TY - JOUR
AU - Morrison,, Scott
AB - Abstract Takaful is the Islamic counterpart of indemnity-based insurance. It is a cooperative, charitable scheme comprising a fund compensating participants in case of the occurrence of specified adverse events. The features of takaful distinguishing it from insurance give rise to three legal problems: first, the voluntary, non-contractual donation—counterpart of a premium; secondly, the capacity in which the takaful operator invests and manages the fund; and thirdly, the operator’s obligation to return the residue of the fund to participants at scheme expiry. This article explores how the introduction of the English trust provides an amenable solution to these three problems. Introduction With the establishment of Cobalt Underwriting in London in 2012,1 the specialist insurance sector purporting compliance with Islamic law gained a foothold in Britain.2 This sector is described by the Arabic word ‘takaful’.3 The reasons why insurance policies as usually designed (‘general insurance’) do not comport with shari’a—or to put the point affirmatively, why the devout Muslim would prefer to participate in a takaful scheme over purchasing a general insurance policy—are well known and need not be rehearsed here.4 Suffice it to say, as it is crucial for the analysis to follow, that Islamic law requires that takaful be a charitable, co-operative undertaking rather than a commercial, profit-making enterprise.5 This article’s objects The purpose of this article is two-fold. First, to identify a trio of legal problems ensconced at the heart of takaful. These problems pertain to those essential precepts that distinguish takaful from general insurance. These precepts are the oxygen in the blood circulating to the organs (countries) in which the shari’a compliant insurance industry exists. Secondly, this article endeavours to propose a novel legal analysis that resolves these problems. The proposed solution introduces ordinary principles of equity and English trust law into this Islamic legal creation. To the extent that the prescription set out here is adopted the article will contribute to the enhanced health and vibrancy of takaful: an innovative instantiation of Islamic law that can help to meet the needs of modern life and societies—whether or not Muslims represent a majority or a minority in the society in question. Specifically takaful can add another—albeit another only monetary—shield against the slings and arrows of (outrageous) fortune. Takaful and general insurance Participating in a takaful scheme confers the same benefit as purchase of an indemnity-based insurance policy.6 That benefit is a monetary benefit. In case an uncertain, adverse event transpires, the takaful participant receives a payment to compensate them for the consequences of the event, as with general insurance law and custom.7 The full gamut of personal attributes and property that may be diminished, lost, or damaged (as a result of an uncertain event) comprising insurable interests in the general insurance sector can in principle also be underwritten by means of takaful. The parties Although there are a variety of names assigned to the parties in a takaful arrangement, for the purposes of this article the parties will be referred as ‘participant’ and ‘operator’. These correspond approximately to ‘insured’ and ‘insurer’ in a contract of insurance. A takaful scheme and an insurance policy are each time-limited, with an expiration date agreed at, or before commencement. However, in takaful, unlike in insurance, at expiry any funds not disbursed to participants during the term of the scheme (nor expended as operating costs) must be returned pro rata to the participants (‘the expiry payment’). This obligation follows from takaful’s charitable purpose. The final payment is an added benefit beyond those offered by a general insurance policy where any profits are for the shareholder or for the future operation or growth of the insurer. Risk arbitrage and the float In general insurance For simplicity, setting aside contractual devices and routine industry and law of insurance practices—such as excesses, exclusions and limitations clauses, the duty of fair presentation, subrogation, etc—the sources of profit in general insurance are: (i) risk arbitrage and (ii) ‘the float’. With respect to (i), actuarial science and statistical data have made forecasting the probability of events (adverse ones alone being in the ken of insurance) with some accuracy possible; the greater the number of insureds and the more data amassed about them and about populations and demographics at large, the greater the precision of the forecast. An insurer is in the business of essentially placing a wager on the probability of the incidence of specified events, and damage or injury flowing as causal results therefrom. As with any wager success is not guaranteed and absent re-insurance8 systemic risks triggering loss and damage beyond that predicted or prepared for can overwhelm an insurer. Again to simplify, and setting aside alternative corporate finance methods, premia bankroll the wager. With respect to (ii), the insurer invests the premia. Exploiting the time value of money and with the application of some investment savvy, and perhaps with the help of a little old-fashioned luck, the insurer is able to meet short- and mid-term liabilities whilst profiting in the long term from the float: the time between when the insurer receives the premia until they must pay out its value in a claim. Insurance companies’ operation is, with respect to the float, functionally and in its effects the same as that of a bank operating under the fractional reserve banking system; leverage and profitability are positively correlated, and it is therefore in the best interest of the insurer or the banker to mobilize the maximum amount of their capital, subject to regulatory requirements. The moral hazard and prospect of taxpayer-financed bailouts (as well as the manifest possibility of either an insurance or banking failure triggering an economic recession)9 are key reasons why insurance and banking (including their Islamic variants, notwithstanding their more risk averse postures) are highly regulated sectors in countries including the UK. In takaful Turning to takaful, the position in relation to (i) is not favourable in Islamic law. However, the next paragraph will suggest some arguments in defence of it. The cardinal interdictions with which takaful must contend are two-fold.10 First, that against speculation (maysir, in Arabic), which is understood by analogy with the games of chance played in pre-Islamic Arabia. Modern equivalents to these games would be the throwing of dice, spinning of a roulette wheel and card games where there is a greater proportion of luck of the draw over memory or skill. Secondly, that against excessive risk (gharar). Insurers, like bankers, trade in risk—for profit. Risk arbitrage per se is disapproved in Islam, and doing it for profit compounds the negative value assigned it by shari’a. However, in response to the first interdiction, the takaful operator can reasonably argue in their defence that in order to determine a fair levy on the takaful participant it must make calculations and probabilistic predictions. If it fails to estimate probability and to venture forecasts it will be unable to meet its liabilities (participants’ claims) as they fall due. Such a failure would defeat the charitable purpose of the takaful scheme and the mutual cooperation between the participants and the operator. Secondly, in relation to gharar,11 the insurer can reasonably argue that takaful actually reduces risk—both in aggregate and with respect to any given participant. This is its principal purpose, as with general insurance. It is often stated in the literature supportive of takaful that it is a form of risk-sharing (between participants and between operator and participants), not a matter of risk transfer to the insurer alone.12 Islamic law does not categorically prohibit (ii) to the takaful operator. However, it severely circumscribes it by dint of two restrictions. First, since with the winding up of the takaful scheme the operator must return the residual fund to the participants, the duration of the float is truncated. It is coterminous with the takaful scheme and does not extend beyond it as would overlapping policies and funds held by a general insurance company. An insurer is not subject to this limitation imposed by the necessity to wind up and treat as discrete individual takaful schemes. A general insurer has the world of long-term investments (for instance, the ability to purchase and hold illiquid assets, such as property or other investments carrying high transaction costs or sold into thin secondary markets) at its disposal. Secondly, the Islamic ban on usury (riba’) which means, in short, that only screened equities, or other shari’a compliant investments, and not debt, debentures, or other fixed income instruments—may be purchased or traded by a takaful operator. The float (and for that matter risk arbitrage) are done for different motives and more conservatively than they are done in general insurance, although takaful falls to be regulated in the UK as general insurance, and has received none of the tax reliefs or other exceptional regulatory treatment that some shari’a compliant products (such as Islamic mortgages, or sale and leaseback sukuk) have.13 A broad-brush characterization from the vantage point of the religiously agnostic consumer or investor and one that fits Islamic finance and banking as well as takaful would be that these are conservative, cautious legal and financial techniques. The caution or—to place a more positive valence upon it—prudence of these rules and principles developed in hardscrabble Arabia and gradually elevated to become Islamic law (shari’a) renders them less profitable (in the good times), safer (in the bad) and a more valuable tool for portfolio diversification (in both good and bad).14 Comparative conclusion on insurance and takaful The duties of the takaful operator to the participants are greater than those of an insurer to an insured, but the operator’s rights and powers are circumscribed both by express rules and principles of Islamic law and by the generally charitable intent required for the conformity in letter and spirit to the mutuality that is the sine qua non of takaful.15 Nevertheless, the assumption upon which this article will proceed is that none of the obstacles or challenges explained thus far are insurmountable. They are at any rate not a result of absent or unclear legal analysis. They represent essential characteristics of the takaful sector and that which distinguishes it from general insurance. They will accordingly be treated below as axiomatic. Three legal problems with takaful In contrast with the previous section which distinguished general insurance and takaful, and identified some feasibility issues in relation to takaful, this section and the solution proposed in the next will focus exclusively on the legal analysis of takaful. A legal problem arises at each of three stages in the creation and operation of a takaful scheme: (i) the transfer of legal title to money (‘contribution’) from participant to operator, creating a ‘fund’; (ii) during the interval when the operator holds title to the fund, the legal capacity in which he or she does so is either unclear, unsatisfactory or both; and (iii) the obligation of the operator to pay the remainder of the fund (or its value) at expiry cannot be adequately explained by orthodox takaful principles. The first problem In the literature on takaful, the contribution is characterized as a tabarru’; this Arabic word is usually translated as ‘voluntary donation’.16 It may be compared to alms or, in the Catholic faith, to the practice of tithing. The translation itself invokes the Latin ‘donatio’. However, although the word for ‘gift’ in Arabic is not the same (it is the word ‘hiba’),17tabarru’, like donatio, implies that legal title passes from donor to donee, who takes absolutely, unconditionally and immediately. The donor transfers all rights in relation to the fund to the operator, retaining no legal interest in it. The contribution is irrevocable. The donee—here, the takaful operator—is under no further obligation to the donor. There is no distinction between legal and equitable title in Islamic law, as there is no equitable jurisdiction. There is instead a unitary conception of ownership, with ownership of property being a precondition of both tabarru’ and hiba. Tabarru’ is a fundamental and necessary element of takaful.18Tabarru’ is the sole source19 of the funds deployed to compensate participants during the life of the scheme and at its expiry, as with the simplified example of premia in general insurance above. If the contribution to a takaful fund is revocable or if it burdens the operator with new legal obligations, then it is neither a tabarru’ nor compatible with the Islamic law of takaful. An (in one sense) troublesome implication of tabarru’ is that, should the adverse event occur to a participant, the operator is under no legal obligation to compensate them. As a result of the meaning of ‘tabarru’’ the operator may lawfully retain or dispose of the fund as he or she wishes. The purpose of the takaful scheme would thus be defeated. This is an absurd result. A solution based on the Islamic law of contract, however, is possible. It avoids the absurd result in that (as in a contract of indemnity), the contribution is consideration for a promise of compensation (upon the incidence of the adverse event), which creates a right legally enforceable against the operator.20 However, the contractual analysis21 transforms the contribution from tabarru’ to consideration,22 which is fundamentally inconsistent with the nature of both tabarru’ and the charitable character of takaful. The binding force of a (legal) obligation may be welcome. However, the contractual means of creating that obligation renders the resulting arrangement general insurance, not takaful. The contractual solution then to this first problem produces a result that is not absurd. But it is unlawful. The solution proposed by this article aims to find a way to simultaneously preserve the voluntaristic, donative nature of tabarru’ whilst preserving the ability of a takaful scheme to function as an effective method of indemnifying scheme participants. The second problem The second problem relates to the ‘float’. Industry practice converges on two of the nominate contracts (available from the universe of Islamic legal contracts) for investment of the takaful fund: mudaraba (partnership) and wakala (agency). In the first, the operator holds the fund as the rabb al-mal, or financier/capitalist/investor, who can then, whether as an active or sleeping partner, enter one or more business ventures. In the alternative, the takaful participants may act as the rabb al-mal, in partnership with the operator who is actively engaged in one or more business ventures for profit.23 A second possibility is that the operator holds and invests the fund as an agent (wakeel) of the participants; this is a wakala (agency) agreement, with the relevant meaning of agency broadly the same in Islamic as in English law.24 The operator enters contracts on behalf of the participants investing their capital; with respect to English law the agency arrangement is distinct from a trust in that no equitable interest is created and legal title to both initial capital and profits are retained by the principal, with the agent having simply a fiduciary duty to account.25 Mudaraba and wakala and their deployment in takaful are in and of themselves uncontroversial. And there is no reason in principle why other nominate contracts such as that based on lease (ijara, if the operator were in the property business, for example) or mudaraba (asset- or commodity-based financing) should be unavailable for this purpose, nor that these or other classic Islamic contracts could not be subsidiary or collateral elements to an overarching agreement based on partnership or agency, or to a takaful scheme. The first problem with the adoption of any of the above forms of investment is that these are contracts. They are contracts of a commercial nature. Therefore, they give rise to the problem as stated above regarding the contractual analysis of tabarru’ and the uneasy marriage of a commercial undertaking with the essentially charitable purpose of takaful. The incompatibility of the charitable and commercial is not a decisive issue; however, it is a feature of takaful as constructed and conducted by the industry in the contemporary setting which this article contends can be improved upon, as will be set out in the solution proposed in the next section. The second issue is that in case the investments fail or disappoint expectations and the fund loses value, unless the operator has been negligent he or she does not have a duty under mudaraba, or wakala contracts to compensate the participant for the loss. On the contrary, the operator has a duty to share the losses and to refrain from offering, or providing a capital guarantee to participants at any stage pre- or post-contracting. The hallmark of avoiding usury and of the shari’a compliant investment industry is the sharing of risk; equities therefore (with their inherent risks) rather than fixed income investments are most compatible with Islamic law. Placing capital at risk during the float, even if expected by the rules and ethos of Islamic law, is evidently inconsistent with consumer and market demand as takaful schemes use interest-free loans in order to smooth returns and to cover short-falls where they occur.26 Like the use of a commercial contract in service of a charitable takaful scheme the use of a loan (provided it is not in itself commercial, ie at interest) is not a fatal flaw. However, it does not accord fully with the notion of risk sharing in the context of a takaful arrangement: legal liability is exclusively the operator’s, although actual exposure to risk may cascade to participants in case of operator insolvency. An additional result of the practice of lending and borrowing is that a takaful scheme can only be self-funding if the life of the scheme is long enough that the scheme can recover its losses and pay its debts before the expiry of the scheme. Otherwise it is not an exclusive and mutual self-help society, but one that relies partially on non-members. The third problem in relation to the float is that in case of operator negligence or of misappropriation of the fund, the participants have only personal remedies—the right to sue under the law of tort, or contract (if the notion of tabbaru’ was subsumed into contractual consideration). They would lack any and all of those protections that a proprietary interest in the fund would furnish them. Even supposing they were successful in a legal action against the operator, as unsecured creditors it would likely avail them little. The third problem In addition to the satisfaction of participating in a supportive mutual help arrangement, the merits of which may be amplified by means of religious fidelity and belief, an attractive feature of takaful—unlike an offer to purchase an insurance policy—is the expectation of receiving a payment at the expiry of the scheme. However, as indicated in the previous section, the equity-driven character of Islamic finance27 means that the expiration payment is not certain, nor can it be; there is a real risk that the expiration payment will be reduced or eliminated. This is not a problem specific to takaful and it is arguably an acceptable (and at any event an inevitable) risk from the standpoint of a participant seeking to conduct their affairs in a matter consonant with Islamic law and faith. The specifically legal problem in relation to the expiration payment is that there is no evident grounding for the obligation. Tabarru’ implies that the operator is under no legal obligation in relation to paying compensation during the life of the takaful fund nor at expiry. The immediate rejoinder to this statement of the problem is that the obligation to make the expiration payment follows from the nominate Islamic contracts themselves, mudaraba, or wakala. Although there is no necessity to formulating this as a duty to make a single payment after a period of time, as opposed to periodic payments, or payments at irregular intervals, any of these arrangements could be agreed under either contract. Whether as a form of partnership or agency in either case the operator is obliged to share profits in pre-agreed proportions (absent agreed costs and remuneration) with the participants. This resolution of the issue, however, is susceptible to the problems elaborated in the previous section: the inherent contradiction of attempting to harness commercial contracts designed for accumulation of profit in service of a charitable scheme. It also continues to be the case that the participants have no proprietary interest but only a personal claim against the operator—whichever of these two nominate contracts is used. These two observations might not be decisive reasons to reject customary industry practice of operators during the float. They are, however, sub-optimal. The engagement of participant capital in investments directly by means of agency (where legal title to the money does not pass to the agent)28 and where the participants are themselves investors (where they act as the rabb al-mal) are particularly undesirable as they become parties to commercial contracts themselves. The solution as set out in the next section will aim to advance a preferable solution, one that improves upon existing practice and also the accepted legal analysis of takaful—from contribution to expiration payment. Solution to problems one, two, and three The central thesis of this article is that an English trust can solve each of the three problems set out above. It is quite surprising that this seemingly obvious solution does not appear to have been suggested until now. This is all the more puzzling in that a significant proportion of those jurisdictions with Muslim majority societies (where takaful would have a natural retail market) are, as a legacy of the British Empire, common law systems (and Commonwealth members) whose lawyers and legal scholars would be familiar with the trust and the equitable jurisdiction invented in England and Wales. It may be less puzzling that the application of a trust did not occur to practitioners or takaful analysts in those jurisdictions that either do not or only latterly have become acquainted with the trust, for example those civil jurisdictions in the Arab Gulf states, or in most of the rest of the Middle East (the Levant, Turkey) and Francophone North Africa. The ‘takaful trust’ The takaful trust, to coin a phrase, could be structured in several ways, to accommodate features of particular takaful schemes, for example, to facilitate the desired duration and size of the scheme, to suit the characteristics of its participants, its location and material national law and policy. However, this section proposes one model as that which would most fully overcome the problems shared by takaful globally, as this article has set these out above. With this introduction of the trust into takaful this section aims to create a legal structure and analysis that will more fully conform to the letter and spirit of Islamic law than existing accounts of takaful design and their lawful operation. In the proposed model, the takaful participants are presumed to be liable for recurring payments to the fund during the life of the takaful scheme, or for a single lump sum payment at the outset, coterminous with the creation of the takaful fund. In doing so they act as settlors, making an irrevocable transfer of monetary value into a trust fund. These payments comprise the tabarru’. The participants divest themselves of a legal interest in the money. This avoids a conflict with the Islamic legal requirements regarding tabarru’ since there is no equitable jurisdiction known to Islamic law. From the standpoint of English law, however, the tabarru’ comprise the transfer of property into a trust. The documentation of the takaful scheme would necessarily reflect the intention to dedicate assets to a trust, and with it the implication of an intended creation of an equitable interest—with the transfer of the legal interest in the contribution to the operator. The takaful operator, as trustee, would segregate the fund from personal property and that from other schemes, or funds, as is already accepted takaful practice. Under the trust deed the operator would have a fiduciary power29 to transfer money from the fund to participants (and this class may be narrowed by a term of the trust to exclude those participants who are or who have fallen into arrears) who have suffered the anticipated misfortune as a result of which they have sustained the damage, harm, or other loss as envisaged by the trust deed. In addition to the fiduciary power to pay the scheme participants qua beneficiaries, the trust deed may impose upon the operator obligations regarding the float, and how the fund may be invested: this would include the requirement of investing in a manner compliant with shari’a. The participants would, by participating in the fund, have to accept the approach adopted by the scheme regarding the investment of trust property. If they did not accept it, they would of course have the option not to participate, although once having made a donation to the fund—since that contribution was irrevocable—they could not recover it. Throughout the scheme the operator would have the right to agreed remuneration and expenses, and these could be structured and agreed to account both for inflation and the charitable nature of the scheme. At the expiration date of the scheme, the residue (after exercise of the fiduciary power to make payments) including any possible investment returns (less operator expenses) would fall to the participants qua beneficiaries of a fixed trust, with the balance becoming payable to them, or only to those who had paid the full amounts in tabarru’, if that were so stipulated by the trust document.30 Transferring the duties of the operator and the interests of the takaful participants into the equitable jurisdiction is the mechanism through which the integrity and character of tabarru’ is preserved, and the additional benefits of the analysis offered here, created. In addition fiduciary duties and the remedies under equity regarding their breach are wider and greater than under the common law or under Arab laws or Islamic law itself. In case of the operator’s insolvency the fund would be protected from their creditors, protecting the participants in the takaful scheme. Although not a charitable trust within the meaning of English law, this express takaful trust analysis and in particular the inclusion of fiduciary duties is consonant with charitable intent, as well as capturing the trustee and fiduciary role under which the operator does not stand to enjoy the benefits of the trust property, and the obligation to pay (and the calculation of) the expiration payment. These advantages are not exhibited by the existing structures used for takaful schemes, which do not rely upon a trust, or confer any proprietary interest31 in the fund. In the nature of risk sharing In contrast to industry practice, which may be seen (as argued above) as sub-optimal, there would be no scope on the trust solution for the operator to add personal or other funds from outside the trust to meet obligations under the scheme; for instance if liabilities exceeded the value of the fund, or in the case of losses from the fund resulting from poor investment performance, or actual losses of trust capital. This would only be possible in cases of negligence or breach of trust where the court ordered the trustee (operator) to compensate the trust fund. The possibility of shortfalls is common as well to those agency and mudaraba structures as elaborated above—when loans are excluded. This danger highlights the importance of schemes being large enough to maximally benefit from what was called risk arbitrage above; not for the purpose of shareholder or operator profit, but for the purpose of fully discharging the purpose of—and obligations under—the takaful scheme. A possible objection to the proposed solution An objection which might be raised to the proposed solution is that a foreign legal system that is secular or rooted (at least historically) in different faith and national traditions is being ‘imported’ into or combined with Islamic law. To a doctrinal purist, since a major attraction of takaful is that it is a creation of the laws and principles of the Islamic faith (and not any other religion), this solution may seem to dilute, or even to eliminate altogether the claim to religious (ie Islamic) piety and authenticity. In particular, the entirety of the equitable jurisdiction and with it the trust are unknown to Islamic law. This section will attempt to demonstrate that such an objection would be mistaken. Rule of law and silence of the shari’a in Islamic law It is a settled proposition that the shari’a is exhaustive regarding the several gradations of immorality and illegality32 identified in Islam, meaning that anything not proscribed (and therefore categorized as haram) by shari’a is impliedly lawful (though not necessarily worthy of moral or religious approbation); in the absence of express legal provisions to the contrary, any conduct or transaction is lawful.33 A parallel could be drawn between the famous English public law case, Entick v Carrington,34 with the writing requirement of the law being an essential element of the doctrine of the rule of law. Equity and the trust are unknown to Islamic law. Therefore, there is no bar to these in shari’a either. Use of foreign legal devices in the contemporary shari’a compliant industry The company An excellent example of the ability of Muslim societies and Islamic legal authorities to not only countenance but to use to great effect legal structures and the laws of foreign, non-Islamic origin is the example of corporate personality and the structure of the limited company. In the same way that the trust is unknown to Islamic law, so too is the company. In the Islamic law of business organizations, the partnership is paramount, and as with the English Partnership Act 1890, the partnership lacks legal personality (which is retained exclusively by the partners themselves). The same is true of musharaka and mudaraba, joint ventures recognized by Islamic law since its inception. The first joint stock company appeared in the Islamic world as a result of the initiative of no less a figure than the Ottoman Sultan, in 1851.35 Since then the corporate structure has spread to become pervasive throughout Muslim majority societies including countries that purport, under shari’a provisos in their constitutions,36 to be governed by Islamic law. To give one example directly relating to the subject matter of this article, the AAOIFI expressly states that a takaful scheme can be organized as a company.37 The special purpose vehicle: company or trust A further illustration of the permeability of Islamic law and the modern shari’a compliant industries is that both the company and the trust itself are already central to Islamic finance transactions, featuring crucially in the structuring and transaction documentation of sukuk, a shari’a compliant financial capital market instrument38 which adopts a special purpose vehicle—either a company or a trust—formed in an offshore jurisdiction,39 for the issuance of debt or securitized equity. The Islamic charitable trust: the waqf Another legal construct upon which a takaful scheme may be based, in addition to mudaraba and wakala (discussed above), is the waqf. The waqf is the closest equivalent in Islamic law to the English trust.40 Broadly resembling an English charitable trust the purpose of a waqf must be ‘religious, pious, or charitable’.41 The settlor (waqif) transfers property irrevocably into the waqf and the actions of the trustee (mutawalli) disposing of the property and fulfilling the designated purposes of the waqf are governed by a document (the waqfnama). There may be, depending upon national law, scope for judicial management and enforcement of the waqf and removal or replacement of the mutawalli.42 However, there are key differences between the waqf and the trust. First, in the case of the waqf, legal title vests not in the mutawalli, but in God.43 As stated already, in Islamic law there is no parallel equitable jurisdiction in which to locate a beneficial interest. Secondly, unlike an English charitable trust which must be purely charitable, a waqf may amongst its religious, or charitable purposes also include private purposes such as a family settlement.44 Thirdly, with regard to the definition of ‘religion’, the case law and the UK Charities Commission would differ from Islamic law; in the latter, only Islamic religious purposes would be deemed charitable religious purposes.45 Fourthly, not only is there no rule against perpetuities in relation to the waqf, as in the case of the private trust,46 there is its opposite: a waqf must continue to operate until the property in it is diminished to a point where it can no longer perform its original purpose47 at which point the doctrine (as expressed at least by English judges in the South Asian context) of cy prés comes into effect.48 With regard to the fourth and final difference, and the permanent nature of a waqf, the trust better accords with takaful in that a takaful scheme is, as observed above, time limited. A takaful scheme cannot be perpetual; the participants themselves are human, not immortal. The takaful participants are not the public, as in an English charitable trust, but a finite set of individuals living concurrently. For this reason, the waqf is actually ill-suited to takaful and in particular to the expiration and the payment it occasions. The application of the trust set out above is that of an express trust, not a charitable trust, and is therefore as a matter of law (as well as by the trust document) limited in time. Also unlike the waqf, this application of the trust does not permit mixed objects (charitable, religious, and private) as the waqf would, making it more suitable to perform the single function of compensating participants and mobilizing their collective monies for their mutual (and, within this group, exclusive) benefit. Conclusion There is a historical argument that the waqf greatly influenced if not provided the inspiration for the English trust.49 If indeed the English trust is a repackaging of the waqf, the doctrinal purist of Islamic law may take some comfort in the fact that the solution proposed by this article advances a sort of second-generation Islamic legal creation when it proposes the trust. Whatever the merits or demerits of the evidence and arguments regarding the origins of the English trust, the contention in this article is that the trust—as it is now under English law—suits rather well the purposes of takaful and the Islamic legal and charitable commitments that are fundamental to it. The objection raised in the previous section regarding the use of non-Islamic law can be expanded to encompass fora of litigation and adjudication as well. However, as with the use of the trust and English law itself in shari’a compliant industries, this has proved in reality to be no bar. Both English law and courts are selected as governing law and disputes in (particularly larger) cross-border Islamic financial deals with some frequency. Furthermore, it is possible to satisfy this objection with the inclusion of an arbitration clause in the takaful scheme documentation; alternative dispute resolution and arbitration is readily available and has proved attractive in other jurisdictions in relation to Islamic financial disputes governed by English, Malaysian and other national laws. This article has examined legal problems central to the structuring and operation of takaful schemes, considering en passant the constraints under which any shari’a compliant form of indemnity or financing must operate—specifically in regard to risk arbitrage and the float. Whilst other works consider the penetration of takaful into insurance markets and its global distribution, or the future prospects of takaful,50 these matters have not been within the ambit of this article. In its examination of existing legal analysis and practices, this article identified three central problems with contemporary takaful. The principal contention of this article is that these can be solved by means of the English trust. The trust preserves the character of tabarru’, can accommodate the conduct and investment strategies of the operator during the float, and grounds the obligation to return the value of the fund at expiry. Each of these are attractive features of the law of takaful. And they are features that can be preserved, indeed enhanced, by means of the trust. Finally, this article dealt with the objection to combining Islamic law with foreign (ie non-Islamic) law and courts. With reference to the existing adoption of English law and courts as governing Islamic financial and more broadly commercial contracts, and litigation, the article maintained that the importation of foreign legal structures and principles is something with which Islamic jurists are demonstrably comfortable and indeed have done to good advantage. The silence of shari’a regarding equity and the trust is an opportunity rather than an obstacle. Whilst the waqf has a variety of uses in the modern world and has flourished in places, this article contended that it is inapt or in any event less apposite than the English trust for the structuring of a takaful scheme. Dr Scott Morrison is Reader in Commercial Law at Oxford Brookes University. His research specialism is Islamic finance and banking, capital markets (sukuk), and commercial applications of Islamic law. He has worked in universities in London, New York, Istanbul, Tokyo and Akita (Japan), Dubai and Abu Dhabi, and the Maldives. E-mail: smorrison@brookes.ac.uk. Footnotes 1. The company began as a general agent in the Lloyd’s of London insurance market. Cobalt Insurance Holding Ltd operates under Cobalt Underwriting Services Ltd and Cobalt Advisory Services Ltd < http://www.cobaltuw.com/other-information/> accessed 21 January 2019. The idea for this article was conceived when participating as an audience member in a discussion at the World Congress of Middle East Studies (WOCMES), in Sevilla, Spain 20 July 2018. The trigger was as a response to Germán Rodríguez Moreno (IE Business School) and his talk: ‘Takaful in Crisis?’ Thanks also for thoughts (on takaful participants having a legal interest in the takaful fund) to Pablo Andrés Hernández González-Barreda (Universidad Pontificia Comillas) and his talk ‘Islamic Banking Practices in a Changing World: Sharia as Choice of Law and its Tax Implications’. 2. One of the few cases involving takaful in the courts of England and Wales was one which involved a takaful operator as defendant and which was appealed to the Supreme Court: Global Process Systems Inc and another v Syarikat Takaful Malaysia Berhad [2011] UKSC 5. The definition of takaful, whilst acknowledged by the court, was not at issue. Perhaps illustrating the convergence of takaful and general insurance or at least their overlapping features is the fact that the importance of this case (that has frequently been cited) was in relation instead to causation and proximate cause—[17] and [18]. 3. As it will appear in this article. However, in the financial and popular press, it is usually glossed as ‘takaful insurance’. This is a redundant formulation that is like saying ‘insurance insurance’ just as saying ‘shari’a law’ is like saying ‘law law’ as both ‘takaful’ and ‘shari’a’ are nouns, not adjectives. One of the magisterial, ingenious traits of Arabic is that the meaning of a word is based on a triconsonantal root and deducible from the grammatical form into which that root is manipulated; the form is created by adding vowels and consonants to the root. In the case of takaful, the root k-f-l means ‘to support, provide for, secure, guarantee’. The form (VI) of this word, takaful (with a long medial a), is the noun form denoting reciprocity and meaning ‘mutual or joint responsibility; solidary; mutual agreement’—Hans Wehr, Arabic-English Dictionary (Spoken Language Services, 4th edn, 1994). (A simplified Arabic transliteration system is in use in this article, so long vowels and diacritics will not be apparent.) The same root is also the basis for the word denoting guarantee, which itself is a common Islamic legal contract—for a discussion of guarantee, see W Al-Zuhayli, Financial Transactions in Islamic Jurisprudence, vol 2 (MA El Gamal tr, MS Eissa reviser, Dar al-Fikr, 2nd edn, 2007) ch VIII. With some justification both in law and other areas of human endeavour, a great deal of weight is based in Arabic etymology (and therefore dictionary definitions), in Muslim environments and Islamic contexts (owing to its status as the language of the Qur’an, among other reasons) justifying this linguistic digression. The Islamic Financial Services Board (IFSB), a leading Islamic finance standards setting organization based in Kuala Lumpur, Malaysia, in its Standard 8 (Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings, December 2009) states that ‘Takaful is derived from an Arabic word that means joint guarantee […] The underwriting in a takaful is thus undertaken on a mutual basis, similar in some respects to mutual insurance.’ 4. General insurance categorically violates four more or less central interdictions of Islamic law, those against: riba’ (glossed—without too much distortion—as usury), gharar (‘“excessive” uncertainty’), maysir (speculation), and ignorance (jahala)—each in specified senses as illustrated in the contract of sale. In shari’a, the contract of sale is the contractual type from which all other contracts are derived—Jeanette A Wakin, The Function of Documents in Islamic Law: The Chapters on Sales from Tahawī’s Kitab al-Shurut al-Kabir (SUNY Press, 1st edn, 1972) 1. For an accessible, concise discussion of the Islamic interdictions listed in this note, and the motivation of working around them by means of takaful, see Asyraf Wajdi Dusuki and Nurdianawati Irwani Abdullah, ‘Takaful: Philosophy, Legitimacy and Operation’ in Humayon A Dar and Umar F Moghul (eds), Chancellor Guide to the Legal and Shari’a Aspects of Islamic Finance (Chancellor, 1st edn, 2009) 285 and 292–95. 5. The Qur’anic basis of takaful is slender. Verses relevant to guaranty or takaful include 3:37, 3:103 and regarding mutual cooperation (ta’wun) 5:2. Codifying mutual cooperation and assistance in modern national law, the Takaful Act of Malaysia 1984, s 2 defines takaful as ‘a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need, whereby the participants mutually agree to contribute for that purpose’. The Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), the Arab Gulf counterpart to the IFSB, based in Manama, Bahrain also publishes standards and its Shari’a Standard (SS) No 26 ‘Islamic Insurance’ para 2 defines takaful ‘as an alternative to the conventional concept of insurance that is based on Shari’a concepts of mutuality and cooperation’. 6. Peter Hodgins and Caroline Jaffer, ‘Takaful’ in Craig Nethercott and David Eisenberg (eds), Islamic Finance: Law and Practice (Oxford University Press, 1st edn, 2012) , 271 cite IFSB and AAOIFI standards including the following from the latter (SSNo 26, ibid) ‘payment of contributions as donations and leads to the establishment of an insurance fund that enjoys the status of a legal entity and has independent financial liability. The resources of this fund are used to indemnify any participant who encounters injury … . The fund is managed by either a selected group of policyholders, or a joint stock company that manages the insurance operations and invests the assets of the fund against a specific fee.’ 7. For further comparative analysis, see Hairul Suhaimi Nahar, ‘Insurance vs Takaful: Identical Sides of a Coin?’ (2015) 13(2) Journal of Financial Reporting and Accounting 247. 8. There is an industry phenomenon called re-takaful; however, it does not function precisely as re-insurance and will not be considered here. 9. With the proximate cause of the last global financial crisis (commencing in 2007) being the failure of a US-based insurance company, AIG, followed in rapid succession by banks, triggering a liquidity crisis. 10. As observed at n 4, with gharar and maysir being the most problematic interdictions in relation to risk arbitrage. 11. For an interesting deeper analysis of gharar in connection with takaful, with reference to Knightian uncertainty, see Daniele D’Alvia, ‘(Legal) Uncertainty: Takaful Between English Common Law and Shari’a Law’ (2017) 10 International Review of Law 1. 12. Each takaful participant is simultaneously insurer and insured. A typical term of takaful is one year—for more on the variety of possible schemes: Zubair Hasan, Islamic Banking and Finance: An Integrative Approach (Oxford University Press, 1st edn, 2014) 253 and 263–64. 13. See, respectively, by Scott Morrison, ‘The Upcoming UK Sovereign Sukuk Issue’ (2014) 29(7) Journal of International Banking Law and Regulation 362; and Scott Morrison, ‘The Application of UK Prospectus Rules to Sukuk (Islamic Securities) on the London Stock Exchange’ (2016) 31(4) Journal of International Banking Law and Regulation 237. 14. A body of work has emerged analysing the respective performance of Islamic and conventional banking in times of economic crisis, and some of these findings are pertinent as well to takaful. For example, Habib Ahmed, Mehmet Asutay and Rodney Wilson, Islamic Banking and Financial Crisis: Reputation, Stability and Risk (Edinburgh University Press, 1st edn, 2014) . 15. See n 5. This premise of takaful is similar (apropos of the thesis of this article as will become clear below) to the requirement in English law that a charitable trust must be solely charitable (Charities Act 2011, s 1); Re Resch’s Will Trusts [1969] 1 AC 514. 16. Shariah Advisory Council (SAC) of the Central Bank of Malaysia on 26 January 2016 has reiterated the importance of tabarru’ defining it as a ‘voluntary gift’. IFSB 8 (n 3): ‘In a takaful arrangement the participants contribute a sum of money as a Tabarru commitment into a common fund that will be used to mutually assist the members against a specific type of loss or damage.’ For some of the complexities attendant on the commitment to tabarru: Oliver Agha, ‘Tabarru in Takaful: Helpful Innovation of Unnecessary Complication?’ (2010) 9 UCLA Journal of Islamic and Near Eastern Law 69. 17. A very useful 19th-century codification of Islamic law, written in Ottoman Turkish and translated into Arabic (al-Majallat al-Ahkām al-‘Adalliyah—literally, Journal of Judicial Rules) is available in English as The Mejelle (The Top Press, 1st edn, 2007). The Mejelle Book VII deals with the law of gift; art 833 states, ‘Hibe is to give the owner-ship of property to another without reward.’ Chibli Mallat, Introduction to Middle Eastern Law (Oxford University Press, 1st edn, 2009), compares The Mejelle to a bench book (245). Muhammad Hidayatullah and Arshad Hidayatullah, Mulla’s Principles of Mahomedan Law (NM Tripathi, 19th edn, 1990) ch XI deals with the law of gift, with para 138 stating that a hiba or gift is ‘a transfer of property, made immediately and without any exchange, by one person to another, and accepted by or on behalf of the latter’. 18. IFSB (n 6) para 13 states: ‘The underlying concept/principle for takaful scheme is tabarru’ and ta’awun (mutual assistance) among the takaful participants.’ 19. Except in the case of an industry practice of introducing interest-free loan capital in case of a fund shortfall, as will be further explained below. 20. Hans Visser, Islamic Finance: Principles and Practice (Edward Elgar, 2nd edn, 2013) 131: ‘Insurance premiums are not seen as payments made to reduce insecurity, but as tabarru, voluntary contributions made for the good of group members that suffer mishaps.’ In relation to ta’awun, mutual assistance Visser emphasizes that it is not a purchase, not a sale—citing Abdul Rahim and others, ‘Islamic Takaful: Business Modules, Shariah Concerns, and Proposed Solutions’ (2007) 49(3) Thunderbird International Business Review 371. 21. As adopted, for example, in Ahmad Basri Ibrahim and Ahmad Fadihil Hamdi Mohd Ali, ‘Absolute Assignment in Takaful Industry: Shari’ah Contracts, Issues and Solutions’ (2015) 23 Intellectual Discourse 1, 3. 22. Strictly speaking there is no exact counterpart to the term ‘consideration’ as in English law, in Islamic law, Al-Zuhayli (n 3) 53–54 distinguishes price, value, and debt in relation to sale contracts. 23. For discussion of these options, see D’Alvia (n 11) 11. 24. As set out for instance comprehensively in Al-Zuhayli (n 3) ch XII; Bowstead and Reynolds on Agency (21st edn, 2017) 1-001. 25. Paragon Finance v DB Thakerar and Co [1999] 1 All ER 400, 416. 26. D’Alvia (n 11) 11; Antony Hainsworth, ‘Retakaful, Regulation and Risk: Developing the Islamic Insurance Market in the Uk—Conventional Reinsurance Will Give Way to Retakaful Facilities’ (2009) 24 Journal of International Banking and Financial Law 193, 195. 27. An excellent introduction to the field of Islamic finance, aimed at the practitioner, is Craig Nethercott and David Eisenberg, Islamic Finance: Law and Practice (Oxford University Press, 1st edn, 2012) forthcoming in a new edition in 2019. 28. Paragon Finance (n 25). 29. On the coupling of a trust with a power—Burroughs v Philcox (1840) 5 My & Cr 72. 30. Other formulae could be devised that would allow partial payments to members who had paid part of their tabarru’, or into the estates of those scheme participants who had died before the expiration date. For some methods of calculating the payment: Lukman Ayinde Olorogun, ‘A Proposed Contribution Model for General Islamic Insurance Industry’ (2015) 8(1) International Journal of Islamic and Middle Eastern Finance and Management 114. Alternatively, takaful participants could agree unanimously to terminate the trust under Saunders and Vautier [1841] EWHC J82. 31. Re Weekes’ Settlement [1897] 1 Ch. 289; [1897] 1 WLUK 86. 32. Rather than a dichotomous division into legal and illegal, shari’a assesses actions as falling into one among five categories: haram (forbidden), makruh (sinful, disliked), mubah (allowed, neutral), mustahabb (recommended), and wajib (required, mandatory). 33. Mohammad Hashim Kamali, Shari‘ah Law: An Introduction (Oneworld 2008, 2011 repr) 186, citing ‘Abd al-Qadir’ Awdah (al-Tashri al-Jina’i al-Islami, 115), invokes the Islamic legal maxim that the ‘conduct of reasonable men (or the dictate of reason) alone is of no consequence without the support of a legal text’. As Kamali explains the point ‘No one, therefore, should be deemed a violator because of committing or omitting an act which is not forbidden by the clear provisions of the law.’ Awdah elaborates that ‘In the absence of a clear text which may require affirmative action or abandonment of a particular conduct, the perpetrator or abandoner incurs no responsibility and no punishment can be imposed’ (cited above, 187). 34. [1765] EWHC KB J98 95 ER 807. 35. The name of the company was ‘Sirket-i Hayriye’ that literally means ‘the Auspicious Company’; it was a marine transport company, based in Istanbul—Timur Kuran, ‘The Absence of the Corporation in Islamic Law: Origins and Persistence’ (2005) 53(4) The American Journal of Comparative Law 785, 785. 36. Examples of countries purporting the rule of Islamic law: the Kingdom of Saudi Arabia (art 1 of the 1992 Basic Law); Egypt’s art 2—‘The Principles of the Islamic sharī’a are the Chief Source of Egyptian legislation’; Afghanistan (art 3); Iran (arts 2–4); Pakistan (art 227); Qatar (art e 1); and Yemen (art 3). See Clark B Lombardi, ‘Constitutional Provisions Making Sharia “A” or “The” Chief Source of Legislation: Where Did They Come from? What Do They Mean? Do They Matter?’ (2013) 28(3) American University International Law Review 733. 37. See n 6. However, in an illustration of the type of objection considered here, the use of a company for takaful has attracted criticism, as in Kamaruzaman Noordin and others, ‘The Commercialisation of Modern Islamic Insurance Providers: A Study of Takaful Business Frameworks in Malaysia’ (2014) 2(1) International Journal of Nusantara Islam 1. 38. Scott Morrison, Law of Sukuk: Shari’a Compliant Securities (Sweet and Maxwell 2017). 39. ch 8(VI), (n 39). 40. Hidayatullah and Hidayatullah (n 17)—ch XII deals with the waqf. At 178, quoting the (Indian) Wakf Act 1954, s 2(1): ‘Objects of Wakf.’ The purpose for which a wakf may be created must be the one recognised by the Mahomedan law as ‘religious, pious, or charitable.’ Under s 3: ‘A wakf may also be created in favour of the settlor’s family, children and descendants.’ Hybrid structures combining waqf, wakala, and mudaraba are also current in the industry— Hasan (n 12) 266–69. 41. Wakf Act 1954, s 2(1). 42. For example, in the Mauritian Waqf Act 1941—see Scott Morrison, ‘The Social and Legislative History of the Islamic Trust (waqf) in Mauritius’ 42(1) (2016) Commonwealth Law Bulletin 59. 43. Fida Hussain, The Musalman Law of Wakf (Central Indian Printing, 1st edn, 1939) 127, quotes the 1922 Privy Council case Vidya Varuti v Balyswami: ‘Mahomedan Law Relating to Wakfs Differs Fundamentally from the English Law … Neither the Mutawalli nor the Sajjadanashin has Any Right in the Property Belonging to the Wakf, the Property is not Vested in him and he is not a Trustee in the Technical Sense.’ 44. Wakf Act 1954, s 3. 45. Charities Act 2011, s 3(2) allows for religions with one, multiple, or no gods. Neville Estates Ltd v Madden [1962] Ch. 832; [1961] 3 WLR 999; [1961] 3 All ER 769; [1961] 7 WLUK 117; (1961) 105 SJ 806 allows all deistic faiths. 46. Under the common law rules and the Perpetuities and Accumulations Act 2009. 47. SA Kader, The Law of Wakfs: an analytical and critical study (Eastern Law House, 2nd edn, 2008) 5: ‘Two Conditions are Necessary for the Validity of a Wakf Under Sunni or Hanafi Law Viz:—1. A Wakf Shall be Certain, Absolute and Unconditional. 2. A Wakf Shall be Perpetual.’ 48. S Morrison (n 42) . 49. Monica M Gaudioisi, ‘The Influence of the Islamic Law of Waqf on the Development of the Trust in England: The Case of Merton College’ (1988) 136 University of Pennsylvania Law Review 1232; in the article she examines the 1264 Statutes of Merton College. Other articles on this subject include Henry Cattan, ‘The Law of Waqf’ in Law in the Middle East (Brill, 1st edn, 1955) 203 and 212–18; Ann Van Thomas, ‘Note on the Origin of Uses and Trusts’ (1949) 3 Southwestern Law Journal 162. 50. EY, Global Takaful Insights, annual publication[AQ12]; research on Cobalt’s webpage (n 1); Tahani Coolen Maturi, ‘Islamic Insurance (Takaful): Demand and Supply in the UK’ (2013) 6(2) International Journal of Islamic and Middle Eastern Finance and Management 87; Marc Jones, ‘The Next Step’ (2008) 109(6) Best’s Review 145; Mohamed Sherif and Sadia Hussain, ‘Family Takaful in Developing Countries: The Case of Middle East and North Africa (MENA)’ (2017) 10(3) International Journal of Islamic and Middle Eastern Finance and Management 371. © The Author(s) (2019). Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)
TI - Mobilizing the trust for Islamic insurance (takaful)
JF - Trusts & Trustees
DO - 10.1093/tandt/ttz017
DA - 2019-05-01
UR - https://www.deepdyve.com/lp/oxford-university-press/mobilizing-the-trust-for-islamic-insurance-takaful-XyDaYEqwK4
SP - 450
VL - 25
IS - 4
DP - DeepDyve
ER -