INCEIF

 The
Global
University
in
Islamic
finance



Kuala
Lumpur,
Malaysia

 
 CIFP
part
2
 SH2002
Shariah
issues
in
Islamic
finance





Title

 Shariah
Issues
in
Takaful:
 Nomination
and
Hibah


Semester
Sept
2013



Name:
Fatima
Zahra
Habib
Eddine
 Matric
No:
1300135


Abstract
 _________


Fatima Zahra Habib Eddine 1300135


 Although
is
having
a
rapid
growth
the
Takaful
Industry
has
some
Shariah
issues
still
unsolved.
 Mainly
in
the
Family
Takaful
(Islamic
life
insurance)
not
all
Scholars
agree
on
the
nomination
 practice.
 This
 issue
 will
 be
 discussed
 in
 the
 first
 chapter.
 When
 nomination
 is
 accepted
 not
 all
 Scholars
 agree
 whether
 the
 appointed
 person
 is
 a
 sole
 recipient
 of
 the
 gift
 (hibah)
 or
 an
 executor.
The
Shariah
Advisory
Council
of
Bank
Negara
Malaysia
faced
the
issue.
However
there
 are
still
some
open
discussions
and
inconsistencies
in
regulations.
 
 
 
 
 
 
 Key
terms
of
the
research

 
 Takaful,
nomination,
hibah,
Shariah
issues,
family
takaful.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 2

Shariah Issues in Takaful


 Objectives of the research:

Fatima Zahra Habib Eddine 1300135

The principal objective of the research is to present the Shariah issues during the application of the nomination and the hibah in the Family takaful plans by the takaful operators. Therefore, the research will discuss: • • • • • The nomination practice in the Family takaful plans; The application of the hibah practice to the takaful proceeds; The role of the nominee in a Family takaful plan from the Shariah point of view. The applicability of the faraidh to the Family takaful proceeds; The best practices of Malaysia in the issues discussed.

Introduction Takaful is considered to be the Islamic equivalent of the conventional insurance. It aims to alleviate the hardships and to provide material security and assistance for those who face an expected risk or distress. The word takaful comes from the Arabic word kafala that means guarantee and it refers to the fact that in takaful concept a group of persons share the risks among them through a financial contribution that is based on the donation (tabarru’). These donations compensate the person of the group affected by a misfortune, based on the hadith narrated by Abu Huraira (r.a.) in Sahih alBukhari that the Prophet Mohammad peace be upon him said: “Whosoever removes a worldly hardship from a believer, Allah (SWT) will remove from him one of the hardships of the day of judgement. Whosoever alleviates from one, Allah (SWT) will alleviate his lot in this world and the next”. Therefore, there are no prohibited elements by Shariah in this form of mutual assistance, in particular: gharar (uncertainty) and maisir (gambling) do not exist as the fund is composed by donations; riba also is avoided, as the money donated is not invested in non-Shariah interest earned instruments. The source of takaful comes from the Quran and the Sunna. Since the takaful contract contains the element of mutual assistance the contract is binding both to the operator and the participant under the Islamic law.

3


Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

Introduction to the market place: Takaful Industry Latest data show that Takaful contribution to the world economy is estimated to reach US$11 billion in 2012 with a sustainable growth rate of 16% per year. Key markets area are Malaysia, UAE and Indonesia that achieved a growth rate of 24%.1 In these and other countries where takaful industry started to grow, takaful is seen as an alternative to the conventional insurance. However, there are few open Shariah issues that the industry is facing and mainly they are regarding the surplus distribution and the nomination issue, whether it coincides with the hibah as it is practiced in the conventional insurance or not. In this brief paper we discuss the second issue presenting the divergence of opinions supporting one or another view and presenting the best practices followed in what is at this time the most developed takaful market in the world i.e. Malaysia.

1. The Shariah issues The first Shariah issue is about the legitimacy of the application of the concept of hibah (as it is intended in the Islamic Law) in takaful nomination and if the nominee is considered as sole beneficiary of the takaful benefits or as an executor. The second issue is whether the nominee can receive the takaful benefits gifted to him through the hibah concept or he should only act as an executor and distribute the benefits among the legitimate heirs as part of the deceased estate. And, lastly, the third Shariah issue is whether the hibah of the Takaful funds can be revoked from the takaful participant without the consent of the nominee or the trustee.

2. The Shariah issue one 2.1 The concept As in the conventional insurance, in Family Takaful plan the participant has to name a person as a nominee to receive takaful benefits. Hence, the nomination is the process of appointing the nominee or nominees. Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) specifies also that

1

Ernst&Young (2013).

4


Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

the takaful nomination shall clearly mention if the status of nominee is as beneficiary of hibah or a trustee2. Hibah is an Islamic contract based on the voluntary transfer of a property from a donor to a receiver without any form of compensation in return from the receiver. The conditions for the application of hibah are that the donor and receiver should be living individuals and the property must exist in the time of the contract. The word hibah is commonly translated in English in “gift”.

2.2 The function The nomination is an important requirement for the purposes of life insurance policies and the Family Takaful policies, because both aim to provide the participant’s beneficiaries with a financial protection or support in case of his death. The nomination should help the nominee i.e. mostly a family member of the deceased, to access the benefits promptly without going through the often long bureaucratic process needed to access the estates of a deceased.

2.3 The current practice in Islamic finance and the different practices of the industry based on the resolution of the different SSB of the IFI All Takaful operators in Malaysia use nomination. However they are split in two categories according to the nomination practice: a) Those who clarify the role of the nominee as an executor of the distribution of the benefits according to fara’id; and b) Those who do not make any clarification about the distribution of the takaful benefits. To the first category belong Syarikat Takaful Malaysia Berhad and CIMB Aviva Takaful. To the second category belong: MAA Takaful Berhad, HSBC Amanah Takaful (Malaysia) Berhad, Takaful Ikhlas Sdn. Berhad, Hong Leong Tokio Marine Takaful, Etiqa Takaful Berhad and Prudential BSN Takaful Berhad.

2.4 Elaboration of the Shariah issue 
























































2

SAC, BNM, 2006.

5


Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

In insurance nomination is the eligibility of the designed person to receive the proceeds and the funds arising out of the insurance policy in the event of death of the policyholder. The issue is whether the Shariah accept the application of the nomination practice in the takaful industry and what is the role of the nominee: the sole beneficiary or an executor.

2.5 View of the scholars on the issue Unlike the practice of conventional insurance to pay the insurance benefits of a life insurance plan to the nominee, in Islam there are differences of opinion regarding the legitimacy of the nominee to access these benefits. In Malaysia the takaful operator is not forced by the law to pay the takaful benefits to the nominee whether he is entitled or not. However, the Malaysian Court sentenced differently in front of similar cases: in one case the Court decided that the nominee is only an executor3 and in others4 the nominee was considered the sole beneficiary. In his 34th meeting dated 21 April 2003 the Shariah Advisory Council of Bank Negara Malaysia has stated that: “The takaful benefit may be made as hibah because the objective of takaful is to provide coverage for takaful participant. Since the takaful benefit is the right of takaful participant, the participant is at liberty to exercise his right in accordance with Shariah;”5 In the same occasion the SAC declared also: “The takaful denomination form has to be standardised and must stipulate clearly the status of the nominee either as a beneficiary or an executor (wasi) or a trustee. Any matter concerning distribution of takaful benefits must be based on the contract. Participants should be clearly explained on the implication of every contract being executed.”6 Therefore, BNM leaves the decision whether the nominee is an executor or a beneficiary to the Takaful operators, as we mentioned before. The majority of them follow the view that the nominee is a simple executor. The Takaful Act (1984) is not clear regarding this issue, as there are sections that support both positions.7

3 4

Re Ismail bint Rentah (1940) Re Man bin Mihat (1965) and Re Bahadun bin Haji Hassan (1974)
 5 SAC, BNM, 2006. 6 SAC, BNM, 2006. 7 Salman, Htay.


6


Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

Ismail (2009) mentions also that some takaful companies do not distribute takaful proceeds as hibah leaving participants without this option. He explains that most likely their Shariah committees are not of this view, most probably their argument is that the proceeds did not existed at the time of hibah formulation by the participant, therefore as a contract the hibah can not be executed and hence the contract is void. Most probably in their opinion such contracts contains gharar and therefore they are haram. However, this position is not unanimous because according to the majority of jurists the presence of gharar does not affect hibah contracts but only sales contracts. Not only, some properties that are not classifiable to be sold because they contain elements of gharar (e.g. the unborn cattle, the fish still in the sea, etc.) they can instead be gifted. Therefore, in the some jurists’ opinion, the takaful proceeds whether they contain elements of gharar or not, they can be gifted.8

2.6 The proposed alternative solution if any As there are different legitimated opinions supporting both views on the role of the nominee, Shariah Advisory Council of Bank Negara Malaysia practice that we mentioned above is the best practice on the issue at this time. However, in our point of view the SAC should make it compulsory for the takaful operators, and hence for participants, to clarify in the contracting phase what is the role of nominee, a sole beneficiary or a simple executor.

3. The Shariah issue two 3.1 The concept Hibah in Arabic means gift. It is a concept being used widely in Islamic Finance industry to indicate the voluntary payment (in cash or in kind) at discretion of financial institutions to their customers on some financial instruments to reward them for the “loan” they have made to them. More specifically, hibah is a contract that grants the ownership of a property or an object from one party to another on a voluntary basis, without expecting any reward. In Islamic Finance jurists unanimously approve this practice because it does not involve any riba element; in other words it is not equivalent to the interest rate since the hibah is given away on a voluntary basis: the IFI may 
























































8

Ismail (2009).

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Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

give it or may not. Also, although most banks in Malaysia give hibah in order to reward the customers for their loyalty, it is not an amount previously agreed between the bank and the customer. Hibah is based on the Quran and the Prophetic Sunna. It had been widely used by the Prophet Muhammad (peace be upon him) and the Sahaba.

3.2 The function Hibah is used mainly in takaful industry particularly in the Family Takaful plans, in investment transactions such as Interbank Mudarabah Investment Contracts, in the financing contract of Al Ijarah Thumma Al-Bai’, in Banking Deposits as Wadi’ah Yad Dhaman and in Qard contracts.

3.3 The current practice in Islamic finance The concept of hibah is used in the Family Takaful products offered by some takaful operators. In Malaysia the first Takaful operator to offer it is Takaful Ikhlas in its Family Takaful product. The Company gives the participant the possibility to give away the takaful benefits in the event of his death in a form of hibah. However it restricts the choice to the legal spouse, parent, sibling and/or children. Other Takaful Operators offering hibah in Family Takaful products are9: Syarikat Takaful Malaysia Berhad MAA Takaful Berhad HSBC Amanah Takaful (Malaysia) Berhad

3.4 Elaboration of the Shariah issue The Shariah issue here is whether the Family Takaful Benefit can be given as hibah (gifted) to the sole nominee or it can be distributed among heirs as per tarikah. A consequential issue directly related to the first one is whether the hibah of the Takaful benefit can be revoked without the consent of the nominee or the trustee. 3.5 View of the scholars on the issue 























































 9
Salman, Htay. 8

Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

Concerning the issue whether the hibah should be constrained to tarikah or left the sole beneficiary Noor and Abdullah (2008) said that “The payment of takaful benefits upon the death of the policyholder before the maturity of a plan seemingly belongs to the deceased policyholder’s legal heirs on the grounds that it is the product of the deceased’s efforts and hence is part of his tarikah.” This view is in line with the position of jurists and operators who believe that the takaful fund is part of the deceased estate and for this reason only closed relatives should be appointed as nominees and they have to distribute the benefits according to faraidh. However, Noor and Abdallah evidenced also that this type of takaful contracts are unilateral contracts (tabarru’at) and create an obligation upon the takaful company to pay a financial assistance to the nominee appointed by the policyholder in case of his death, on behalf of the other participants from the tabarru’ fund, who are the legitimate owner of the fund, not of the takaful operator and not the participant either. Therefore, the choice to select whom to be paid is freely left to the deceased. This results in accordance with the objectives of the takaful and the reason why a participant can appoint a beneficiary. Hence, it legitimates the opinion of those who believe that hibah should be given to the nominee if the deceased has not specified the role of the nominee as an executor. However, it is also argued that, although this takaful contract falls into the category of unilateral contracts, it is still the participant that creates the purpose that generates the takaful benefits. Therefore, effort legitimates ownership. Hence, the takaful benefits should be subjected to tarikah and the nominee role is to execute that.10 As we mentioned earlier, the Shariah Advisory Council of Bank Negara Malaysia specified in a resolution that takaful benefits can be gifted as hibah and the purpose of the nomination should be specified: whether the nominee is a beneficiary or an executor.

Another issue related to the first one is whether the hibah of the takaful proceeds can be revoked without the consent of the nominee or the trustee. The SAC resolution on this regard says: “Participant is entitled to revoke his hibah which was made before the maturity of takaful certificate, because a conditional hibah will only be completed after delivery (qabd).

10

Noor and Abdallah (2008).

9


Shariah Issues in Takaful


 -

Fatima Zahra Habib Eddine 1300135

Participant is entitled to revoke his hibah which was made to certain individual and deliver the benefit to another person, or terminate his participation in takaful if the nominated recipient passed away before the maturity date.”11

The Scholars have different opinions on the revocation issue because of the divergence of opinions on the hadiths related to hibah. The main hadiths that Scholars quote on this regard are:  “The person who revokes his gift is like the dog that licks its vomit”. Based on this hadith, some jurist such as Imam An-Nawawi are of the opinion that hibah revocation is not haram (forbidden) but makruh (disliked).  “The donor should not revoke his gift except when the father makes gift to his son”. Based on this hadith the majority of Scholars, and Imam Malik, Imam Shafi’i and Imam Ibn Hanbal are of the opinion that hibah revocation is prohibited after making over its possession (qabd).12

Ismail (2009) reports that Al-Sharakhsi prohibited the revocation between intimate ones such as husband and wife and between relatives, because it might affects negatively their relationship. Imam Al’ (peace be upon him) had declared that a revocation done by a husband is not valid while that by a wife is valid. Finally, Ibn-Hazm was of the opinion that a gift cannot be revoked except in case of fathers and mothers to their children. Here revocation is valid unless the child (or children) dies before revocation is made. In this case the gift makes part of the child estate. Ismail (2009) concluded that taking in account the Scholars opinions and the legal framework of many countries where takaful companies operates “it makes more sense to prohibit revocation of takaful benefits in line with legislation that have been enacted in these countries, otherwise conflicts may arise and there will be a greater harm to participants, their families and ultimately, society”. Concerning what would happen if the participant is still alive when takaful certificate matures, BNM’s SAC declared that as the takaful benefit is subject to the condition of the death of the participant, if this is still alive when the takaful benefit matures than he is the legitimate owner. But, if he dies before the maturity date the hibah will be applied as per contract.13

11 12

Ibid. Ismail, 2009. 13 SAC, BNM, 2006.

10


Shariah Issues in Takaful

Fatima Zahra Habib Eddine 1300135

3.6 The different practices of the industry base on the resolution of the different SSB of the IFI Since the Shariah Advisory Council of Bank Negara Malaysia did not put any restriction, and the Takaful Act also does not regulate the above issues, there are different practices on the implementation of hibah among the Takaful Operators in Malaysia. Basically Syarikat Takaful Malaysia Berhad and MAA Takaful Berhad do not put any limitation on whom to nominate as beneficiary of the Takaful Benefits. While HSBC Amanah Takaful (Malaysia) Berhad and Takaful Ikhlas Sdn. Berhad require that the hibah beneficiary should be only the legal spouse, parent, sibling and/or children. Finally in Hong Leong Tokio Marine Takaful, Etiqa Takaful Berhad and Prudential BSN Takaful Berhad hibah is not practiced at all14.

Conclusion


In Malaysia the SAC encouraged the participants to a Takaful Plan to clearly specify what is the role of the nominee, a sole beneficiary or only an executor. It is clear then that the Shariah Council does not want to limit the Takaful Operators activities to one or to another interpretation since the jurists’ opinions are divergent, but the SAC leaves the decision to their Shariah committees. In conclusion, in some legislation contests the opinions of the majority that prohibits the hibah revocation have more sense. Takaful operators, their Shariah committees in particular, have the important role to make sure that takaful business creates benefit to people and alleviate their difficulties, instead of creating harm. Therefore, they can choose which position makes sense with the contest they are operating in, and they can also decide what is the best way to meet the participants’ will, after informing them clearly with all the implications of each decision.

























































 14 Salman, Htay.


11


Shariah Issues in Takaful


 References: Books:

Fatima Zahra Habib Eddine 1300135

Bank Negara Malaysia (2010), Shariah Resolutions in Islamic Finance, second edition. Articles: Abdullah, Abdul Aziz (2010), “Case studies of the practice of nomination and hibah by Malaysian takaful operators” ISRA International Journal of Islamic Finance, Vol. 2 (2): p 67. Azman Bin Ismail (2009), “Nomination and Hibah Issues in the Takaful Industry” ISRA Shariah Conference on Takaful 2009. Noor, Abdullah (2008), “Ownership and Hibah Issues of the Takaful Benefit” ISRA Islamic Finance Seminar (IIFS) 11 November 2008. Salman, Nu Htay, “Nomination and hibah issues in Malaysian Takaful (Islamic Insurance) Industry” IIUM Institute of Islamic Banking and Finance Malaysia.

12


Shariah Issues in Takaful