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The future of Takaful in Pakistan

The year 2019 has been good for the Takaful in Pakistan. This is evident from the performance of the Takaful Industry. The annual gross contribution of the Takaful Industry has risen to Rs.10.98 billion in 2019 registering an increase of 27%, over the previous year (2018: Rs. 8.65 billion). The encouraging growth in contribution speaks itself that the Takaful is gaining strengthen in Pakistan where interest based insurance and banking are dominant disallowing any breathing space to Islamic Insurance.

No doubt, the Takaful has the potential to grow faster in the country provided issues confronting with the Takaful to be addressed at the national level. One of the problems is unclarity about the Takaful to many people in Pakistan. Even some people engaged in selling insurance keep saying that the Takaful as being the same as conventional insurance. They are of the view that there is no difference between the Takaful and conventional insurance except the name.

This situation requires taking necessary steps to make clarity about the Takaful in the minds of the people particularly the insurance professionals. Because we have a lot of hope from the insurance personnel to play their role for the growth of Takaful as they have done for the development of insurance industry in Pakistan.

Before coming to the point, it seems appropriate to mention here that the Takaful has been developed by a large number of Shariah scholars belonging to all schools of thought. This is the output of collective efforts made by Islamic jurists to present the Takaful as alternative to conventional insurance. There is consensus among Muslim scholars that the Takaful is an Islamic Insurance based on Shariah principles. Secondly Shariah scholars have a lot of evidences and proofs derived from the Holy Quran and Sunnah supporting their claim that the Takaful being an alternative to the interest based insurance.

In light of the above I would, mostly humbly, request all those who perceive the Takaful being the same as insurance to provide proofs in support of their claim. Because, according to the law, the burden of proof goes to the claimant to prove each element of the claim. If they have knowledge about the Takaful or any evidence supporting their point of view then they have the rights to raise their concern. Otherwise, it is not wise to criticize just on the basis of assumption. Without solid proof, their claim has nothing but to promote confusion in the minds of the people. In other words it is like, intentionally or unintentionally to create an obstacle standing in the way of the Takaful development in the country.

Now details of Takaful with comparison of conventional insurance are presented here with the hope that the comparative study would make it clear that the Takaful and insurance are two different systems and not the same.

On the surface the Takaful looks like conventional insurance. This is because the structure of insurance was adopted by the Takaful after modification and necessary changes with characteristics to meet the Shariah-compliance. All these changes can be divided into three categories. First conceptually, second in transactions and third in terminologies.

It is also important to know as to how a change in the concept can bring about a change in the entire result. For example, we as Muslims eat only Halal (permissible) foods. Meat of cow is a Halal product. The process of slaughtering a cow is most important to make the meat Halal or Haram. If a butcher starts slaughtering a cow with the recitation of Allah’s name, Shariah allows to eat it but, if the butcher calls a name other than Allah at the time of slaughtering, Islam does not permit to eat it because of it being labelled as Haram (impermissible). What made the meat Halal or Haram although everything is the same be it the butcher, cow and knife. Of course, it is the name of Allah which made the meat permissible to eat. Similarly digging a well with a good intention that people would get water from it but, if someone falls in the well and dies, the digger would not be held responsible because of positive intention. In case the well is built with a bad intention that people would die by falling in it but people would take advantage of it, the digger would not receive any reward because of evil intention. There are a lot of references in the Holy Quran and Hadith explaining the significance of intention in making an act right or wrong. In short all actions in Islam are judged by intention.

In light of the above examples, it would be easy to understand the basic difference between the Takaful and insurance. The Takaful is a risk management system based on the principle of mutual cooperation, sharing responsibility and assistance amongst groups of participants. The word ‘Takaful’ is an Arabic word meaning joint guarantee by a group of people who agree to cover each other’s losses while the insurance is a mechanism to transfer a risk from one person to another. These are two different concepts (risk sharing and risk transfer) playing a vital role to differentiate between the Islamic and conventional insurance.

Another important factor which makes the Takaful different from conventional insurance is the concept of ownership. In insurance, the company is owned by the shareholders who are entitled to receive profits from the business. But in the Takaful, the concept of ownership is different. The Takaful operating all over the world is generally based on Waqf plus Wakala model. This requires to establish a separate fund called Participant Takaful Fund (PTF). All contributions received as Taburruh (donation) from participants are funded to the PTF. The resources of this fund are used to pay claims and Wakala fees as defined under the Waqf deed. The underwriting surplus of the Waqf fund, if any, is distributed amongst the participants at the end of each year. No shareholder is allowed to withdraw money from the PTF as profit or gift it to any person or make ex gratia payment because there is no owner of this Waqf fund except Allah. Even, if the Takaful company is closed, all its funds after settlement of dues donated to a charity organization. This is the great difference based on the Waqf making the Takaful different from conventional insurance.

The main elements, which separate the Takaful from conventional insurance, are that the risk is handled and fund is managed in a way to avoid Gharar (uncertainty or speculation), Maisir (gambling) and Riba (interest). Here it is significant to know about the nature of transactions responsible for giving rise to non Shariah-compliance in an insurance contract.

One of the main objections raised by the Islamic law is involvement of Riba in the insurance contract. Riba in the contract occurs due to exchange of money. A little amount of premium is being exchanged for a larger amount of claim. The amount of claim received in excess of the total premium is called Riba.

Secondly there is a high degree of uncertainty in the insurance contract. It is clear that the insured must pay the premium after conclusion of the contract but on the other side it is unclear whether the insured will receive a claim or not, when and how much amount he will receive. All these transactions depend on the probability and severity of loss occurrence. As the end result is hidden and unknown, leading towards uncertainty in the insurance contract.

Thirdly gambling under insurance agreement involves by way of premium paid by the insured but he may achieve nothing at all in return or may receive a huge amount of claim.

It is clear that conventional insurance involves uncertainty, gambling and interest due to exchange-based dealing. On the other hand the operations of Takaful scheme based on cooperation and donation avoid all such non Shariah prohibited elements which exist in conventional insurance.

The spirit of risk sharing and donation are the most important aspects of the Takaful leading the transaction to be free from all non Shariah factors. As explained earlier that the Takaful is a type of system in which all members mutually agree to pay donation into the pool guaranteeing each other against loss or damage. In short the objective behind the use of donation for the help of group members is basically a way to protect the transaction from involvement of uncertainty, gambling and usury in the Takaful.

Here a question can arise whether one can get the benefit against his donation. Answer is simple. It is common that people donate money to Masjid which is Waqf for worship. The donors can avail light, air conditioner, fan and water of the Masjid. The similar concept of getting benefit exists in the Waqf fund of Takaful which enjoys the status of legal entity specifying to compensate any participant who suffers injury subject to the rules laid down in the Waqf deed.

Moreover, there are some people who say that there is no concept of risk coverage in Islam. Muslim scholars, in response to this question, quote a number of examples derived from the Holy Quran and Sunnah. One of the evidences about risk mitigation is derived from the story of Prophet Yousuf (A.S.) who established the storage houses for the crops so that it could be used in the future. Another example taken from Hadith is that once upon a time a companion visited the Prophet (peace and blessings of Allah be upon him). He asked, O Messenger of Allah, should I tie my camel and trust in Allah, or should leave her untied and trust in Allah? The Prophet (peace and blessings of Allah be upon him) said, “Tie your camel first, and then put your trust in Allah”. There are many other references from the Holy Quran and Prophetic teachings that not only support risk management but also encourage risk mitigation.

Another important aspect making the Takaful different is its Shariah screening criteria. Under the Takaful scheme, Shariah prohibited goods and businesses engaging in non-Shariah-compliant activities are impermissible to cover. For example, a factory producing wine, or a godown full of prohibited goods or a shop selling meat of pork, or a vehicle used to transport prohibited items all these are impermissible to cover under the Takaful policies. Similarly, it is not allowed to invest in a business involved in non Shariah activities. In case a transaction made against the Shariah-compliance would be treated null and void. The operator is bound to separate immediately all such incomes received from non-Shariah investment avenues as well as Takaful contribution generated through the coverage of forbidden items. All these impermissible incomes must be donated to a charitable institute. This Shariah screening criteria for the purification of income distinguishes the Takaful from conventional insurance.

It is hoped that the above briefing has made it clear that the Takaful is not only different from the interest-bearing insurance but also permissible to get risks covered in line with the Shariah-compliance.

I would not be out of place to mention here that the consensus of Shariah scholars on the Takaful gives itself a message to follow the majority of Islamic jurists. There is a Prophetic Hadith guiding us in such circumstances. The Holy Prophet (peace and blessings of Allah be upon him) said, “My Ummah will never agree upon misguidance, whenever you see people are in dispute, follow the majority”. What we have to do is to follow the majority of Muslim scholars and avoid creating confusion about the Takaful as it will have an adverse effect on Islamization process in the country. We being Muslims should think as to how we can contribute towards eradication of interest based insurance by promoting the Takaful in the society.

Last but not least, the case of the Takaful is very strong in terms of Islamic insurance but the advocates (insurance professionals) who have to fight for the growth of the Takaful need to be equipped with the knowledge of Takaful so that they may play an active role for the development of the Takaful in Pakistan.

Contributor is a Senior Manager & Shariah Compliance Officer

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