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Takaful and Islamic Cooperative Finance

Takaful and Islamic Cooperative Finance

Challenges and Opportunities

Studies in Islamic Finance, Accounting and Governance series

Edited by S. Nazim Ali and Shariq Nisar

Islamic finance distinguishes itself from conventional finance with its strong emphasis on the moral consequences of financial transactions; prohibiting interest, excessive uncertainty, and finance of harmful business. When it comes to risk mitigation, it is unique in its risk sharing approach.

Chapter 11: Shari’ah-compliant high watermark protected lifetime annuity in family takaful?

Hiba Allam and Volker Nienhaus

Subjects: economics and finance, islamic economics and finance, law - academic, finance and banking law, islam and the law


There is a demand for conventional unit-linked life insurance and investment products that not only pay out death benefits or a lump sum at maturity but provide in addition a protection of the invested capital, a guarantee to redeem the units of the fund at maturity at the highest net asset value that the fund has reached over its lifetime (= high watermark), and an option to convert the lump sum into a lifetime annuity. The chapter explores whether such a product could be structured in a shari’ah-compliant manner. Major shari’ah compliance issues are related to the use of stock options that are applied for the capital protection and high watermark guarantee in a conventional setup. But if these issues can be overcome, the operational structure for a shari’ah-compliant alternative would not be very different from conventional patterns. However, the conversion of a lump sum into a lifetime annuity requires a more complex institutional arrangement with a cash waqf, or alternatively a shari’ah-compliant trust, at its core. The overall conclusion of the chapter is that a shari’ah-compliant capital protected high watermark fund with a lifetime annuity option can be structured as a family takaful product. The chapter does not cover market potentials or regulatory aspects.

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