Broader Application of Ta`awun in Takaful

Mutual assistance (ta`awun) is a fundamental Islamic value that promotes cooperation in pursuit of good causes and righteousness, while prohibiting actions associated with sin, injustice or transgression. Ta`awun reflects the ethical obligation of individuals and societies to support one another, upholding the values of solidarity and collective responsibility.

Ta`awun forms the foundation of the risk-sharing mechanism in takaful. In line with the definition of “takaful” under section 2(1) of the Islamic Financial Services Act 2013 (“IFSA”), takaful is an arrangement based on mutual assistance under which takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to the takaful participants or their beneficiaries on the occurrence of pre-agreed events. This fundamental concept differentiates takaful from conventional insurance that works on the basis of risk transfer from policy owners to licensed insurers. At present, the regulatory framework mainly focuses on the confined application of ta`awun among takaful participants in a takaful fund. This is intended to preserve the best interest of takaful participants as the collective owner of the takaful fund, i.e. participants’ risk fund.

In the context of the takaful industry, a broader application of ta`awun encourages licensed takaful operators to adopt business practices that are responsible and beneficial to society at large, fostering a stronger culture of empathy and support, which is essential for achieving the socio-economic objectives. Through a broader application of ta`awun, licensed takaful operators are expected to contribute significantly to the socio-economic development of the community. This is consistent with the aspirations of Value-Based Intermediation (“VBI”) towards generating a positive and sustainable impact on the economy, community and environment, while significantly enhancing the realisation of objectives of Shariah (maqasid Shariah) in a more comprehensive manner.

As the industry progresses, ta`awun concept can be applied broadly to enable the takaful industry to contribute in a more meaningful way while continuing to preserve the rights of takaful participants and consistently achieving the objective of takaful.

The requirements in this policy document (“Policy Document”) aim to facilitate a smooth and effective broader application of ta`awun in the takaful business by setting out the following:
(a) scope of a broader application of ta`awun encompassing the sources of fund that can be utilised;
(b) Shariah requirements in preserving the rights and ensure fair treatment of existing takaful participants, particularly when the broader application of ta`awun is also benefitting third parties beyond the existing takaful participants;
(c) regulatory requirements to support prudent and innovative implementation of a broader application of ta`awun, encompassing introduction of new and/or enhanced requirements on governance and oversight, market conduct as well as transparency and disclosure; and
(d) guiding principles to facilitate the exploration and development of new takaful operational models to support an effective implementation of broader application of ta`awun.

The Bank acknowledges that innovation inherently presents both opportunities and risks. In this regard, the Bank will adopt a balanced and proportionate regulatory approach in ensuring the regulatory framework remains accommodative and facilitative for the continuous development of sound, progressive and inclusive takaful industry, while prioritising financial soundness of licensed takaful operators and safeguarding the interests of takaful participants.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking