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Umar A. Oseni

Recent years have seen significant progress in the takaful industry with a strong double-digit growth of 16 per cent amounting to US$11 billion global gross takaful contributions in 2012. In order to sustain this growth and enrich its legal landscape, there is a need to examine the feasibility of effective dispute resolution mechanisms for the takaful industry while drawing some lessons from the conventional insurance industry. This does not undermine the significance of the relevance of Islamic law in designing suitable models of enforceable dispute resolution mechanisms. While using qualitative legal analysis that predominantly adopts content analysis of current trends in takaful and insurance litigation, the chapter finds that effective dispute resolution processes such as arbitration and mediation could be adapted to suit the specific needs of shari’ah dispute resolution in the takaful industry. This would allow for cost-effective settlements that will guarantee existing business relationship among the parties and prevent unnecessary bad publicity in a highly competitive global insurance industry.
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Ajmal Bhatty and Shariq Nisar

Modern takaful practices have evolved in response to reservations against conventional insurance that trades in risk; where operations involve excessive uncertainty (gharar) that is prohibited in shari’ah; and where investments are made in interest bearing instruments and activities that are generally harmful for society and the environment. The chapter discusses the inspirations and factors behind the development of takaful as an alternate mechanism for social protection. It analyses various takaful models that have been developed in response to market needs and shari’ah compliance preference. It also discusses the challenges associated with these models in view of the practical realities where takaful businesses are mostly publically quoted entities and required to bring risk-based capital to support participants’ risk pools. Finally, the chapter analyses some of the key challenges impeding the growth and development of takaful and offers suggestions that can help overcome these challenges.
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Volker Nienhaus

Takaful is often presented as a system of cooperation and mutual help. This does not capture takaful realities properly. Islamic insurance schemes were not initiated by people looking for mutual protection against risks of life but by Islamic banks seeking protection for leased assets, collateral and outstanding debt. Most takaful undertakings are not organized as member-centred mutuals, but as hybrids with a profit-oriented shareholding company as the driving force. Regulators have stipulated that the solvency of the participants’ risk fund has to be guaranteed by the takaful operator through an interest-free loan (qar_) in case of need. However, the repayment of a qar_ is highly unlikely in a competitive market. An unrecoverable loan implies the factual transfer of the underwriting risk from the participants to the takaful operator. Contrary to takaful rhetoric, the economic quality and socio-economic impact of takaful and conventional insurance do not differ in substance.
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Hiba Allam and Volker Nienhaus

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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Tanvir Ahmed Uddin and Muhammad Maaz Rahman

The chapter analyses approaches of Islamic microfinance institutions (IMFIs) to scale poverty reduction in Indonesia through the lens of an Islamic poverty reduction institutional framework. This framework suggests that IMFIs should take a holistic, integrated approach to poverty reduction, apply Islamic socio-religious norms and support localized socio-legal structures. Whilst recently there have been positive developments on all of these fronts in Indonesia, many tangible steps can be undertaken to significantly increase the effectiveness of IMFIs. Acknowledging the important role of government as an enabler for effective IMFIs, this chapter proposes three policy measures to enhance their poverty reduction capabilities. The authors recommend that the Indonesian government integrate IMFIs into the national poverty reduction framework, simplify the regulatory framework that unifies complementary activities, such as awqaf, zakat and microfinance, and that they expand local autonomy whilst balancing the need for central regulation to a limited set of matters such as member protection.
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Hussam Sultan and Abdur-Rahman Syed

Some observers (‘purists’) lament the gap between the highest aspirations of the Islamic financial services industry and its track record. Others (‘pragmatists’) celebrate the industry’s limited gains on the premise that higher socioeconomic outcomes cannot be achieved without significant structural change. The authors of the chapter believe the strategic use of takaful can transcend this purist/pragmatist debate and introduce an element of social banking within the current market and regulatory environment. By setting up a takaful pool at the basic current account level with depositors alongside the bank’s existing corporate structure, the authors’ social banking model reduces the gap between depositor and shareholder without rewriting an Islamic financial institution’s corporate structure or Islamic financial services regulation. As banks experiment with alternative forms of banking within their existing corporate structure and regulatory environment, this paradigm shift may also create the success cases necessary to advocate more significant structural changes in the future.
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Abdullah Nana

The chapter proposes that the waqf-wakalah model of takaful is the most shari’ah compliant and is best suited to serve as a viable lslamic alternative to conventional insurance. It discusses the mindset among many consumers that takaful is the same as conventional insurance, evaluates controversial practices within the takaful industry that reinforce this prevailing attitude and analyses the effects such practices have had in stunting the growth of the takaful industry. The chapter provides an overview of the three major unlawful elements of contemporary insurance, that is, riba, qimar and gharar, and describes how these elements are avoided in different takaful models in light of expert research. The chapter also highlights the history of the waqf model along with some of its salient features such as the waqf of money, the independent legal entity of the waqf fund and the right of the donor to benefit from the endowment. Finally, the chapter addresses some criticisms of the waqf model that have been lodged by shari’ah experts and practitioners and examines the practical challenges of implementing the waqf model in the United States.
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Edited by S. Nazim Ali and Shariq Nisar

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Sara E.B. Carmody

The chapter focuses on the regulatory challenges and potential for the future growth of takaful products within the Gulf Cooperation Council (GCC) states. Takaful is a contract that creates risk sharing obligations between participants, with monies pooled between participants in order to provide coverage for specified events. Cooperative and mutual entities are very similar in terms of their underlying principles; they have all grown within the fields of ethical investment and microfinance. One of the barriers to the growth of takaful within the GCC is the regulatory environment for shari’ah-compliant mutual and cooperative organizations that has been put in place. The challenge is to provide competitive products on commercial terms within the marketplace that meet regional financial service regulatory standards whilst adhering to principles of sharing and mutuality. There are significant barriers within the legal framework currently in place, most notably the lack of developed laws for cooperative and mutual structures and for trusts within the GCC states. The chapter (1) defines a cooperative and a mutual, as a point of comparison and analyses the compatibility of the same principles to shari’ah-compliant financial institutions; (2) studies the companies that may offer various regulated financial services products within the GCC states, with reference to capital requirements and corporate vehicles required by law; (3) considers various issues arising from a mutual model that is to be compatible with shari’ah-compliant principles and meet regulatory requirements; and (4) reflects the overall trends in terms of financial services legislation and practice within the GCC states and whether a move to encourage a mutual model within the financial services industry is feasible for the GCC states.
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Abu Umar Faruq Ahmad, Ismail Bin Mahbob and Muhammad Ayub

Takaful has emerged in the global Islamic finance industry from the fundamental Islamic principles of ‘brotherhood’, ‘cohesion’ and ‘mutual assistance’, utilizing the virtuous contract of ‘donation’. Given that risks are inevitable both at individual and institutional levels, retakaful has been innovated as an Islamic alternative to conventional reinsurance so as to allow takaful operators (TOs) to reduce or mitigate the financial impact to their respective takaful funds (TFs) arising from the occurrence of such risks. Unlike conventional reinsurance where risks are transferred from the original insured to the insurance company and then from the insurance company to the reinsurer the concept of retakaful, like takaful, is based on risk sharing. Retakaful operators (RTOs) manage the TFs on behalf of their respective participants. The mechanism of retakaful would benefit TOs in the form of (1) risk spreading; (2) capacity boosting; (3) financial stability; and (4) protection against catastrophic losses. The research in the chapter examines the shari’ah issues related to retakaful as to whether risks are genuinely shared by the participating TOs/retakaful funds (RTFs) or transferred to RTOs, and whether participants should be responsible to provide additional fund to cover deficits in the RTFs that are managed by the RTOs. It suggests that in light of the very nature of the cooperative agreement and the small number of cedants vis-à-vis the number of participants in takaful, the cedants may be required in the contract to provide additional contributions in case the RTFs fall short of the claims lodged, or would accept pro-rata reduction in the bills to be paid during a period.