Takaful (ethical) Insurance (25)

Accordingly, Takaful insurance scheme is a mechanism in which the members, or participants in the Takaful insurance company, jointly agree to guarantee themselves against loss or damage. The entire participants would assist the incumbent person to indemnify his/her loss and to provide him/her with financial help.
Takaful insurance is a legally binding agreement by all the participants of the scheme to pay, any of its members, who suffers a loss as specified in the Takaful policy document).
 This discussion will be in greater details; which will include its structure, the rules and regulations, the players, the products and services, the standard accounting entries and provisions and so many other requirements. Insurance, both Takaful and conventional, is the business of assuming the risks/liabilities/losses and injuries suffered by the clients/participants based on an insurance contract which specifies the rights and obligations of the parties to the contract.
In general, and from the point of view of insurance company, whether Takaful or conventional, there are four fundamental criteria for deciding whether to insure risks or not and these are: (1) Existence of large number of similar participants/clients and or events so that the financial outcome of insuring the pool of exposures will be predictable. This will enable the insurer to calculate a reasonable contribution/premium. (2) Any loss has to be accidental and unintentional (on the insured’s/participant’s part) (3) the loss must be measurable, identifiable in location and time and definite, and (4) the loss potential to the insurer must not be catastrophic (must not put the insurer in financial jeopardy).
Takaful insurance company, unlike conventional insurance company, is owned by the participants, while the company acts as the agent of the participants. This is basically formed by a contract agreement whereby the participants are the owners of the capital/investment known as Rabbul Maal (they are the providers of the capital), while the Takaful insurer is the Mudarib (the agent of the participants). This is made possible by a contract which binds the two parties together by specifying the roles and obligations of each party.
There are various forms of contracts in which a Takaful insurance business can be formed, few of which are; Mudarabah, Musharakah, combination of Mudarabah and Musharakah and Wakalah. The most popular of these forms is Mudarabah.
Let us discuss Mudarabah in some details: This is a special kind of company/partnership, whereby one party, known as the Rabbul Maal, gives money to another party, known as the Mudarib, for business transactions in a profit and loss sharing agreement, which stipulates the percentage of the profit to be paid to the Mudarib and should loss occur, which arises not due to the negligence of the Mudarib, the Rabbul Maal bears the consequences/loss a 100%, while the Mudarib losses his fees.
Please note the followings facts:
1) Under Mudarabah, the investment funds come from Rabbul Maal.
2) The Rabbul Maal must be adult, sane and be capable of making sound and rational decision, the Mudarib, if an individual, must have the same qualifications, and if a company, must be registered under the Companies and Allied Matters Act- CAMA – and if a Takaful Insurance company, must obtain an operating license from the National Insurance Commission- NAICOM.
3) The investment must be made in a form of money, gold or silver. Investment in any other form i.e goods and services does not constitute Mudarabah investment.
4)  The management of the company is the preserve of the Mudarib; the capital providers do not involve themselves in the daily affairs of the company.
5) The Mudarib, being an agent of the Rabbul Maal, acts within the transactional boundaries delineated by the contract agreement.
6) The Mudarib is duty bound to be transparent and must disclose all transactions to the Rabbul Maal, NAICOM and the general public. In the case of Takaful Insurance, ALL transactions must be Shari’a compliant and the members of the Advisory Council of Experts of the company must sign off all products/services before, during and after the products/services are launched by the Takaful insurance Company. All non-resolved issues must either be resolved or reported to NAICOM for resolution.  
7) In a Mudarabah contract, either of the two parties may terminate the Mudarabah agreement at any time.
8) In a Mudarabah arrangement, the Rabbul Maal is not allowed to interfere in the running of the business. Thus, a Mudarabah arrangement looks very much like an equity investment by a shareholder in a public listed company. In fact, Takaful Insurance companies, consider Mudarabah financing to be the equivalent of equity financing.
Sharubutu is the Managing Director/CEO, Skills First Consulting Ltd.