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Saturday, November 21, 2009

Bank Aljazira ( BAJ ) Takaful Model

Bank Al Jazira (BAJ) having reviewed many of the Takaful models in operation worldwide has decided to propose the following model. This model is based on the Ta'awun concept and Wakalah contract.

In the context of takaful, ta'awun meaning mutual help allows participants make donations with the intention of helping one another within the takaful group. The elements underpinning the ta'awun the ta'awun concept as applied in takaful, can be broken down into the following:

1) Mutual responsibility
2) Mutual cooperation
3) Mutual protection
All these principles are based on the Quran and the Sunnah.

1 ) Mutual Responsibility

The feeling of responsibility towards one another is the foundation of solidarity of Islamic community. The poor feel safe being sheltered by the rich and the sick do not feel much hurt because they know the healthy will provide help. This principle is established through the following hadith:

"The attitude of the believer and feeling of brotherhood to one another is like that of the single body. When one member of the body is hurt, it will have an effects on the whole body." (Mutafaq 'alihi).

" The relationship between one believer and another (in a community) is like that of a building where one part of the building strengthens the other parts." (Mutafaq 'alaihi).

"Each one of you has a responsibility and each one of you is responsible towards those under your responsibility." (Mutafaq 'alaihi).

"One is not judged as righteous until he cares for his brother as much as he cares for himself." (Bukhari).

"If any one does not have compassion towards others then he does not get any compassion from God". (Mutafaq 'alaihi).

2 ) Mutual Co-operation

The principle of cooperation is established both through the Quran and the Sunnah. Some of the Quranic injunctions are:
"Help one another in furthering virtue and God-consciousness (taqwa), and do not help one another in furthering evil and enmity" (Quran 5:2).

It is not righteousness that you turn your faces towards east or west but righteousness is whoever believes in God and the Last Day and the angels and the Book and the messengers; and spending out of his wealth for His love towards kin, and orphans and the poor and the wayfarer and those who ask and the freeing of slaves and those in debt; to be steadfast in prayer and practice regular charity; to fulfil the contracts which you have made; and to be firm and patient in pain or suffering and adversity and throughout all periods of panic. Such are the people of the truth, the God-fearing." (Quran 2:177).

The Sunnah has also established the principles of co-operation. Some of the hadith that urge cooperating are:

A Muslim is the brother of a fellow Muslim. He should neither commit oppression upon him nor ruin him; and he who meets the needs of a brother. God will meet his needs and he who relieves his brother from hardship Allah will relieve him from the hardness to which he could be put on the day of judgement (Muslim).

Whosoever fulfils the intention of a brother, God will fulfil his intentions. (Ahmad & abu Daud).

God always help those who helps his brother (Abu Daud).

Help your brother either those oppressed or those who oppress. The companions ask "Oh Messenger of God, we understand about helping the oppressed how do we help those who oppress?" The Messenger replied "relieve them of their power." (Mutafq 'alaihi).

3 ) Mutual Protection

This principle is established by both the Quran and the sunnah. The Quran mentions in several places regarding protection from hunger and fear. The Quran Says:

"(He) who has fed them against hunger, and has made them safe from fear." (Surah Quraish verse: 4).
"And remember when Abraham said "My Lord, make this city (Mecca) a place of security." (Quran 2:126).

Some of the hadiths that discussed protection are as follows:

"Indeed a believer is one who can give security and protection to the life and property of mankind". (Ibn Majah).
By God in Whose power I am under, one will not enter paradise unless he provides protection to a neighbor in difficulty." (Ahmad).
Aishah reported that The Prophet of God (s.a.w.) said, "Jibrail impressed upon me the kind treatment towards neighbors so much that I thought as if he would confer upon them the rights of inheritance."
"A person is not a believer if he sleeps comfortably on a full stomach while his neighbor suffers from hunger". (Al-Bazzaar).


Wakalah (Agency)

In this modern and complex financial world many skills are required to successfully manage a takaful operation. By management one would include ensuring that the rights of the participants in the mutual fund are protected. What follows is a sample of what a takaful operator should do so as to run a successful takaful operation. This is not meant to be an exhaustive list:

Promote participation of new members (e.g. via advertising). Takaful is not sold but participation is invited.
Explain the concept of a takaful cooperative to the masses
Set up a proper administrative system to run the takaful program
Keep records of newly registered members
Maintain records of all participants in the event there is a change in information about a member
Invest the donations in halal investments
Develop new takaful products to meet the needs of participants
Maintain statistical information and perform experience studies
Determine the appropriate contribution to be made by each member such contribution shall be determined actuarially to enable an adoption of an equitable and fair charging to all members
Pay takaful benefits when a participant makes a claim
Prepare the balance sheet, revenue accounts and other financial statements - to enable public accountability of the management
Perform actuarial valuation to determine the surplus of tabarru' at fund
Distribute the surplus equitably to participants

The question that comes to one's mind is : who will carry out such responsibilities with effectiveness, accuracy and efficiency? One option is that it could be performed by volunteers who are members of the takaful program. Alternatively, it can be sourced out to a third party who possess the skills, qualifications and experience to handle such a complicated job.

Under the first alternative, volunteers who are existing members of the takaful program may help carry out the above functions on a charitable basis. As the takaful fund gets bigger, and as more and more people enter into the takaful program, the administrative activities will become more complicated and cumbersome to the extent that there is need to seek assistance from an outside party to ensure that the takaful operation is run in the most efficient, productive and professional manner for the benefit of the members. Thus, an entity who possesses the necessary expertise in running the takaful program needs to be established. Islam permits the establishment of such entity with the view of administering the takaful program under the concept of wakalah.

According to the Encyclopedia of Islamic Banking and Insurance, wakalah is a concept of a businessman entrusting another to act in his stead or as his representative. It has been a long standing custom to appoint an agent to facilitate trade operations. The Encyclopedia of Islamic Banking and Insurance further elaborates conditions which must be met under wakalah. Some of these conditions are:

The essence of the appointment of an agent (wakil) is the proposal and acceptance of the position
It is a condition that the person who appoints an agent be legally competent to do the work for which the agent is appointed. Thus an insane person or an infant cannot appoint an agent.
A person can appoint an agent to conduct all business transactions that he would be able to do personally. Thus, it is lawful to appoint an agent for selling or buying, letting or hiring, giving or taking a pledge for depositing or receiving a thing for safe keeping, making or receiving a gift, making a compromise, bringing an action, paying or receiving a debt and for receiving anything.
An agent appointed to sell and buy or to pay or receive a debt, is a custodian of his principal's property and in the position of an amin (rustee).
An agent is entitled to receive remuneration only when so contracted.


The rationale behind the concept of wakalah can be seen from the following arguments:

It is difficult for takaful members to voluntarily carry our the administrative works as the scheme gets bigger.
To set up a takaful operation system during the initial phase of the program requires heavy expenditure on the part of members. The question now is whether all members agree or can afford to contribute towards meeting this high start up cost.
During the early phase of implementation, it is possible that claims, retakaful cost and expenses could exceed collected contributions together with investment income. This would mean a loan to the participants is needed to avoid insolvency of the takaful program (i.e. inability to pay claims). From an Islamic perspective this is undesirable for it may reflect poor management of the takaful program.
Members may not have all the technical expertise associated with managing the takaful funds. The skills required are underwriting, marketing, claims management, legal, accounting, actuarial, IT and so on.
The takaful program may not be managed in an organized or structured manner unless a dedicated, professional, highly skilled and financially reputable party is involved.

The structure of Wakalah for Bank Aljazira

In the context of a takaful model for Bank Aljazira, takaful members, through the contract they enter voluntarily, give consent in the form of absolute authority to Bank Aljazira to act on their behalf as an agent to run the takaful program under the ta'awun concept explained earlier. In other words, collectively Bank Aljazira is entrusted to act on behalf of all participants to ensure that all administration work pertaining to preserving the financial and nonfinancial soundness and solvency of the takaful fund and operation are adhered to.

Bank Aljazira, being an outside party to the takaful program, voluntarily agrees to act as trustee and hence lend support to ensure the above tasks and many other tasks not mentioned can be performed effectively and efficiently to meet all takaful operating requirements. It is proposed such support is provided on the basis that Bank Aljazira will be compensated for this effort via agency fees in the form of:

A percentage of contribution. This percentage will cover the operating cost of Bank Aljazira in running the takaful program
A performance related commission in the form of a percentage of underwriting surplus in general is defined as the excess of contributions over claims. This additional fee will provide an incentive for Bank Aljazira to:

Ensure that prudent underwriting is carried out at all times;
Optimize investment performance of the takaful funds
Minimize direct expenses related to the takaful fund such as issue cost, stamp duty, legal fees, reinsurance cost etc
Minimize claims amount payable (i.e. control fraud) without sacrificing the objectives of takaful
Ensure that contributions for participation in takaful is set at a reasonable level to ensure adequacy, equity and fairness among participants.


The application of Qardul Hasan

It is important to highlight that the involvement of a third party wakala contract is not merely restricted to operating or managing the takaful funds but also extends beyond this, Under wakala, the agent or representative of takaful participants is charged with the following obligations:

It has the financial obligation to ascertain that all initial or start-up costs, which usually are substantial at the beginning, under modern operating conditions, are met.
It has the financial obligations though not a shariah one, to ensure that in the event of a deficit of the takaful fund (defined in general as claims exceeding contributions), the agent will assist. Hence it requires the application of the principal of qardul-hasan (benevolent loan) on the part of takaful operator on a voluntary basis. To the agent this role as the 'lender of the last resort' would require having capital on standby at all time.

It is emphasized that the takaful operator is not obligated under sharia to finance the deficit as the takaful operator only acts as a wakil. Its job is to manage the fund. Participants among themselves are in effect required to finance any deficit under the concept of ta'awun established earlier. At the first instant under the proposed model the deficit can be financed by a qardul hassan from the participants from their saving account. Each participant's contribution toward this loan can be determined in proportion to the participant's tabarru in the year the deficit occurs. As a gesture of mutual help the takaful operator can also voluntarily provide this qardul hassan

Bank Aljazira Takaful Accounts

For practical purposes, it is proposed that all contributions from the participants should first be deposited in an Inividual Investment Account (IIA). This account is maintained for each individual participant. The funds in this account will be invested by the operator. The participants agree at the outset to transfer from his (IIA) agreed amounts periodically being his contribution to a second account Ta'awuni Ta'awuni Account (TTA).

1.5. Conclusion

The relationship between Bank Aljazira and the participants as described above would be fair to both parties as BAJ as the manager of the fund would be compensated fairly and the participants would receive a majority share of the surplus if any.

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