TA-1.1.1

It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shari'a. Takaful firms (that is, those insurance firms that choose to apply Shari'a to govern their operations and products) provide products and services corresponding to those offered by a conventional insurer to an insured (policyholder) but in a legitimate co-operative manner consistent with Islamic principles. Accordingly, takaful contracts are designed so as to be free of any gharar (uncertainty that would render them non-compliant with Shari'a), riba (interest) and other prohibitions.

TA-1.1.2

The concept of takaful involves the payment of contributions that are wholly or partially donated to form an insurance portfolio. The pooled resources are then used to pay indemnity when the insured risk occurs. The pooling of donations and assisting those in need through indemnity payments does not contradict Shari'a but is in line with the principles of compensation and shared responsibilities among the community.

TA-1.1.3

Takaful has been undertaken using a number of different operational models or combinations thereof. The two most common bases of operating a takaful fund are as follows:

TA-1.1.4

The al mudaraba model, as the name suggests, is a profit sharing model whereby investors provide capital and contributions (investment funds/premiums) are received from the takaful participants. The contract specifies how the profit (surplus) from the operations is to be shared according to the principle of al mudaraba. Generally the sharing arrangements allow the operator to share in both the underwriting results from the operations as well as any favourable investment performance on the invested contributions.

TA-1.1.5

The al wakala model operates somewhat differently. The takaful participants pay contributions to the takaful fund. However these contributions include the payment of fees and charges due to the operator together with a donation to the community (takaful) fund. All risks are borne by the fund and the annual operating surplus belongs exclusively to the participants. The takaful operator does not share directly in either the risk borne by the fund or any surplus/deficit of the fund. Instead, the operator receives a set fee for managing the operations on the participants' behalf. It should however be noted that the operator's remuneration may (depending on the terms of the contract) include a performance fee, charged against any surplus, as an incentive to effectively manage the takaful fund. Under the al wakala model the operator can only make a profit by ensuring expenses of managing the operations are less than the fees. Those costs and charges that can be charged to the takaful fund must be provided at the lowest possible cost level that the operator can negotiate.

TA-1.1.6

In Bahrain, the current practice is to adopt the al wakala model for underwriting activities and the al mudaraba for the investment activities of takaful. This approach appears to be that favoured by the 'Accounting and Auditing Organisation For Islamic Financial Institutions' ('AAOIFI'). The CBB Rules have been designed to be in line with AAOIFI standards and have been adapted to correspond to current industry practice.

TA-1.1.7

Each licensed takaful firm is required to have a Shari'a Supervisory Board, whose duty is to direct, review and supervise the activities of the company in order to ensure that they are in compliance with Islamic Shari'a rules and principles.

TA-1.1.8

The CBB does not propose to establish Rules as to what constitutes a takaful product; this is a matter for each firm's Shari'a Supervisory Board. However, the CBB has an obligation to ensure that consumers of takaful products are afforded the same level of protection as that afforded to the purchasers of conventional insurance products. In addition, the CBB has an obligation to ensure that the operations of takaful firms do not represent a threat to the stability of Bahrain's financial services industry or wider economy.

TA-1.2.1

The table below lists the Modules of the CBB Insurance Rulebook and indicates those that apply to takaful and retakaful firms. The remaining chapters of this guide describe, in more detail, the principal requirements of each Module of the Regulations and Directives that apply to takaful and retakaful firms.

HIGH LEVEL STANDARDS

BUSINESS STANDARDS

REPORTING REQUIREMENTS

ENFORCEMENT AND REDRESS