UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for December 15, 2010

Indemnity or General Takaful in Islamic Finance


General Takaful provides indemnity to participants who suffer loss relating to their property.  Indemnity refers to replacing the value of the properties and assets to the equivalent of that prior to the damage and/or loss.  The General Takaful contract period usually runs for one year on a renewable basis.  The participants contribute to the Takaful fund based on a Tabarru/donation contract, which is sometimes called a Participant Special Account or PSA.  The Takaful operator raises the Tabarru’ fund and invests the remainder of the fund after deducting the operational cost of the scheme with the goal of obtaining a return. If any participant suffers a loss or damage, then she will be compensated from this fund by considering the level of occurred losses.   The residual of net contribution plus investment profit minus the agency and ReTakaful costs amounts to the surplus.  Any profit or return from the investment is returned back to the fund.  Unlike Family Takaful, net surplus in the General Takaful Fund is shared between the participants and the Takaful operator on expiry of each insured’s insurance policy and the distribution ratio is agreed upon in the contract.  This distribution may be replaced by a reduction in participants’ instalments to avoid the element of Riba in the contract.  If the total contributions and the income from investments cannot cover all claims and expenses during the period, the participants may be required to pay additional premiums.   In addition, the profit sharing excludes participants who have received compensation from their claims.  At the end of each yearly Takaful contract, the renewability and premium rates can be negotiated.  (AMANIE and

General Takaful

General Takaful Business by Prof. Dr. Mohd. Ma’sum Billah

Types of Takaful

Wadia’h in Islamic Finance



Wadiah (safekeeping)


‘In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank’s discretion, may be rewarded with Hibah (gift) as a form of appreciation for the use of funds by the bank.

Hibah (gift)

‘This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a ‘gift’ on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.

It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank’s discretion, and cannot be ‘guaranteed.’ However, the opportunity of receiving high Hibah will draw in customers’ savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.’  (Wikipedia)

Al Wadiah Yad Dhamanah (guaranteed custody)

Musawamah in Islamic Finance




‘Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.’ (Wikipedia)

Musawamah Facility Agreement

Musawamah Financing

Qard Al Hassan in Islamic Finance

Qard Hasan, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking By Mohammad Omar Farooq

Qard Hasan Wadiah Amanah and Bank Deposits ( Click on Link to the Left)



‘This is a loan extended on a goodwill basis and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.’ (Wikipedia)

Articles Regarding Qard

Qard Al Hassan – Interest Free Loan

Qard Al Hassan

Different Types of Sale in Islamic Finance

Bai’ al ‘inah (sale and buy-back agreement)

‘Bai’ al inah is a financing facility with the underlying buy and sell transactions between the financier and the customer. The financier buys an asset from the customer on spot basis. The price paid by the financier constitutes the disbursement under the facility. Subsequently, the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. The second sale serves to create the obligation on the part of the customer under the facility.

Bai’ bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. Like Bai’ al ‘inah, this concept is also used under an Islamic financing facility. Interest payment can be avoided as the customer is paying the sale price, which is not the same as interest charged on a loan.

Bai’ muajjal (credit sale)

Literally, bai’ muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. Bai’ muajjal is also called a deferred-payment sale. (Wikipedia)

Takaful Management Models

Wakalah Contract

The participants appoint the Takaful Operator as ‘Agent’ (Wakalah) to manage the administrative and investment activities of the Takaful for as secured agency fee. Legally Wakalah refers to a contract where a person authorizes another person to do a certain well-defined legal action on his or her behalf.   In this management model, the Takaful Operator usually fixes the agency fees upfront and the fees are deducted from each partner contribution to the Takaful in advance.  The agency fee is used to cover the costs of managing the Takaful as well as the Takaful investments.  The Takaful Operator also uses this fee to cover their operating expenses.  In some Takaful, their Sharia’h boards have allowed for the company to share in the surplus as an incentive fee for the Takaful operator under the principle of ‘hafiz’ (over and above the agency fee).  Therefore, under the Wakalah model, the Takaful operator may get upfront agency fees as well as an incentive fee based on the performance of underwriting surplus.  (AMANIE and IIU – International Islamic University, Malaysia)

Mudarabah Contract

Under the Mudarabah Model, the participants appoint the Takaful Operator as the mudarib or manager whereby both the participants and the manager share in the profit.  (Mudarabah essentially means profit-sharing)  Remember Mudarabah is a contract with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. Compared to Musharakah, in a Mudarabah only the lender of the money has to take losses. The Takaful Operator uses the profits it makes to cover its operating expenses rather than charging an agency fee or collecting incentive fees such as in the Wakalah management model.  The risk falls with the Takaful Operator in the event of loss of or lower profit.  This model is about investment return.  (Amanie and Wikipedia)

Hybrid Wakalah and Mudarabah Contract

This model adopts a fee-based as well as a profit- sharing based with regards to the two different accounts contributed by the participants.  For example, the Takaful Operator may charge a fee for managing the Takaful based on Wakalah such as 15% of the total Takaful contribution.  However, at the same time, the Takaful Operator will also share in the profit with the participants based on the Mudarabah model.  Therefore, in this hybrid model, the Takaful Operator receives a secured income in the form of agency fees as well as investment income from the investment activities of the Takaful Operator itself.  (AMANIE)

The World Takaful Report 2010



World Takaful Report 2010

Interesting Articles:

Unit-Linked Investment Takaful



“The investment-linked takaful will allocate your contribution in two parts. One part is your participative contribution (tabarru’) which is used to help the participants that need it most, as in the case of death or disability.

The rest of your contribution goes into buying investment-linked units. You can choose which Shariah-approved investment funds you want to invest in. The investment-linked units are then managed by the takaful operator, who in return receives a fee (ujrah) for its services.

If, during the period of takaful, you do not make a claim, you will receive a share of the surplus in the takaful fund, based on the pre-agreed ratio between you and the takaful operator. Your share of the surplus will be used to purchase additional investment-linked units.” 


If any of the investors in the scheme die during the period of investment, his or her family would get a protection/compensation amount according to the published rate or amount of compensation, for example, 1.25% of his or her principal investment.  As with other mutual funds/unit trusts, there is a NAV attached to the fund to reflect the net asset value of the fund on a daily basis.  This product is Sharia’h compliant as long the investment portfolio and the takaful structure are compliant to Sharia’h principles. (AMANIE)

Investment Linked Takaful

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance