UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for December 16, 2010

Retakaful in Islamic Finance

Retakaful is basically reinsurance.  According to Amanie, in an insurance market, the insurance company may need to cede (transfer) some of the risk to another bigger insurance company (cedant) because it has assumed greater risk than it can handle.  The purpose is to protect the cedant company against catastrophic losses. Thus, accordingly, Retakaful aids the ceding company to underwrite a large risk by reinsuring or transferring some of that risk to another more capable party.  According to Amanie, Retakaful would allow the Takaful companies to transfer some of the risk on behalf of the Takaful participants to another company, which can assume a larger risk.  The act of pooling some of the largest risk together is done based on the tabarru/donation contract in order to ensure Sharia’h compliance of the Retakaful activity. Under Sharia’h, a Takaful company is only to ‘reinsure’ its risk to a Retakaful company.  However, the Sharia’h scholars have allowed a Takaful Company to reinsure the Takaful risk to a reinsurance company under the principle of necessity or (hajah).  According to Amanie, necessity means that if something is not done or something is done, a great difficulty will implicate the Takaful industry.  This type of transfer of risk based on hajah is allowed under the following three criteria: (1)  a Retakaful company does not have the capacity to underwrite the risk from Takaful companies; (2) the Takaful company is not entitled to any commission paid by the reinsurance company; (3) and the concession is reviewed by the Sharia’h Board of Takaful companies on an occasional basis.  Basically, without Retakaful, the Takaful industry cannot expand if it limited by its inability to underwrite larger risks. (AMANIE)

Takaful and Retakaful

Family Takaful in Islamic Finance




The general purpose of Family Takaful is to guarantee a supply of money for dependants should the Takaful participant die prematurely.  If the Takaful participant survives, the Takaful fund acts as a sort of certificate of deposit or term savings plan with a return on investment.  Family Takaful plans can generally be divided into the following: (a) Individual plans; (b) Mortgage plans; (c) Credit plans; and (d) Group term and hospital plans.  Unlike General Takaful, the contributions of the Takaful participants are paid into two accounts, one investment/saving account and one risk/donation account.  However, some plans of Family Takaful are based on one risk/donation account.  (AMANIE)

Mortgage/Credit/Hospital Takaful

Mortgage and Credit Takaful plans are formed to settle the amount borrowed by the participant from the financial institution/bank (mortgage or credit) upon the participant’s death or disability.  Hospital Takaful plans are formed to cover the cost of medical treatment of a Takaful participant if needed.  (AMANIE)

Individual Plans of Family Takaful

Individual plans of Family Takaful provides for three benefits including death, survival, and surrender.  The Takaful contributions are paid into two accounts.  The Participant Special Account/Donation Account is meant to build up the Takaful fund while the Participant Account/Saving/Investment Account is invested to grow the fund in the long term.  The contribution for this Takaful plan can be either in a single lump sum or a period of contributions.  The proportion between the donation and saving account can vary from 5%-95% depending on the product.  (AMANIE)

Death Benefit for Family Takaful: This is basically life insurance as the benefit is payable to the participant’s beneficiaries or nominee(s) if the participant dies before the date of maturity of the Takaful policy.  The benefit amount includes all of the participants principal investment and investment return accumulated in the savings account and the total unpaid amount of Takaful contribution for the period from the date of the participant’s death until the date of maturity of the Certificate that is payable from the donation account.  (AMANIE)

Survival Benefit of Family Takaful:  Basically, this is what results if the participant survives the life insurance policy plan.  The participant will get back all of her investment and its return throughout the period of the plan and a proportionate surplus from the donation account/Participant Special Account.  (AMANIE)

Surrender Benefit of Family Takaful:  This benefit results when a Takaful participant decides to surrender her certificate or terminate her Takaful policy.  Upon termination, the participant is entitled only to her investment amount plus any investment profit.  Her contribution to the donation account will not be reimbursed in this scenario and is forfeited.  (AMANIE)


Family Takaful Links

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance