Module 6 Shariah Governance and Ethics for Takaful Operators
Module 6: Shariah Governance and Ethics for Takaful Operators LEARNING OUTCOMES At the end of the programme, the participants will be able to: • Demonstrate Shariah Governance Framework of a Takaful Operator • Demonstrate Essential Shariah Requirements in Takaful • Classify Basic Code of Ethics for Takaful Staff and Agents 2
Module 6: Shariah Governance and Ethics for Takaful Operators 3 LEARNING TOPICS: Shariah Governance Framework Essential Shariah Requirements in Takaful Code of Ethics — Staff and Agents of Takaful Operators 1 2 3
Module 6: Shariah Governance and Ethics for Takaful Operators SHARIAH GOVERNANCE FRAMEWORK
Module 6: Shariah Governance and Ethics for Takaful Operators SHARIAH GOVERNANCE POLICY DOCUMENT (SGPD 2019) SHARIAH GOVERNANCE FRAMEWORK This policy document comes into effect on 1 April 2020, and paragraph 12.5 only come into effect on April 1, 2023 This policy document is applicable to Islamic financial institutions (IFIs) which include the following: 5
Module 6: Shariah Governance and Ethics for Takaful Operators SHARIAH GOVERNANCE FRAMEWORK 6 The Board of Directors
Module 6: Shariah Governance and Ethics for Takaful Operators Roles and Responsibilities The Board of Directors SHARIAH GOVERNANCE FRAMEWORK 7
Module 6: Shariah Governance and Ethics for Takaful Operators Interaction with Shariah Committee The Board of Directors SHARIAH GOVERNANCE FRAMEWORK 8
Module 6: Shariah Governance and Ethics for Takaful Operators Interaction with Shariah Committee (cont’d) The Board of Directors SHARIAH GOVERNANCE FRAMEWORK 9
Module 6: Shariah Governance and Ethics for Takaful Operators Roles and Responsibilities Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 10
Module 6: Shariah Governance and Ethics for Takaful Operators Roles and Responsibilities (cont’d) Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 11
Module 6: Shariah Governance and Ethics for Takaful Operators Composition of Shariah Committee Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 12
Module 6: Shariah Governance and Ethics for Takaful Operators Shariah Committee Meetings Shariah Committee The Chairman of the Shariah Committee must: SHARIAH GOVERNANCE FRAMEWORK 13
Module 6: Shariah Governance and Ethics for Takaful Operators Shariah Committee Meetings Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 14
Module 6: Shariah Governance and Ethics for Takaful Operators Shariah Committee Meetings Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 15
Module 6: Shariah Governance and Ethics for Takaful Operators Secretariat to the Shariah Committee Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 16
Module 6: Shariah Governance and Ethics for Takaful Operators Secretariat to the Shariah Committee Shariah Committee SHARIAH GOVERNANCE FRAMEWORK 17 Duties and responsibilities of Shariah secretariat
Module 6: Shariah Governance and Ethics for Takaful Operators Roles and Responsibilities Senior Management SHARIAH GOVERNANCE FRAMEWORK 18
Module 6: Shariah Governance and Ethics for Takaful Operators Control Functions under Shariah Governance Control Functions SHARIAH GOVERNANCE FRAMEWORK 19
Module 6: Shariah Governance and Ethics for Takaful Operators Shariah Risk Management Control Functions SHARIAH GOVERNANCE FRAMEWORK 20 Shariah Risk Management is a function that systematically identifies, measures, monitors and reports Shariah noncompliance risks in the operations, business, affairs and activities of the IFI.
Module 6: Shariah Governance and Ethics for Takaful Operators Shariah Review Shariah review refers to a function that conducts regular assessment on the compliance of the operations, business, affairs and activities of the IFI with Shariah requirements. Control Functions SHARIAH GOVERNANCE FRAMEWORK 21
Module 6: Shariah Governance and Ethics for Takaful Operators Control Functions Shariah Audit Shariah audit refers to a function that provides an independent assessment on : The senior officer principally accountable and responsible for internal audit shall be responsible for Shariah audit which forms part of the overall internal audit function An IFI must ensure that its internal auditors who perform the Shariah audit function are qualified to perform internal audit and have the requisite knowledge on Shariah requirements applicable to Islamic financial business BNM may require the IFI to appoint any persons as the Bank may approve to conduct an independent audit on Shariah compliance by the IFI SHARIAH GOVERNANCE FRAMEWORK 22
Module 6: Shariah Governance and Ethics for Takaful Operators Shariah Compliance Culture and Remuneration SHARIAH GOVERNANCE FRAMEWORK 23
Module 6: Shariah Governance and Ethics for Takaful Operators Transparency and Disclosure Disclosures must include: The IFI may also publish the disclosures on its website SHARIAH GOVERNANCE FRAMEWORK 24
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 26
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Takaful Model Based on Tabarru` and Wakalah 27 The SAC, in its 24th meeting dated 24 April 2002, has resolved that the Takaful business model based on tabarru` and wakalah is permissible. The wakalah contract is concluded between the participants and the Takaful company, whereas the tabarru` contract is concluded amongst the participants only. In the 2 nd special meeting dated 18 June 2007, the SAC has also resolved that a Retakaful business model based on tabarru` and wakalah is permissible in Shariah. 2002
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Hibah in Takaful 28 The SAC, in its 34th meeting dated 21 April 2003, has resolved the following: i. 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; ii. Since the hibah by the participant is a conditional hibah, the status of the hibah will not be transformed into a bequest; iii. Normally, Takaful benefit is attached to the death of participant and maturity of Takaful certificate. If the participant is still alive when the Takaful certificate matures, the participant will receive the Takaful benefit. However, if the participant passed away before the maturity date, the hibah will be effective; iv. 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); v. 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; and vi. Takaful nomination form shall clearly mention that the status of nominee is as beneficiary, if it is intended by the participant as hibah. 2003
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Nomination Based on Hibah under Takaful Scheme 29 i. The SAC, in its 52nd meeting dated 2 August 2005, has resolved that the concept of statutory protection as practised by conventional insurance may be applied in Takaful industry in the following manners: ii. Payment of Takaful benefit will neither become part of the estate of the deceased (Takaful participant) nor subject to the deceased’s debt; a) There is no appointed trustee; b) Nominee is incompetent to enter into a contract; and c) The parents had predeceased the nominee in the event the nominee is incompetent to enter into a contract. iii. The Takaful participant may appoint a responsible trustee for the Takaful benefit. However, the government-owned trustee will be the trustee for such Takaful benefit in the following situations: iv. Once the trustee received the Takaful benefit, the Takaful company is deemed to be released from all liabilities relating to such Takaful benefit. 2005
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Retakaful with Conventional Insurance and Reinsurance Company 30 The SAC, in its 47th meeting dated 14 February 2005, has resolved the following: i. A Takaful company is not allowed to accept inward Retakaful whether on treaty or facultative basis from a conventional insurance company and reinsurance company; and ii. A Takaful company is given the flexibility to distribute its risks based on outward Retakaful to conventional insurance company and reinsurance company subject to the following conditions: a) Priority shall be given to a Takaful company and Retakaful company; b) Non-existence of a Takaful company and Retakaful company, either locally or internationally, that is viewed as capable to absorb the distributed risks; and c) The strength of the Takaful company and Retakaful Company, either locally or internationally, is doubtful. 2005
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Co-Takaful Agreement 31 The SAC, in its 47th meeting dated 14 February 2005, has resolved that co-Takaful between a Takaful company and a conventional insurance company is permissible provided that the execution of the agreement between the customer and the Takaful company as well as between the customer and the conventional insurance company are done separately. 2005
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Takaful Coverage for Conventional Loans 32 The SAC, in its 54th meeting dated 27 October 2005, has resolved that a Takaful company may offer a Takaful coverage for a customer’s asset even though the asset is financed conventionally, provided that it is offered separately and not as a package. 2005
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Segregation of Takaful Funds 33 The SAC, in its 62nd meeting dated 4 October 2006, has resolved that the proposal to segregate Takaful funds as outlined below is permissible: i. Participants’ Investment Fund that belongs to the individual participants. The portion of contribution for investment purpose from the participants will be credited into this fund; and ii. Participants’ Risk Fund that belongs to Takaful participants collectively. The portion of contribution received from the participants based on tabarru` concept will be credited into this fund. 2006
Module 6: Shariah Governance and Ethics for Takaful Operators ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL SAC BNM resolution: Distribution of Investment Profit from Participants’ Investment Fund and Participants’ Risk Fund 34 The SAC, in its 62nd meeting dated 4 October 2006, has resolved that a Takaful company is allowed to share or to impose fee or performance fee on the investment profits from participants’ investment fund and participants’ risk fund subject to the following: i. For sharing of investment profit from the participants’ investment fund: ii. The investment profits may be distributed to the Takaful company on the basis of profit sharing or management fee of the participants’ investment fund. In order to ensure that the amount in participants’ investment fund is sufficient to maintain tabarru` payment, the distributed profit or fee to the Takaful company shall be adjusted appropriately. iii. For sharing of investment profit from participants’ risk fund: a) For Takaful model based on mudarabah, the Takaful company is allowed to share the profit whereas for Takaful model based on wakalah, the Takaful company is allowed to charge a fee or performance fee on the investment profit of the participants’ risk fund. However, the distribution of the investment profit, either through profit sharing or imposition of fee or performance fee by the Takaful company, may only be done if there is surplus in participants’ risk fund after taking into account provision for payment of claims, Retakaful and required reserves; and b) Profit sharing ratio or imposition of performance fee distributed to the Takaful company shall be reasonable and the distribution of the investment profit shall be expressly stated in the takaful agreement contract. 2006
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Provision of Reserve in Takaful Business ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 35 The SAC, in its 62nd meeting dated 4 October 2006, has resolved that provision of reserve in Takaful fund is permissible. 2006
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Mechanism to Overcome Deficit in Participants’ Risk Fund ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 36 The SAC, in its 38th meeting dated 28 August 2003, 46th meeting dated 28 October 2004 and 62nd meeting dated 4 October 2006, has resolved the following: i. Takaful company shall be responsible for any insufficiency of the participants’ risk fund by injecting fund from the shareholders fund on the basis of qard; and ii. The Takaful company shall make an outright transfer from the shareholders fund to the participants’ risk fund in the event the deficit is still persistent or due to mismanagement of the participants’ risk fund. 2006
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Distribution of Surplus from Participants’ Risk Fund ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 37 The SAC, in its 42nd meeting dated 25 March 2004 and 59th meeting dated 25 May 2006, has resolved that surplus from participants’ risk fund (for family Takaful and general Takaful plan) may be distributed amongst the participants and the Takaful company. However, the method of distribution shall be clearly mentioned and agreed upon by the Takaful participants during conclusion of the takaful contract. The SAC, in its 62nd meeting dated 4 October 2006, has further resolved that: i. For Takaful model based on wakalah concept, the risk fund surplus may be taken by the Takaful fund manager as a performance fee based on an agreed percentage; and ii. For Takaful model based on mudarabah concept, the surplus from participants’ risk fund may be shared between the participants and Takaful company based on percentage or profit sharing ratio as agreed by all contracting parties. 2006
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Imposition of Management Fee on Takaful Participants’ Contribution ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 38 The SAC, in its 62nd meeting dated 4 October 2006, has resolved the following: i. For Takaful model based on wakalah contract, Takaful company is allowed to charge management fee on contribution paid by Takaful participants. The amount of management fee shall consider the responsibilities of Takaful company towards Takaful participants and shall be agreed upon by the contracting parties. The imposition of management fee shall be clearly stated in Takaful agreement contract; and ii. For Takaful model based on mudarabah contract, Takaful company is not allowed to charge any management fee on contribution paid by Takaful participants. On the other hand, all operational expenses shall be borne by the shareholders fund whereby its income is derived from its share of investment profits or surplus of the Takaful fund. 2006
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Takaful Coverage for Conventional Credit Card Product ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 39 The SAC, in its 70th meeting dated 12 September 2007, has resolved that a specific Takaful coverage for conventional credit card as proposed is not allowed. 2007
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Retakaful Service Fee as Income for Shareholders Fund ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 40 The SAC, in its 4 th special meeting dated 29 November 2007, has resolved that the proposal to treat Retakaful commission (received from a Retakaful company) as an income of shareholders fund is not allowed. 2007
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Retakaful Business Model Based on Wakalah - Waqf ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 41 The SAC, in its 87th meeting dated 23 June 2009, has resolved that the Retakaful business based on wakalah model with the element of waqf according to the features as stated above is permissible. However, such Retakaful operation model structure based on wakalah and waqf will not depart from the requirement of contribution based on tabarru` by the Takaful participants. Thus, the effect of such model is viewed to be similar with the existing Takaful model based on tabarru`. In addition, the SAC has also resolved that the contribution of tabarru` by the Takaful participants in a Takaful or Retakaful agreement based on wakalah with the element of waqf is owned and managed by the waqf fund but does not form part of the waqf asset. 2009
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Mechanism to Overcome Deficit in Participants’ Risk Fund – revisit ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 42 Besides that, the SAC in its 38th meeting dated 28 August 2003 and 100th meeting on 30 April - 1 May 2010, has resolved that: i. Utilisation of general Takaful fund to cover deficit in family Takaful fund or vice versa is not allowed; ii. Utilisation of participants’ risk fund of a particular family Takaful plan to cover deficit in another participants’ risk fund of a particular family Takaful plan is permissible, provided that both Takaful plans employ the same method for management and classification of risks; and iii. Utilisation of participants’ investment fund to cover deficit in participants’ risk fund based on qard is not allowed. 2010
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Application of Tabarru` in Takaful ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 43 The SAC at its 164th meeting dated 24 November 2015 and the 165th meeting dated 26 January 2016 has resolved that: i. The basic concept / principle of Takaful scheme is tabarru` and ta`awun (helping) among Takaful participants. ii. Tabarru` in Takaful is implemented through the participant's contribution to the tabarru` fund managed by (and entrusted to) the Takaful operator in the interest of the Takaful participant based on the terms and conditions agreed upon. iii. The financial responsibility (zimmah maliyah) of the tabarru` fund is distinct and separate from the financial responsibility of Takaful operators and individual Takaful participants. 2016
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Distribution of Takaful Fund’s Surplus in the Event of a Winding Up of a Takaful Operator ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 44 The SAC at its 186th meeting on 31 July 2018 decided that the distribution of a Takaful fund’s surplus (after meeting all of the Takaful participant’s rights and Takaful fund’s liabilities) in the event of a winding up of a Takaful operator (TO) to the Takaful protection fund managed and owned by Malaysia Deposit Insurance Corporation (PIDM) is permissible, provided that such surplus shall first be utilised to cover the deficit of any other Takaful funds and the liability of the failed TO. 2018
Module 6: Shariah Governance and Ethics for Takaful Operators SAC BNM resolution: Financial Retakaful Model based on the Concept of Hibah Bithawab ESSENTIAL SHARIAH REQUIREMENTS IN TAKAFUL 45 The SAC at its 188th meeting on 30th October 2018 decided that the Financial Retakaful (FinRe) proposal based on the concept of hibah bithawab (gift with reward in return) between a Retakaful operator (RTO) and a Takaful operator (TO) is not permissible due to the following reasons: i. In principle, the application of hibah bithawab is a form of tabarru` and is an act of appreciation (mukaramah) and affection (widad). Therefore, it is unsuitable to be applied in the business context which is motivated by profit as it alters the concept of hibah bithawab from tabarru` to an exchange contract. ii. In this regard, hibah bithawab with a business motive is not allowed. Nevertheless, the application of tabarru` contract in Takaful (Participant Risk Fund) for the purpose of mutual indemnity and not for business or substantial profit generation is allowed. iii. In addition, both the components of gift (hibah) and reward (thawab) take the form of cash/monetary, which may lead to a transaction with the element of riba. iv. The concept of hibah bithawab shall not be applied on the basis of necessity (daruriyyat) or need (hajiyyat) as there are other alternative Shariah concepts which are more suitable to be applied in the proposed FinRe model. 2018
Module 6: Shariah Governance and Ethics for Takaful Operators CODE OF ETHICS – STAFF AND AGENTS OF TAKAFUL OPERATORS
Module 6: Shariah Governance and Ethics for Takaful Operators CODE OF ETHICS – STAFF AND AGENTS OF TAKAFUL OPERATORS Manager of Funds Roles of Takaful Operators Shareholders’ Fund (SHF) Participants’ Risk Fund (PRF) Participants' Individual Fund (PIF) Shareholders Participants Takaful Operator The Takaful Operator, under its capacity as the manager of the operation, ensures all the three funds perform according to its respective objective. 47
Module 6: Shariah Governance and Ethics for Takaful Operators Manage Interests of Various Stakeholders 48 Takaful Operator and its staff are bound by regulations and supervision of Bank Negara Malaysia via the Islamic Financial Services Act 2013 which stipulates that the Board of Directors have the ultimate responsibility to oversee the effective operation of the Takaful Operator. This binding responsibility necessitates the Takaful Operator to put in place appropriate governance structure for all its internal staff to abide by certain code of conduct to secure the interests of particularly its participants. Participants • Healthy income from all funds • Good reputation • Value for Investment Shareholders • Solvent PRF • Profitable PIF • Paid claims • Shariah-compliant activities Shariah Committee • Clear separation of funds • Shariah-compliant operation Public • Confidence towards the industry CODE OF ETHICS – STAFF AND AGENTS OF TAKAFUL OPERATORS Roles of Takaful Operators
Module 6: Shariah Governance and Ethics for Takaful Operators Code of Conduct – Requirements and Obligations of Takaful Operators 49 CODE OF ETHICS – STAFF AND AGENTS OF TAKAFUL OPERATORS Roles of Takaful Operators
Module 6: Shariah Governance and Ethics for Takaful Operators Manage Interests of Various Stakeholders Roles of Intermediaries of Takaful Operators 50 The intermediaries of the Takaful Operator however, unlike the staff of Takaful Operators, are not bound by employment agreement with the Takaful Operator. Intermediaries of Takaful Operators, are independent contractors which are appointed to undertake the following functions on behalf of the Takaful Operators: The independent nature of the intermediaries makes it tricky for them to be closely monitored by the Takaful Operators. CODE OF ETHICS – STAFF AND AGENTS OF TAKAFUL OPERATORS