issues in general takaful model azman ismail

HIJRAH Strategic Advisory Group Sdn Bhd, No. 7B Jalan Mamanda 5, Ampang Point, 68000 Ampang, Selangor Darul Ehsan, MALAYSIA. Tel : 603.4260.1995, Fax : 603.4260.1994, email:[email protected]

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1Issues in the General Takaful Model

By

Azman Bin Ismail

Executive Director, HIJRAH Strategic Advisory Group Sdn Bhd

When I was asked three weeks ago to talk on the subject, I realized that I have to prepare a short

write-up in addition to the usual powerpoint presentation that I normally do for workshops like this.

The reason for this is that this workshop is specially tailored for Bank Negara Malaysia; and Bank

Negara Malaysia is the regulator for the takaful business. Being the regulator means that one’s

decision will have long-term effects not only on the operators, but the economy and society at

large. It is not easy being a regulator as one has to consider various factors such as policy

matters, current and future internal & external resources and constraints, public interest and the

like. The problem (or rather opportunity) is compounded with the fact that fiqh al-takaful is a new

field and naturally both practitioners and shariah scholars are still grappling, given the fact that

takaful came into being only two decades ago. Furthermore, unlike Islamic banking and finance,

takaful is seen to be more difficult to understand; but like Islamic banking there are still issues that

need to be reviewed, reevaluated and resolved. However, in Islamic banking and finance, we can

gather enough scholars and practitioners to intelligently discuss these issues like what you did

with Bai’ ad dayn recently. On the other hand, this is not so with takaful and this is why the

following discussion is important.

When we talk about general takaful models in practice, we can divide them into two categories,

the social takaful model and the commercial takaful model. The commercial takaful model can be

divided into two types, the mudharabah model and the wakalah model. The general takaful

business in Malaysia and in this region basically follows the mudharabah model; specifically the

modified mudharabah model. Under the pure mudharabah model, the takaful operator and the

1 Presented at a workdhop conducted by the Central Bank, Malaysia


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participant share direct investment income only and the participant is entitled to a hundred

percent share of the surplus. However, under the modified mudharabah model, the investment

income is ploughed back into the takaful fund and the takaful company share with the participant

the surplus from the takaful fund. I have been asked several times, what is my opinion on the

modified mudharabah (also called qualified mudharabah) model? My opinion have been

ambivalent; initially I defended it. Furthermore, I have always thought that the shariah scholars

have thoroughly thought about it and so there should not be any question. However I later

thought otherwise; the mudharabah model cannot be defended. This opinion was enhanced when

I was doing a project in Qatar and when I discussed with practitioners and eminent scholars

there.

There should be no apology for changing one’s opinion when there’s new information or rationale

to an argument. When one changes his or her opinion, it does not necessarily mean that he or

she has no principles. In fact Imam Shafi’e, the great scholar, is famous for his qaul qadim and

qaul jadid. He changed his opinions on numerous issues, either because there was new

information, or because he looked at the same issue in a new light or new angle. For example, in

his qaul qadim, Imam Shafi’e is of the opinion that musta’mal water can be used for ablution

whereas in his qaul jadid he is of the opinion that musta’mal water cannot be used for ablution.

The great Imam changed his opinion due to new information that he received that shows that the

hadith to justify the use of musta’mal water is defective in the chain of narration.

I was also asked by a friend of mine last month what I think of the modified mudharabah model. I

told him then that I don’t agree with the modified mudharabah model but I’m trying to defend it.

Since then I have given it some thought and at times I thought that it conforms to shariah and at

other times it does not conform. Now you can see that it is no longer a qaul qadim and qaul jadid

issue but qaul keliru. I am sure you are confused as well. Let’s hope that at the end of this

workshop, and with the help of our shariah scholars here, we will be more enlightened on the

issue.


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Before looking at the issue, let us recap the meaning of mudharabah. Mudharabah is defined as

the contract between one party, known as the ra’sul mal (or capital provider) with another party

known as the mudharib (entrepreneur) where the ra’sul mal provides the capital and the mudharib

provide the skills in a business venture and when there is profit, the profit is shared between the

ra’sul mal and the mudharib in a pre-agreed manner. The pure mudharabah takaful model

conforms to this definition. In this case the takaful operator is the mudharib and the participants

are the capital providers. However, the modified (or qualified) mudharabah model does not

conform to this definition.

Under the modified mudharabah model, no profit from the venture is shared between the operator

and the participants. Instead profits, defined as the positive difference (or surplus) between the

balance of the takaful fund at the end of the mudharabah contract and the balance of the takaful

fund at the beginning of the mudharabah contract (not period per se as there is a slight difference

in practice, but I will use the word period from now on). What is shared under the modified

mudharabah model is the actual balance of the fund at the end of the period (also called

underwriting surplus) and not the surplus between the balance of the takaful fund at the end of

the period (meaning the mudharabah contract) and the balance of the takaful fund at the

beginning of the period. In general takaful business, the balance (or underwriting surplus) of the

fund at the end of the period is always lesser than the balance of the fund at the beginning of the

period. Under a pure mudharabah model, the business is considered a loss and that the ra’sul

mal loses (some of) his capital and the mudharib loses in terms of effort. Therefore, the modified

mudharabah model is not really mudharabah and that is why some scholars, especially in the

middle east do not condone it.

Having said the above, let us try to defend the modified mudharabah model using Islamic

principles. Under Islamic law, the original legal position of any matter is permissibility, unless and

until there is evidence (dalil) prohibiting it. This principle of permissibility applies to muamalat


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matters. It is an established legal maxim that is accepted by all schools of thought. This legal

maxim is based Quranic verses, some of which are :

We have subjugated to you all that is in the heavens and the earth

(45:13)

He it is who created for you all that is in the earth

(al-Baqarah; 2:29)

God has explained to you in detail what is forbidden to you excepting that to which you are under

compulsion)

(6:1190)

And God will not mislead a people after He has a guided them, until He makes ,clear to them

what to fear (and to avoid )

(9:115)

Do you not see that Allah has subjected to you whatever is in the heavens and what is on earth,

and has showered upon you His favors, both apparent and unseen?

(31:20)

According to Sheikh Yusuf Qaradawi, the sphere of prohibited things is very small, while that of

permissible things is extremely vast. There is only a small number of sound and explicit texts

concerning prohibitions, while whatever is not mentioned in a nas as being lawful or prohibited

falls under the general principle of the permissibility of things and within the domain of Allah's

favor. In this regard the Prophet (peace be on him) said: What Allah has made lawful in His Book


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is halal and what He has forbidden is haram, and that concerning which He is silent is allowed as

His favor. So accept from Allah His favor, for Allah is not forgetful of anything. He then recited,

"And thy Lord is not forgetful." (19:64) (This hadith was reported by al-Hakim, classified as sahih)

Furthermore the above principle is clearly explained by a companion of the Prophet, Said bin

Jabir. When he was asked for a ruling on coitus interruptus, he said, “We were practicing coitus

interruptus whereas the Quran was being sent down. Had it been prohibited, the Quran would

have prohibited it.” Since the Quran is silent (and the Sunnah for that matter), coitus interruptus

is allowed for, in order for a matter to be declared prohibited the nass must be decisive in

meaning and transmission (qat’i al-thubut wal-dalalah). The validity of the modified mudharabah

model may be further argued by the Hanbali’s position that people have the freedom to contract

as long as there is willingness (ridha) between them. Imam Ahmad b. Hanbal is of the opinion

that the norm in regard to contracts and stipulation (‘uqud wa shurut) is permissibility. Therefore

people are at liberty to enter any contract and engage in any trade that they wish, whether this

conforms an existing precedent or not. Ibn Taymiyyah has categorically stated that the Quran

address to the people to “fulfil your contracts” (al-Ma’idah, 5:1) is evidently broad and

comprehensive which would naturally comprise every contract that the Lawgiver has not

specifically forbidden. The only basic requirement is the mutual consent of the parties (taradda

minhum).

On the other hand, the modified mudharabah model is not accepted by some scholars and

practitioners in the middle east as mentioned above. I have not seen any fatwa yet on this but

from my discussions with them, the contract cannot be mudharabah. Under mudharabah, the

takaful fund belongs to the participants and not the takaful operator. The takaful operator

therefore has no right to a share of the surplus. Sheikh Nizam for example has mentioned this in

the International Conference on Takaful in 1999 and 2000. If we call the modified mudharabah by

the name of mudharabah, then we are not putting things in the right perspective.


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Another dimension to the issue is that the current general takaful practice inserts the tabarru’

element in the contract. If it is tabarru’, then the fund does not belong to the participants as they

have willingly relinquish it. So it seems that under the current general takaful contract, the fund

belongs to neither the operator nor the participants. From the opposite perspective, which may

seem convoluted logic to some, it belongs to both operator and participants. The issue becomes

more problematic as the next question that arise is; in what proportion?

To recap, the current logic says that under the present general takaful practice in this region, the

fund does not belong to the operator since it belongs to the capital provider and does not belong

to the participant since it is tabarru’. Then under what basis does the operator manage the fund?

If it is under the presumed wakalah principle, is it correct to assume that it is a trust fund that

‘belongs’ to the community of participants but that they should not expect any surplus. Sheikh

Yusuf Qaradawi said ;

In order to establish a cooperative system on a sound footing in any group which desires to help

its members in the event of unforeseen calamity, the following conditions must be met in regard

to the money collected:

1. Every member who pays his allotted share of money pays it as a donation, in the spirit of

brotherhood. From this pool of donations help is given to those who are in need.

2. If any part of this money is to be invested, it should be invested in halal businesses only.

3. It is not permitted to the member to donate his share on the condition that he will receive

a pre-determined amount in the event of an unforeseen calamity. Rather, he will be paid

an amount which will compensate his loss or a part of it, depending on the resources of

the group, from the pooled monies.

4. What has been donated is gift from the donor, and taking it back is haram.(Taken from

the book, Al-Islam wal-manahij al-ishtirakiyyah (Islam and Socialism), by Muhammad al-

Ghazzali, p. 131.)


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It is often said that the basis of the participants getting back a share of the surplus is through a

counter tabarru’. In this respect, the operator donates back to the participant. If the operator

donates back to the participant, on what basis shall it be? If it is under mudharabah, then the

operator has no right since the fund belongs to the participants. If it is under tabarru’ it is not

necessary to give back to the participants and the participants cannot expect any surplus to be

given back to them as mentioned by Sheikh Yusuf Qaradawi above. Now which is which? Is it

mudharabah or tabarru’? Mudharabah and tabarru’ at the same time? Obviously we have not

given much thought in this matter.

Some of us might ask, since the modified mudharabah brings so many shariah–related questions,

why don’t we just go for the pure mudharabah or wakalah models? I suppose we should but we

have been using the modified mudharabah model since the advent of takaful in Malaysia and for

some of us, change is difficult. Furthermore there have been opinions that suggest that deduction

of expenses under the mudharabah principle is not allowed. If that is the case, then the pure

mudharabah model is not viable as I will show in tomorrow’s paper on Technical Aspects of

Takaful. That is why the takaful company concerned uses the modified mudharabah model.

However, this opinion seems to have changed slightly from prohibition of agency to the

prohibition of deduction of management expenses from the ra’sul mal. The latest twist to this is

that management expenses can be deducted from the ra’sul mal provided it is clearly made

known to the participant. (I was made to understand that Bank Negara, being the regulatory

authority, allowed deduction of management expenses but not agency expenses from the takaful

contribution.) Some of us might argue that if this is the case, then there is no further need to use

the modified mudharabah model since it is full of controversies. I agree, but before we make a

quick conclusion, why don’t we satisfy ourselves by looking at other angles.

As I said earlier, previously I thought that the modified mudharabah model can be defended. This

is so because the modified mudharabah is superior to the mudharabah model when we look at

the operational implications. Under a pure mudharabah model, profits to the operator depend only


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on its ability to generate business and investment return. The more business it generates, the

more funds it has. The more funds it has, the more profits it will generate from investment. On the

other hand, under a modified mudharabah model the operator’s profits also depends on the

quality of business. Therefore profits to the operator depends more on its ability to manage it’s

risks rather than it’s ability to generate business and investment. In this respect, the operator is

more of a risk manager than an asset management company.

If that is the case, can the modified mudharabah model be shariah compliant using other

principles? Since I am not a shariah scholar, I would like to pose the following questions so that

we can bring up this issue to them. Can ‘urf be used here to justify modified mudharabah?

Another possible justification is by using istihsan. In fact istihsan is a dynamic principle whose

applications have solved a number of issues especially in the financial sector. For example,

qardhul hasan is prohibited if we use qias as the Sunnah prohibits the exchange of ribawi items

like for like at different times. Using istihsan, qardhul hasan is permissible because of the hidden

‘illat.

A possible argument to justify the modified mudharabah model is that the takaful operator

participates in the risk. Therefore it makes the takaful operator prudent as it has to ensure quality

risks. This is so since under the modified mudharabah model, profits transferred to the

shareholder’s funds is from underwriting surplus. If the takaful operator is not prudent, the surplus

ratio will be small and hence the income transferred to shareholders’ funds. On the other hand,

under the pure mudharabah model (and the wakalah model), the takaful operator need not be

prudent as income to shareholders’ funds is basically a function of business generated and

investment income.

Another possible argument is that the takaful operator needs to have a minimum paid up capital

to start operations. The minimum paid up is required to ensure that the takaful operator have

sufficient funds to pay for liabilities should the takaful fund experience losses which are greater


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than the takaful contributions. The transfer from the shareholders’ funds to the takaful fund is

based on qardhul hasan. This means that there is opportunity costs since the operator would not

be able to invest the monies that has been transferred to the takaful fund for the benefit of the

shareholder’s funds. Having said that however, as at now it is still difficult to justify the modified

mudharabah model as the above points given does not argue from the sharia angle.

Since prudence is necessary to operate a takaful business, and since the pure mudharabah and

wakalah models do not factor this characteristic, we are left with the modified mudharabah model

for general takaful. However, since the modified mudharabah may not be acceptable to some

scholars ever, I propose that we (i.e. those who are interested in the development of takaful

worldwide) look into what I would call the musharakah ta’awuniyah model. The musharakah

ta’awuniyah model is similar to the modified mudhrabaha model from the financial standpoint.

However, it could be acceptable to most scholars. In order for us to know for sure, we need to

bring it up to our shariah scholars. If it is acceptable, then we would have solve the issue of the

general takaful model.

Those are my thoughts at the moment.

Jazaka Allah u khairan for listening.

Wabi Allah ut taufiq wa al hidayah.

Wassalam.

Azman Ismail

issues in general takaful model azman ismail

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