Protecting Takaful against the Risk of Failure: A Critical Appraisal of the Takaful Benefits Protection System (TBPS) in Malaysia

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The establishment of the Takaful and Insurance Benefits Protection System (TIPS) in Malaysia is a statutory requirement. TIPS aims to ensure financial stability, soundness and public confidence. Perbadanan Insurans Deposit Malaysia (PIDM), known internationally as the Malaysia Deposit Insurance Corporation, is the sole regulatory body entrusted with the mandate to regulate deposit insurance across the country. At the outset, its mandate was confined to banking institutions. Since 2010, however, PIDM’s role has been extended to include takaful and conventional insurance institutions. With regard to takaful, the operation of the Takaful Benefits Protection System (TBPS) and the relationship between PIDM and its takaful members pose major concerns that have been raised by the industry in Malaysia. The concerns are related to contractual relationships, sources of premiums, the subject matter of the contract, and the services and guarantee that PIDM provides for takaful participants.

 

Having ujrah wa kafalah (fee and guarantee) as the underlying contract governing the relationship between PIDM and its takaful members raises serious Shari?ah and operational concerns. The main concern is whether it is different from kafalah bi ujrah, or are they the same contract? If it is kafalah bi ujrah, then that is highly controversial. In light of the ongoing process of standardizing Shari?ah standards and increasing crossborder transactions, it is suggested that preference be given to less controversial contracts. On the other hand, if the two are different contracts, there is a need to determine whether the essential elements of the identified contract are present. Ujrah is paid against services while kafalah is provided for takaful participants in the event of a member’s bankruptcy. Services should be clearly defined with the right nomenclature, and the price must be commensurate with the service provided. The guarantee (?aman/ kafalah) is not an independent mechanism for entitlement to profit; rather, it should be attached to other elements such as labour and capital contributed to the business.

 

The first and annual PIDM premiums are required to be taken from the shareholders’ account, whereas it is the takaful participants who are the beneficiaries of the protection. Takaful operators (TOs) are only agents who accept funds to administer them in the interest of takaful participants. They are unlike banks, which employ deposits for their own interests, and insurance companies, which treat premiums as income. The latter two types of financial institutions thus have a very different responsibility toward their customers. Since the TO is an agent (wakil), taking the first and annual premium from the TO shareholders’ fund is a clear manifestation of holding the agent responsible to guarantee the protected benefits. This raises Shari?ah issues related to the combination of the wakalah (agency) and kafalah (guarantee) contracts.

 


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