ISLAMIC INSURANCE TAKAFUL AND ITS APPLICATIONS IN SAUDI ARABIA A thesis submitted ...

261 Pages·2013·3.17 MB·English

by  Yuosef Alhumoudi

ISLAMIC INSURANCE TAKAFUL AND ITS
APPLICATIONS IN SAUDI ARABIA

A thesis submitted for the degree of Doctor of
Philosophy

by
Yuosef Abdullah Alhumoudi
Law School
Brunel University
October 2012
DEDICATION

I dedicate this thesis to my wife and children for their unconditional support and love.
ACKNOWLEDGEMENTS

First of all, purely and simply, I would like to thank God for providing me with the heath
and the intellectual ability necessary to complete this thesis. It is from him I draw support
in life.
Secondly, I would like to thank my wife, my sons, my Father in-law Mr. Hamad
Alhumoudi, my brother and my sisters who have supported me. I pray God will reward
them with all the happiness and success that life can bring.
Thirdly, my special thanks go to his highness Mr. Saleh Al Sheikh, the Minister of
Islamic Affairs in Saudi Arabia, who made it possible for me to fulfil my goal of
pursuing postgraduate studies.
Fourthly, I would like to thank my friends for their constant and unwavering support, for
providing me with advice, for encouraging me to work hard and to achieve all that I have
accomplished.
Last but not least, this piece of research would have remained incomplete without the
guidance, advice and encouragement of my supervisor, Prof. Ilias Bantekas who has
always been forthcoming and generous with his time and assistance.

iii
ABSTRACT

Takaful is an Arabic term meaning solidarity, which is used to describe a system of
Islamic insurance that functions as an alternative to conventional insurance. Takaful, as a
form of insurance, is entering a fast growing global market, promoted by the growth of
the Asian economies and economic prosperity in the Middle East. The Takaful system is
based on the principle of cooperation or mutual assistance, and is Tabarru (Voluntary),
meaning that the attendant risks are spread collectively across the group of volunteers.
The Takaful system is best understood as a pact (or policy) ascribed to by a group of
participants who choose to jointly guarantee themselves against loss or damage suffered
by individual signatories, as confirmed in the policy. The prediction is that Takaful will
be the default choice for citizens in Islamic countries in the near future. The combination
of the system’s financial efficacy, combined with principles underwritten by religious
correctness has accentuated the attractiveness of this, and similar, Islamic banking and
financial products to Muslims.
By examining the Saudi insurance sector, which is a market leader in the region, this
thesis delivers a brief history of insurance in general and of the Saudi insurance legal
framework in particular, and by so doing sheds light on Islamic insurance Takaful
applications worldwide. It also engages in an evaluation of insurance products available
in Saudi Arabia to determine whether the facilities offered by the insurance companies
operating in the country incorporate obstacles and obstructions, which may impact on the
effectiveness of governmental regulations and supervision in relation to setting a
legislative framework. This influences the extent to which the foundations for the
insurance market are secured in Saudi Arabia. The aim of the present study also leads to
some suggestions and recommendations for future practice.

iv
Table of Contents
List of Figures ....................................................................................................... xii

CHAPTER 1: INTRODUCTION 13

1.1 overview .......................................................................................................... 13

1.2 The context ...................................................................................................... 13

1.2.1
 Islamic Insurance Takaful ................................................................... 13

1.2.2 Islamic Sharia Law ............................................................................. 15

1.2.3 Saudi Insurance Law ........................................................................... 16

1.3 Motivation ....................................................................................................... 16

1.4 Purpose ............................................................................................................ 17

1.5 The objectives of the thesis ............................................................................. 17

1.6 The significance of the thesis .......................................................................... 18

1.7 study capacity and justifications ..................................................................... 19

1.8 Methodology ................................................................................................... 20

1.9 Contribution and Originality of the Thesis ..................................................... 22

1.10 Research Questions ....................................................................................... 23

1.11 The scope of thesis ........................................................................................ 23

1.12 Summary ....................................................................................................... 24

CHAPTER 2: COMMERCIAL INSURANCE FROM THE PERSPECTIVE OF ISLAMIC
SHARIA LAW 26

2.1 Introduction ..................................................................................................... 26

2.2 Global Development of Commercial Insurance ............................................. 26

2.2.1 Introduction ......................................................................................... 26

2.2.2 The Emergence of Insurance .............................................................. 27

2.2.3 The Origins and Development of Insurance ....................................... 28

v
2.3 Principles of commercial insurance ................................................................ 34

2.3.1 Indemnity ............................................................................................ 35

2.3.2 Insurable Interest ................................................................................. 36

2.3.3 Utmost Good Faith .............................................................................. 36

2.3.4 Mitigation ............................................................................................ 36

2.3.5 Subrogation ......................................................................................... 36

2.3.6 Proximate Cause ................................................................................. 36

2.4 Conventional insurance from an Islamic contract perspective ....................... 38

2.4.1 Introduction ......................................................................................... 38

2.4.2 The Definition of Contract (Aqd) in Islamic Sharia Law. .................. 40

2.4.3 Basic principles and features of Islamic Insurance ............................. 41

2.4.4 Pillars of the Insurance Contract from an Islamic Perspective ........... 45

2.5 An Islamic Jurisprudential analysis of the Commercial Insurance ................. 59

2.5.1 Insurance as an idea or theory vis-à-vis Insurance regulation of existing
contracts .............................................................................................. 59

2.5.2
 Jurisprudential analysis of the rules of commercial insurance ........... 60

2.5.2.1 Introduction: ............................................................................ 60

2.5.2.2 Jurisprudential contradiction of rules of insurance ................. 61

2.5.2.2.1 The opinion that commercial insurance is unlawful ... 61

2.5.2.2.2The view that commercial insurance is permissible: ... 69

2.5.3 The rule of commercial insurance in Islamic Sharia .......................... 70

2.6 Takaful Commercial Insurance ....................................................................... 73

2.6.1 The Basic Principle of takaful Commercial insurance ....................... 73

2.6.2 Takaful Types ..................................................................................... 73

2.6.2.1 Family Takaful ........................................................................ 73

2.6.2.2 General Takaful (Non-Life Insurance) ................................... 76

2.6.2.3 Re-Takaful (Re-Insurance) ..................................................... 77

2.6.3 The Model of Takaful ......................................................................... 78

2.6.3.1 The Mudarabah model (share in profit) .................................. 78

vi
2.6.3.2 The Wakalah Model ................................................................ 78

2.6.3.3 Wakalah with waqaf ............................................................... 79

2.6.4 Takaful insurance Similarities & Differences ..................................... 79

2.6.4.1 Similarities .............................................................................. 79

2.6.4.2 Differences .............................................................................. 80

2.7 survey of Takaful operations .......................................................................... 80

2.7.1 Takaful in Arabian Countries .............................................................. 82

2.7.2 Takaful in EAST ASIA ....................................................................... 84

2.7.3 THE WEST ......................................................................................... 86

2.8 The Regulation of Takaful .............................................................................. 87

2.9 SUMMARY .................................................................................................... 90

CHAPTER 3: THE MODELS OF TAKAFUL (MUDARABAH, WAKALAH (AGENCY),
WAKALAH WITH WAQF) AND FAMILY TAKAFUL; THE DIFFERENTIATION OF
OPINIONS AMONG ISLAMIC SHARIA LAW SCHOOLS 91

3.1 Introduction ..................................................................................................... 91

3.2 Definition of Islamic Mutual Cooperative Insurance (Takaful) ..................... 92

3.3 Takaful Operations adopt the same rules as those applied in General Contracts94

3.4 Features of Islamic Insurance (Takaful) ......................................................... 97

3.5 The Jurisprudential (Fiqhi) Analyses of Takaful Verdicts ............................. 99

3.6 The Nature of Takaful Contracts .................................................................. 104

3.6.1 Is Takaful purely a Contract of Donation or is it a Qualified Contract of
Donation? .......................................................................................... 104

3.6.1.1 Issues associated with the Donation Relationship ................ 105

3.6.1.2 Rulings of Conditional or Qualified Donation ...................... 105

3.6.1.3 The Obligatory Nature of the Takaful Donation ................... 107

3.6.2 Is Takaful a Mutual Cooperative Contract, or is it a Contract of
Reimbursement? ............................................................................... 109

3.6.2.1 The Features of Contract of Reimbursement (Muawadah) ... 109

vii
3.6.2.2 Analysis regarding the Nature of Takaful Contracts ............ 110

3.6.2.3 The Legal Relationship of Compensation between Parties .. 112

3.7 The Nature of the Legal Partnership/Relationship between Parties ............. 114

3.7.1 The Implied Waiver (Takharuj and Mubara’ah) Relationship ......... 114

3.7.2 The Relationship between Participants and the Operator ................. 115

3.7.2.1 The Agency-Agency (Wakalah) Basis .................................. 116

3.7.2.2 The Mudarabah Relationship ................................................ 118

3.7.2.3 The Mixed Agency-Mudarabah Relationship ....................... 119

3.7.2.4The Wakhalah with Waqf Relationship ................................. 125

3.7.2.4.1 The Hybrid Wakalah with Waqf for South Africa .... 128

3.7.2.4.2 Advantages of Takaful with Waqf ............................ 129

3.7.2.5 The Model of Mixed Wakalah – Musharakah Relationship . 131

3.7.2.6 Family Takaful Models ......................................................... 132

3.8 Issues and Ruling of Surplus ......................................................................... 136

3.8.1 Surplus, Contrary to Profit ................................................................ 136

3.8.2 Sharia Rulings pertaining to Surplus ................................................ 136

3.8.3 Methods of Takaful Surplus Distribution ......................................... 137

3.8.4 Application of Surplus and Reserves for Innovation ........................ 137

3.8.5 Sharing Surplus as an Incentive to Good Performance .................... 138

3.9The Reinsurance Arrangement and Investment ............................................. 140

3.10 Arranging a Loan Facility to cover an Insurance Deficit ........................... 141

3.11
  Some Regulatory and Supervisory Considerations .................................... 143

3.11.1 Mechanism of Monitoring Segregated Funds ................................. 143

3.11.2 Risk of Misleading the Public by Takaful Operators ...................... 144

3.11.3 Capital Adequacy Requirements for Takaful Companies ............... 144

3.11.4 Risks of Takaful Models ................................................................. 145

3.11.5 Application of Conventional Methods of Regulation and Supervision145

viii
3.12 Conclusion .................................................................................................. 146

CHAPTER 4: CRITICAL ANALYSIS OF THE SAUDI INSURANCE SYSTEM FROM THE
PERSPECTIVE OF ISLAMIC SHARIA LAW 148

4.1 Introduction ................................................................................................... 148

4.2
  The Insurance system and its consistency with the ruling regime in the Kingdom
Of Saudi Arabia. ........................................................................................ 149

4.3
  Characteristics of the Insurance policy in the Saudi regime: ..................... 151

4.3.1
 The characteristics of the relationship between a specific insured person,
and the remaining policy holders ...................................................... 153

4.3.1.1
  Financial reimbursement contract (Muawadah) ............. 154

4.3.1.2
  Binding contract for both parties: ................................... 156

4.3.1.3
  Contract of submission: .................................................. 157

4.3.1.4
  Insurance is a probable contract or a contract of deceit
(Gharar): .................................................................................. 157

4.4
  Legislative qualification of the Insurance company in collecting and investing
contributions as well as payment of compensations .................................. 160

4.4.1
 The collected returns by the company: ............................................. 162

4.4.2
 The Islamic jurisprudential (Fiqhi) analysis of the insurance company,
according to the insurance system in Saudi Arabia: ......................... 163

4.4.2.1
  Agency contract with fixed payment .............................. 163

4.4.2.2
  Mudarabah contract: ....................................................... 165

ix
4.5
  Legislative qualification of The Council of Cooperative Health Insurance
(CCHI) in the Kingdom of Saudi Arabia: .................................................. 171

4.6
  Surplus and its distribution: ....................................................................... 175

4.7
  Investment of Insurance Funds .................................................................. 177

4.8
  Conclusion ................................................................................................. 180

CHAPTER 5: APPLICATIONS OF ISLAMIC INSURANCE IN THE KINGDOM OF SAUDI
ARABIA (USING NATIONAL COMPANY FOR COOPERATIVE INSURANCE
(TAWUNIYA) AND AL RAJHI COMPANY FOR COOPERATIVE INSURANCE (AL
RAJHI TAKAFUL) AS CASE STUDIES). 183

5.1
  Introduction ................................................................................................ 183

5.2
  The National Company for Cooperative Insurance (NCCI) (Tawuniya) ... 184

5.2.1
 Applicable Model .............................................................................. 184

5.2.2
 Definitions ......................................................................................... 186

5.2.3
 Insurance Account, or Insurance Portfolio ....................................... 188

5.2.4
 Company’s Commitment towards Operations Account, or Insurance
Portfolio ............................................................................................ 188

5.2.5
 Commitment to the Application of Islamic Law .............................. 190

5.2.6
 Powers and Duties of the Sharia Board (Tawuniya) ......................... 190

5.2.7
 Surplus .............................................................................................. 192

5.2.8
 Investment ......................................................................................... 195

5.2.9
 Overall Opinion on the Applications of the Cooperative Company for
Islamic Cooperative Insurance, and its Compliance with Islamic Sharia196

5.3 Al-Rajhi Company for Cooperative Insurance (Takaful Al-Rajhi) .............. 200

5.3.1
 Applicable Form ............................................................................... 200

5.3.2
 Definitions ......................................................................................... 201

5.3.3
 Commitment to the Application of Islamic Sharia Law ................... 202

5.3.3.1 The Mechanism for Achieving Legitimate Compliance ...... 202

5.3.3.2 Functions of the Sharia Auditing Department ..................... 203

5.3.4
 Surplus .............................................................................................. 204

x