ANALYSIS BY TSI TEAM
For a moment, visualise a scenario where you are paying for insurance premiums and some percentage of it will be given back to you if you do not make a claim during the period of cover. This may sound too good to be true compared to conventional insurance, but the reality is that the practice exists, courtesy of Sharia compliant insurance cover – Takaful – offered in Somalia mainly by Takaful Insurance of Africa.
Though young, the company has already made two annual surplus payouts in an environment where it’s others globally have hardly made progress as far as surplus payouts are concerned. Takaful is universally known as Islamic insurance. It is relatively new in Africa, save for Sudan. The word Takaful is derived from the Arabic verb “Kafala”, meaning to aid or help out. The basic premise of Takaful is to bring equity to all the parties concerned in an operation based on serving others who are facing risk and misfortune.
Making a profit is not the prime objective here. Its origin can be traced back to the Islamic practices centuries ago. In modern times, the development of Takaful was undertaken in Sudan in 1979 and Malaysia in 1984. The culmination of this initial development was encapsulated within the 1985 Fiqh Academy ruling declaring that conventional commercial insurance was “haram,” meaning forbidden. It was held that insurance based on the application of cooperative principles that were Sharia compliant and had charitable donations, was “Halal,” meaning acceptable.”
Takaful operations have opened up in many parts of the world, especially in Islamic countries or countries withlarge Muslim populations. It has developed in Malaysia, Singapore, Indonesia, Saudi Arabia, Bahrain, Iran, Egypt and Kuwait, but it has not been successful in the western world – Europe and USA. Takaful can be implemented in various ways a follows:
Mudharabah Model: This was first developed in Malaysia. Under this model, the Takaful operator acts as an entrepreneur (Mudharib) and the contributors as the capital providers
(Rabbul mal). It is specified in the contract how the surplus from the Takaful operations is to be distributed among the contributors. The loses are also borne by the contributors, as they are the capital providers. In order to protect the interest of the contributors, the operator observes prudential rules that include provision of free loans to the Takaful risk funds in the event that there is a deficiency in the Takaful risk funds.
Wakalah Model: This was first established in the Gulf. It is an agent principal relationship, where the Takaful operator acts as an agent on behalf of the capital providers (contributors) and earns a fee for the service offered. The fee can be a fixed amount or an agreed ratio of surplus of the Takaful funds.
Hybrid model: Under this, the Wakalah principle is used in underwriting activities and the Mudarabah is used in the investments of the Takaful funds. Thus, the Takaful operator is entitled to an agency fee for managing the fund and a share of profit for managing the investments of the fund. Each of these models has its merits and demerits. The Mudarabah model is seen as a better investment model in a Takaful fund, while the Wakalah model is considered better for a risk sharing feature in Takaful operations. Using a mix of the two is a better option.