Presentation on theme: "Islamic Finance & Takaful: An Introduction"— Presentation transcript:
1 Islamic Finance & Takaful: An Introduction Mohd Johan LeeJ. Lee & AssociatesFor Kowloon Mosque & Islamic CentreIslamic Finance & Takaful: An Introduction
2 Outlines Sources of the Shariah Framework of Islamic Finance (c) Mohd Johan Lee 20123/17/2012OutlinesSources of the ShariahFramework of Islamic FinanceShariah, Fiqh & Mu’amalatNecessary Requirements of Islamic FinanceRiba, Gharar, Maysir & OthersEssential Contracts in Islamic FinanceProducts and Instruments
3 Sources of the Shariah Primary Sources The Holy Quran (c) Mohd Johan Lee 20123/17/2012Sources of the ShariahPrimary SourcesThe Holy QuranSunnah (the sayings, deeds and endorsements of Prophet Muhammad PBUH)
4 (c) Mohd Johan Lee 20123/17/2012Sources of the ShariahSecondary Sources (mostly by the exercise of Ijtihad (reasoning by the learned))Ijma (Unanimous decision of the Ulama)Qiyas (analogy)Istishan/ Istihab (equity in Islamic law)Maslahah (necessity of the people)Surdul Dara’ih (Blocking the means)U’ruf (custom)
5 Framework of Islamic Finance (c) Mohd Johan Lee 20123/17/2012Framework of Islamic FinanceIn general, the framework of Islamic finance is the same framework used by the conventional finance practices.These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc.Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity.In certain jurisdiction, Islamic banking and finance might be regulated by different sets of regulations, either separate or additional, e.g. IBA 1983
6 (c) Mohd Johan Lee 20123/17/2012Cont’dHowever, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance.Any violation of this framework will definitely effect the validity of Islamic finance itself.Shariah Compliance Framework
7 The Shari’ah Framework of Islamic Banking and Finance (c) Mohd Johan Lee 20123/17/2012The Shari’ah Framework of Islamic Banking and FinanceThree main interrelated terminologies: Shariah, Fiqh & MuamalatShariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba’, etc.As such, it is revealed in nature
8 (c) Mohd Johan Lee 20123/17/2012Shariah & FiqhShariah, in this sense, is wide and encompassing various branches of IslamNormally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time)It is the duty of the judge (qadi), mufti and jurisconsult (ulama’) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios.The result of human reasoning and understanding to the shariah is known as fiqhFixed v. FlexibleAgreements v. Differences
9 Fiqh Mu’amalat (Islamic Commercial Law) (c) Mohd Johan Lee 20123/17/2012Fiqh Mu’amalat (Islamic Commercial Law)However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law).Islamic commercial law is one of the components of Islamic lawOther components of Islamic law include:Islamic law of purification and worshipIslamic family lawIslamic criminal lawIslamic law of evidence and procedureIslamic law of inheritance, etcThe main subjects of Islamic commercial law are commercial contracts and the rules governing them
10 Islamic Finance Paradigm (c) Mohd Johan Lee 20123/17/2012Islamic Finance ParadigmOriginal rule of permissibility:- Initial legal ruling in commercial contract is permissibility- Contrary to acts of devotion (Ibadat)- No legal injunction is needed in sanctioning new contract- Every contract is considered lawful and acceptable if no principle of shari’ah is violated- Open a very wide door for further innovationsReal Economic ActivitiesTransactions-oriented not loan-based.
11 WHAT AMOUNTS TO SHARI`AH COMPLIANCE? (c) Mohd Johan Lee 20123/17/2012WHAT AMOUNTS TO SHARI`AH COMPLIANCE?In Islamic jurisprudence, the main source of law is the Shari`ah or Islamic law as contained in the Quran and SunnahUnderlying rule: all contracts are deemed permissible except when there is contravention of any established principles of Islamic law / Shari`ahLegal maxim (qa`idah fiqhiyyah):“Al Asl fi al `Uqud al Ibahah”“the original rule in contracts is permissibility”The parameter: Avoidance of any contravention of the established principles and prohibitions in Islamic law
12 What to do and what to avoid (c) Mohd Johan Lee 20123/17/2012What to do and what to avoidConclusion of contract by mutual consentThe avoidance of riba’The avoidance of ghararThe avoidance of transactions involving maysir (gambling)The avoidance of transactions involving prohibited commodities
13 (c) Mohd Johan Lee 20123/17/2012WHAT TO BE AVOIDEDRiba – prohibited in many Quranic verses and sayings of the Prophet s.a.w.Meaning: riba is every excess in return of which no reward or equivalent counter value is paid, in short, every unjust enrichment is riba
14 The avoidance of riba’ Literally: excess, expand, increase, growth (c) Mohd Johan Lee 20123/17/2012The avoidance of riba’Literally: excess, expand, increase, growthAny unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities)
15 PROHIBITION OF RIBA IN THE QURAN (c) Mohd Johan Lee 20123/17/2012PROHIBITION OF RIBA IN THE QURAN4 STAGESFirst Stage(30:39)Second Stage(4: )Third Stage(3:130)Fourth Stage(2: )Compare riba with zakat & charityPraising zakat & charity, not ribaAttaching the practice of riba with the JewsConsider the practice as an iniquity (zulm)Prohibiting the practice of charging double and multiple ribaConclusively prohibiting all forms of ribaAny excess over the capital is disallowed
16 (c) Mohd Johan Lee 20123/17/2012(Ar Rum 30: 39)“and that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people’s property, has no increase with Allah…”
17 (c) Mohd Johan Lee 20123/17/20124:“… and their taking of Riba though they were forbidden from taking it and their devouring of men’s substance wrongfully…. and we have prepared... a painful torment.”
18 (c) Mohd Johan Lee 20123/17/20123:130“O you who believe, Eat not Riba doubled or multiplied, but fear Allah that you may be successful.”
19 (c) Mohd Johan Lee 20123/17/20122: 275“those who eat riba will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: trading is only like Riba,” whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba, shall not be punished for the passt; his case is for Allah (to judge); but whoever returns (to riba), such are the dwellers of the Fire – they will abide therein forever.
20 (c) Mohd Johan Lee 20123/17/20122:Allah will destroy riba and will give increase for sadaqat (deeds of charity, alms).….O you who believe, be afraid of Allah and give up what remains (due to you) from Riba (from now onward), if you are really believers
21 (c) Mohd Johan Lee 20123/17/20122:279And if you do not do it, then take a notice of war from Allah and hiss Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than our capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).
22 (c) Mohd Johan Lee 20123/17/20122:And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay; but if you remit it by way of charity, that is better for you if you did but know.And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly.
23 (c) Mohd Johan Lee 20123/17/2012CONT’D…There are also a number of narrations from the Sunnah on the prohibition of ribaSome of the narrations give general prohibitions of riba, e.g.:“The Prophet of Allah s.a.w. cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt)”.
24 (c) Mohd Johan Lee 20123/17/2012Cont’d…Under Islamic law, riba can occur in two main situations, i.e.:riba al duyun (loan): the riba or excess which occurs in debt and loan transactions because of extension/delay in repaymentriba al buyu` (exchange): the riba or excess which occurs in trading transactions involving the exchange of riba-bearing commodities without observing the required rules
25 PROHIBITION OF RIBA (Loan) (c) Mohd Johan Lee 20123/17/2012PROHIBITION OF RIBA (Loan)Surah al-Baqarah, ayat 275“ … But Allah hath permitted trade and forbidden usuryInterpretative EffortsWhat amounts toTradeUsuryCriteriaFair exchange of goods or valueFair distribution of risk & returnCriteriaOppressive / unfair distribution of risk & returnUnjustified enrichment at expense of others
26 PROHIBITION OF RIBA (Exchange) (c) Mohd Johan Lee 20123/17/2012PROHIBITION OF RIBA (Exchange)Sunnah of the Prophet:Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand or spot transaction.”Interpretative EffortsApplicationCurrencyStaple FoodRulesSame denominationAt ParSpotDifferent denominationRulesSame TypeAt ParSpotDifferent Type
27 SUMMARY OF RULES UNDER THE HADITH (c) Mohd Johan Lee 20123/17/2012SUMMARY OF RULES UNDER THE HADITHmoney1 + money1=2 conditions:EqualityHand-to-handfood1 + food1money1 + money21 condition:food1 + food2money + foodNo condition – free tradingothers + others
28 CONT’D… In contemporary finance, riba can occur in: (c) Mohd Johan Lee 20123/17/2012CONT’D…In contemporary finance, riba can occur in:All interest-based lending activities (e.g. all conventional bonds)Fixed return on deposits in conventional banking (e.g. designated accounts for receivables of the bonds)In the secondary trading of debt securities – if the transaction is not spot & if there is discounting (according to global Shari`ah standard)Thus, to be Shari`ah compliant, all contracts in Islamic finance cannot be involved in any of the usurious activities mentioned above
29 The avoidance of riba’ Literally: excess, expand, increase, growth (c) Mohd Johan Lee 20123/17/2012The avoidance of riba’Literally: excess, expand, increase, growthAny unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities)
30 DIVISION OF RIBA Riba’ al-buyu’ Riba’ al-Duyun (Riba in exchange (c) Mohd Johan Lee 20123/17/2012DIVISION OF RIBARiba’ al-buyu’(Riba in exchangecontracts )Riba’ al-Duyun(RIba’ in LoanContract)
31 Riba’ al-duyun(c) Mohd Johan Lee 20123/17/2012The debtor borrowed money to be paid in certain time, and the amount is more than the amount borrowedA creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be chargedArising out of exchange contract, a buyer must pay a consideration. If he failed to settle on time, the period will be extended by increasing the amount (principle + interest).
32 (c) Mohd Johan Lee 20123/17/2012Riba al-Buyu’Mainly based on the saying of the Prophet: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is riba’”.
33 Cont’d(c) Mohd Johan Lee 20123/17/2012These commodities can be classified under two main categories which make the illah (ratio decidendi) for their prohibition:- i- medium of exchange (currency): Gold and Silver-ii- Staple foods: Wheat, barley, dates and saltAny other items, even though not mentioned in the hadith but serve the same purpose will be considered as having the same illah by way of qiyas (analogy)
34 RIBA IN MODERN FINANCIAL TRANSACTIONS (c) Mohd Johan Lee 20123/17/2012RIBA IN MODERN FINANCIAL TRANSACTIONSRiba’ al-duyun in loans and certain controversial contracts (bay’ al-’inah, bay’ al-dayn, etc)Riba’ al-buyu’ mainly in bay’ al-sarf(exchange of currencies)
35 THE AVOIDANCE OF GHARAR (c) Mohd Johan Lee 20123/17/2012THE AVOIDANCE OF GHARARMeaning of gharar:- Literally: risk, uncertainty, hazard- The sale of probable item whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling
36 EXAMPLES OF THIS KIND OF SALE IN HADITH (c) Mohd Johan Lee 20123/17/2012EXAMPLES OF THIS KIND OF SALE IN HADITHSale of fish in the sea, birds in the skySale of unborn calf in its mother’s wombSale of runaway animal, slave Involve item which may or may not existHowever, the Prophet did not lay down the principles (qawa’id) for the prohibition of gharar.Examples given in the hadith were some of the manifestations of the doctrine, but not principles.This has led to the dispute among jurists on the area and coverage of gharar.
37 (c) Mohd Johan Lee 20123/17/2012GHARARMeaning: has a range of negative connotations, such as, uncertainty, deception, risk, hazard, ignorance etc.If there is gharar, the contracting party/ies do not really understand the attributes / consequence of the contractUnder Islamic law, gharar is prohibited because its existence in the contract may deny the parties of equal bargaining power and they cannot make informed decisions; or if there is risks on deliverability of the object of the contract
38 Interpretative Efforts Trade by Mutual Consent (c) Mohd Johan Lee 20123/17/2012PROHIBITION OF GHARARSurah an- Nisa’: ayat 29“ … squander not your property amongst yourself unjustly (batil) except it be a trade among you by mutual consent…”Interpretative EffortsWhat amounts toUnjust (batil)Trade by Mutual ConsentCriteriaAll illegal & defective elements in contracts including gharar & uncertaintyCriteriaOffer & Acceptance, indicating consentElimination of mistake, fraud etc
39 PROHIBITION OF GHARAR IN THE SUNNAH (c) Mohd Johan Lee 20123/17/2012PROHIBITION OF GHARAR IN THE SUNNAHThe sunnah uses the word gharar and its derivatives much more extensively than the Qur`an in the sense that several new meanings are addedIn relation to commercial transactions, the Prophet s.a.w. in many of his sayings directly prohibited the sale involving gharar (uncertainty) and jahalah (ignorance)Thus, the prohibition of gharar is made conclusive by the sunnah / hadith of the Prophet s.a.w.Examples: the prohibition of gharar sale (i.e., the sale contract affected by gharar), the prohibition of the sale of fish in the sea, bird in the air, unborn animals, lost items, etc.
40 CONT’D… In Islamic law, gharar can be of two degrees: (c) Mohd Johan Lee 20123/17/2012CONT’D…In Islamic law, gharar can be of two degrees:Excessive or major (gharar fahish)Minor and tolerable (gharar yasir)Only major /excessive gharar will affect the validity of contracts, where it will render the contract void / voidable, depending on the degree of uncertaintyGharar affects trading and exchange contracts (mu`awadat); not charitable and unilateral contractsIn banking & finance – gharar can be triggered e.g. – in the sale contract to create the indebtedness if the asset used is uncertain / vaguely identified; the trading of a securitised debt which is unconfirmed / not established, sale of insurance policy
41 (c) Mohd Johan Lee 20123/17/2012Application of GhararBroadly speaking, gharar will effect the validity of contract if it occurs in these areas:- gharar in kind / type / attribute / quantity of the object- gharar due to delivery time- gharar due to the price/ mode of payment- doubt over the ability to deliver
42 (c) Mohd Johan Lee 20123/17/2012The BenchmarkGharar which is excessive (gharar fahish) occurs in exchange contracts (‘uqud al-mu’awadat)To prevent gharar, the parties to contract must have adequate knowledge and information on the subject matter:i- Their existence and deliverabilityii- Its quality, quantity and attributes are knowniii- Time –frame for payment and delivery
43 Tolerable gharar However, gharar is tolerable if: (c) Mohd Johan Lee 20123/17/2012Tolerable ghararHowever, gharar is tolerable if:- i) it is trivial (gharar yasir)- ii) It occurs in other than exchange contracts, such as in gratuitous contracts.-iii) It happens to the ancillary object (appendages) only (not the principal and main subject matter of contract)- iv) the economic need for the contract embodying the risk is substantial
44 OTHER THINGS TO BE AVOIDED… (c) Mohd Johan Lee 20123/17/2012OTHER THINGS TO BE AVOIDED…Transactions involving the prohibited commodities, e.g., pork and liquorSurah al Maidah (5:3)Surah al Maidah (5:90)Transactions involving gambling or maysir/qimar
45 The avoidance of transactions involving maysir (gambling) (c) Mohd Johan Lee 20123/17/2012The avoidance of transactions involving maysir (gambling)Involves the creation of risk for the sake of riskA combative relationship between two contracting parties, each of whom undertakes the risk of loss and the loss of one means gain for the otherApply to all games of pure chanceNo economic activities are gained in the practice. The gambler will simply seek to amass wealth without efforts.Gambling is gharar in its worst scenario.Prohibited by al-Qur’an in Surah al-Maidah (5:90)
46 TRANSACTION INVOLVING PROHIBITED COMMODITIES (c) Mohd Johan Lee 20123/17/2012TRANSACTION INVOLVING PROHIBITED COMMODITIESIt is also not allowed to conclude contract on illegal commodities such as pork, liquor etc.Illegality of certain commodities has been spelt out clearly in the texts of al-Qur’an and Sunnah of the Prophet.E.g. :- Surah al-Maidah (5:3)- Surah al-Maidah (5: 90)
47 Essential Contracts in Islamic Finance (c) Mohd Johan Lee 20123/17/2012Essential Contracts in Islamic FinanceUnderlying principles utilised in devising products of IBF is very important as they separate IBF from conventional products.Contrary to conventional finance, which is specification driven product, Islamic finance is more structure and principle based productRules and regulations will differ from one product to another, depending on the structure employedIn general, various underlying Shariah principles have been utilised in devising products of Islamic Banking and Finance.They can be summarised as below:- Sale based products- Lease based products- Participatory products- Fee based products
48 Examples of the products and underlying principles (c) Mohd Johan Lee 20123/17/2012Examples of the products and underlying principlesBanking productsIIMM productsCapital Market Products
49 SHARI`AH COMPLIANCE: MAIN PRINCIPLES (c) Mohd Johan Lee 20123/17/2012SHARI`AH COMPLIANCE: MAIN PRINCIPLESCONTRACTSMutual consentAvoidLawful ContractualObjectiveInterest(riba)Uncertainty(gharar)Gambling(maysir/qimar)Other prohibitionse.g. Liquor, pork
50 ENCOURAGEMENT OF TRADE BY MUTUAL CONSENT (c) Mohd Johan Lee 20123/17/2012ENCOURAGEMENT OF TRADE BY MUTUAL CONSENTThe Quran encourages work and tradeThe Prophet (s.a.w.) himself was a traderThe encouragement of trade is evidenced by the many instruments of trade available during the Prophet's lifetime and in Islamic history thereafter
51 BUSINESS CONTRACTS RECOGNISED IN ISLAM (c) Mohd Johan Lee 20123/17/2012Contracts of sale and purchase (bay`), including all its subdivisions, like:normal or spot salemark-up sale (murabahah)deferred payment sale (BBA)sale with advance payment but deferred delivery (bay` al salam)sale for future delivery of goods with flexible payment of the price or manufacturing contracts (bay` al istisna`)sale of currency (sarf), etc.
52 CONT’D… Some controversial sales: (c) Mohd Johan Lee 20123/17/2012CONT’D…Some controversial sales:Sell and buy back (bay’ al `inah)Sale of Sale of debt (bay` al dayn)Islam recognises partnership contracts which are mainly based on profit and loss sharing (PLS), e.g.:mudharabahmusharakahA relatively new invention in this regard is:Musharakah mutanaqisah
53 CONT’D… Islam recognises public and private project financing, e.g.: (c) Mohd Johan Lee 20123/17/2012CONT’D…Islam recognises public and private project financing, e.g.:Leasing (ijarah) - private;Endowment (waqf) – private/public;State treasury (bayt al mal) – public.Modern forms of private project financing:Operational leaseFinancial lease – AITAB (hybrid contract)
54 (c) Mohd Johan Lee 20123/17/2012CONT’D…Islam recognises other additional contracts to provide security to the parties in a contract, i.e., the contracts of security (`uqud al tawthiqat), e.g.:suretyship/guarantee (kafalah): involves three partiesmortgage (rahn): involves two partiesThese security contracts are normally combined with other types of contracts, e.g.:the contract of BBA may be secured by a contract of security involving collateral (rahn)Other contracts recognised in Islamic law:contracts of trusts (al amanat), e.g.: safe-keeping (wadi`ah)contracts to do a specified task, e.g.: commision (ju`alah); agency (wakalah)
55 KEY ISLAMIC COMMERCIAL CONTRACTS (c) Mohd Johan Lee 20123/17/2012KEY ISLAMIC COMMERCIAL CONTRACTSGratuitous ContractsTrading ContractsInvestment ContractsSupporting ContractsGiftLeasingSaleMudarabahKafalahWaqfMusharakahRahnOperational LeaseBay` Bithaman Ajil (BBA)LoanHiwalahIbra’WadiahFinancial LeaseMurabahahWakalahSalamJualahIstisna’ etc.Muqasah
56 Islamic Banking SOURCES OF FUND APPLICATIONS OF FUND (c) Mohd Johan Lee 20123/17/2012Islamic BankingSOURCES OFFUNDAPPLICATIONSOF FUND
57 DEBT FINANCING EQUITY FINANCING (c) Mohd Johan Lee 20123/17/2012DEBT FINANCINGEQUITYFINANCINGLease Based Financing-Ijarah-AITABMudharabahMusharakahFee Based ServicesWakalahKafalahSale based financingBBA / Murabahah‘Inah/Tawaruq/daynSalamIstisnaComsumerBankingCorporateBanking
58 ISLAMIC CAPITAL MARKET (c) Mohd Johan Lee 20123/17/2012ISLAMIC CAPITAL MARKETEquityMarketBondMarketDerivativesMarket?-Future Contract-Options-SwapMusyarakahMudarabahDebt BasedABSEquity BasedMutual Fund / IslamicREITsWakalah / mudarabah/ musharakahIslamicHedge Fund
59 (c) Mohd Johan Lee 20123/17/2012ConclusionBesides various frameworks applied to banking practices (be it Islamic or conventional), Shariah framework is a framework which is peculiar to Islamic finance aloneYet, it forms the very substance of Islamic finance, without which Islamic finance will loss its IslamicityAs such, in practicing Islamic finance, the do’s and don’ts must be clearly observedIslamic commercial law, from the fact that it subjects to human interpretation and understanding admits differences of opinion, as long as these differences are grounded by valid evidence, produced by capable personnel, done according to the right methodology
60 Takaful(c) Mohd Johan Lee 20123/17/2012Derives from the word Kafalah, a verb, which means to bail, guarantee, warrant or to secure ones need.Means Joint Guarantee.An arrangement between members of community to jointly guarantee each other should mishaps befall to any of themFOR MORE INFO...Al Mawrid: A Modern Arabic-English Dictionary, Dar-el-Ilm Lilmalayin, Beirut, Lebanon, 1991
61 Prologue to Malaysian Takaful Act 1984 (c) Mohd Johan Lee 20123/17/2012Prologue to Malaysian Takaful Act 1984National Fatwa Committee in Malaysia resolved that the present-day life insurance business provided by the conventional insurance companies was not in line with the principles of Shariah as it contains elements which are against Islam such as Riba (Usury), Gharar (uncertainty) and Maisir (Gambling). ~~~ June 1972
62 Prologue to Malaysian Takaful Act 1984 (c) Mohd Johan Lee 20123/17/2012Prologue to Malaysian Takaful Act 1984Perak Fatwa Committee subsequently also declared that: “life insurance is not permissible as it is based on riba from which the profits of policyholders are derived. The policyholders must pay premiums for an indeterminate period which lead to the element of gharar (uncertainty)”.
63 (c) Mohd Johan Lee 20123/17/2012Takaful PioneersTakaful started some 30 years ago in the Middle East with the launching of two companies in 1979:The Islamic Arab Insurance Co. (IAIC) in the UAE andThe Islamic Insurance Co. of SudanBut it took some time for the movement to take shape.Later in 1984, Malaysia played a pioneering role in setting the first Legal framework specific to Takaful (Takaful Act Malaysia).This was instrumental in the successful launching of the Takaful movement in Malaysia and in other countries of South East Asia.
64 Other Islamic/ Takaful Legislations (c) Mohd Johan Lee 20123/17/2012Other Islamic/ Takaful LegislationsOther markets such as the Sudan and Iran have Islamic regulatory environments and became naturally Takaful markets.In Pakistan Takaful Act is enacted in 2005.In the Gulf countries specific Takaful legislations are coming through in Bahrain and in Saudi Arabia
65 (c) Mohd Johan Lee 20123/17/2012Takaful TodayFrom a handful of operators two decades ago the Takaful movement has blossomed into a fast growing phenomenon in many Muslim countries with very promising prospects in other countries with a large Muslim community.
66 Takaful drivers This movement is driven by (c) Mohd Johan Lee 20123/17/2012Takaful driversThis movement is driven bya strong demand from a public who would not insure otherwise (because of religious beliefs); andThe successful development of Islamic banking institutions providing capital and Islamic financial instruments for asset management and investment.
67 (c) Mohd Johan Lee 20123/17/2012Takaful DriversIslamic banks and financial institutions play a strategic and important role in the distribution of Takaful products (especially Life Takaful Products).Just as Bancassurance played an important role in the distribution of personal lines insurance products Bancatakaful is an important driver for Takaful.
68 (c) Mohd Johan Lee 20123/17/2012Takaful WorldwideThe number of Takaful operators worldwide is now estimated at:150 Takaful companies operating in 40 countries10 Retakaful companies and 6 Conventional Reinsurance companies have established Islamic windows.Takaful is one of the fastest growing segments in insurance (at around 20% pa. on average)World Takaful contributions are conservatively estimated at around US$ 3billions, of which:60% General Takaful40% Family Takaful
69 Takaful Geographical Spread (c) Mohd Johan Lee 20123/17/2012Takaful Geographical SpreadSouth& East Asia : 56%Middle East : 36%Africa: 7%Europe, USA & Others: 1%
70 WORKING OF THE TAKAFUL BUSINESS: The Malaysian Case (c) Mohd Johan Lee 20123/17/2012Takaful Business is based on the concepts of Mudarabah and Tabarru. Involvement of these two Islamic forms of business eliminates the elements of Riba from insurance contract and convert Gharar into tolerable form.In Family Takaful each Takaful installment is divided and credited into two separate Accounts namely, the Participants' Account(PA) and the Participants’ Special Account(PSA). A substantial proportion of the installments is credited into the PA solely for the purpose of savings and investment.
71 (c) Mohd Johan Lee 20123/17/2012The balance of the installments is credited into the PSA as `tabarru' for Sharikah Takaful Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before the maturity of the contract.The amount accumulated in the PA is invested in various business according to Islamic financing techniques, and the resultant profits are divided between the company and the participants according to the agreed upon ratio, e.g.,The participant's share is calculated according to their individual share in the PA, and credited into their respective accounts, the PA and the PSA.
72 Mudarabah Model Family Takaful PA FTF PA PSA PSA Company (c) Mohd Johan Lee 20123/17/2012Mudarabah ModelFamily TakafulProfit AttributedTo ShareholdersCompany’s Admin& Manag. ExpensesCompany30%Takaful Contractbased on MudarabahInvestmentProfit70%PAFTFPAPayment fromPAParticipantDonationPayment fromPSAPSAPSA
73 (c) Mohd Johan Lee 20123/17/2012Payment of claimsShould the Participant die or suffer Permanent and Total Disability in the fifth year of participation, Takaful benefit will be paid in the following manner:-i. From Participant's Account =RM 4,890(RM978 x 5)profit if any, say RMii. From Participants Special RM 5,000Accounts (RM1000 x 5)Total Takaful Benefit Payable RM 10,290
74 In case the Partcipant survived (c) Mohd Johan Lee 20123/17/2012In case the Partcipant survivedShould the Participant survive until the maturity of his FTP, payment of Takaful benefit will be made to him as follows:-i. From his Participant's Account = RM 9,780(RM978 x 10)profit from investment RM 1,800ii. From Participants Special RM XXXXAccountTotal Takaful Benefit = RM 11, surplus determined by Sharikah Takaful.
75 Mudarabah Model(c) Mohd Johan Lee 20123/17/2012General Takaful
78 (c) Mohd Johan Lee 20123/17/2012Definition of WaqfWaqf is an Arabic word and it means to stop to withhold and not to let go.In technical meaning Waqf means to allocate or donate some property or cash for a specific purpose to get pleasure of Allah and not to let it go through consumption or sale.The Waqf property comes into ownership of Allah (SWT) and Waqif will have no property rights on it.
79 Waqif has right to set the rules for Waqf and manage the Waqf. (c) Mohd Johan Lee 20123/17/2012Waqif has right to set the rules for Waqf and manage the Waqf.Waqf may be general purpose or specific purpose, like Waqf ‘Ala al Aulad or Waqf ‘Ala al Aqarib.In Islamic Law Waqf is a legal entity
81 (c) Mohd Johan Lee 20123/17/2012A Waqf Fund would basically be a separate legal entity to which the Shareholders would initially make a donation to establish the Waqf Fund.The donation can be of any reasonable amount (Shariah Board may specify such an amount).The objectives of the Waqf fund would be to provide relief to participants against defined losses as per the rules of the Waqf fund.
82 (c) Mohd Johan Lee 20123/17/2012In this modified Wakala Model with Waqf, the relationship of the participants and of the operator is directly with the Waqf fund. The Operator is the Wakeel of the Waqf Fund and the participants pay one sided donation to the WAQF fund (not conditional) which also eliminates the issue of Gharar. The WAQF fund rules may define the sharing of surplus and other rules under which it would operate but there is no obligation to distribute surplus. Further the Qard would be given by the shareholders to the WAQF entity and not to individuals as in the typical Wakalah model.
83 (c) Mohd Johan Lee 20123/17/2012Future OutlookDespite the remarkable growth rate recorded by Islamic finance and Takaful industry, penetration is still far below the enormous market potential offered by the Muslim community worldwide (23% of the total world population).
84 (c) Mohd Johan Lee 20123/17/2012Growth OutlookWorld Muslim population is estimated at 1.5 billions, of which around 97% are based in Asia and Africa.A two-digit growth in the range of 15% to 20% can be reasonably sustained for at least the next 10 years in the existing markets (Far and Middle East).
85 (c) Mohd Johan Lee 20123/17/2012New Takaful FrontiersMarkets like Europe, North and Latin America, Central Asia, Australia where large Muslim communities live are huge untapped reservoirs;The recent opening towards “Islamic windows” in the banking sector in Europe is likely to be followed by “Takaful windows” initiatives.
86 Islamic Finance and Takaful Products to Non-Muslims (c) Mohd Johan Lee 20123/17/2012Islamic Finance and Takaful Products to Non-MuslimsIslamic Finance and Takaful Products are not exclusive to Muslims.Competitively priced and sold through the right channel it could attract any consumer irrespective of their origin or faith.
87 (c) Mohd Johan Lee 20123/17/2012ConclusionsDespite the challenges facing this “new” industry, exciting times are ahead once the latent potential is unleashed.The success of Takaful largely depends on that of Islamic Financial institutions on a global basis.
88 Thank You & Wassalam Mohd Johan Lee J. Lee & Associates (c) Mohd Johan Lee 20123/17/2012Thank You & WassalamMohd Johan LeeJ. Lee & AssociatesA-16-13, Tower A, Menara UOA Bangsar59000 Kuala LumpurTel: Fax:Also at:Kuala Terengganu & Penang