Global Economic Crisis: The Perspective of Islamic Banking

vvvMr. Amer Bukvić, CEO of the Bosnia Bank International, delivered very insightful academic lecture on “Global Economic Crisis: The Perspective of Islamic Banking.” This was the sixth lecture held at the International University of Sarajevo as a part of public monthly Academic Lecture Series. Mr. Bukvic, highly influential and prominent speaker, had attracted the attention of more than seventy participants. Such tremendous interest in this lecture arose as a result of widespread global economic forums dealing with the subject of present economic crisis and, more importantly, due to less known, to the extent ‘controversial’, promising future of the Islamic banking.

At the beginning of the session, Dr. Muhidin Mulalić, Coordinator of Academic Lecture Series, introduced the audience with the aims and objectives of such lectures, thus, articulating the very fact of their extensive role in providing a platform for experts, researchers, diplomats and professors to tackle various challenges of the 21st century. Indeed, as Dr. Mulalić rightly pointed out, presence of previous high-ranking speakers indicate very promising role of Academic Lecture Series.

Dr. Mulalic, in his welcoming style, made a brief yet soul-touching introduction of the guest-speaker. He introduced the educational background of Mr. Amer Bukvić whose Malaysian, Japanese and British educational experience has played the decisive role in his climbing top of the pyramid. Mr. Bukvić who is embodiment of youth, knowledge and experience is indeed promising future of Bosnia-Herzegovina. Mr. Bukvic has very rich professional international experience, from 2001 to 2004 he held different positions at Abu Dhabi Islamic Bank, Dubai Islamic Bank and Islamic Development Bank. He taught at the College of Business Administration in Saudi Arabia; University of South Africa in Saudi Arabia and in the International University of Sarajevo, Bosnia-Herzegovina. Mr. Bukvić was presented to the audience as sincere friend and supporter of the International University of Sarajevo. On behalf of the University, Dr. Mulalić extended sincere gratitude to the guest-speaker for sponsoring several students, being former member of IUS Advisory Council, recommending IUS application to the Islamic Development Bank and issuing student’s identity/credit cards.

Mr. Bukvić began his lecture with an attempt to put into the perspective current global economic crisis, taking into consideration ‘historicity’ of international financial system. Perhaps, being partly influenced with the dependency theory, Mr. Bukvić made quick conclusion that current global economic crisis originated from the West, whose economic foundations are at the verge of collapse. The speaker made in-depth comparison between Asian and Western economic future and made revolution-making statement, “Asia will rise and Europe will decline!?” Using such a premise, which is indeed another novelty, he articulated ‘look east economic policy’ for all the Balkan states. In this regard, Mr. Bukvić articulated Bosnia Bank International as a bridge between South Eastern Europe and Asia. According to Mr. Bukvić there is the need for new international financial system whereby he didn’t hesitate to declare that Islamic banking and its financial system have been already playing key global role. Islamic banking and its financial system, with it’s as the speaker said, “silent features” is indeed the serious alternative to the conventional banking and conventional financial system. Mr. Bukvić has also articulated present challenges of Islamic banking and its financial system. The bulk of his lecture was but the promotion of, and rightly so, Bosnia Bank International. He asserted that Bosnia Bank international is a key player and leader of economic development, banking and investment in South Eastern Europe, especially in Bosnia and Herzegovina. He stressed the challenges Islamic banking faces in Bosnia-Herzegovina such as a challenge to educate citizens, to introduce the insurance on Islamic principles and to create the new generation of bankers.

Mr. Bukvić had proposed various kinds of cooperation between Bosnia Bank International and International University of Sarajevo. Token of appreciation for honorable guest-speaker was given by Assoc. Prof. Dr. Ali Gunes, the Dean of the Faculty of Arts and Social Sciences.

sourece : ius

Islamic Banking in France

images19The credibility of Islamic finance banking has been boosted by the current financial crisis in Europe and the Koran-inspired system is being embraced by France.

Its supporters claim Muslim principles protect it from the booms and busts of western capitalism. It is already well established in the Middle East and Islamic banks have been thriving in London since 2003. Now Islamic finance is looking to expand in the huge, untapped market of continental Europe.

Strasbourg in France, has a sizeable Muslim population. Its School of Management has just started teaching an 11-month course in Islamic finance.

One of the teachers, Ibrahim Sekissi, says Islamic banking is different from traditional Western banking:

“Islamic banks don’t charge interest. That is forbidden in the Koran. Instead they get involved in their clients’ projects and share their profits or their losses. And Islamic finance won’t touch anything that is bad for man like alcohol, tobacco or arms.”

The theory of Islamic finance was drawn up a century ago but Muslim banking is a recent phenomenon, starting in Dubai and Qatar in the late 1970s. It has grown at a rate of 15% a year and Islamic banks now have billions of euros in assets. So it is no surprise that France wants is share of the business and the jobs.

Stephan, a Christian lawyer and a student at the university, thinks Islamic banking is a good opportunity:

“It’s about time that the Muslim community in France gets the means of financing projects that are in line with their religious beliefs. From a business standpoint, this is good news for our Muslim clients because we’ve got a few clients in the Gulf countries and they very often require that we structure Muslim financing schemes.”

Many believe the subprime crisis that led to the international banking disaster would not have been possible under an Islamic system. Without the bait of interest or the lure of speculative gain, forbidden in Islam, bankers wouldn’t have invested their money so riskily.

But Islamic finance is not invulnerable. Because they’re not allowed financial assets, Islamic financial institutions’ balance sheets contain a lot of real estate whose value has been hard hit in many countries.

Strasbourg Management School Economics professor Laurent Weill is one of the directors of the Islamic finance course. He believes there are other weak spots in Islamic banking:

“Interest is not allowed for Islamic banks so it means that normally, when they give you some money, they cannot expect a certain interest rate and must accept to share with you profits and losses. So, for instance, if they have given some money to a company and the company has no profits, the bank will have nothing. So from this perspective it’s riskier.”

Source : Euranet

The Diploma in Islamic Accounting and Compliance (DIAC)

faa030000399Association of International Accountants (AIA) uk jiontly with BIBF has introduced Diploma In Islamic Accounting And Compliance (DIAC) to cater the islamic finance market.There is an increasing demand for accountancy professionals who demonstrate a thorough understanding of Islamic Accounting and Governance Reporting requirements as set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), while preserving compliance with International Financial Reporting Standards (IFRS). To access global markets and maintain the process of Islamic transactions, Islamic Finance professionals need to be familiar with both sets of standards as they apply to Islamic Financial Institutions. The Diploma in Islamic Accounting and Compliance (DIAC) has been designed to address this demand.

The Diploma in Islamic Accounting and Compliance (DIAC) is a professional certification jointly developed and certified by the Bahrain Institute of Banking and Finance (BIBF) and the Association of International Accountants (AIA).AIA, a premier international professional accountancy body, is responsible for setting the syllabi for the course, preparing the independently developed exam papers and appointing leading professional examiners.

The BIBF, as the premier institute for financial education and training in the Gulf, is responsible for compiling the course structure and providing its highly reputed teaching and support services. The DIAC programme seeks to develop the next generation of accounting professionals and leaders in Islamic Finance. It is specifically designed to cater to the needs of global professionals who require a qualification that enhances and certifies their knowledge and practical understanding of the multi-jurisdictional accounting systems that Islamic banks are exposed to.

source : bibf

Dubai Islamic Bank launches loyalty program for Al Islami Credit Cards

dib_logoAl Islami Credit Card members automatically enrolled for “Wala’a Dirhams”.


In a move to enhance cardmember experience, Dubai Islamic Bank (DIB) announced today the launch of Wala’a Dirhams, the loyalty program for Al Islami Credit Cards. The easy to earn and easy to spend loyalty program allows card members to earn unlimited Wala’a Dirhams on their card transactions.

Each Wala’a Dirham is equal to AED 1 in value and card members can redeem them against utility payments such as DEWA, SEWA, Etisalat payments, E-vision and RTA Salik recharge. Card members can also redeem their Wala’a Dirhams against gift vouchers for Carrefour, Union Co-operative Society, Sharjah Cooperative Society, Abu Dhabi Cooperative Society, Home Centre, Sharaf DG, Paris Gallery as well as travel vouchers.

Platinum and Platinum Plus Card members will earn 3%, Gold and Gold Premium Card members 2% and Classic Card members will earn 1% of their spends as Wala’a Dirhams.

Dr. Adnan Chilwan, Chief of Retail and Business Banking, DIB, said: “As part of our strategy to offer unique and convenient banking solutions to our customers, we have introduced a key benefit – Wala’a Dirhams – to our Credit Card offering. This program offers customers huge savings and rewards for using their Al Islami Credit Cards. As there is no limit to the Wala’a Dirhams that can be earned, cardmembers will find this program extremely rewarding. We have also taken this opportunity to re-launch our Al Islami Credit Card, with an objective of loading it with more value and benefits to customers.”

All existing Al Islami Credit Card members are automatically enrolled into the Wala’a Dirhams programme.

Ali Rahim, Head of Retail Products, DIB, said: “The facility of paying utility bills through Wala’a Dirhams earned on their Al Islami Credit Card will result in substantial savings for our cardmembers. Additionally, we have a range of benefit options for our customers to redeem their Wala’a Dirhams. We will continue to create special benefits and rewards to serve the financial needs of our customers.”

As a special offer to co-incide with the launch of Wala’a Dirhams, DIB also announced that any customer who gets an Al Islami Credit Card will receive a free mobile phone. This offer is valid till February 28, 2009 only.

About Dubai Islamic Bank

Dubai Islamic Bank (DIB), established in 1975, is the first Islamic bank to have incorporated the principles of Islam in all its practices. DIB is a public joint stock company and its share is quoted on the Dubai Financial Market. The bank enjoys a reputation as a leader and innovator in maintaining the quality, flexibility and accessibility of its products and services. In a very short space of time it has created market leading services and products that are setting benchmarks for the rest of the sector.

The bank reported AED 2.5 billion in net profit for the year ending December 31, 2007, rising by 60 per cent compared to AED 1.56 billion for 2006. The bank recorded total revenues of AED 7 billion for 2007, rising by 46 per cent compared to AED 4.8 billion for 2006. Total assets in 2007 reached to AED 84.3 billion, an increase of 31 per cent compared to AED 64.4 billion in 2006.

DIB set a world record by raising a US$3.52 billion sukuk for the Nakheel Group. This sukuk adopted an innovative structure never used before in Islamic or conventional banking history.

The bank has been proactive in creating partnerships and alliances at both the local and international level. DIB has adopted an aggressive expansion strategy, which started with the establishment of DIB Pakistan Limited, a wholly owned subsidiary of DIB. DIB opened its first representative office in Turkey to enhance its access to that market. DIB has also acquired a stake in Al Khartoum Bank and a stake in Emirates and Sudan Bank (ESB). These steps mark DIB’s ambitious plans to roll out its operations into regional and international markets as part of its overall strategic plan.

DIB has won the respect of its peers around the world. The bank was recently named by Islamic Finance News the UAE’s Best Islamic Bank. DIB has also received many awards from international organizations, such as the prestigious “Bank of the Year – UAE” award from The Banker magazine and additional accolades from Euromoney.

source : dubaichronicle

Islamic finance sector needs more sharia scholars

As the world financial industry sheds jobs by the tens of thousands, the $1 trillion Islamic banking sector has a growing load of work for sharia scholars but few candidates coming forward to do it.

Experts steeped in the Muslim scriptures are critical to Islamic finance, which requires a religious stamp of approval before a bond, mortgage contract or other financial product can be marketed as moral according to the standards of the holy Qur’an.

But qualifying for this work takes much more time and effort than other jobs in finance require. Candidates must first study Islamic law or sharia for many years, and then master finance.

Globally, and especially in Europe and America, there is a shortage of scholars familiar with both fields,” said Mufti Abdul Kadir Barkatulla, an Indian-born imam in London who sits on sharia boards for six banks including Lloyds TSB Bank.

“A few scholars are going around the world [advising banks] and new scholars are not being trained fast enough to take their place,” he said at an Islamic finance conference in Paris.

Part of the problem is linguistic. Many Middle Eastern scholars work only in Arabic, the language of Islam, but the global market needs scholars fluent both in Arabic and in languages such as English or French.

A study for Paris Europlace, an industry group trying to develop Islamic banking in France, said there were fewer than 100 scholars in the world qualified to sit on sharia boards.

Demand for Islamic banking has grown in recent years and expanded from the Middle East as more of the world’s 1.3 billion Muslims seek investments that comply with their faith.

The current financial crisis has also hit the Islamic sector, but Islamic banks say they are better placed to weather it because of their more conservative stance.

“We’re not immune, but we’re not failing catastrophically,” said Sheikh Nizam Yaquby from Bahrain, who advises the Islamic units of HSBC and BNP Paribas , among others. “The scholars stopped us from buying subprime loans.”

Islamic law bans fixed interest rates and trade in companies dealing in alcohol, pork or pornography. But like sharia in any other field, there are no fixed rules that all scholars accept.

“About 90 percent of all sharia board rulings are consistent so there’s only about 10 percent difference,” Yaquby said.

Some differences are theological. Malaysia, home to over half the global Islamic bond market, follows the Shafi school of Sunni Islam and is the most flexible with debt.

Saudi Arabia, with its Wahhabi form of the Hanbali school, is the strictest, while the Gulf states chart a middle course. Islamic finance in western countries generally follows the Gulf.

Shi’ites used to have some striking differences, such as the view that the interest ban did not apply to interbank lending, “but now they are joining the mainstream,” Barkatulla said.

Mufti Ahmed Said Louqman Ingar from the French Indian Ocean island of Reunion said an investment fund there almost failed despite approval by an international sharia board. “Clients wanted approval by local French-speaking scholars,” he said.

One sharia board might reject an airplane leasing deal because the airline served passengers alcohol while another might ignore that and approve the contract, he said.

There are also no set fees for sharia advisers, who Gulf media say can earn up to $100,000 per fatwa, or religious edict, on a contract. But Barkatulla said money was not the issue.

“There is enough economic rationale for people to get trained,” he insisted. “This will not be a problem.”

Dubai Leads in Islamic Finance with New Shariah Hedge Fund Index

The Dubai Multi Commodities Centre Authority (DMCCA) and Shariah Capital, Inc. (SCAP.L) today announced the Dubai Shariah Hedge Fund Index, the first internationally-recognised index comprised exclusively of Shariah compliant hedge funds. The Dubai Shariah Hedge Fund Index will be calculated and reported by Thomson Reuters (NYSE:TRI), the global news and financial information organisation.

The Index reflects the performance of the DSAM Kauthar Commodity Fund, Ltd. (”DKCF”). DKCF is an equally-weighted fund-of-funds comprised initially of four single- strategy, commodity-focused funds that invest exclusively in Shariah compliant long/short equity hedge funds on the Al Safi Trust platform. The Al Safi Trust is a comprehensive Shariah compliant platform designed specifically for hedge funds and launched recently by Barclays Capital and Shariah Capital. Distributed under the DSAM Kauthar label, the four funds underlying the index have been seeded with $50 million each by DMCCA. They are:

25% DSAM Kauthar Gold Fund, Ltd

25% DSAM Kauthar Energy Fund, Ltd.

25% DSAM Kauthar Natural Resources Fund, Ltd

25% DSAM Kauthar Global Resources & Mining Fund, Ltd.

100% Dubai Shariah Hedge Fund Index = DSAM Kauthar Commodity Fund,

Ltd., (DKCF)

The Dubai Shariah Hedge Fund Index itself is not an investable vehicle. However, it mirrors the returns of the DSAM Kauthar Commodity Fund (DKCF) which is open to institutional and individual investors on a monthly basis.

The Dubai Shariah Hedge Fund Index is accessible on Thomson Reuters under the RIC code .DUBSHF for those subscribers using the 3000 Xtra system, including a description page on DUBSHF1. For those using the Bridge system, the RIC code is us&DUSHF. The index will be disseminated to over 300,000 traders and investors throughout the world who subscribe to news and market information from Thomson Reuters. For the first time, Islamic investors can use the index to compare the performance of their other professionally-managed absolute return investments and to determine strategies that include diversification into commodities such as those covered by the index.

DSAM, or Dubai Shariah Asset Management, is a joint venture between Dubai Commodity Asset Management (DCAM), a wholly-owned subsidiary of DMCCA, and Shariah Capital, a publicly-traded company that creates and customises Shariah compliant products and platforms. DSAM develops and brands commodity-linked investment products under the DSAM Kauthar name and distributes them in the UAE through DCAM, a UAE-licensed financial investment company.

“The purpose of the Dubai Shariah Hedge Fund index is twofold,” explained Ahmed Bin Sulayem, Executive Chairman of DMCCA. “First, it provides a benchmark for investors in Shariah compliant hedge funds who are looking for absolute investment returns, particularly in commodities, during periods of market volatility. Secondly, it reconfirms Dubai’s leadership role in Islamic Finance by its support of innovative solutions for those interested in Shariah compliant investment products, like the DSAM Kauthar funds. The Dubai Shariah Hedge Fund Index represents another significant step for Islamic finance into the mainstream of global investing.”

Basil Moftah, senior company officer for Middle East and Africa, Thomson Reuters, commented: “Thomson Reuters is proud to be first in providing access to the Dubai Shariah Hedge Fund Index to hundreds of thousands of traders and investors around the globe. The launch of this unique index to our clients in one more example of the importance Thomson Reuters is placing on accommodating those who wish to invest within the parameters of Shariah compliance.”

Eric Meyer, Chairman and CEO of Shariah Capital, expressed his enthusiasm for DMCCA’s initiative and highlighted the opportunity for investment managers within Shariah: “The Dubai Multi Commodities Centre Authority and DSAM have established the gold standard for Islamic hedge funds with this index. Under Ahmed Bin Sulayem’s leadership, DMCCA has selected and seeded prominent hedge fund managers with established track records who have accepted our Shariah guidelines and who are committed to superior absolute returns. We expect that more conventional hedge fund managers will now explore the opportunity of managing within Shariah and make their skills available to the growing number of Islamic investors.”

Shaykh Yusuf Talal Delorenzo, Chief Shariah Officer and Board Member of Shariah Capital, reiterated the discipline of the index’s underlying funds within Shariah: “We have taken exhaustive steps to insure that each company within the funds’ portfolios passes our Shariah screens and that all trading is executed within the strict parameters established by the Al Safi Trust Shariah Supervisory Board.”

“Moreover, in addition to the transparency afforded to Islamic investors by Al Safi through segregated, separately managed accounts, independent custodial oversight and Shariah Board access to daily trading activity, this index provides a second level of comfort to investors. Information about the index and its constituent hedge funds is publicly disclosed and distributed on a regular basis to reporting agencies and specialized fund data bases around the globe.”
sourece : dmcc

Islamic finance makes further inroads

economic strength and sound macro management are prerequisites in ensuring the success of the Malaysian Islamic finance industry, said Kuwait Finance House (KFH) Malaysia chief economist & head (research) Baljeet Kaur Grewal.

Baljeet Kaur Grewal
She said Malaysia had already established itself as a key player in the global Islamic sphere, thanks to an environment of strengthening economic growth, underpinned by strong fundamentals.

However, there remained tremendous prospects for growth in the industry, which she said, would be of a vertical nature.

“The Malaysian emphasis now is on capacity building, investment in human capital development, enhancing financial soundness and compliance of Islamic financial institutions and enhancing syariah compliance and governance, among others,” she told StarBiz.

Baljeet said the local Islamic finance market and the Gulf Cooperative Council (GCC) Islamic market would have different yet complementary growth patterns.

Unlike Malaysia, Baljeet said, the GCC states would see more of a lateral expansion such as the establishment of new banks and companies and the introduction of new products.

“This is partly because of the vast liquidity in the market (GCC) which impacts directly on demand dynamics for financial products,” she said.

In five years, she expects to see increasing embedded capital within clusters of economies, which will jointly build a framework for an integrated Islamic finance industry.

Baljeet also noted that the next phase of global industrialisation could not be financed solely out of equity or government budgets.

Instead, there would be an increased reliance on debt markets for Sukuk and other capital market instruments.

“In this regard, Islamic finance is set to leverage its position because of its competitive pricing and now increasingly acceptable structures,” she said.

“Regulations will need to remain supportive of the development of Islamic markets.”

Locally, she believes that sound regulation in the Islamic markets has been key to the industry’s growth.

She said that the challenge, moving forward, would be to maintain this advantage while advocating risk management policies, corporate governance, transparency and market conduct within the syariah framework.

To maintain the growth of the Islamic finance industry in Malaysia, continuous research on markets, products and investments was needed, she said.

On the level of capitalisation of most Islamic banks, she describes it as “still diminutive” compared with global players. “We need to address this as well,” she said.

Meanwhile, in line with the rapid growth of the Islamic finance industry, the KFH group recently launched its research arm, KFH Research, in Dubai.

”The value of an independent point of view to give investors a competitive advantage is crucial, more so in Islamic markets,” Baljeet said.

“Based on this premise, KFH has established the world’s first Islamic economics and investment research arm,” she added.

The outfit’s research activities, according to Baljeet, span global markets and economies, and aim to provide in-depth macro and trend analysis and enable knowledge sharing.

“Based in Malaysia, against a thriving Islamic capital market, our research group acts as a conduit linking the Middle East and Asia, two key economic regions which will drive growth into the next decade,” she said.

Baljeet also said plans were afoot to set up research bases more aggressively across the Middle East, Asia and the greater Middle East and North African regions.

Meanwhile, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz, in a speech delivered by Bank Negara deputy governor Datuk Mohd Razif Abd Kadir during the launch of the research outfit, said that in the recent five years, there had been a rapid evolution and expansion of the global Islamic financial services industry.

“Islamic finance has now been accepted as a viable and competitive mode of financial intermediation, not only in Muslim countries but also beyond the Muslim world,” she said.

Zeti said the overall Islamic financial system’s growing role in mobilising and channelling funds to productive investment activities across borders brought important benefits to the global economy.

“Building stronger financial markets and greater intermediation through knowledge sharing, especially forms an important part of this process to facilitate greater international and investment flows,” she said.

KFH, listed on the Kuwait Stock Exchange, enjoys a strong presence and reputation within the Middle East as one of the pioneers in Islamic banking and finance.

source : star

Seminar on Islamic banking in Sarajevo

imagesIslamic Development Bank (IDB) from Jeddah (Saudi Arabia) and Bosna Bank International have organized a seminar on Islamic Banking which will be held on 12th and 13th January this year. The Seminar is intended for bankers, representatives of regulatory banking authorities, representatives of the authorities of the state and entities level and students of economics in order to learn about Islamic finance, insurance, trade financing, large project financing and government sector financing and operations under Islamic finance.

The Seminar is intended for bankers, representatives of regulatory banking authorities, representatives of the authorities of the state and entities level and students of economics in order to learn about Islamic finance, insurance, trade financing, large project financing and government sector financing and operations under Islamic finance.
Moreover, to explain the overall challenges faced in Islamic finance by contrasting the theory with practice as well as to provide information about successes and difficulties of Islamic finance in Bosnia and Herzegovina.

The speakers will be some of the most eminent experts in filed of Islamic Banking and finance in the world. They are Dr. Muhammad Umer Chapra, Dr. Muhammad Umer Chapra, Adviser (Research), IRTI – Islamic Research and Training Institute of the Islamic Development Bank; Mr. Iqbal Khan, CEO of Fajr Capital, London and one of the founders of HSBC Amanah, one of the largest banking and financial institutions in the world, Dr. Salman Syed Ali, Senior Economist, IRTI – Islamic Research and Training Institute of the Islamic Development Bank and Dr. Humayon Dar, Islamic Economist & Shari’ah Advisor, London, as well as Mr. Amer Bukvić, CEO of Bosna Bank International.

Dr. Umer Chapra, Kemal Kozarić, Governor of the Central Bank of B&H, Nedžad Tuce, Deputy Director of the Banking Agency of the Federation of B&H will speak in the opening ceremony of the Seminar.

source : bbi

Takaful & Retakaful

Takaful & Retakaful


Insurance is not a new concept within Islam. The principle of a person protecting himself against loss or misfortune is even described in the Qur’an through stories of some of the prophets (pbut). In Arabic this concept is known as “takaful”. It is acknowledged that the foundation of shared responsibility or Takaful was laid down in the system of “Aaqilah”, which was an arrangement of mutual help or indemnification In case of any natural calamity, every body used to contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.

It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance.

Takaful, means “guaranteeing each other”, is the same as insurance. It represents the concept of insurance based on mutual co-operation and solidarity of people by participating in a takaful scheme. Takaful (which is based on the concept of social solidarity, co-operation and mutual indemnification) satisfies the need for insurers that now need to provide Shariah compliant insurance services as an alternative to the conventional insurance.

Takaful products are based on two main business models:

1. The Mudaraba model: is essentially a basis for sharing profit and loss between the takaful operator and the policyholders. The takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment. This is commonly used in Malaysia.

2. The Wakala model: is a contract of agency, which replaces surplus sharing with a performance fee. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund in return for a defined fee. This model is used more in the Middle East region.

Under the Al-Mudharabah principle, the profit as universally defined by conventional insurance companies, which in the case of general business is taken to mean returns on investment plus underwriting surplus, is then shared according to a mutually agreed ratio between the participants and the operators. Management expenses of the operator including agency remuneration, if any, shall be borne by the shareholders’ fund and not from the takaful funds. Hence, there is a distinct separation between Takaful funds and shareholders’ fund.

Whereas, under the Al-Wakalah principle, the paid-up capital is contributed as donation by the shareholders. Therefore, under this principle the shareholders do not expect and probably do not mind for not receiving any returns on the capital donated. However, it is understood this standpoint has changed in view of opinion expressed by certain scholars that the shareholders (operators) in their capacity as managers should also be entitled to share the profit arising from the takaful business.

On a strict interpretation of the Wakalah Model, the surplus of policyholders’ funds investments (net of the management fee or expenses) goes to the policyholders. The shareholders charge Wakalah fee from contributions that covers most of the expenses of business. The fee rate is fixed annually in advance in consultation with Shari’ah board of the company. In order to give incentive for good governance, management fee is related to the level of performance


The theory of a takaful contract is based contracts amongst a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively. The takaful contract usually involves the concepts of Mudarabah, Tabarru (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.

The fundamental principles of takaful contracts are:

  • The policyholders (takaful partners) pay premium to assist and indemnify each other and share the profits earned from business conducted by the Company with the funds.
  • Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru is incorporated in the contract.
  • As to how much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements. Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators.

Takaful contracts may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment.

(a) The protection aspect of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally.

(b) The savings aspect ensures that individual rights are protected under Mudarabah principle and the contributions along with profit (net of expenses) are paid to the policyholders at the end of policy term or before, if required.

The distinction between the conventional insurance and Takaful business is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreements. Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.


The terms “Family Takaful”, “Takaful Ta’awani” or just “Takaful” are generally used for family solidarity in place of conventional life insurances. Other products available in various countries are General Takaful, Education/Medical Takaful, etc. Based on the nature of relationship there are various models like Wakalah (agency) Model, Mudarabah Model and the combination of agency and Mudarabah models. In Mudarabah model the policyholders get profit on their part of funds only if takaful company earns profit. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the company. The Shariah committee approves the sharing ratio for each year in advance. Most of the expenses are charged to the shareholders.


A Takaful or Retakaful company must strictly adhere to principles of co-operation, protection and mutual responsibility and will avoid acts of interest (riba), gambling (al-maisir) and uncertainty (al-gharar).

The two main principles are the prohibition of Riba and Gharar.

Riba is the main point of distinction between Islamic and non-Islamic financial means. Riba refers to a creditor exploiting a transaction for unfair gain, for example, paying too little for an item or repaying significantly less of a loan than its original value. Very commonly it can occur through applying interest or usury (extortionately high rates of interest) in his/her transactions. This is expressly forbidden in Islam.

Gharar is the selling of items which have an uncertain existence or uncertain characteristics making the transaction risky and similar to gambling.

It is therefore important to distinguish insurance from gambling.

Allama Yusuf Ali, in his translation of Holy Quran, comments on Sura Al-Baqara, ayat 219 –

“Insurance is not gambling, when conducted on business principles. Here the basis for calculation is statistics on a large scale, from which mere chance is eliminated. The insurers charge premium in proportion to the risks, exactly and scientifically calculated”.

In gambling, it is possible to win or lose by creating that risk. In insurance, the risk is already there and the aim is to try to minimise the financial effects of that risk. Insurance shifts the impact of that risk to someone else and relieves the person of risk.

It is imperative that the Retakaful or Takaful company will conduct all its affairs in a manner that meets the Islamic Shari’ah Principles whether it is to do with investing its funds, in carrying out its business in all classes of insurance or in any other related financial field.

All operations and contracts are set-up to ensure that any element of speculation, uncertainty and gambling is eliminated or minimized from them.


Reinsurance of takaful business on Islamic principles is known as retakaful.

Reinsurance is a form of insurance whereby an insurance company or a Lloyd’s syndicate can transfer to another insurer (the reinsurer) all or part of its liabilities in respect of claims arising under the contracts of insurance that it writes. This enables the an insurance company (reinsured or direct insurer) to protect itself against the risk that its total claims costs in any one year maybe so large wiping out its profits, or even cause it to be insolvent. This is the essence of the concept of social solidarity, cooperation and mutual indemnification of losses of members whereby there is joint indemnification of the loss or damage that may occur, out of the fund that is collectively contributed to.

The main problem worldwide is the lack of retakaful companies that are capitalised to the levels required by insurers and more particularly the lack of “A” rated retakaful companies. This has resulted in takaful companies having to reinsure on a conventional basis, contrary to the preferred option of seeking cover on Islamic principles.

The Shari’ah scholars have allowed dispensation to takaful companies to reinsure on conventional basis so long as there are no retakaful alternatives available. Takaful companies therefore actively promote co-insurance. A number of large conventional reinsurance companies from Muslim countries take on retrocession. Therefore a large proportion of risk is placed with international reinsurance companies that operate on conventional basis.

The retrocession from takaful companies ranges from some 10% in the Far East where Takaful companies have relatively smaller commercial risks (so far), to the Middle East where up to 80% of risk is reinsured on conventional basis.

Retakaful companies need to ensure that they are capitalised sufficiently to enable them to:

  • protect the financial stability of takaful companies from adverse underwriting results
  • stabilise claims ratios from one year to the next
  • minimise claims accumulation from losses within and between different classes
  • geographically spread risk
  • increase capacity
  • increase the profitability of insurers through permitting greater flexibility in the size and type of risks accepted
  • secure technical support and help


Even though a typical reinsurance transaction is generally based on the principles of al-‘Aqd (contract), the nature of this transaction is quite different from other forms of commercial contracts in conventional reinsurance. Whilst the contract must ensure that the policy is for the purpose of sharing responsibility to provide some material security against unpredicted loss or damage resulting from unexpected risks on both life and property it must also comply with Sharia’ah principles..

Reinsurance contracts must essentially be financial transactions that bind both the reinsurance company and the insurance company on the general principles of al-‘Aqad.
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