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Abstract
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I. Historical Development and Origins of Takaful
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II. Insurance And Takaful In Malaysia
To safeguard the situation, the Government had to step in and this led to the
introduction of the Insurance Act 1963 (now replaced by Insurance Act 1996)
to monitor and supervise the insurance industry. In 1972, the National Fatwa
Committee of the Malaysian Islamic Affairs Council declared that the
conventional life insurance business contradicted with the Islamic principles
and subsequently in 1985, the Fiqh Academy of the OIC made a declaration
that all forms of conventional insurance do not conform with the Islamic
principles.
Since the majority of the Malaysian population are Muslims, the government
realized that there was an urgent need to devise a comprehensive system to
solve the economic problems facing the Muslim community. The first Islamic
Bank was set up in 1983 and subsequently in the following year, the first
takaful operator, Syarikat Takaful Malaysia Sdn. Bhd. was incorporated with a
paid up capital of RM 10 million. Since the Insurance Act could not be
applied to the takaful business, the Takaful Act 1984 was introduced to
supervise the takaful activities in the country (Yusof, 1996).
Certain concepts are specific to the Takaful business. They are the concepts
of:
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i) Al-Mudharabah – which literally means ‘profit sharing’. The takaful
operator accepts and invests the takaful contributions (premiums)
received from the takaful participants. The contract will specify how
the profit will be shared between the participants and the takaful
operator. For example ratio may be, on a 60:40 basis (see chart 1 and
2)
ii) Al-Takaful – this means ‘joint guarantee whereby the participants
jointly guarantee amongst themselves. Any member faced with a
calamity will be financially compensated from funds contributed bythe
participants.
iii) Tabarru – this refers to the element of ‘donation’. Each participant
agrees to relinquish a portion of the takaful contribution to a common
fund that is used to pay a member that suffers a loss. (See Chart 1 and
Chart 2)
According to Omar Fisher and Dawood Taylor (2000), when drafting the
framework of takaful, the Muslim jurists must be aware of certain fundamental
guidelines. The guidelines are outlined as follows:
i) the practice must adhere strictly to the Islamic principles of business or
commerce;
ii) business must be conducted openly in accordance with utmost good
faith, honesty, full disclosure, truthfulness and fairness in all aspects;
iii) co-operative risk sharing and mutual assistance amongst the
participants in the group; and
iv) awareness amongst the group members that they are facing similar
risks and are willing to contribute to any unfortunate member.
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takaful business the basic elements of a contract as well as the insurance
principles (utmost good faith, proximate cause, indemnity and insurable
interest) also apply.
There are three elements present in the conventional insurance that do not
conform with the requirements of the Shariah. They are:-
i) Al-Gharar
This referes to ‘unknown’ or ‘uncertain’ factors in a conventional
insurance contract. In conventional insurance, it is not made known to
the policyholders on how profits are distributed and in what the funds
are invested in. In a takaful operations which is based on the
mudharabah concept, the distribution of profits to the operators and the
participants in the contract are clearly outlined.
ii) Al-Maisir
This is the ‘gambling’ element and is said to derive from the ‘gharar’
element. In conventional insurance, the policyholders stands to lose all
the premiums paid if the risk does not occur. On the otherhand, he
stands to get more should a misfortune happens whilst paying small
amount of premium. In takaful, eventhough the risk does not occur,
the participant is entitle to get back the contributions that he has paid.
Should the risk occurs, he will be paid from his amount of premium
fund plus the pool of funds from the ‘donation’ of other participants.
iii) Riba
This refers to the interest factor present in the investment activities of
conventional insurance companies. The policy loan in conventional
life insurance is infact a riba based transaction. Islam prohibits any
investment activities which is interest based, in alcoholic beverages
and non-halal products.
VI Takaful Models
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This refers to social governmental owned enterprises and programs
operating on a non-profit basis. The contributions paid by the
participants are wholly for tabarru (donation) to unfortunate members.
The Al-Sheikhan Takaful Company in Sudan, SOCSO in Malaysia are
examples of this kind of business.
ii) Al-Mudharabah Model
This refers to the co-operative risk sharing where participants and
operators share in the distribution profit. An example of this model the
Syarikat Takaful Malaysia Berhad (STMB)
iii) Al-Wakala Model
In this model, the co-operative risk sharing occur among participants
with a takaful operator whereby a fee is agreed to be paid to the
operators for the services rendered. The operator shall not participate
in the underwriting results. An example of this model is Takaful Ikhlas
Malaysia.
Presently, there are more than 30 takaful operators worldwide, including in
certain non-Islamic countries such as Luxembourg, UK, USA, Singapore and
Australia. Most of the takaful operators are found in the Arab countries
(Bahrain, Saudi Arabia, Sudan, Tunisia, UAE), whilst Non-Arab Muslim
states such as Brunei, Bangladesh, Indonesia, Turkey and Malaysia also have
their respective takaful business. (Billah, 2003).
Besides the 3 elements of gharar maisir and riba that separates conventional
insurance from takaful, most of the activities in both these businesses are very
much similar (e.g. underwriting, claims, marketing etc). Two classes of
business i.e the Family Takaful (life insurance) and the general Takaful are
transacted in a takaful operation. These businesses must first be approved by
the Shariah Council (Religious Supervisory Council).
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the sum assured, the participant decides how much installment he is
willing to pay either on a monthly, quarterly or yearly basis. The
installment payment is up to the participant although subject to a
minimum amount.
Each installment is divided and credited into two separate accounts i.e.
the Participants Account (PA) and the Participants Special Account
(PSA). The portion of the installment that goes into the PA is for
savings and investments whilst the balance of the installment is
credited into the PSA as the tabarru contribution (donation). Should
death occurs, the money payable will be from the participants account
(PA) and also from the PSA accounts the amount of installments that
he would have paid had he survived up till the maturity date. The
sharing of profits is on the investment portion.
If a participant survives the duration he would receive the whole
amount he has contributed to the PA accounts inclusive of his portion
of profits from investment activities of this fund. A participant who
decides to surrender his policy is entitled to receive the installment
payments and any investment profit from his PA account.
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VIII. Challenges and Opportunities
The future prospects of the takaful business depend heavily on its ability to
convert challenges into opportunities. Challenges that the industry face
include the lack of uniform terminology, Shariah interpretation, human
resource development, product innovation, retakaful, promotional and
marketing strategies are but a few.
Although the takaful industry in Malaysia has emerged into a robust and
dynamic segment of the financial industry since its inception about 18years
ago, the level of market penetration in terms of takaful policies in force over
the total population remains rather low at 3.8 percent compared to that for
conventional insurance which stands at 34.7 percent (Insurance Annual
Report, 2003). A large market remains untapped and takaful operators need to
keep pace with their conventional counter parts in coming up with a
comprehensive range of products that are innovative and Shariah compliant.
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Another priority area to be addressed by the operators is the development of
human resource. Besides ensuring that the companies are managed by capable
and skilled personnel, they must also be equipped with the technical know-
how in the insurance and takaful disciplines.
IX Empirical Model
Where PGF = Profit generated from general and family takaful distributed to takaful participants
PG = Profit generated from general takaful distributed to takaful participants
PF = Profit generated from family takaful distributed to takaful participants
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We shall now look at the significance of each of the explanatory variable in
explaining the profits generated by the two businesses.
Table 1.1
Model Summary
As indicated in Table 1.1, the results from the Multiple Regression Analysis
suggest that both employment and zakat contributions in STMB may be
potential variables explaining the profitability of both general and family
takaful businesses. Although the serial correlation analysis indicates the
presence multicollinearity in the model, this is expected as zakat contribution
of STMB is directly related to the profits generated. However, as stressed by
Gujarati (2001), even if the multicollinearity is very high, as in the case of
near multicollinearity (correlation of 0.8 or greater), the OLS estimator still
retain the BLUE (Best Linear Unbiased Estimator) property. Generally, we
can conclude that the three models do not suffer from autocorrelation as
indicated in the Durbin Watson statistics. To check for robustness we employ
the RESET and ARCG LM to test misspecification and as well as for second
moment auto correlation (The results for the diagnostic tests are not presented
but are available upon request).
It is also interesting to note that the macroeconomic variables namely the GDP
and inflation rate do not significantly affect the profitability of STMB (both
general, family as well as combined profits). Perhaps, one may infer that
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insurance services are no longer perceived as a luxury food but instead, a
necessity. Despite the changes in the macroeconomic variables, the demand
for takaful services are still needed. This further suggests the resilieance of
STMB for instance a steady growth of the profits generated although the
economy is exposed to the recent 1997 financial crisis. From the Central Bank
of Malaysia’s point of view, this could also be due to its role in monitoring
and supervising of the industry.
X Conclusion
Malaysia has also taken the lead in introducing and developing the takaful
business in the ASEAN region. In line with Malaysia’s Prosper Thy
Neighbour policy with neighbouring countries, the takaful operators here have
expanded their services to other muslim and non-muslim countries within this
region. With the co-operation of the Malaysian takaful operators, other Asean
member contries (Brunei, Indonesia, Singapore) has also followed suit in
setting up their respective takaful operators.
References
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2. Insurance Annual Report 2001 Central Bank of Malaysia.
10. Yusof, Mohd Fadzli 1996. The Concept and Operational System of Takaful
Business (Islamic Insurance, Kuala Lumpur, BIRT)
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APPENDIX A
Figure 1.1 : Combined Contributions to Participants
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GRAPH 1.1
Combined Contributions to Participants
$200,000,000
$150,000,000
Profit (RM)
$100,000,000
$50,000,000
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
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APPENDIX B
Figure 1.2 : Profit Contributions to Participants
GENERAL TAKAFUL
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GRAPH 1.2
Profit Contributions to Participants
$40,000,000
$35,000,000
$30,000,000
$25,000,000
Profit (RM)
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
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APPENDIX C
FAMILY TAKAFUL
Profit
Beginning Of $76,961 $122,611 $1,294,693 $2,324,919 $5,983,336 $7,636,083 $10,058,948
The Year
Profit End Of
$122,611 $1,294,693 $2,324,919 $5,983,336 $7,636,083 $10,058,948 $15,812,531
The Year
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GRAPH 1.3
Profit Contributions to Participants
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ye a r
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APPENDIX D
GRAPH 1.4
Zakat (From Consolidated Incom e Statem ent)
$1,400,000 $1,305,425
$1,200,000 $1,124,100
$1,083,542
$1,000,000
$800,000
$668,906 $652,220
$622,804
$600,000 $500,248
$400,000
$264,500
$233,362
$185,126
$149,853
$200,000
$65,411
$13,347 $20,559
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ye a r
Zakat
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APPENDIX E
Figure 1.5 : Employment at Syarikat Takaful Malaysia
GRAPH 1.5
Employment at Syarikat Takaful Malaysia
1,600
1,400
1,200
1,000
Total Staff
800
600
400
200
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Total Staff
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