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Sunday, 30 September 2012

Seven Misconceptions About Insurance and Takaful

Seven Misconceptions About Insurance and Takaful

What you should know...

Misconception no 1:
Risk Protection (insurance) is against Tawakkul - total dependence upon Allah (swt). 
No human actions change the Will of Allah (swt) for our destiny. Whether a person has insurance/Takaful or not has no effect on future events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah (swt): in Hadith narrated by Anas bin Malik when an Arab Bedouin asked Prophet Muhmmad (PBUH), "Shall I leave my camel untied and seek Allah's protection on it, or should I tie it?" The Holy Prophet replied, "Tie your camel and then depend upon Allah (swt)." {as quoted by Sunan Al Tarmizi, 1981,}.

Misconception No. 2:
All Risk Protection (insurance) is Haram-prohibited
Fiqh Council of World Muslim League (1398/1978) resolution and Fiqh Council of Organization of Islamic Conference (1405/1985) in Jeddah resolved that, "..conventional insurance as presently practiced is Haram." And that, "..cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles." Hence, conventional insurance is prohibited for Muslims because it contains elements of Riba, Al Maisir, and Al Gharar. By contrast, Takaful provides risk protection in accordance with Sharia using principles of Ta'awun (mutual assistance), brotherhood, piety and ethical operations.

Misconception No. 3:

All Insurance is a form of Gambling of Wagering, which is forbidden in Islam
Risk or uncertainty can be divided into: Pure Risk and Speculative Risk. Pure Risk involves the possibility of Loss or No Loss. For example, damage to property due to fire. Pure Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risks involves the possibility of Loss, No Loss or Gain. For example, venturing into a new business, or gambling on horse race. Speculative Risks that include a potential gain or profit cannot be insured.

Takaful schemes use the principle of indemnification to compensate for the loss that occurs to a Takaful Participant. Takaful insures only Pure Risks and claims pay in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum. In Takaful Taawuni (assurance), the compensation equals each participant's accumulated savings plus investment profit added to a sum covered taken from the Takaful general pool.

Misconception No. 4:
All Insurance seeks to maximize profits which takes benefits away from policyholders
Most conventional insurance companies are stock companies that seek to maximize profits. Since the interests of shareholders conflicts with policyholders, by raising prices, denying claims, etc. these insurers can boost profits for shareholders. Takaful operators, by contrast, are mutual or cooperative entities. The goal of Takaful is community well-being and self-sustaining operations - not high profits. Under the Takaful Mudarabah Model, surplus (or "profits") is shared fairly between shareholders and policyholders. Under the Takaful Wakalah Model, surplus is owned by the policyholders and may be reduced by a performance fee incentive for the operator before distribution to the policyholders.

Misconception No. 5:
All Takaful operators are the Same
Alhumdilallah , in Islam there is unity in diversity. Over the centuries, several Takaful Models have evolved which are approved by Islamic scholars. While they all share the fundamental goals of cooperative risk sharing, these models differ slightly in legal structure and organizational operations. Takaful Models usually are described by the Islamic contracts used; namely Hebbah or 100% Tabarru (Sudan), or al Mudarabah {Bahrain/Malaysia}, or Al Wakalah {Saudi Arabia}.

Misconception No. 6:
Insurance shemes are a modern day invention
Actually, social arrangements for pooling of risks existed may centuries ago. The Takaful system evolved from ancient methods of risk protection in Arabia 14 centuries ago called : (a) daman Khtr-altariq-surety for traders; (b) a'qila - payment to family of murdered victim by accused relatives (c) hilf - confederation for mutual assistance. The year 1706 marked the emergence in United Kingdom of the first "perpetual assurance scheme". The first insurance company in America (1740s) founded by Ben Franklin was a merchant's cooperative. However, in modern times many of these old cooperatives have "demutualized" and converted into stock companies to pursue higher profits.

Misconception No. 7:
"I don't need Insurance/Takaful."
A Takaful scheme gives us an opportunity to practice the virtues of Islam, including self-purification. Surah Al Maidah (V.2) says: "Help one another in furthering virtue and Taqwa (God-consciousness), and do not help one another in evil and transgression." In Hadith by Ahmad and Abu Daud: "Whosoever fulfils the intention of his brother, Allah will fulfil his intentions." And "Always help those who helps his brother."

The first Constitution in Medinah (622 CE) arranged by Prophet Muhammad (PBUH) contained three aspects directly related to risk protection: social insurance for the Jews, Ansar and Christians; Article 3 concerning 'wergild' or 'blood money' and provision for Fidyah (ransom) and Aqila. We should follow his example to meet our needs and social obligations.

A Takaful scheme provides us the self-discipline for savings and the habits of sound financial planning to take care of ourselves and the needs of our children and families. Hadith by Sahih Al-Bukhari, as narrated by Amir bin Saad bin Abi Waqqas, describes Prophet Muhammad (PBUH) as saying: "verily, it is better for you to leave your offspring (heirs) wealthy than to leave them poor asking others for help" and "..The one who looks after and works for a widow and for a poor person is like a warrior fighting for Allah's cause.." Also, from Sahih Muslim Hadith No. 59, as narrated by Abu Huraira, has the Holy Prophet (PBUH) saying: "Whosoever removes a wordly hardship from a believer, Allah (swt) will remove from him one of the hardships of the day of Judgment."

Takaful operations can provide an effective method to accumulate the savings of individuals for the collective good of the community. In many Muslim communities lacking capital resources, a Takaful can become an engine for economic growth and development by channeling its funds into Sharia approved investments sponsored by the local business community.

written by Dr. Omar Clark Fisher
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Malaysia: Should you get an Islamic mortgage?

CHOICES- Dr Sr Rosli Said, Senior Lecturer, Department of Estate Management, Faculty of Built Environment, University of Malaya, reveals the workings of Islamic mortgage financing in Malaysia.
RED: Please define briefly Islamic banking and explain how it differs from conventional banking.
Islamic banking which follows Shariah law has been in operation since the enactment of the Islamic Banking Act in 1983. In these 30 years, Malaysia has been practising the dual-banking system - Islamic and conventional. Islamic principles dictate that money lending (dealing with interest) as well as investing in businesses that are considered haram (unlawful) are prohibited. Islamic finance is all about accumulating all the available resources (from savings) and providing financing based on pre-determined profits [or profit-sharing] rather than dealing with interest.
All the available resources will be utilised by Islamic banks to provide financing through either buying, selling or leasing. Islamic banks are required to buy an asset (including real estate) and lease it to the customer through a co-ownership agreement where the customer pays 10 per cent downpayment (customer’s equity) and the bank will finance the balance of 90 per cent (bank’s equity).
On the assumption that the customer occupies the house, the bank will rent its 90 per cent equity (share) to the customer who pays rent for occupying the bank’s equity.
The title of the property is still in the customer’s name although the asset is co-owned within the contractual agreement. The customer holds 90 per cent of beneficial ownership with the bank acting as trustee.
During the amortising period, the bank will transfer its equity to the customer over time. Therefore, as compared to conventional banking, the transaction is not considered as a property loan but more as property financing based on co-ownership principles.
The differences are based on the principles attached to each system – halal vs haram, interest vs profit, loan vs financing and ownership vs co-ownership.
Uncertainty of the numbers – although the Islamic financing concept sounds acceptable, the basis of calculation between one bank to another differs significantly. In my experience with one of the Islamic banks, they still have to work within the conventional system i.e. by reversing the amortisation of principal plus interest as implemented for conventional loans. This may not be considered as one of the weaknesses but it makes both the bank and customer feel uncertain. 
• Alteration of terms of financing – should a customer choose to alter the terms of financing, a new Sale and Buy-back agreement needs to be created and signed. A conventional loan would only require the amendment to be stamped which incurs cheaper cost.
• RED: In Islamic banking, there is no interest, so how does the financing work in terms of property purchases?
The profit is normally calculated upfront prior to approval of home financing. The calculation of the profit is similar to conventional loan which is based either on monthly or daily rest. The calculation of monthly instalment is also based on similar mathematical model used for conventional home loan for the whole length of the amortisation period. The only difference is the rate used for conventional home loan is Base Lending Rate (BLR) whereas Islamic financing is based on Base Financing Rate (BFR).
Once the profit is determined, the sale price will be established to include the principal. As in most conventional fixed rate loans, the monthly instalment in fixed-rate Islamic financing does not change throughout the amortisation period. Therefore, a decrease in the profit rate will result in surplus (rebate) to customer which directly shortens the length of the financing. In a variable rate Islamic finance, any decrease in the profit rate will either shorten the tenure of the loan or change the instalment amount.
Any individual Islamic bank will produce different figures due to certain requirements imposed such as zero entry cost as well as the prepayment penalty. The basis of calculation between the banks will also produce different results and it is entirely up to the customer to shop around before they make up their final decision.
RED: Are there statistics to show more homebuyers opting for Islamic over conventional housing loan?
Statistics show that Islamic home financing has grown over 30 per cent in the last five years as compared to conventional of around 11 per cent. The majority of demand would come from the Muslim population which is estimated at 60 per cent of Malaysia’s population.
• RED: When a borrower defaults in his Islamic housing loan, is there any difference with conventional banking in terms of recovery of the outstanding loan?
Islamic banks are more considerate as they would give more time to the customers according to the Islamic way of life. During this difficult time, the banks are not supposed to impose further burdens on the customer. The late payment charges are normally about 1 per cent, which is lower than conventional banks. In a worst case scenario, there is no difference in the final recovery process where both banks have the right to foreclose the transaction through auction.
• RED: Are there any issues that you are aware of in regards to Islamic mortgages that are still pending resolution?
Lock-in period is one of the issues that should be carefully looked into. The banks are supposed to return the rebate to the customer on all unexpired profit from the remaining tenure. However, if the customer prepaid earlier than the lock-in period, the non-refundable rebate is imposed on the original loan amount with certain percentage (e.g. 3 per cent).
It seems like the unexpired profit is like the bank’s future profit which has been priced into the full amount of financing. The lock-in period is sometimes not mentioned in the letter of offer but replaced with some terms such as ‘if the cost of fund is less than the cost of borrowing’, the bank will charge the customer an administration fee if the borrower sells the property during this period.
In my experience, some mortgage officers are not sure of the effect of such terms. This will create another issue in cases of refinancing, for example.
(Malaysia Hronicle / 29 Sep 2012)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Tunisia plans to issue sukuk early 2013 - Central Bank

Tunisia plans to issue Islamic bonds early next year as the North African country seeks to reform its banking sector and diversify sources of funding, the central bank governor said on Saturday.
"Tunisia will begin issuing sukuk (Islamic bonds) early next year ... This is part of the draft budget for 2013," Tunisian central bank governor Chadli Ayari told Reuters on the sidelines of a banking seminar.
"There are studies under way for Islamic finance in the country, including issuing Islamic bonds."
Committees set up by the finance ministry, religious affairs ministry and the central bank are currently working on an Islamic finance law in order to establish Islamic banking in Tunisia, where there are only two Islamic banks.
Ayari said the total assets of those two banks was 1.4 billion Tunisian dinars ($893 million), or 2.5 percent of the total assets of Tunisian banks.
Nadia Kamha, Director-General of the Tunisia central bank told Reuters the law would be ready "within weeks" and that it will be presented to the government for approval.
The moderate Islamist Ennahda movement is leading Tunisia's government after winning elections last year that followed the ousting of former President Zine al-Abidine Ben Ali. 
Tunisia's budget deficit should narrow to 6 percent next year from 6.6 percent of GDP expected in 2012, Ayari said on Friday, indicating economic recovery in the cradle of Arab Spring revolts may take longer than anticipated.
The Tunisian economy is gradually recovering from last year's political turmoil but faces problems as a result of the crisis in the euro zone, the main market for its exports and the source of a majority of tourist visitors.
Morocco, also led by a moderate Islamist party, is in a race with Tunisia to become a regional hub for Islamic finance.
General Affairs and Governance minister, Najib Boulif, told Reuters in March the government would submit to parliament a draft bill with a set of regulations for the introduction of Islamic finance products in the country.
"We are keen to capitalise on the stability we enjoy here to turn Morocco into a regional Islamic finance platform," Boulif said in March.
(Reuters Africa / 29 Sep 2012)

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