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The concept of insurance can be defined by many perceptions including religious perception. Insurance is one of the improvements according to the times of history as it has already existed in our world since olden times. Insurance or more specifically as the contract in which an insurer agrees to pay a premium in exchange for repayment of any damage or loss of expected benefits that may occur because of an unforeseeable incident is more known as the risk protection of human beings. Insurance also can be disguised as protection from any risks that are unexpected, such as pure risk, fundamental risk, and speculative risk. The financial consequences of these risks can burn a hole in people's pockets. They may have to tap into their savings or the hard-earned funds of their family. As a result, they and their families are in desperate need of insurance to provide sufficient coverage and financial support against all hazards related to life, health, and property. This can be related to certain situations such as whenever an investor is involved in an accident, the unhappy investor is compensated through this fund so that he can recoup his loss, regain his bearings, and reestablish his business. According to the ICICI Prudential Life Insurance website (2019), the needs of life insurance include retirement planning, financially securing the future of children’s education, and protecting home in unforeseen events.

Two types of insurance are called life insurance and general insurance. Life insurance includes the protection for the human being in daily life and general insurance includes protection for the assets or properties of the human.

1. Life insurance could be a financial protection that pays a whole of money to the policyholder or the candidate within the occasion of anything untoward happening to policyholders, such as passing. Regularly, the life protection covers more than a year. This implies occasional premium payments, month-to-month, quarterly, or yearly premise, to be settled. Dangers secured in this sort are death during the approach term, wage during retirement, sickness, and incapacity. The most items incorporate entire life approaches, blessing approaches, blessing approaches, investment-linked arrangements, annuity approaches, and medical and well-being arrangements (Hachemi, M., 2014).

2. General insurance is a protection arrangement that ensures a backup plan against any misfortune or harm suffered that is not secured in life protections. The coverage period for most general insurance approaches and plans may be a year that requires a protuberance entirety premium payment. The dangers secured by common protections of property due to fire or robbery, risk emerging out of damage to third parties caused by the backup plan, inadvertent passing or injury.

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The word takaful is obtained from the Arabic word “kafala” which brought out the meaning of bail or guarantee act as a warrant of protecting one’s need. According to the Takaful Act 1984 section 2, "Takaful" refers to a program that is founded on fraternity, solidarity, and mutual aid and that allows members to mutually contribute for the goal of providing financial support and assistance to one another in times of need. A type of Islamic insurance called takaful allows participants to combine their resources to shield one another from harm or loss. Sharia, or Islamic religious law, which outlines how individuals are required to cooperate and defend one another, is the foundation of takaful insurance. For the past 38 years, takaful has been used in several OIC and non-OIC member nations. Between 2005 and 2009, the industry grew at a 29 percent compound annual growth rate (CAGR) (EY, 2012). Takaful policies provide coverage for life, health and other forms of insurance (Akhter & Khan, 2015).

General takaful and family takaful are the two most common types of takaful. General Takaful plans are designed to meet the insurance needs of individuals and businesses in the event of a major damage or loss caused by a calamitous event. Non-life risk coverage is available through general takaful such as property takaful, marine takaful, motor takaful and miscellaneous general takaful. The family takaful based on the Taburru contract in which members make recurring non-zakat donations to the Waqf Fund. This takaful covers all risks related to human life, including disease, incapacity, and death, in addition to covering both short-term and long-term speculative requirements. The types of family takaful such as endowment takaful, whole life takaful, term life takaful, universal takaful, education plan and marriage plan (Aims, 2020).

In the Al-Quran, insurance was mentioned by Allah SWT indirectly in Surah Al-Maidah (5:2) with the meaning,

“Help (ta’awun) ye one another in righteousness (birr) and piety, but help ye not one another in sin and rancour, fear Allah, for Allah is strict in punishment”

- Surah Al- Maidah (5:2)

We can see from the context of the verse, that the word “Ta’awun” implies common help. The prophet too clarified that a few of the ethical pre-Islamic hones are Islamic and can be embraced on the premise of “assisting one another” (Al-Fatakh, A., 2015).

The Prophet (s.a.w.) noticed a Bidawi leaving a camel and Prophet asked, “Why don’t you tie down your camel?” The Bidawi answered, “I put my trust in Allah.” “Tie your camel and then, put your trust in Allah.”

(Hadith quoted by Al-Tarmizi and Ibn Majah)

This hadith determines the indicator measure for any risk or loss that should be taken in order to avoid the worst event. Prophet Muhammad (s.a.w.) taught Muslims to guard themselves with protection to ensure financial security for any unforeseen event. There is also another term in Islam that supports the hadith above, and is related to takaful: “al-darar yuzal” which means “damage or harm is removed”. This term states that if there are possibilities of any damages or risks, it needs to be removed with effort. Both offered the arguments that Takaful concepts are well supported by Quranic verses or Sunnah as both are applicable (Al-Fatakh, A., 2015).

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2.1 Comparison Between Conventional Insurance & Takaful

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2.1 Comparison Between Conventional Insurance & Takaful

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Comparison Between Conventional Insurance & Takaful

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2.2 Conventional Insurance Impermissible and Takaful Permissible

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2.2 Conventional Insurance Impermissible and Takaful Permissible

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2.2.1 Why Conventional Insurance does not conform to Sharia Law

Conventional insurance does not comply with Shariah Law because of embodying certain features that are prohibited in an Islamic financial contract. There are three prohibitive elements in conventional insurance, that are, Usury (Al-Riba), Uncertainty (Al-Gharar), and Gambling (Al-Maysir).

2.2.1.1 Interest (Riba)

In conventional insurance, Riba means “Excess, Increase, or Addition” (Ali, 2012). It is also defined as illegal additional profits from lending, borrowing, or sale transactions (Suzuki & Miah, 2021). It is used for Usury or Interest, which can be easily found in commercial transactions. It might be categorized as secured (mortgage loans, life insurance loans, car loans, savings-secured loans, and hire-purchase loans) and unsecured loans (student loans and credit cards).

The prohibition of riba is stated in Quran and Hadith. Let's take some references.

وَمَآ اٰتَيْتُمْ مِّنْ رِّبًا لِّيَرْبُوَا۠ فِيْٓ اَمْوَالِ النَّاسِ فَلَا يَرْبُوْا عِنْدَ اللّٰهِ ۚوَمَآ اٰتَيْتُمْ مِّنْ زَكٰوةٍ تُرِيْدُوْنَ وَجْهَ اللّٰهِ فَاُولٰۤىِٕكَ هُمُ الْمُضْعِفُوْنَ39

“And whatever you give for interest to increase within the wealth of people will not increase with Allah. But what you give in Zakath, desiring the countenance of Allah – those are the multipliers.”

Surah Ar-Rome, (30:39)

Conventional insurance is forbidden in the Islamic Principle because the interest (Riba) is involved in the transactions. The insurers or operators usually invest the funds paid by policyholders in the interest-bearing account or securities. In other words, conventional insurance is operating investment activities using the concept of debt and equity, debt with the component of interest. Interest-based transactions are also shown in bilateral commercial transactions, where the transaction of money between both parties is uneven, with the consideration of clear interest. In addition, policyholders are eligible to obtain interest when they have paid the premium completely throughout the years (Shofawati, 2020). This means that the transaction takes place over time and is done in the future (Amanie, n. d.).

2.2.1.2 Uncertainty (Gharar)

Gharar means “unknown” or “uncertainty” and is also defined as “the sale of what is not yet present”. Business or other financial transactions are considered as Gharar when there is a likelihood of misunderstanding arising between both the buyer and seller on the agreed price of products or services, associated with a high level of uncertainty (Downey, 2022). For example, financial contracts such as derivatives, which include forward contracts, futures contracts, options, and swaps, possess potential risks and rewards due to their fluctuating prices.

The policyholder is uncertain about receiving protection or coverage from the insurance, making the existence of a Gharar element in the conventional insurance. From an Islamic legal standpoint, it is prohibited because policyholders behave without appropriate knowledge, taking a risk in insurance without fully understanding the potential implications. Both policyholders’ premium payment and the insurer’s indemnity as stated in the claim are uncertain. Risk arises if any party is trying to mislead another party through an unfair contract, causing the negotiation of the contract containing the elements of Gharar (Waemustafa & Sukri, 2016).

2.2.1.3 Gambling (Maysir)

Another element not compliant with conventional insurance is Maysir, which means gambling or speculation. Literally, it refers to a game of chance that involves money, where a person can either be a winner getting a profit easily without any skills and capabilities or be a loser unfortunately. Gambling practices can be found in common transactions, for example, the benefits provided by pure life insurance that are unpredictable and uncertain. Another social gambling behavior is Casino, either a physical place or online gambling, a place where money is merely transferred from losers to winners without any new money being created.

Other than that, the lucky draw is also one of the common activities that may involve gambling. In a lucky draw, a prohibitive element arises when people invest a small amount of money. Still, they expected and managed to receive a higher return, in terms of money, prize, or other things. However, if the gift is purchased with the organizer’s funds and not the participants’ funds, then it is halal and acceptable. Equivalently, the contest has a similar concept because of its little amount of entrance fee and enormous prize (Ismail, Mahat, & Mazlan, 2020).

According to Islam, one should only earn money legally such as salaries paid from working a job or extra income from putting effort into time, labor, and skill.  In the Quran Surah Al-Maidah (5: 91) has stated that “Satan only wants to cause between your animosity and hatred through intoxicants and gambling and to avert you from the remembrance of Allah and from prayer. So, will you not desist?”.

Conventional insurance is impermissible in Islamic transactions because of its gambling (Maysir) features and speculative nature of profit and loss. The insurer receives no claims and consideration for the conventional insurance paid at all. To be entitled to significant compensation for the accident, insurers are required to purchase a single premium. Since conventional insurance is a type of bilateral commercial transaction, the funds are contributed by both parties. This is like gambling because both parties have the potential to win a certain amount of money from each other, but one of them may likely lose everything if an unpredictable future event occurs.  As a result, conventional insurance does not guarantee financial gain and does not protect against unforeseeable losses.

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2.2.2 How Takaful is Sharia Compliant

Interest (al-riba), uncertainty (al-gharar), and gambling (al-maysir) are three elements in conventional insurance that are strictly prohibited in Islamic Shariah. To comply with Islamic Law, Takaful was established by the government and operated in Malaysia in November 1984. The term takaful contains the meaning of “guarantee”, “bail”, “warrant”, or “an act of securing one’s need”. It is also referred to as an agreement between two parties on mutually safeguarding one another against a specified loss. From the perspective of the insurance context, takaful helps protect and compensate participants who have suffered from risks or hazards.

اِنَّمَا الْمُؤْمِنُوْنَ اِخْوَةٌ فَاَصْلِحُوْا بَيْنَ اَخَوَيْكُمْ وَاتَّقُوا اللّٰهَ لَعَلَّكُمْ تُرْحَمُوْنَ (10)0

“The believers are but a single brotherhood: so, make peace and reconciliation between your two (contending) brothers; and fear Allah, that you may receive mercy”.

Surah Al-Hujurat (49:10)

Some conventional insurers invest in interest-bearing instruments such as bonds and loans. Therefore, conventional insurance involves the interest element, which is forbidden in Islamic law. The Takaful principle does not contain the element of riba (usury) as it is further strengthened by introducing the idea of “al-Tabaru”, which means donation. Based on the al-Mudharabah concept, funds contributed to Takaful are used to provide social assistance to those who are in hard times. The parties involved in Takaful such as customers, government, operators, and investors are willing to cooperate and collaborate, sharing the risk of loss. Anwar (2008) stated that a takaful entity must ensure that policyholder and shareholder funds are invested in non-Riba assets and that any bank with which the takaful company conducts business is not participating in the Riba. Unlike conventional insurers, their funds are restricted from investing in something that bears interest (Riba). The existence of a shariah board assists in ensuring the takaful company’s investment practices, policies, profit-sharing ratios, and procedures all adhere to shariah (Azhar & Arshad, 2012).

There is no uncertainty (Gharar) element that exists in Takaful as Islamic insurance is certain and definite.  The basic principle of the takaful system is to ensure wealth protection and social assistance, which is in line with the objectives of Sharia. Takaful is used for wealth preservation by shielding assets and resources from unforeseen events and possible loss, as well as safeguarding personal wealth from financial risks. In addition, takaful is employed for social security by protecting personal health from disease, extended illness, disaster, injury or handicap, or death. Since only God can decide when life begins and ends, takaful is an important tool for Islamic estate planning. For instance, a takaful policy that permits participants to designate a nominee to facilitate asset management following death. Participants can also appoint either an executor or Hibah proposals to arrange the contribution towards their needs (Azhar & Arshad, 2012).

The Takaful insurance is also free from the element of Maysir (gambling) because of the concepts of mutual protection, joint benefit, and shared responsibility that are incorporated. In Takaful, surplus profit would not be treated as the profit to the insurance company but is treated as a mutual contribution and distributed among the policyholders. This means that profit earning is not the priority while profit sharing is the real goal. Therefore, participants should make an effort to abstain from any pecuniary gain or self-profiting activities that can jeopardize the interests of other participants. The management of Takaful funds must be careful to refrain from subjecting such funds to greater returns associated with high-risk events (Karim & Jamal, 2012).

In short, Takaful is an alternative insurance scheme for both Muslims and non-Muslims. This transaction is free from all prohibitive elements, that are, Interest (al-riba), uncertainty (al-gharar), and gambling (al-maysir), adhering to the principles of Shariah Law and the guidelines of its Shariah Board. Takaful is not just preparing for the uncertainty of life, but also inspiring people to develop responsible financial planning practices, emphasizing the cooperation between participants. As a result, the security of individuals, families, society, and country will be guaranteed.

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2.3 Types of Shariah Contract Used in Takaful & Its Legal Issues

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2.3 Types of Shariah Contract Used in Takaful & Its Legal Issues

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One of the contracts under Islamic law is the Wakalah. It also goes by the name "agency contract." According to Prabowo and Jamal (2017), the word "Wakalah" is really a term that derives from the word "wakala," which means representation, agency, empowerment, and delegation. In technical language, wakalah means authorizing someone to act on one's behalf in any transaction. It is sometimes referred to as an agent. This gives the authority for the agent acting on the principal's behalf, either for free or paid.

The agency contract is authorized by law and practiced based on evidence from the As-Sunnah, and Al-Quran.

Al-Quran:

فَابْعَثُوْٓا اَحَدَكُمْ بِوَرِقِكُمْ هٰذِهٖٓ اِلَى الْمَدِيْنَةِ فَلْيَنْظُرْ اَيُّهَآ اَزْكٰى طَعَامًا فَلْيَأْتِكُمْ بِرِزْقٍ مِّنْهُ وَلْيَتَلَطَّفْ وَلَا يُشْعِرَنَّ بِكُمْ اَحَدًا

"Now, send one of you with your money to the town. Let him find out which is the best food (to be had) and bring some to you, that (you may) satisfy your hunger therewith: and let him behave with care and courtesy: not inform anyone about you."

- Surah Al-Kahfi (18:19)

As-Sunnah:

"Narrated by Jabir r.a, he said: I went out to Khaibar, and I came to the Prophet saw he said, "If you meet my agent, take or ask from him fifteen wasq."

-(Book 7, 887. Abu Daud quoted it and graded by Sahih Muslim)

Due to the people's dire need for help in achieving some duties that they are incapable of undertaking on their own, a majority of Muslim scholars has agreed on the legality of the wakalah contract (Sapuan, 2016). In today's world, an agent is critical to the spread and marketing of an insurance profession, particularly Islamic insurance in Malaysia. In the practice of Islamic insurance, the takaful firm, the insurer, may select an agent. The appointment might be either full-time or part-time in nature. The individual delegated is known as the Agent, and his primary responsibility is to apply his expertise to the enhancement of the designated work activities. Accordingly, under the terms of the al-Wakalah contract, the agent and principal are equally bound to one another. As a result, a Takaful operation is founded on the concept of the al-Wakalah contract.

Other scholars, such as the Hanbali, Maliki and Syafie, believe that an agency contract consists of 4 elements: Sighah (offer and acceptance), Muwakkil bih (object), Muwakkil (principal), and Wakil (agent) (Shamsuddin et al., 2013). For instance, Etiqa Takaful Berhad complies with Shari'ah principles in the Family Takaful Agency Agreement, which consists of four elements (Amin & Hamid, 2014). In terms of the offer and acceptance element, the declaration has to be made verbally or in writing. Family Takaful Agency Agreement had been formalized in writing. Only after reading and comprehending the terms and conditions of the contract will both parties sign on the last page of the agreement. Therefore, it satisfies the agency contract's offer and acceptance element. In relation to the element of principal and agent in this agreement, Etiqa Takaful Berhad, a takaful operator, is the agent. Etiqa Takaful Berhad is a firm that owns the takaful business and has complete control over it. Failure on the part of the agent to follow the company's instructions or directives will result in the contract being terminated. Last but not least, the Family Takaful Agency Agreement's object or subject matter aspect is acceptable according to Shari'ah principles since its product pertains to the matter of pension compensation, death claims, permanent and total disabilities, and education. The goal of the shared contribution made by the parties to this agreement is to assist individuals who are in need of those specific matters.

Legal Issue:

Wakalah contract ---- agency problem

The issue that arises in the Wakalah contract is an agency problem. An agency relationship is a contractual arrangement whereby a principal engages an agent to undertake services on the principal's behalf (Jensen & Meckling, 1976). The agent will have some decision-making power granted to it by the principal. According to the agency theory relationship, the Takaful operators (as agents) are assigned power to handle the Takaful fund by the participants (as principals). As a result, Takaful operators must act themselves in the participants' best interests. However, agency issues, such as moral hazard and adverse selection, may arise due to the separation of ownership and control, and Takaful operators may want to maximize their own interests to the detriment of the participants (Millson & Ward, 2005).

The major problem from agency theory, the presence of agency cost, or the difference in firm value between 100% owner managed and non100% owner managed enterprises, is therefore the primary problem with the agency theory (Mueller, 2006 & Williams et al., 2006). The principal of Wakalah in Takaful is a contract between the participants and Takaful operator. The agent is able to provide services under this contract and get payment for them. From the viewpoint of Shari'ah, unless there is gross carelessness or other misbehavior, the Wakil (agent) is not liable for any losses and not entitled to share the profit. Because he isn't able to share the profit, the agent may be unmotivated to perform better.  However, in certain instances, the agent receives a performance fee in exchange for any sound fund management; this presents another issue of personal aggrandizement. This leads the agent to put his or her personal interests ahead of all others because of this promise. Therefore, by preventing the participant who experiences a loss from receiving sufficient compensation, the agent may attempt to maximize profit at the lowest possible cost in this scenario. It will lead to unethical behavior, which is not permitted in Islam. According to Bukhari and Muslim, the S.A.W (Prophet) stated, "Each of you has a responsibility, and each of you is responsible towards those under your responsibility."

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The term "tabarru'" an Arabic word, which means "donation," is used to refer to contribution-based contracts. The Shariah Advisory Council (SAC) of Bank Negara Malaysia defines tabarru’ as a "contract of gratuity" which entails giving up a portion of the contribution as a donation in order to fulfill the duty of mutual aid and using that money to settle claims made by qualified claimants. Based on the general principles of a contract, a Tabarru' is formed wherein the party making it commits themselves unilaterally by providing something of value for the noble purpose goal of ensuring the wellbeing of others. In takaful operations, the tabarru’ concept is used to represent the relationship between participants (SAC BNM, 2010).

According to the Engku Rabiah and P.Odierno (2008), the aspect of tabarru' (donation) is therefore the key distinction between (takaful) (Islamic insurance) and conventional insurance. The use of tabarru' contracts makes the transaction valid and acceptable under Shariah law because the rule against uncertainty (Gharar) cannot be strictly applied when a contract is charity-based rather than exchange-based (Rusly & Ahmad, 2003, Engku Rabiah & P.Odierno, 2008). The element of the contract of al-Tabarru' is directly involved in a Takaful operation. For instance, the Participants' Account (PA) and the Participants' Special Account (PSA) are the primary accounts to which contributions from participants are credited. The sum credited to the PSA is known as Tabarru', and it is maintained by the Takaful operator in order to offer protection for others who need it. In other words, the participants have no right to gain from the PSA and are unilaterally obligated to pay the cash into the PSA.

Islam incorporates the idea of tabarru’ to make it lawful. To fulfill his duty to provide a shared guarantee and mutual help in the event that any of his fellow participants sustain a specific loss, a participant, in this case, agrees to contribute as tabarru', which is a certain percentage or all of his takaful contributions that he or she agrees or undertakes to pay (Yusof, 1996). Through Tabarru, participants would be able to carry out their good actions in really helping other participants who may sustain harm or loss as a result of a disaster or calamity. In takaful, the effect of tabarru' shifts the insurance contract's base to a donation or charity contract from an exchange contract.  The unknown (Gharar) is permitted when a contract is charitable (tabarru'). In actuality, the donation contract is unknowable by definition. For example, none of the participants knew in advance when or how they would experience death or property damage as a result of pure risks.  In the case of a loss, they can support one another by contributing their money. This is not the same things as a conventional insurance contract, which is based on the purchase and sale of protection (subject matter). Participants' premium payments are made with the intention of fostering mutual aid and indemnification among the group's members. Consequently, the tabarru' element conforms to Shariah and eliminates the objectionable aspects of conventional insurance.

Legal Issue:

Tabarru' Contract ---- element of Gharar (uncertainty) is not fully eliminated

Although all jurists concur that the concept of tabarru' is really honorable in Islam, the application of tabarru' in takaful is still up for debate and is an unresolved contentious Shari'ah issue because contributions made by the participants may not represent a donation in the pure sense which contributes to the elements of uncertainty (Gharar) being there, not fully eliminated (Jaffer, et. Al, 2010).

Instead, the donation is made on the condition that each takaful member contributes a particular amount to cover an unanticipated future financial loss. The requirement to make a donation or contribution is in place in order to get compensation in the future. As a result, the participant knows that they will get their money back, making the donation is created conditionally. Furthermore, the degree level of risk also determines the contribution amount. The donation rate is modified based on the participants' risk exposure; the biggest the risk exposure, the larger the charge for the contribution amount. The idea of tabarru' is meant supposed to be carried out voluntarily rather than mandatory, which presents Shari'ah concerns among scholars (Ali et al., 2015).

Moreover, it is contended that granting the participant the right to file a claim for the compensation of the contribution paid will transform the takaful concept into a bilateral contract (Mu'awadah), in which funds donated are swapped for funds claimed. Similar to its conventional counterpart, the issues of Maysir and Gharar arise at this point since it is ambiguous of the subject matters exchanged.

Some scholars believe that the Maliki school of thought provides strong support for the notion of turning something voluntary into an obligation (Ab Rahman & Mohamad, 2010). From this viewpoint, the participant's donation is regarded as an iltizam bi al-tabarru' (self-commitment to contribute) that has been sanctioned by Shari’ah. This concept states that anybody who commits to doing good is obligated to do so. However, some scholars, disagree with this idea since it involves two promises that result in a bilateral contract which are contribution and indemnity. However, this criticism is being refuted by the argument that, despite the concept's two commitments (donation and indemnity), but the indemnification is not certain because it is dependent on the disaster occurring (Muhammad, 2010).

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An Islamic financial contract known as a mudarabah is usually used in relation to Takaful, which is an Islamic insurance product. In a Mudarabah contract, there are two parties involved: the Rab-ul-Maal which is the capital provider and the Mudarib which is the insurer. This contract is designed to facilitate the sharing of profits and losses between these two parties. Ibn Manzur (2006) states in Lisan al-Arab that a mudarabah is a contract in which two parties exchange capital—one provides the capital and the other receives it in exchange for engaging in trade. Through a mutual agreement, the parties have a deal whereby the profit is divided between them or whereby the latter is entitled to a defined share of the profit (Sadique, 2009).

The Mudarib, also known as the Takaful operator, is in charge of overseeing the Takaful fund and making investment decisions on behalf of the participants. The funds received from the participants is invested by the Takaful operator in Sharia-compliant securities. The participants are the Rab-ul-Maal. They contribute their premiums or contributions to the Takaful fund. These contributions are pooled together to create a common Takaful’s fund. After a period of time, any profits generated from the Takaful’s investments are shared between the operator and the participants according to a pre-agreed profit-sharing ratio.

After all the related claims and expenses such as management fee of Takaful have been accounted for, the remaining profit is distributed among the participants. The Quran place a strong emphasis on sharing of profits and losses, cooperation, and mutual benefit. The cooperative spirit of Mudarabah is reflected, for instance, in Surah Al-Hadid (57:18), where it is said that those who practice generosity and "loan Allah a goodly loan" will see their efforts quadrupled.

The participants bear the loss in the event of losses or negative Takaful’s investment outcomes. Therefore, due to a number of obstacles such regulatory restrictions and moral hazard issues, financial institutions actually find the profit-loss sharing (PLS) contract to be less desirable (Mazuin, 2016). Additionally, the clients lack the courage to take on the risk associated with this type of financing.

Furthermore, in the event of a loss, the takaful operator does not receive any management fee. Qard Hasan will be used in the event of a loss, when there is a deficit or the claims amount beyond the takaful funds. The Qard Hasan scheme (free-interest loan) is the special feature in Mudarabah takaful model practices which is an approach to overcome takaful fund deficits caused by claims. Once the fund is in surplus, this free-interest loan will be repaid (Htay et. al, 2013).

The Mudarabah contract used in Takaful is created to adhere by the rules of Islamic finance, which prevent engaging in activities regarded Haram (forbidden), such as gambling or investing in businesses that deal with alcohol, as well as the payment or receiving of interest (Riba).

Legal Issue:

Mudarabah Contract ---- Qard Hasan Issue

Since the Mudarabah takaful contract was established, the Qard Hasan issue has been arisen and has been the topic of ongoing scholarly debate for a long period of time. Qard Hassan can be defined as an interest-free loan in the Islamic religion, or zero-return loan. Qard is described as providing a property to be consumed with the expectation that the party will return it later (Al-Mawsu\ah al-Fiqhiyyah al-Kuwaitiyyah, 1993). The problem in takaful practises arises when the total amount of claims exceeding the contributions. In other words, the Takaful Operator will suffer a contribution deficit, when contributions are insufficient to cover the claims. If the deficit is to be covered by shareholders, then another question that will come up is whether the Takaful Operator would manage the deficit fairly or if it will require participants to pay more to cover the deficits.

Further to this issue, Onagun (2011) mentioned that the Takaful Operator finds it challenging to maintain fairness regarding participant differences according to the period of involvement. To make up for the previous years' loss, the new participants have to contribute more. Another potential consequence of the deficit issue is that judgments about paying the deficit may result in the new participants receiving little or no underwriting surplus.

Aside from that, one typical issue with Qard Hasan is misconception and misunderstanding of its notion (Farooq, 2011). This happens as a result of Qard Hasan's unclear and imprecise terms and conditions about the timing and payback of the funds (Sohail, 2007). As the Qard Hasan is a benevolent loan, it implies that the borrower cannot be forced to repay. If participants fail to pay back the benevolent loan, the lender, who is the shareholder, has to accept it as a charity. This is why certain shareholders feel worried when a deficit occurs in the takaful operation.

As a result, any deficit from the fund required to cover claims must be borne by the shareholders. Furthermore, the Takaful Operator is not permitted to collect the portion from participants to offset their deficits under any circumstances. The Takaful Operatorqa's impartiality and transparency in providing information regarding the deficit, however, raises another point that should be brought to light.

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Waqf is derived from the Arabic term 'al-Waqf'. Waqf has several literal meanings, include the following: to halt (al-sukun), to prevent (al-mana'a), to suppress, or to detain (al-habs) (Ayub, 1998). It conveys the idea that something should be kept from being consumed and its benefits should be distributed for the purpose of ibadah (Abu al-Fadl, 1982). Therefore, Waqf is widely defined as the holding and preservation of a particular sadaqah (charity) with the aim of forbidding any use or disposition of the property other than the specified purposes for which it is not allowed to be sold (Chowdhury et al., 1996).

The Waqf-Takaful concept has only been applied in Arab countries, and Malaysia should seize this chance to instill Waqf culture among Muslim populations, as Waqf is the death saving for life after death, and it is a long-term recompense offered by Allah. A hadith narrated by Muslims, pertaining to the Prophet saw. There is no mention of Waqf in the Qur'an specifically. However, Allah emphasizes the value of sadaqah (charitable giving) in the Qur'an through endowments and donations (Chowdhury et al., 2011). Abu Hurairah emphasizes the everlasting advantages of three categories of deeds: recurring charity, sadaqah jariyyah, helpful knowledge, and pious children.

‘When a man dies, his deeds come to an end except for three things: Sadaqah Jariyah (ceaseless charity); a knowledge which is beneficial, or a virtuous descendant who prays for him (for the deceased)’

-          Hadith by Sahih Muslim

In Takaful, "Waqf" refers to the allocation of benefits for death compensation to specific religious institutions in order to establish permanent Waqf property. In Takaful, waqf can supplement contributors' financial requirements while also meeting community needs (Muhamat et al., 2019). In this case, the Waqf will continue to exist after the contributor passes away, and the Waqf recipient's compensation will be utilized for religious welfare up to the Day of Judgment.

The Takaful Waqf Plan's fundamental idea is to allow anyone to save consistently in order to build up a fund that can be bequeathed as a donation under the waqf system. Through the accumulation of the takaful payments, paid on a regular basis over a set period of time, the participant (contributor) might accumulate an amount of money, which would then be sufficient to be endowed as waqf.

Legal Issue:

Waqf Contract ---- Unclear Information about loss in the contract

Takaful Waqf Contract was found that there are some unclear Shariah issues. The certificate states that any earnings created from the takaful instalment investment will be dispersed in accordance with the mudarabah principle at a 70:30 (participant and firm) ratio. However, there is no mention of the loss. The amount of money in the participants' accounts will be less than anticipated if this actually occurs. In the end, they would be unable to donate the anticipated amount of money for waqf (Hashim, 2007).

If a participant passes away, Takaful Malaysia will pay the waqf recipient the takaful benefits, which include the remaining balance in the participant's account plus the unpaid takaful payments for the time between the death and maturity dates. The Special Accounts of the Participants will be used to make this payment. What happens if there is not sufficient funds in the Participants' Special Accounts to cover the payment?  For example, a person promises to pay an annual installment of ten million for 10 years and to contribute a substantial amount of money (for instance, one hundred million) to waqf. The person passes away after the first payment. Another example is when a high number of people are killed in a disaster. In either scenario, the whole balance in the Participants' Special Account could not be sufficient to cover the deceased participants' pledge. The contract is unclear about what should happen in this kind of scenario—that is, whether the company or the other participants will have to make the payment? Despite the fact that this is an extremely unusual event by definition, it is appropriate to have a comprehensive plan in place to manage the risk and to informed participants from the very beginning.

An additional issue is that, in certain situations, it is discovered that the Waqf manager or mutawalli, who are in charge of overseeing the Waqf fund, are not competent (Chowdhury, 2012). In certain cases, non-Muslims overseeing the Waqf are incompetent in managing it, both intellectually and ethically. In light of this, how can authorities trust them in the absence of their core values? That means Waqf assets should be granted to the best Mutawalli (Waqf manager) based on their competence, willingness, and beliefs, as well as their ability to utilize the fund with confidence and dependability.

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Figure 1: Modus Operandi for Family Takaful based on the Wakalah contract & Tabarru` contract

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In a family takaful contract, members designate the takaful operator as their agent to handle their money and all matters connecting with the takaful activity. In this case, the Wakalah contract serves as the foundation for the contractual arrangement between the takaful operator and the participants. Because of this, the takaful operator is qualified to be paid for any services rendered in the capacity of a representative handling the funds of the takaful participants.

Participants additionally concur that any premium or portion paid by them will be credited into two accounts that are tabarru' account (participants' special account) and the participants' account. The takaful operator will invest this money on behalf of the participants in Shariah-compliant instruments in accordance with a wakalah contract.  Any earnings made from this financial activity are the property of the participants.

We believe that the principle of sadaqah, which has no precise rules or regulations, is the most suited to employ in order to satisfy the demand for a definition of a tabarru' contract in the Malaysian takaful industry. Moreover, we think that sadaqah is the best concept to apply when drafting a tabarru' contract since it embodies the spirit of takaful, which is to support and shield one another in times of sorrow.

When people sign up for a takaful plan, they really commit to contributing a portion of their fund to the tabarru' account. The money accumulated in this account will support the takaful members as well as their families. As a result, if the participant dies, the monies accumulated in his or her account will be given to the participant's heirs in line with faraid law.

If there is a surplus in the tabarru' fund, it can be carried forward to the next year, donated to Shariah-compliant charity organizations,or returned to the participants.

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2.5 Role of Takaful Agent According to Al-Quran and Sunnah

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2.5 Role of Takaful Agent According to Al-Quran and Sunnah

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The Arabic word for "agent," or "wakeel," appears several times in the Qur'an and Sunnah. It denotes a person's conduct of representing another person in specific situations.

يَوْمًا اَوْ بَعْضَ يَوْمٍۗ قَالُوْا رَبُّكُمْ اَعْلَمُ بِمَا لَبِثْتُمْۗ فَابْعَثُوْٓا اَحَدَكُمْ بِوَرِقِكُمْ هٰذِهٖٓ اِلَى الْمَدِيْنَةِ فَلْيَنْظُرْ اَيُّهَآ اَزْكٰى طَعَامًا فَلْيَأْتِكُمْ بِرِزْقٍ مِّنْهُ وَلْيَتَلَطَّفْ وَلَا يُشْعِرَنَّ بِكُمْ اَحَدًا 19

And so, We awakened them so that they might question one another. One of them exclaimed, “How long have you remained ˹asleep˺?” Some replied, “Perhaps a day, or part of a day.” They said ˹to one another˺, “Your Lord knows best how long you have remained. So, send one of you with these silver coins of yours to the city, and let him find which food is the purest, and then bring you provisions from it. Let him be ˹exceptionally˺ cautious, and do not let him give you away.

Surah Al-Kahfi (15:19)

According to surah Al-Kahfi (15:19), the phrase “so send one of you with these silver coins of yours to the city and let him find which food is the purest and then bring you provisions from it” shows the early meaning of takaful agent in Islam. This is because according to Islamic history, there were several guys whose homes were destroyed because they held an Islamic belief. After arriving in a cave, Allah forced them to sleep for a long period of time (309 lunar years, or 300 solar years). They felt as though they had slept for a whole or nearly full day when they woke up. One of them disguised himself and went to the town to obtain some food, fearing that others might see and hurt him. only to discover himself surrounded by new individuals. The look of this man and the ancient coins he was using astounded the residents of the town (OnePath Network, 2021). The trust they put on one of the guys to go to the town and find some food with their money can be defined as the concept of takaful agent. Takaful agent acts as the person responsible for becoming the medium in between the insurer of takaful insurance and the insured person.

Regarding Takaful, the agents should:

1. have a clear aim to genuinely assist consumers. In this situation, Takaful agents shouldn't let their own interests get in the way of the admirable goals of Takaful. This can be achieved by giving their customers access to all product details and making recommendations for the best products that will meet their demands going forward. They have to be sincere, accountable, follow through on promises, patient, and committed.

2. should be pivotal in recognizing Takaful as the finest Islamic approach for financial management. Agents are accountable for providing Takaful services in addition to selling Takaful goods.

3. should elucidate the beauty of Takaful's Tabarru principle and how it differs from its conventional insurance. Every Takaful agent needs to spread this message. To fulfill the objective of Takaful, the contract must be interpreted in accordance with the Islamic notion of Ibadah and the Tabarru’ and shared responsibility concepts (Mohd Akram, 2012).

4. are responsible for educating the public about the fundamental objective of Takaful products, as well as the significance of making plans for their heirs' financial protection. Islam has made it clear that should protect the welfare of their heirs when they pass away. According to a hadith of the Prophet Muhammad (s.a.w.), it is preferable for one to leave their offspring wealthy rather than poor, relying on others for assistance.

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To conclude, takaful insurance and conventional insurance are some of the resorts to map out for possible scenarios and ambiguities of life. In Islam, Muslim usually depends on the al-qada' wal qadr which means the belief of fate and destiny. Therefore, they tend to put behind the possibilities of changing their fate and destiny even though there are many alternatives to help them provide assurance in life. In insurance business, it is necessary for Muslim to take up the Takaful product as it is by virtue of Islamic Principles despite the fact that many elements such as Ghara, Maysir, and Riba are entangled with it. The existence of takaful satisfies shariah aims through its underlying premise of mutual collaboration and oneness. Investing in a Takaful plan that meets our necessities adds to good money management in both the immediate and long-term. For non-Muslim, conventional insurance may seem like the best option of protection as it provides them more comprehensive coverage of insurer with fixed commission fee. Whatever paths are chosen, make sure to do some homework and obtain the greatest protection for according to the needs.

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In EBA3143 Commercial Law, we are requested to conduct the analysis of Principles of Valid contracts and Types of Syari’ah Contracts in Commercial transactions. We need to work in a group of 5 people with multiple races to complete this assignment. On 28 October 2023, I met with the other members of my group to choose the topic we would like to work on for this project.  After a discussion among the group members, we decided to choose to do "Syari’ah Contracts in Commercial Transactions: Insights from Takaful and Conventional Insurance Practices".

Challenge of group work:

The common challenge of group work in our group is time constraints to complete this project. Because the due date of this project is close to the date of our midterm test and another assignment as well, we must manage our time properly in order to complete this assignment. It was quite challenging for us. We made every effort to finish our project before the deadline. Besides, we also face trapped while doing group work. It is really difficult for us to complete this assignment because this assignment related to Shariah law is a new topic to us.  Nevertheless, we made every effort to finish this assignment. In addition, all members of a perfect group participate and contribute equally. In truth, there is usually at least one member of a group who would rather assign tasks to others.

Another challenge of group work is the communication within the group members. In this group work, most of the time we communicate by using WhatsApp. Even though this method makes it easier for us to communicate at any time, but it causes the problem that some members are unable to notice the message on time as they are possibly offline or slip through the message. This scenario results in members being unable to communicate in a timely manner and delays communication. Thus, when a new problem arises, it takes more time to solve the problem.

Benefit of Group Work:

Challenges emerged, highlighting the importance of clear communication and coordination. Throughout this project, we learned the importance of communication between the group members. Some of us experience miscommunication and misunderstanding among us but we successfully manage it without taking any serious and hurting other members' feelings. Besides, cooperation among the group members is important as we did it as one team. We cannot do a challenging project alone and working in a group can help us save a lot of time. Reflecting on the experience, we recognize the significance of proactive planning and addressing conflicts promptly for smoother collaboration in future assignments.

One and only one Malays girl in this group, that is Haziqah, has spent a lot of time, consideration, and energy on teaching the correct pronunciation of these Arabic terms, as well as explaining the meaning of the quotes from al-Quran and al-Sunnah. Now we have realized and understood the painstaking efforts made by Madam through the instructions that we should form a multicultural and diverse team in this assignment. Without this assignment, four of the Chinese girls might have a lack of opportunities to get a deep understanding of Islamic things, which contains a lot of Arabic terms such as Riba, Gharar, Maysir, Tabarru, Takaful, and so on.

Furthermore, we are quite appreciative that there are no freeloaders in our group. Each of our team members possess different skills. For example, Winnie has a strong leadership skill, good at delegating part of assignments and distributing tasks to us, and always keeps the group progression on track. Bong and Queenie possess excellent graphic design skills, work hand in hand to help creating a high-quality and colourful Canva presentation slide and helping others to arrange the important points that are required to be presented. Chin has always been responsive in the group chat to solve the question asked and recommend it because she is an expert at researching reliable and relevant journal articles.

What have we learnt from this assignment related to our topic:

In this assignment, we are given an opportunity to acknowledge the differences between Conventional and Takaful Insurance. Exploring the differences between conventional and takaful insurance through this assignment has been informative. It is now evident how dissimilar their fundamental principles are from one another: takaful, which has its roots in Islamic values, encourages a collaborative, community-based strategy for risk management. The idea of sharing responsibilities and helping one another sticks out from Takaful Insurance. Conventional insurance, on the other hand, has a more individualistic and profit-driven structure since policyholders pay premiums to a corporation that takes on the risk.

We have also learned about how Islamic principles of valid contracts relate to conventional insurance and takaful insurance. It shows why Islamic principles allow Takaful Insurance and do not allow Conventional Insurance depending on the situation. Al-Quran and Al-Sunnah are our guides on this group project. For Muslims, they are required to choose only Islamic insurance, that is Takaful Insurance, complying with Islamic principles. For non-Muslims, although there is no prohibition on choosing insurance, they are recommended and allowed to be a party in Takaful Insurance, aiming for a win-win situation. In addition, controversial issues arising in the context of Takaful Insurance have been founded and discussed.

Improvement for the next time:

We now know that meticulous preparation is the most crucial step to do when given an assignment or project, which will help us with our next group project. This is because group assignments are more difficult than individual assignments. As a result, group members must be arranged by meticulous planning in accordance with the project requirements. For instance, to appreciate the point of view of the project structure, all participants must first completely understand the purpose of the provided project. This stage should be completed as soon as possible to prevent missing deadlines.

The next step is to assign the task to each member of the group. For ideal collaboration, it is critical to distribute the tasks in the group evenly. This work allocation is required in every group project to guarantee that everyone is involved with the project and can boost the group's efficiency and production. It is advised that members select the duty for which they are most capable and strong in order to ensure that the distribution of work becomes more effective. This way, they can make the necessary preparations. In reality, the group project may proceed more smoothly as a result of this.

Furthermore, for future group projects, we will be harsher in choosing the timeframes for the project that is earlier than the provided due date. We feel that by specifying completion dates for the project, people may better manage their time and fulfill their particular tasks on time. It is preferable if all members hold each other accountable by reminding each other of the group's objective due dates. Furthermore, if our group completes the project sooner, we will have the opportunity to review all portions and take remedial steps as needed. A highly thorough strategy is required anytime we operate as a group since it aids in the achievement of the project's objectives and aims.

Conclude:

Although the process of this group project was very tortuous as we encountered many difficulties, fortunately, we were able to successfully complete this group project in the end. This project not only allowed us to gain a lot of knowledge about Takaful, Conventional Insurance, and Shariah Law but also taught us how to exert ourselves and contribute to a team. Hopefully, this experience can lay a good foundation for our future group work.

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EBA3143 Commercial Law (G15) (Full Report_Without Turnitin)

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EBA3143 Commercial Law (G15_Turnitin Report)

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EBA3143 Commercial Law (G15) (Presentation Slide)