Takaful operations have specific characteristics and conditions that differentiate them from conventional insurance activities. In fact, Takaful agreements cannot be sales contracts as such because of the element of uncertainty they contain; yet they should not include any uncertainties about main characteristics such as price, time and modes of payment. Takaful contracts should also include a subject matter upon which contracting parties mutually agree by an offer and an acceptance. And as any Shari’ah accepted operation, Takaful should avoid Riba, gambling and investing the fund in unlawful activities.

In addition, Takaful agreements should embody particular conditions that regard specialty, co-operative, mutuality, partnership, investment and management. The specialty condition validates that the Takaful Operator manages the fund according to Shari’ah principles and excludes prohibited activities such as Riba, Gharar and Maysir. Cooperative condition is about the participants paying contributions to a common fund to insure themselves against risk and help other members who suffer loss; they should pay a part of their contributions by way of Tabarru’. Mutual condition is linked to the principle of membership where the insurers and the insured are the same people managing and controlling their mutual security. Partnership condition guarantees the participants the right to share profits and losses; in fact any surplus goes back to the Takaful participants in proportion to their contributions; they also share eventual losses by contributing additional amounts if premium reserves were not sufficient to cover all the losses. The Takaful Operator shareholders receive their income in form of agency fees and a percentage from the common fund, plus profits on investment of capital and some particular funds. Investment condition specifies the scope of investment by the Takaful Operator which should be within the Shari’ah framework. Finally, management conditions represent the organization of Takaful Operator including the Shari’ah Supervisory Board which aspires at protecting participants’ interests.

Specificity

Takaful agreements have specific characteristics and conditions that differentiate them from conventional insurance agreements. In fact, Takaful agreements cannot be sales contracts as such because of the element of uncertainty they contain; yet they should not include any uncertainties about main characteristics such as price, time and modes of payment. Takaful contracts should also include a subject matter upon which contracting parties mutually agree by an offer and an acceptance. And as any Shari’ah accepted operation, Takaful should avoid Riba, gambling and investing the fund in unlawful activities.

In addition, Takaful agreements should embody particular conditions that regard specialty, co-operative, mutuality, partnership, investment and management. The specialty condition validates that the Takaful Operator manages the fund according to Shari’ah principles and excludes prohibited activities such as Riba, Gharar and Maysir. Cooperative condition is about the participants paying contributions to a common fund to insure themselves against risk and help other members who suffer loss; they should pay a part of their contributions by way of Tabarru’. Mutual condition is linked to the principle of membership where the insurers and the insured are the same people managing and controlling their mutual security. Partnership condition guarantees the participants the right to share profits and losses; in fact, any surplus goes back to the Takaful participants in proportion to their contributions; they also share eventual losses by contributing additional amounts if premium reserves were not sufficient to cover all the losses. The Takaful Operator shareholders receive their income in the form of agency fees and a percentage from the common fund, plus profits on investment of capital and some particular funds. Investment condition specifies the scope of investment by the Takaful Operator which should be within the Shari’ah framework. Finally, management conditions represent the organization of Takaful Operator including the Shari’ah Supervisory Board which aspires at protecting participants’ interests.

Distribution of surplus

Under a Takaful scheme, if the fund generates net surplus at the end of the year then Takaful operator distributes it to the participants and the company based on the pre-agreed profit sharing ratio. A proportion of the surplus may be upheld as a contingency to protect participants’ interests, while the remaining part is distributed among the policyholders. The surplus is calculated based on the total contributions paid by the participants to the Takaful Fund less the total value of claims paid to cover assured losses, less Takaful Operator’s management fees and expenses, less commission paid to the intermediaries and the change in the reserves. If the balance is negative and is insufficient to pay compensation and benefits, then the Takaful shareholders may provide a bridging interest-free loan to make up the deficit that would be recovered from future surplus.

The distribution mechanism is decided by the board of directors of a Takaful operator and should be approved by the Shari’ah board. In fact, at the end of each financial year the Takaful operator undertakes an evaluation to determine surplus or deficit. The surplus is distributed to participants only in the case of Family Takaful business that is associated with protection for livelihood and is prohibited for General Takaful that is associated with non-life forms of protection.

The surplus may be calculated separately for each class of risk or on a combined basis. It could be distributed in cash, reduced from of future contributions, or credited to the participant’s investment fund. Moreover, depending on the Takaful Operator policy, the surplus may not payable to participants whose paid claim exceeds the premium received plus a share of the surplus, or those who simply were paid a premium during the year of account. Finally, a proportion of the distributable surplus may be donated for charitable purposes after the consent of Takaful shareholders and participants.

Tabarru’

Tabarru’ is the agreement by a Takaful participant to donate a proportion of his contribution to enable him to fulfil his obligation of mutual help and joint guarantee should any of the other participants suffer an unexpected but defined risk that requires financial assistance. By incorporating the concept of Tabarru’ , where no return is expected, the elements of uncertainty and gambling in the Takaful contract are minimized and the social cooperation promoted by Islamic teachings is respected. The Tabarru’ clause is included for all members in participating in a Takaful scheme. However, its percentage depends on the Takaful operator based on technical and statistical parameters that take into account different expected risk types.

Contributions paid by the participants are divided into two parts, the first part is put into a Mudarabah investment fund and the other part is put into a common pool on the basis of Tabarru’ to protect the financial well-being of fellow participants in times of need. In essence, the donation part of Takaful would enable the participants to perform their deeds sincerely in protecting members of the community and assisting those who might suffer a misfortune in life or business. The sharing of the profit is allocated only after the obligation of indemnifying and helping the unfortunate members has been completed. Income is shared on the basis of Mudarabah principle between the participants and the Takaful operator.