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.