Takaful Operator is not part of this donation and mutual assistance arrangement, but it is an agent of the participants to manage the fund with fee.

23

cont

Iltizam bi al-tabarru (commitment to donate).

Indemnification commitment Providing compensation for injury as per regulations and underlying constituent documents

Cont.

AAOIFI STANDARD 5/8

The Takaful operator must strictly adhere to Shariah principles and rules in its operations, activities, investment and underwriting, particularly not to accept risk from non-halal things or any business leads to haram.

Accounting and Auditing of Islamic Financial Institution (AAOIFI)

which based in Bahrain is a governing body for Islamic financial institutions

Cont Shariah Governance

The establishment of Shariah Advisory Council, Shariah department/ secretariat to conduct Shariah advisory, supervisory, control, research and audit tasks.

Internal Shariah supervision

Regulatory level

Market Demand

Contractual Relationship in Takaful

The policy holders among themselves

Musharakah and Taawun (cooperation) ,

Iltizam bi al-tabarru (commitment to donate),

Indemnification commitment Providing compensation for injury as per regulations and underlying constituent documents

Company and policyholders Wakalah

Managing the fund under Wakalah to manage the fund, e.g. payment of claim, provisions for reserve, retakaful etc.

Investing the Fund

Mudharabah - Profit sharing ratio

Wakalah bi al-istithmar - Certain fees

27

Model: Commercial Enterprise vis--vis co-operative and mutual insurance

Some believe that takaful which is based on co-operation, brotherhood, solidarity and mutual help should not be established for the purpose of making profit.

Profit Making Model

Co-operative Insurance Model

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Cont. Most of Takaful operations are not wholly

cooperative but a hybrid of cooperative and commercial bussiness. This implies:

The permissibility for the operators to make profit.

It is suggested that the policy holders as participants and contributors be given platform to vote via AGM on business operations, activities and underwriting policy.

Takaful operators in malaysia Bank Negara Malaysia, the central bank and insurance

regulator, last week issued the licenses to joint ventures to be established by i) American International Assurance Berhad (70 percent) and Alliance Bank Malaysia Berhad (30 percent); ii) AMMB Holdings Berhad (70 percent) and Friends Provident Group plc, UK (30 percent); iii) ING Management Holdings (Malaysia) Sdn Bhd (60 percent), Public Bank Berhad (20 percent) and Public Islamic Bank Berhad (20 percent); iv) and The Great Eastern Life Assurance Company Limited (70 percent) and Koperasi Angkatan Tentera Malaysia Berhad (30 percent).

Cont This brings the number of Takaful operators in Malaysia

to 12. The other Takaful operators include CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad and Takaful Ikhlas Sdn. Bhd.

Arab News, Sep 6, 2010

Takaful Assets Globally, the takaful industry has been growing

rapidly, appealing to both Muslims and non-Muslims. The industry is expected to grow by 15-20% annually, with contributions expected to reach USD7.4 billion by 2015. Currently, there are more than 110 takaful operators worldwide.

Central Bank of Malaysia (Bank Negara of Malaysia website),

Legal and Regulatory Framework

In Malaysia, Takaful business is regulated by the Takaful Act 1983

The Act consists of 68 sections, divided into 4 main sections

Preliminary

Conduct of Takaful Business

Return, investigation, Winding Up and Transfer of Business

Miscellaneous and General 33

Establishment of takaful company

Restriction on Takaful term - use of word takaful or any of its derivative in any language, or

any other word indicating that such person carries on Takaful business in the name, description or title under which it carries on business in Malaysia is not allowed unless with the consent of the Director General of Takaful (DGT)(Section 6)

Director-General of Takaful

DGT is the Governor of Bank Negara Malaysia (BNM) (Section 54(1))

Registration of Takaful operator

- By DGT, with or without conditions (Section 8)

- May impose conditions of registration for Takaful operators that are already registered (Section 8)

34

Criteria for Takaful Operators (Section 4 (2)

Registered under Act in respect of the class of Takaful business

Maintains a surplus of assets over liabilities not less than

the amount prescribed from time to time

Makes deposit with the Accountant-General not less than

the amount prescribed from time to time (also Section 13;

alternative - banks covenant to deposit under Section 14)

Membership in a Takaful association approved by Minister

35

Security for takaful participants

Similar to deposit insurance scheme for bank deposits

Establishment of takaful guarantee scheme funds by DGT in respect of family solidarity business and general business carried out by takaful operators

Income for the takaful guarantee scheme funds derived from levies imposed and collected from Takaful operators

Sums from the takaful guarantee scheme funds may be withdrawn/utilized with approval/direction of DGT inter alia to meet the liabilities of any insolvent operator as may be prescribed

(Section 21)

36

SHARIAH COMPLIANCE FRAMEWORK (1) Section 8(5) Internal Controls

aims and operations of Takaful operator do not involve any element not approved by the Shariah

articles of association of the Takaful operator provide for establishment of Shariah Advisory Body as may be approved by DGT to ensure operations of its takaful business are in compliance with the Shariah

Section 53A Advisory powers of SAC BNM

any person involved with Takaful business may seek the advice of the Syariah Advisory Council (SAC) of BNM (established under Central Bank of Malaysia Act 1958), and such person must comply with such advice provided by the SAC of BNM

37

Shariah compliance framework

SAC BNMs authority over takaful matters

Section 16B Central Bank of Malaysia Act 1958 SAC of BNM shall be the authority for the ascertainment of Islamic law for the purposes of takaful business or any other business which is based on Syariah principles and is supervised and regulated by BNM

38

cont

SAC BNMs role in court/arbitration proceedings involving takaful business

if, in any proceedings relating to takaful business before any court or arbitrator, a question arises concerning a Syariah matter, the court or arbitrator may refer such question to the SAC BNM for its ruling (Section 16B(8) CBMA)

any ruling made by the SAC BNM pursuant to such reference shall be taken into consideration by the court in arriving in its decision/ be binding on the arbitrator (Section 16B(9)CBMA)

Types and Models of Takaful

General Takaful Family Takaful

Motor

Fire (Property)

Engineering

Liability

General Accident

Family

Education

Savings

Investment -Link

40

Model: Mudarabah, wakalah, waqf

Mudarabah with only sharing of investment profit Mudarabah with sharing of investment profit and surplus

with operator Wakalah on the contribution with no profit/surplus

sharing with operator Wakalah on the contribution with sharing of investment

profit and/or surplus with operator Waqaf on the first contribution (to set up the fund) and

appointment of company based on wakalah with fees.

41

41

GENERAL TAKAFUL MODELS AND PRODUCTS Mudharabah with only sharing of investment profit

Mudharabah with sharing of investment profit and surplus with operator

Wakalah on the contribution with no profit surplus sharing with operator

Wakalah with sharing of surplus with operator

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1) MUDHARABAH WITH ONLY SHARING OF INVESTMENT PROFIT

43

Participants

Contrib

utions

Contributions +

Profit Surplus

Takaful Operator

Participants

Y%

X%

Profit

Expenses

This model is acceptable by AAOIFI Shariah Standard

100%

43

2) MUDHARABAH WITH SHARING OF INVESTMENT PROFIT AND SURPLS WITH OPERATOR

44

Participants

Contrib

utions

Contributions +

Profit Surplus

Takaful Operator

Participants

Y%

X%

Profit

Expenses

This Model is not accepted by AAOIFI Shariah Standard

X%

Y%

44

3) WAKALAH ON THE CONTRIBUTION WITH NO PROFIT / SURPLUS SHARING OPERATOR

45

Participants

Contrib

utions

Contributions +

Profit Surplus

Participants

Expenses

This Model is accepted by AAOIFI Shariah Standard

100% Fees

Profit

45

4) WAKALAH WITH SHARING OF SURPLUS WITH OPERATOR

46

Participants

Contrib

utions

Contributions +

Profit Surplus

Takaful Operator

Participants

Expenses

This Model is not accepted by AAOIFI Shariah Standard

X%

Y%

Fees

Profit

46

FAMILY TAKAFUL MODEL AND PRODUCTS Mudharabah with only sharing of investment profit

Mudharabah with sharing of investment profit and surplus with operator

Wakalah on the contribution with no profit surplus sharing with operator

Wakalah with sharing of surplus with operator

1) MUDHARABAH WITH ONLY SHARING OF INVESTMENT PROFIT

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Participants

Contrib

utions

Risk (P) Account

Saving (PS) Account

Surplus

Takaful Operator

Participants

Y%

X%

Profit

Saving (PS) Account

Risk (P) Account

Expenses

100%

48

2) MUDHARABAH WITH SHARING OF INVESTMENT PROFIT AND SURPLUS

49

Participants

Contrib

utions

Risk (P) Account

Saving (PS) Account

Surplus

Takaful Operator

Participants

Y%

X%

Profit

Saving (PS) Account

Risk (P) Account

Expenses

X%

Y%

49

3) WAKALAH ON THE CONTRIBUTION WITH NO PROFIT/SURPLUS SHARING WITH OPERATOR

50

Participants

Contrib

utions

Risk (P) Account

Saving (PS) Account

Surplus

Takaful Operator

Participants

100%

Saving (PS) Account

Risk (P) Account

Expenses

100% Fees

Profit

50

4) WAKALAH ON THE CONTRIBUTION WITH SHARING OF SURPLUS WITH OPERATOR

51

Participants

Contrib

utions

Risk (P) Account

Saving (PS) Account

Surplus

Takaful Operator

Participants

X%

Saving (PS) Account

Risk (P) Account

Expenses

Y%

X%

51

Fees

Takaful Operator

Legal and Shariah Issues Capacity to contract

Insurable interest

Utmost Good faith

Payment to Claimant

Sharing of surplus

Takaful Benefit

Death due to suicide or prohibited acts

Capacity to contract

Takaful: minimum age for policy holder: 18 years old (Section 64 Takaful Act)

A person under the age of eighteen years shall not have the capacity to enter into a contract of takaful.

Opinions of jurists on age of majority

Compare to conventional Insurance: Policy holder must be of minimum age of 16 years old; those between 10-16 years need to obtain guardians written consent (Section 153 Insurance Act)

53

Insurable Interest The name given to the financial interest which a person has in

the subject matter of the cover. Generally, it is the particular relationship between the person

taking the insurance policy and subject matter of the insurance.

Explicitly required in conventional insurance, without which the contract will be illegal, void or simply unenforceable (Insurance Act 1996 (sec. 152 (1) & (2)

Does takaful requires the same? Silent in both family and general takaful

Not required, as it is about mutual assistance? Covered by sec. 31 of the Contract Act against wagering

agreement. By virtue of this sect., a participant is required to show sufficient interest in the subject matter, both at the time of inception and at the time of loss.

54

54

Utmost Good Faith (Uberrimae Fidei)

Sec 28 of Takaful Act imposes the disclosure of all material facts Known as the duty of utmost good faith. Defined as: a positive

duty to voluntarily disclose, accurately and fully, all facts material to the risk proposed, whether asked for them or not

Means that the parties to the contract is required to disclose to each other all the material facts about the risk and cover, fully, truly and faithfully.

It is imposed upon both, the participants and the operator and the failure will subject the person to a fine not exceeding twenty thousand ringgit or imprisonment for a term not exceeding one year or both

In compliance with the Syariah that requires honesty, sincerity, transparency and full disclosure in contract.

The effect of non-disclosure as to the takaful contract

55

55

Payment to the claimant

The payment of claim made by the takaful operator is similar to compensation made by conventional insurance. It looks like the premium is exchanged for the compensation.

Generally held that the payment comes from the other participants money, not from the claimants money.

Some advocate the concept of trust, in which the participants (as settlors) can also benefit (as beneficiaries) from the trust fund.

56

56

Sharing of Surplus The excess of the total premium contributions paid by

policyholders during the financial period over the total indemnities, paid in respect of claims incurred during the period not of re-takaful and after deducting expenses and changes in technical provisions

Methods in distributing the surplus All policyholders Policyholders that have not claim Policyholders that do not claim or claim less that their

contribution Policyholders and takaful operators

Can the takaful operator share the surplus with the participants, on the concept of mudharabah, wakalah or jualah?

Can the claimants share the surplus or be excluded from

the sharing?

57

Cont. Mudharabah:

underwriting surplus cannot be shared.

Takaful operator shares only in the investment returns.

Wakalah:

The underwriting surplus belongs to the participants (i.e: Takaful operator does not share in UW surplus).

Takaful operator shares only in the investment returns.

Cont (legitimacy) Rational:

UWS belongs exclusively to the participants.

The shariah issue: ownership issue.

Does the UWS really belong to the participants after making tabarru (donation) to the Risk Fund?

Cont (legitimacy) Some other scholars provide the following shariah

evidence:

Hibat al-thawab as a ground for distributing surplus exclusively to participants.

The hadith of Nahd as a ground for distributing surplus exclusively to participants.

Sharing in the underwriting surplus is a kind of taking peoples property unjustly.

Cont (legitimacy) b. 2nd approach: TO can share in the UWS.

Shariah evidence:

Islamic legal doctrine of shurut (conditions).

Absence of any prohibitive texts from the primary sources of Shariah, i.e: Quran and Sunnah.

The Islamic legal doctrine of rida (satisfaction in trade).

The principle of incentive for better risk selection.

Takaful benefit In case of the death of the participant (in Family Takaful),

how to distribute the takaful benefit (from risk account and investment account)?

The nominees can be either the sole beneficiary or as a trustee/ executor where the benefit will be distributed based on law of faraid?

Sec 65 (1) of Takaful Act: Proper Claimant, No express provision as administrators or beneficiaries

Insurance Act (Section 166 & 167): express provisions providing that for:

Muslim policy holders, nominee is treated as executor and not sole beneficiary, any moneys paid would be treated as part of the deceaseds estate; i.e. faraid

non-Muslim policy holders, nominee is the absolute beneficiary and moneys paid are not part of the estate

62

62

Contd Insurance Act provides that both accounts be

considered as part of faraid. Family Takaful consists of two portfolios, i.e risk

account and investment account. Takaful Act Just to proper claimant. Not part of

faraid? Should provision of Insurance Act be applied here.

AAOIFI Shariah Standard: Risk Account: Be given to the nominees, i.e. proper

claimant as it is the contribution of other participants.

Investment Account (if any), be considered as part of faraid, so must be distributed to the beneficiaries according to law of faraid (Standard no 26 (6/2/

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Death Due to Suicide or Prohibited Acts.

Payment from the participant special account (risk account) will only be made if the death of the participant is not due to or arising from suicide and other causes prohibited by Shariah

Not claimable? Why? Who committed the sin. Philosophy behind takaful. Mutual assistance, but to whom?

Closing of the means to an evil act.

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THANK YOU VERY MUCH FOR YOUR ATTENTION AND YOUR PATIENCE