Issues in General Takaful Model Azman Ismail

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Issues 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 ones 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
Presented at a workdhop conducted by the Central Bank, Malaysia 1
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:hijrah@email.com
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 ones opinion when theres 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 Shafie, 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 Shafie is of the opinion that mustamal water can be used for ablution whereas in his qaul jadid he is of the opinion that mustamal 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 mustamal 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 dont agree with the modified mudharabah model but Im 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. Lets 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.
Before looking at the issue, let us recap the meaning of mudharabah. Mudharabah is defined as the contract between one party, known as the rasul mal (or capital provider) with another party known as the mudharib (entrepreneur) where the rasul 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 rasul 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 rasul 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
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
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 (qati al-thubut wal-dalalah). The validity of the modified mudharabah model may be further argued by the Hanbalis 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-Maidah, 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.
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 alGhazzali, p. 131.)
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 shariahrelated questions, why dont 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 tomorrows 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 rasul mal. The latest twist to this is that management expenses can be deducted from the rasul 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 dont 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
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 operators profits also depends on the quality of business. Therefore profits to the operator depends more on its ability to manage its risks rather than its 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
shareholders 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
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 shareholders 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 taawuniyah model. The musharakah taawuniyah 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

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Issues in the General Takaful Model By Azman Bin Ismail

Executive Director, HIJRAH Strategic Advisory Group Sdn Bhd

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

Those are my thoughts at the moment.

Jazaka Allah u khairan for listening.

Wabi Allah ut taufiq wa al hidayah.

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