Despite the remarkable growth and development of the takaful industry in recent decades, a somewhat noticeable component missing in the industry is the trade credit takaful link. Trade credit takaful helps protect businesses, traders and financial institutions from the financial consequences of defaults, insolvencies and bankruptcies of their trading partners. The positive side towards the development of this market is that the shari’ah bases are clear if the structure is based on takaful principles, however, the technical and operational dimensions require further investigation. The chapter highlights the growing demand for trade credit takaful, the regulators’ support, its benefits and scope, its basis in shari’ah as well as the challenges ahead. Particular attention is given to the development of trade credit takaful in protecting sukuk-holders against the default of issuers or in enhancing the credit profile of some sovereigns to access the sukuk market. The chapter discusses how trade credit takaful in sukuk will not be an extension of credit default swaps in the conventional market due to the obvious differences. Similarly, the chapter highlights the central role of micro credit takaful in the development of the microfinance industry and in assisting in poverty eradication.
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Muhammad Al Bashir Muhammad Al Amine
Conventional (commercial) insurance involves an intolerable magnitude of gharar (uncertainty), and hence its prohibition in shari’ah. In order to Islamize insurance, it needs to be reconstructed on a different basis so that the inherent uncertainty associated with the concept of insurance will not invalidate its contracts. This is thought to be doable only if the commutative nature (mu’awada) of insurance is converted into donation (tabarru); deeming the contributions of the policy holders as mutual donations, with the takaful company being only responsible for the administration of the takaful fund as well as the takaful operations. Nevertheless, the existing takaful structures, which supposedly adopt the said methodology, still have unresolved fiqh issues. These issues pertain to the underlying concept of takaful being genuinely of donation nature and also to the applications and practices of takaful being capable of substantially ascertaining their differences from those of the conventional insurance. The chapter scrutinizes the existing takaful structures and highlights their shortcomings in an attempt to outline a new sound model, with a special emphasis on its practicalities and applications.
Joe W. Bradford
The chapter examines fatwa in Islamic insurance and its role as an underlying cause of regulatory capture and arbitrage. The progression of the Islamic insurance industry from one almost unanimously forbidden to a multi-billion dollar industry in less than three decades is indicative of the notable advances the industry has made. With its core principles of cooperation, mutuality and sharing of loss/gain, Islamic insurance is of particular appeal to the consumer. The chapter highlights the key obstacles preventing Islamic insurance from achieving true mutuality and cooperation, and as such truly serving the consumer for whom it was created. These obstacles include the conflation of terms in understanding mutuality under an Islamic rubric, the undue emphasis on the contractual particulars governing the consumer and the role of fatwa or lack thereof in creating regulatory capture. It covers the need for a review of the Islamic legal approaches used in the formation of fatwa in order to limit regulatory arbitrage by way of fees and charitable contributions.
Edited by S. Nazim Ali and Shariq Nisar
Edited by S. Nazim Ali and Shariq Nisar
Mian Farooq Haq and Bushra Shafiq
Despite numerous efforts and various socioeconomic models adopted by local and international agencies, poverty reduction and inclusive economic growth remains a key challenge particularly in developing countries. In this backdrop the chapter examines the issues that led to limited success of earlier models used for inclusive growth and the role of the commercial Islamic cooperative (CIC) in social uplifting of a society. Given its unique structure based on customer ownership this research suggests capitalizing on the innate strengths of CIC, that is, dual bottom line (customer value and equity together), low cost, good governance and continuous provision of social cohesion. The authors present a commercial model of an Islamic cooperative as a means for broad-based economic development in a developing country. The study evaluates the effectiveness of the proposed model of an Islamic cooperative while analysing the challenges in its implementation
Mohammad Faisal, Asif Akhtar, Asad Rehman and M. Abdul Samad
Takaful is one of the most rapidly growing segments in global financial services. The cooperative micro-takaful based on the exclusion of the uncertainty, gambling and interest in its transactions encourages values such as solidarity cooperation and brotherhood. The purpose of the chapter is to study the benefits of offering micro-takaful as a tool for financial inclusion and sustainable development of the masses. It has been found that micro-takaful can be used as an effective tool for financial inclusion. There are various determinants for micro-takaful in India and expected clients have their own priorities. The findings of the study reveal that the attitude of Indian customers can be classified into factors like affordability, trust, implementation and features of micro-takaful. Therefore, considering such factors as a model for micro-takaful in India is proposed.
Mahmoud A. El-Gamal
The general thrust of Islamic jurisprudence of financial transactions is to approach the ideal of justice in exchange. The Islamic finance envisioned by Islamic economists wrongly emphasized contract forms (namely, partnership finance, ostensibly more approbated than debt finance, without any supporting evidence from Islamic scripture or classical jurisprudence). This gave rise to an industry based on legal arbitrage, synthesizing conventional finance at a cost, thus replicating any injustice or inefficiency therein, and adding inefficiency through arbitrage procedures. Mutual contracts were traditionally exempted from juristic prohibitions, for example, in interest-free loans, which are technically riba, mutual insurance and so on, because of their apparent charitable purpose, as argued by Al-Qarafi in his Furuq. However, mutual structures can be arbitraged just as easily (and inefficiently) as commutative ones. The regulatory substance of classical Islamic law – seeking justice – cannot be enforced solely through contract and corporate forms, mutual or otherwise.
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.
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.