The Mudharabah or profit-sharing principle which forms the basis of the takaful contract provides additional incentive to takaful participants. From the consumer perspective this is the value added feature of takaful business. By the profit-sharing arrangement which is guaranteed under the contract, the takaful contribution paid in consideration for participating in the takaful product will generate a certain return to its participants. In contrast to premium as the price for buying an insurance policy, takaful contribution on the one hand is like an investment fund giving income to the provider of the fund. As a matter of fact, the Mudharabah contract is one of the major differences between takaful and conventional insurance.
Essentially, the basic purpose of insurance is to avail of cover wherein an adequate financial compensation is ensured in the event of a loss or damage due to a tragedy or misfortune. Mitigating such loss as a means of relieving the financial hardship of the aggrieved victim is also the bedrock of takaful. Under takaful, the compensation comes from the sum of `tabarru’ or donation made out of the takaful contribution of all participants. The creation of a defined fund, known as the takaful fund, arising from the expression of solidarity and joint-guarantee in the event of misfortune is in fact established through the payment of takaful contribution. On the other hand, the compensation under the conventional system is the only point of exchange for buying the insurance cover. Should there be compensation free, the premium will be an outright cost to the buyer. No other forms of return are shared with the buyer
In the same manner, neither discount nor special rebate be given to the buyer upon renewal of the contract except in motor policy. For motor policy `No-Claim Bonus (NCB)’ is usually given as an automatic discount on the renewal premium for policyholders who have not made or incurred claims. NCB is not profit-sharing, it is merely an up-front price discount for good drivers. Therefore it should not be equated with profit-sharing as in the Mudharabah contract of takaful. For the purpose of recognising good drivers, similar NCB system is also given in takaful. Thus besides profit-sharing which comes upon expiry of the contract, discount on the takaful contribution is also provided upon the commencement of cover. In this regard, profit-sharing as guaranteed under takaful must not confused with the provision of NCB. Being a common market practice NCB is applicable both in takaful as well as conventional insurance.br>
Currently, Malaysia is the only country having a special law to licence and supervise takaful operation. The Takaful Act 1984, amongst others provides the definition of takaful, the requirement for establishing Religious Supervisory Council as well as the types of takaful business that a licensed operator may provide. In the same way as the conventional system, there are two types of takaful business an operator may transact and each requires a separate licence. For instance, in the case of Takaful Malaysia as a composite operator, it provides both the Family Takaful and General Takaful. The former is roughly comparable with the conventional life insurance and the latter is akin to non-life or general insurance.
Products under general business, called takaful schemes, are short-term in nature, usually for a period of one year and may be renewed. Like insurance policies, these schemes are meant to provide cover or protection against material loss or damage to assets such as buildings, houses, motor vehicles, stocks and other related interests. In essence, any individual or organisation may participate in any of the takaful schemes to cover their belongings. Acceptance of participation by takaful operator is usually formalised through the submission of a proposal by a participant.
The agreement entered between the participant and the operator is the mudharabah contract, and not of “buying-and-selling”. Within the Mudharabah contract there is a supplementary agreement incorporated as a sub-contract to enable every participant to give away as tabarru’ his or her takaful contribution in the event of a claim. For general takaful, the tabarru’ amount cannot be determined upon the commencement of the contract. Its actual amount would depend upon the actual loss suffered by the participant.
All sums of takaful contribution paid by participants will be credited into the defined fund: the general takaful fund. The fund is invested and returns on the investment will go back to the fund. Thus the fund would be enhanced from the investment income. Should a participant suffer a material loss, claims are paid from the fund out of the tabarru’ portion. This is joint-guarantee in practice as seen in the mutuality concept. Other expenses deducted from the fund are costs related to retakaful which would help to stabilise the fund and other related reserves. As can be seen, operating expenses or management costs such as overheads, rentals and alike are not charged to the fund. These expenses are borne by the shareholders’ fund.
Assuming that a sum of RM10 million is the total takaful contribution collected in a given year say from 5,000 takaful participants, under the general business. Investment of the fund has generated an income of RM1 million. Hence the fund would increase to RM11 million. At the same time, a sum of RM5 million has been provided for claims paid and incurred to 1,000 participants, whilst an additional RM1 million has been set aside as reserves.
Therefore the fund would post a balance of RM5 million which is profit of the general business. In line with the profit-sharing contract of al Mudharabah, the profit will then be shared in accordance with agreed ratio. If it is 50:50, based on the above illustration, RM2.5 million will be distributed to the participants, excluding those who have received claim benefits whilst the balance of RM2.5 million will be credited to the shareholders’ fund as profit attributable to the operator. Obviously claims would be the most influential factor affecting profit. However, based on the Mudharabah contract as practised by Takaful Malaysia rates of profit paid to participants range between 30% to 40% p.a., an opportunity for participants to enjoy returns on their expenditure.