Understanding Islamic Finance - Doha Academy of Tertiary Studies

424 Understanding Islamic Financeto that, some jurists advocated the use of a Waqf mechanism to develop a Sharī´ah-compliantinsurance system. 9In a pure Wakalah model, generally practised in the Middle East, the Takaful operatoracts as a Wakil for the participants and gets a fee in the form of an agreed percentage, say30 % of the participants’ donations, and the whole UWS/UWL and the investment profit/lossbelongs to the policyholders or the participants. The Wakalah fee is to cover all managementexpenses of business. The fee rate is fixed annually in advance in consultation with theSharī´ah committee of the company. In order to give incentive, a part of the UWS is alsogiven to the operator, depending upon the level of performance. However, the loss (UWL),if any, has to be borne only by the participants. The operator simply provides Qard al Hasan.For this reason, the Sharī´ah scholars have expressed some reservation on this model, dueto it not being equitable.Under a pure Mudarabah model, practised mainly in the Asia – Pacific region, the participantsandtheoperatorenterintoaMudarabahcontractforcooperativesharingoflossesofthemembersand sharing the profits, if any. The profit, which is taken to mean return on investments plus anyunderwriting surplus (as in the case of conventional insurance), is distributed according to themutually agreed ratio, such as 50:50, 60:40, etc. between the participants and the company. TheSharī´ah committee of the Takaful company approves the sharing ratio for each year in advance.Most of the expenses are charged to the shareholders. An issue in this model is that the amountdonated as Tabarru‘ cannot simultaneously become capital for the Mudarabah relationship.Moreover, the Takaful operator gets the UWS, but does not bear the UWL. Therefore, Sharī´ahscholars have raised serious objections to this model.In some cases, a model involving the combination of Mudarabah and Wakalah has beenadopted. Under the combined model, the sharing of profit between participants and operatorsis an entitlement embedded in the contract, i.e. UWS and the investment profit both areshared. There is, however, a structural issue in the way such profit/surplus is determined. Theissue is that, under Mudarabah, the operator, as the Mudarib, cannot charge its managementexpenses from the Takaful fund separate from its share as Mudarib, whereas under Wakalah,the operator, being the agent of the participants, can take its management fees from the fundas per pre-agreed terms. Further, the operator does not bear the UWL. Therefore, it alsosmacks of trouble from the Sharī´ah angle.In the Waqf model introduced in recent years, the shareholders create a Waqf fund (Takafulfund) through an initial donation to extend help to those who want cover against catastrophesor financial losses. More than one Takaful fund can be formed for different classes of service.Contributions of the participants, appropriate to the risk of the participants/assets, are dividedinto two parts: one as donation to the Takaful fund and the other for investment on thebasis of Mudarabah. The donation part always remains with the Waqf. Operational costslike re-Takaful, claims, etc. are met from the fund. The underwriting surplus or loss belongsto the fund, which can be distributed to the beneficiaries of the Waqf, kept as a reserveor reinvested to the benefit of the Waqf. There is no obligation to distribute the surplus.Rules for management fees, distribution of profit, creation of reserves, the procedure, extentor limit of compensation to the policyholders are decided beforehand. In the case of need,shareholders give Qard al Hasan to the fund. For investment purposes, a Mudarabah contracttakes place between the Takaful fund and the company working as Mudarib. The investment9 For details, see Khorshid, 2004, pp. 20–22.