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Every member of the community in his day-to-day life is invariably exposed to the possibility of encountering catastrophe, disaster and mishap which may give rise to all sorts of misfortune and tragedy such as death, fire, burglary, motor accident, etc. For a Muslim he must believe in the catastrophe or disaster befalling him as `qada’ and qadar’ from Allah. In this respect he must face these unfortunate events with resilience, both spiritually and physically, with the strength of faith and patience. Nevertheless it is also the duty and responsibility of every Muslims to find ways and means to strive hard to avoid such catastrophe and disaster wherever possible, as well as to lighten his or his family’s burden in the event of such ill luck occurring.

Indeed it is the possibility of having to cope with such catastrophe and disaster that has made us realise the need to be adequately and fully prepared, in particular in terms of financial resources, should such event occur despite him striving hard to avoid it. Obviously to most people it would quite natural to wish that they would be able to provide their dependents and loved ones a certain the sum of money in the event of their death. They would feel secure in their knowledge as that sum of money would help to alleviate the misery and hardship that their dependents and loved ones may face resulting from such tragedy. For example, a person who is exposed to the dangers of his house catching fire or his motor vehicle meeting with an accident would always wish that he would have enough money to repair his house or his motor vehicle should such disaster did actually take place.

Perhaps one way to cope with such an eventuality is by way of personal savings. However, such measure may not always be sufficient as the sum of money required might be substantial and it takes time to save, whilst a catastrophe or disaster may strike at any time. Although personal savings are essential, in most cases it may be sufficient. Hence additional assistance and financial resources are critical.

Therefore it becomes necessary for us to be prepared. As a matter of fact, Islam encourages Muslims to do their utmost to be prepared and seek protection or cover in their activities as is clear in the following hadith “The Prophet (s.a.w) told a Bedouine Arab who left his camel untied to the will of Allah: Tie the camel and then leave it to the will of Allah” (Reported by Al-Tarmizi and Ibn Majah).

Until recently, one form of protection which a Muslim can avail himself as a means of cover against the consequences of catastrophe and disaster is through the insurance policies provided by conventional insurance companies. Basically, these companies offer two types of policy namely life insurance which essentially covers losses against death, and general insurance which covers losses against fire, motor vehicle, accident and the like.

However, the participation by Muslims in these insurance policies has raised doubts from the viewpoint of Syariah. In view of this, Muslim scholars had conducted a thorough and comprehensive study on the operations of the conventional insurance. Arising from this study, the generally accepted view of the scholars is that the operation of the conventional insurance does not in its present form comply and conform to the rules and requirements of the Syariah. It is indeed important to stress at the outset that it is not the concept but its practice which does not meet the rules and requirements of Syariah. On the contrary, the concept insurance which simply means pooling of common resources to help the needy is very much in line with the teachings of Islam which propagate solidarity, mutual help and cooperation among members of the community. Therefore insurance is not a practice to challenge the will of Allah or having little faith of His mercy.

As a matter of fact, the essence of insurance could be seen in the system of mutual help in relation to the custom of blood money or `diyah’ under the Arab tribal custom. Under this system, the victim would be compensated by the members of the community whose action had resulted in the loss of life or impairment of the victim. Therefore, the principle of compensation and group responsibility was accepted by Islam and the holy Prophet. Muslim scholars acknowledged that the basis of shared responsibility in the system of `aqila’ as practised between Muslims of Mecca (Muhajirin) and Madinah (Ansar) laid the foundation of mutual insurance. It is the pooling of common resources to help the needy, a scheme which is very much in line with the principle of compensation and shared responsibility among the community.

Although as a concept, insurance does not contradict the practices and requirements of Syariah, Muslim scholars however have generally concluded that it is the practice and operation as provided by the conventional insurance companies which do not conform to the rules and requirements of Syariah. Towards this end, in June 1972 the National Fatwa Committee resolved that the present-day life insurance business provided by the conventional insurance companies was not in line with the principles of Syariah. Similarly, in a comprehensive deliberation, the Fiqh Academy of the Organisation of Islamic Conference (OIC), at its gathering in December 1985 resolved that no form of insurance, life or general, conformed to Islamic principle.

In consideration for participating in the takaful programme which forms the basis of a joint-guarantee and mutual help among the takaful participants through various products provided by the takaful operator, the participants would pay a certain sum of fees, like a subscription, called takaful contribution which is then credited into a special fund known as the takaful fund. It represents a risk-pooled fund and accounting wise is separated from any other fund of the operator. Like an investment scheme, the takaful contribution on the one hand is almost similar to an investment capital which generates returns or income to the participants if the takaful business makes money. Unlike the premium paid under the conventional insurance practise, takaful contributions cannot simply be treated as direct and outright expenditure in view of the contractual arrangement of a certain return to the participant upon expiry of the period of cover. On the other hand under the conventional practise, the only `return’ to the policyholder from the premium paid for the price of insurance cover will be confined to the claim proceeds in the event of a catastrophe or disaster inflicted upon the policyholder.

On the contrary, return on the takaful contribution is an entitlement guaranteed under the takaful practise in accordance with the al Mudharabah contract which simply means the right to profit sharing. In this respect the parties entitled to the profit sharing arrangement are the takaful participants on the one hand and the takaful operator on the other. Arising from this unique structure, takaful participants would have the opportunity over a period of time to enjoy at least one period of free cover, in particular for takaful products of one year period of cover. This is seen to be possible through the savings of profit earned out of a number of years of participating in a takaful product. For example, Takaful Malaysia has been declaring not less than 35% p.a. profit for its short-term takaful products such as motor takaful scheme, fire takaful scheme and personal accident. Assuming that the takaful contribution paid by the participant each year is of the same amount, he would therefore have accumulated sufficient sum of money from the profit shared every year over the past three years of his participation to pay the takaful contribution fourth consecutive year. At the same time like an insurance policy, the participant shall be entitled to any claim benefit should he suffer a loss resulting from a misfortune as defined in the al Mudharabah contract. In other words, claims or no claim the participant would have something in return in consideration for his cost of insuring under the takaful practice.

Therefore it is clear that by participating in the takaful programme, participants are not only entitled to certain financial benefits in the event of a loss due to a misfortune but also the right to sharing the profit. The characteristic of the contract is that the takaful participant in his capacity as the provider of capital or fund, termed as `sahibul-mal’ would pay the takaful contribution, called `ra’sul mal’ to the takaful operator acting as the entrepreneur or `mudharib’ who is responsible and entrusted for providing and managing a business project or venture. The rate of contribution can follow the insurance premium as adopted by the market, based on the principle of `uruf’ or common market practice. In the case of takaful, the entrepreneur provides and manages the takaful business as prescribed under the Malaysian Takaful Act 1984.

Apart from the profit sharing provision or entitlement, the al Mudharabah contract also specifies and spells out the obligations and responsibilities of both parties of the contract. In the case of profit sharing, the profit, if any, to be shared is based on a predetermined ratio agreed by the parties concerned upon the inception of the contract. However, the right to profit sharing comes only after all the obligations under the contract have been recognised and fully undertaken. In other words, the fulfilment of takaful needs must be given top priority to ensure that the loss suffered by a participant is rightly and justly compensated. After all the basic purpose for any participant using the takaful programme is to avail himself of cover as a facility to mitigate his financial sufferings should he suffer a loss due to a misfortune or mishap. Therefore, profit can only be determined and shared after all claims and its related expenses are paid to the unfortunate participant.

As provided under the Takaful Act 1984, there are two types of takaful business, namely Family Takaful and General Takaful that a takaful operator can provide. In this regard, the profit-sharing structure varies from one type of business to another. For this purpose, it is obviously imperative to know first what profit is to be shared between the takaful participants and the operator.

In the first place, there must be distinction between profit or loss of the takaful operator itself as reflected in the shareholders’ fund and eventually be distributed as dividends to the shareholders, and profit, if any, of the takaful funds which is to be shared between the operator and takaful participants. A clear definition of these two sets of profit is crucial to ensure the profit sharing is calculation is undertaken correctly. Nevertheless, in any business venture profit-sharing can only take place if the business makes money. Therefore it is essential for the operator to manage the takaful business profitably.

In the case of general takaful of which its products are short-term in nature, usually for a period of cover of one year and subject to renewal, profit is defined as balance of the total aggregate of takaful contributions paid by participants to the general takaful fund, less payment of claims paid and incurred, the cost of retakaful and the provision of appropriate reserves. In insurance jargon this is generally termed as underwriting surplus. Together with the overall returns on the investment of the general takaful fund, the surplus shall be declared as the profit of the general business which is then subject to profit sharing between the participants and the operator under the al Mudharabah contract.

In line with the characteristic of the al Mudharabah contract, profit is shared at the gross level and not after charging expenses of the operator. Sources of income to the shareholders’ fund are essentially its share of profit under the al Mudharabah contract and returns on the fund’s investment. The surplus of income as declared in the shareholders’ fund after paying all the operating expenses shall be the profit of the operator.

It is human nature that anything new would not normally be easily and readily accepted as a matter of course. When takaful was first introduced as an alternative for Islamic insurance in the early eighties, there was strong reservation that it would not be viable, and what more profitable. In fact similar reservation was expressed on the viability of a banking operation without interests when Islamic banking was first introduced. In the same breath takaful was perceived to be a non-starter for the simple reason that its profit ought to be shared with the policyholder. The reservation probably stemmed from the general scenario on the difficulty of insurance industry as a whole at that time to make money out of the insurance operation. Most companies suffered poor underwriting results. Without the support of investment, it was likely that most of these companies would not make profit. Given such a scenario there was bound to be question on how would takaful shareholders able to reap their rewards from their financial sacrifices and faith in investing in the takaful project.

Now, the takaful system developed, and evolved to be the Malaysian model, has turned out to be viable to both participants as users or consumers, and shareholders as investors in term of the financial benefits that they have been enjoying. Right from inception, participants of all takaful products under both the Family Takaful Business and General Takaful Business have been receiving returns on their contributions or premium. In the case of General Takaful, taking the performance of Takaful Malaysia as a practical example, the rate of return for yearly renewable products such as takaful schemes for motor, fire, personal accident payable to participants is on the average has not been less than 35% p.a. In the same manner, shareholders have been enjoying dividends ever since it was first declared and paid in the fourth year of Takaful Malaysia’s operation.

As a system, takaful is steadily gaining popularity and this in fact has posed a challenge to the takaful operators. Measures have to be taken to reach out efficiently and effectively to the consumers in order to satisfy their insurance needs. In this respect, the pace of product development for takaful has been relatively fast. All in, takaful products would now be available to meet the insurance needs of all sectors of the community, both at the individual as well as the corporate levels. Perhaps taken a step further, there are takaful products designed specifically to cater for the needs of a particular sector of the community, normally considered to be of a low priority from the standpoint of conventional insurance. As an example, Takaful Malaysia provides two different products, namely Takaful Rumah Desa and Skim Takaful Baitul Saadah for the purpose of covering houses or private residences in the rural areas and including their owners. These are traditional houses usually built of wooden structure that are not normally readily accepted under the conventional insurance policy.

The diversity of takaful is further illustrated from its ability to cater for the long-term financial needs as usually provided under a life-insurance type of product. This demonstrates takaful would be able to satisfy both the financial benefit due to early death of a breadwinner as well as savings for old age. Under takaful, these are long term family products that are essentially fixed term financial planning programme. Participants of the family product shall agree to participate in a takaful plan with a fixed period of maturity of their choice. For this purpose, a participant may choose a minimum term of 5 years or a maximum of 40 years. In consideration, the participant shall also agree to pay the takaful contribution in instalment monthly, quarterly, half-yearly or yearly within the term as long as he or she is alive. To ensure that the participation shall be in force at all times and the benefits would be payable in the event of a misfortune, the contribution must be paid on time according to the schedule of payment.

As the transactional aspect of takaful is not based on the contract of buying and selling, contrary to a conventional life insurance policy, the family plan does not charge a premium. To a policyholder the price of buying a life policy would be the premium charged, usually depending upon the former’s age. The older the policyholder the higher would be the premium. This does not happen in takaful. In a sense, there is no compulsion in terms of the amount of contribution to be paid. Therefore, the question of financial capacity or affordability on the part of the participant does not arise.

Once the participant has chosen the term of the plan, the next decision he has to make would be his choice of the amount of contribution. For this purpose, for most people it should not exceed 10% of their income. The operator, however, as a matter of policy would set the minimum amount.

The contribution paid shall be credited into the Family Takaful Fund which is sub-divided into two accounts, namely Participant’s Account (PA) and Participants’ Special Accounts (PSA). A huge portion of the contribution that represents the core savings of the participant is in the PA, whilst the balance is for the PSA designed to assume the mortality liability of all participants.

How much of the contribution meant for the PSA shall be based on the mortality table and other actuarial requirements as certified by a qualified actuary in accordance with the Takaful Act 1984. This approach would not be contrary to Shariah as the assumption is merely a sound technical strategy to ensure good governance in the management of takaful operation that would create confidence among participants. In general, mortality basis is relatively low. Thus the corresponding rate of the contribution for the PSA would be relatively small. For Takaful Malaysia the rates range between 3% to 13% depending upon the age of the participant at the inception as well as the term of the family plan.

What is important from the contractual point of view is that the amount credited into the PSA is made as tabarru’ or donation by the participant. The total aggregate of the tabarru’ paid by all participants in the PSA would be the benevolent fund that provides certain benefits in the event of death of a participant. The death benefit from the PSA would be calculated from the date of death to the date of maturity of the plan based on the amount of contribution paid.

Both the PA and PSA are invested and returns thereof shall be subject to profit-sharing under the mudharabah contract between the participant and the operator. Again the sharing is at the gross profit before deducting the operator’s management expenses. The profit attributable to the participant shall be credited into the PA and PSA accordingly.

Upon expiry, the participant shall be paid the maturity benefits comprising of the total balance in his PA. In addition, he shall be paid a certain percentage of the actuarial surplus, if any, out of the PSA. It is noteworthy to mention that in contrast to the conventional system, the takaful operator shall not be entitled to share any of the actuarial surplus. In this regard, like a conventional life policy, the family plan would be able to fulfil the financial needs of the individual either for the purpose of relieving the financial burden in case of early death of a breadwinner or accumulating savings for retirement.

Should a participant have to break the contract and therefore surrender his plan, he shall be refunded of all the contributions in the PA including investment returns thereof at any time. In other words, there is no forfeiture in takaful under which a participant would loose his money if he has to cancel his policy. However the tabarru’ contribution that he has donated in the PSA shall remain in the Fund.

The thrust of marketing takaful products therefore should not be focussed solely on the issues of Shariah. Takaful operator must able to demonstrate that the respective products would be able to meet the specific needs and financial objectives of modern-day consumers. From the dearth of interests shown on the Malaysian model, both at home and abroad, takaful looks poised to steadily becoming a force within the Islamic financial sector in particular, and insurance industry in general.

The unveiling of the Financial Sector Masterplan (FSMP) by Bank Negara on 1st March last year, underlines a strong manifestation and a firm commitment of the Government to ensure an orderly development as well as a vibrant and resilient financial system in Malaysia that would be able to withstand competition and liberalisation arising from globalisation. In a nutshell, FSMP charts the future direction of the system over the next 10 years. In line with the policy of a dual financial system, a special chapter is devoted in the FSMP on Islamic financial sector covering both banking and takaful. All round, the focus is to establish a dynamic and comprehensive Islamic financial system that would contribute meaningfully towards the effectiveness and efficiency of the financial sector whilst meeting with the economic needs of Malaysia.

Among the critical milestones set out in the FSMP include targets of transforming Malaysia to be the regional center for the development and promotion of Islamic banking and finance, and that both Islamic banking and takaful are to capture 20% of the overall market share of banking and insurance respectively by 2010. As for the takaful sector, should the trend of strong growth continued as seen from its main business indicators of double-digit growth, the goal of capturing the 20% market share looks optimistic. For example, contributions income of takaful against total premiums of the insurance industry rose to 9.1% last year, compared with 3.8% the year before.

Nevertheless, steps towards attaining the target would depend a great deal on the direction taken within the takaful sector itself. As expressed in the FSMP, new takaful licenses are to be issued to suitable parties as a measure to accelerate market penetration of takaful business. It is estimated at present less than 15% of Muslims bumiputra are covered by life insurance, indicating a huge market potential for takaful, especially the family products. Certainly the penetration is far below the overall rate of around 35% for the country as a whole. But increasing the number of operators would not necessarily mean higher market penetration. The market share cannot be enhanced should a divergence of practice in terms of operational structure exist. Although diversity is acceptable in Islam, that in a way underscores its greatness of flexibility, due to difference interpretations among Islamic scholars on matters relating to trade and commerce including finance, unity of practice on the other hand would be the preferred choice in the interest or maslahah of the public. Certainly it would not augur well for the growth of takaful sector in particular, and Islamic financial system in general if the operators were to adopt various models of operation simply for the cause of business. It would create a lot of confusion among the public.

The takaful operation as successfully developed and practised in Malaysia is based on the profit sharing contract of al Mudharabah combined with the donation or tabarru’ agreement. The objective of tabarru’ is to enable takaful participants to establish a kind of a defined benevolent fund to provide financial assistance to fellow participant who may suffer a loss in the event of a defined misfortune. This mutual assistance resembles the practise of aqila, a system of joint-guarantee and mutual help founded by the Prophet following his `hijra’ from Mecca to Madinah. Under the system, a defined fund, al-kanz, was formed wherein every member of the community, both from the migrants (muhajirin) of Mecca and the locals (ansar) of Madinah contributed to the fund

Obviously from the practical perspective, there would be variation in terms of profit-sharing basis and the application of tabarru’ between family takaful and general 0takaful. In the case of family, actual investment returns of the fund are defined as profit that shall be subject to profit-sharing between the participants and the operator. For general takaful, profit of the business that shall be subject to similar basis of sharing would be the underwriting surplus plus its investment returns.

As for the tabarru’, the rates for family products are made known to the participants at the outset and would remain the same until maturity of the products based on a certain mortality table as prescribed by an actuary. On the contrary due to its nature of operation, tabarru’ rates cannot be pre-determined or set aside beforehand under general takaful. The tabarru’ amount shall only be known once a claim is finally settled and paid to the claimants or aggrieved participants. In other words tabarru’ shall be contingent upon the occurrence of a defined misfortune.

The Malaysian model which has been in operation for almost 20 years now following the incorporation of Takaful Malaysia has from time to time undergone refinements and modifications in line with changing standard requirements of accounting, reserving, valuation that are equally applicable to conventional insurance sector. With its foundation firmly established, the Malaysian model has proven to be both viable as a business venture as well as profitable to consumers and investors alike. The fact that expenses of the operator are fully borne by the shareholders’ fund and cannot be charged to the respective takaful funds makes the model more credible in terms of upholding the principles of fairness and good virtue in a contractual obligations. The expected cash outflow from the takaful funds would thus be relatively limited mainly confined to claims and other related reserves. Hence profit-sharing would be fairly significant. For example for yearly renewal products under general takaful, the rate of profit payable to participants by Takaful Malaysia has been averaging around 36% p.a. over the last five years.

The Malaysian model is also practised by takaful operators in Brunei. It is reported that the operators there have been paying almost a similar rate of profit to their participants. In fact, takaful as well as Islamic banking have been extremely successful in making a strong impact in Brunei as it is understood their respective market share has exceeded 30%. The model is highly flexible. Softening the burden of having to shoulder a fairly heavy management expenses by the operator especially in the initial years of operation can easily be structured by adjusting the profit-sharing ratio to be slightly favouring the operator without directly affecting the interest of participants.

On the other hand there are takaful operators, in the Middle East and some African countries in particular, practising the al-wakalah or agency model. It is based on the premise that the operator is the agent of participants. Being the agent, the operator is permitted to charge on the contributions paid by participants to pay for overheads or other management expenses, including agency remuneration in consideration for the services rendered by the former. As takaful funds are also required to meet other essential takaful obligations such undertaking payment of claim benefits, retakaful costs and reserve provisions, the outflow of expenses from the funds would be comparatively higher under the wakalah model. In practical terms the model usually allows for substantial tabarru’ rates to be charged on the contributions to enable sufficient allocations be taken to cover the operator’s expenditure. For this reason it is quite common that the agency system as a marketing strategy is practiced under the model. In a way its modus operandi is almost similar to the conventional structure wherein management expenses of an insurer including commissions paid to agents are charged on the premium.

Although profit-sharing is also provided in the wakalah model, by and large the profit rate, if any, is no where comparable to the Mudharabah model. This is largely due to the heavy outflow of cost, resulting in a relatively small amount of profit left. In most instances the operators are confronted with the dilemma of not only unable to share profit with their participants but also ending up with insufficient sum of money to cover its own expenditure.

Notwithstanding the above, wakalah or agency is a practice acceptable in Islam. Nevertheless the practice ought to take into account certain fundamental characteristics that are essential in ensuring fairness, equitability and caring, virtues strongly advocated in Islam, especially on the part of the operator who is the trustee in managing funds belonging to others. Consent must first be obtained from participants before their contributions are deducted by the operator. Above all the principle of muayan has to be strictly observed and upheld, so that participants would know exactly the expences to be charged as well at its amount. The need to be specific as required under this principle is paramount to ensure participants would not be short-changed. By this principle therefore the specific purpose both in terms of types expense item as well as its absolute figure has to be spelt out and made known to the participants. Specifically the amount should also be reasonable. At the same time, Islamic scholars generally do not favour the practice of charging expenses up front whilst obligations and responsibilities under the contract have not been fully performed by the operator.

It is therefore imperative to have a common standard of operation for takaful operators in Malaysia. Since the Malaysian model has worked well and as a result Malaysia has been recognised to be the world leader in takaful, with several countries now seeking Malaysia’s assistance, existing and would be takaful operators do not have to look east or west for a suitable model. Dropping a theory is easy but certainly risky to experiment. Takaful sector must not be perceived to be different from the conventional system merely by changing certain terms.

For purpose of proper description of various transactions under Islamic finance and the underlying principles governing its contract, Arabic terms are generally adopted. These terms had been commonly used in the past by Muslims to express their contractual obligations and dealings in respect of trade and commerce including finance as described in numerous writings and books written by various Muslim scholars. For this reason it can be seen that Muslims in different parts of the world, now practicing Islamic finance are adopting the same approach. Steadily, the terms are becoming universal. Certainly this would help to further accelerate the expansion of Islamic finance at the international level. In the same manner, efforts towards converging and harmonising of various operations and practices would be more conducive.

In the case of insurance, right at the outset `takaful’ is the preferred term instead of `Islamic insurance’. The distinction is clearly seen from the fact that takaful is based on the concept of trusteeship and cooperation in line with Islamic teachings. It is an Arabic word stemming from the verb `kafal’ which simply means to take care of one’s needs. This is an Islamic way of mutual assistance to deal with uncertainties of life. Members or participants of a takaful programme agree to jointly guarantee among themselves against loss or damage caused by specified or defined perils. In other words it is a legally binding mutual agreement among participants to pay or provide financial help to any fellow participant who suffers a loss upon being inflicted by a specified peril as defined in the agreement. The underlying obligations of the agreement illustrate that the entire participants, as a cohesive group would assist the unfortunate to alleviate of his sufferings due to a loss or damage, by providing him with financial help. Therefore it is not a ‘buying and selling’ contract that forms the basis of the underlying principle of the conventional insurance contract. The policyholder or insured would purchase an insurance cover from an insurer as seller and in consideration would pay the price in the form of insurance premium. In return the insured would receive a certain monetary benefit as compensation from the insurer in the event of a loss or damage.

Despite the operational aspects of takaful are subject to Islamic practices and requirements, it is most appropriate ‘Islamic insurance’ is not the term used to describe it. This in itself would help to dispel the notion or thinking that the operation is merely a process to `Islamise’ the conventional system. It is not simply playing with words.

From the standpoint of a community pooling system, any surplus or deficit of the takaful fund, as a source of social security, has to be shared by all participants. But when takaful operates on a commercial venture, within the private sector, providing opportunities and rights of choice to participants in accordance with their financial needs then the contract shall be based upon the principle of al-Mudharabah or profit sharing between participants and the operator as trustee managing the operation. With the incorporation of tabarru’ contract, it allows participants to give or to relinquish or to donate a specific portion of the takaful fund for the purpose of providing financial help to the unfortunate ones.

Certainly by way of profit-sharing principle of al-Mudharabah, investors as shareholders would have the opportunity to earn returns, if any, on the takaful operation. Needless to say, any venture that essentially provides a kind of financial guarantee covering a myriad of risks would require a fairly substantial start-up capital, particularly in the initial period of operation before adequate level of participation is secured that would steadily enhance the takaful fund. Currently insurers in Malaysia are required to have a paid-up capital of at least RM100 million. This should also be applicable to takaful operator to ensure its financial capability would be on the same level playing field. For this reason, it is common now for stock company to be established under which a group of investors would fund the capital. Hence the establishment of takaful companies.

The investors among them would enter into a joint-venture based on the principle of al-musyarakah for the purpose of establishing the takaful company. Returns on the venture would normally be dividends paid to them in proportion to their respective shareholdings. In this respect, the formation of the company is not an issue from the standpoint of Islam. In fact Islam not only reccognises the formation of companies; it categorises them into different types. Each type has its own characteristics. Like most limited stock companies, the formation of takaful operator as a company falls under the type of ‘syarikat-ul-iman’. Shareholders as owners do not assume the task and responsibility of managing and overseeing the day-to-day running of the company. On the contrary a special body of employees are engaged for this purpose. In consideration they would be given remuneration based on the principle of al-ujra.

In reality, managers as professionals in various disciplines would be entrusted to ensure not only that the operation would be profitable as a commercial venture in satisfying the insurance needs of the public but more importantly it is conducted within the confine of Islamic teachings. On this note, where necessary, takaful has developed its own conventions. A practical example can be seen in the accounting practice where the traditional convention would have difficulty in ensuring fairness in the operation.

In order to truly reflect the contractual obligations under the profit-sharing principle, the most appropriate accounting policy would be on cash basis. Profit to be shared has to be based on the actual sum. The rate of profit calculated would then show a true picture as it takes into account only actual contributions received by the operator. Should the accounting policy be on accrual basis, unrealised profit would have to be taken into account in the calculation. Thus distributing the actual profit may not be possible in view that the profit account may have insufficient fund.

Probably the only downside of cash accounting would be the question of bad debt. Cash accounting usually does not recognise bad debt. However, in insurance operation this would not pose a major problem. What constitutes bad debt would be the non-payment or outstanding premium. Takaful operators, like insurers, are required to evoke the warranty condition in case of non-payment of contribution. Cover would cease automatically upon expiry of the warranty period. Therefore, bad debt arising from outstanding contribution would not be significant. On the other hand cash accounting basis helps both participants and operator. Participants should pay the contributions on the day the takaful is effected as in the requirement of cash-before-cover to have the benefit of earning maximising returns. Profit takes into account when the payment is made. Obviously, the sooner the contributions are settled, the higher would be the profit payable.

In order to denote its unique mode of operation, takaful operators world wide have adopted its own terms. It helps to distinguish between the conventional system. Therefore, by merely engaging premiums or insurance funds in investment avenues acceptable in Islam would not tantamount to cleansing or making insurance Islamic.