Takaful Legal Framework & Risk Management in Malaysia

Posted on Jul 12, 2025 in Law

Legal Framework of Takaful in Malaysia

The legal landscape for Takaful in Malaysia has evolved significantly, transitioning from earlier acts to comprehensive modern legislation.

Evolution of Takaful Laws

Insurance Act 1963 (Repealed): Replaced by the Financial Services Act 2013 (FSA 2013).
Takaful Act 1984 (Repealed): Replaced by the Islamic Financial Services Act 2013 (IFSA 2013).

Key Legal Categories

The Takaful industry operates under several categories of laws and policies:

Enabling Laws

These laws and rules are used to manage and control specific institutions, such as those outlined in the Second Schedule of the Central Bank of Malaysia Act 2009 (CBMA 2009). These laws are based on rules made and approved by Parliament (Acts of Parliament).

Central Bank of Malaysia Act 2009 (CBMA 2009)

The CBMA 2009 empowers Bank Negara Malaysia (BNM) to carry out its duties, including overseeing Islamic financial businesses and institutions (IFIs). BNM ensures that Islamic banks and finance institutions adhere to Shariah principles. It also establishes a main Shariah authority in Islamic finance, known as the Shariah Advisory Council (SAC) of BNM.

Three important sections include:

Section 5: The primary role of Bank Negara Malaysia (BNM) is to maintain stability in the country’s monetary and financial systems.
Section 27: Malaysia operates a dual financial system, encompassing both conventional and Islamic financial systems.
Section 60: BNM is mandated to foster and promote Malaysia as a global hub for Islamic finance.

Islamic Financial Services Act 2013 (IFSA 2013)

IFSA 2013 took effect on June 30, 2013, replacing the Takaful Act 1984. It aims to regulate and monitor Islamic financial institutions, payment systems, and related entities. It also oversees the Islamic money and foreign exchange markets, promotes financial stability, and ensures compliance with Shariah principles.

IFSA 2013 sets rules for how Takaful operators (TOs) must operate in Malaysia. These rules are divided into two main types:

Operational Requirements

These are similar to the rules for Islamic banks. They include aspects like obtaining approval to operate, adhering to Shariah law, meeting financial safety standards, ensuring fair treatment of customers, and facing penalties if rules are breached.

Substantive Requirements

These relate to how Takaful functions in practice. For example, keeping the Takaful fund separate from the shareholders’ fund, ensuring Takaful contracts are permissible under Shariah, acting in good faith, and allowing the nomination of beneficiaries.

Relevant Provisions Under IFSA 2013

Section 2: Defines terminology related to Takaful.
Section 5: States there are two types of Takaful business: Family Takaful (similar to life insurance under FSA 2013) and General Takaful (similar to general insurance under FSA 2013).
Sections 8 & 10: A Takaful business must possess a license to operate. Operating without a license is an offense.
Sections 16 & 286: Takaful operators require only one license to operate. This protects consumers and ensures the financial stability of Takaful funds. Breaching license rules is considered an offense.
Section 27 (CBMA 2009): Takaful and Islamic financial institutions must comply with both legal and Shariah (Islamic law) requirements.
Section 28 (IFSA 2013): Violating Shariah rules is treated equivalently to breaking the law.
Section 141 & Schedule 9: Both Takaful operators and customers must act with utmost good faith, providing honest and accurate information when discussing or signing up for Takaful products.
Paragraph 12, Schedule 9 & Section 151, Schedule 12: These sections explain the responsibility or liability of Takaful agents if issues arise.
Section 142 & Schedule 10: Takaful participants can name someone as a beneficiary through conditional hibah (a type of gift with conditions).

Transactional Laws

These laws govern various transactions relevant to Takaful operations.

Civil Law Act 1956

Under this Act, family members (such as parents, spouse, or children) of a person who dies due to a road accident or someone’s negligence can sue for loss of support. This is known as a dependency claim.

Two types of claims can be made when someone dies wrongfully:

Dependency Claim: Under Section 7, for the loss suffered by the dependents.
Estate Claim: Under Section 8, for losses suffered by the deceased’s estate.

Of the two, the dependency claim is more significant as it provides compensation to the family for the financial support they have lost due to the death. Additionally, in Takaful, claims often depend on liability laws. For example, in motor or personal accident Takaful, tort law applies. If a driver accidentally kills a pedestrian, the claim made by the family would fall under civil/tort law, not criminal law.

Contracts Act 1950

All contracts adhere to basic legal rules. A contract is a legal agreement, crucial for ensuring the validity of a Takaful contract. Both parties must fully agree on the important terms (a “meeting of minds”). A Takaful contract follows the same basic rules as any other contract. For a Takaful contract to be valid, it must include:

Legal capacity of both parties to make a contract.
An offer and acceptance.
Payment (called contributions).
Clear terms and conditions.
All other legal requirements of a valid contract.

Companies Act 2016

This Act covers how companies are registered, managed, and dissolved. It is important because all Takaful operators must be public companies (under Section 21 of IFSA 2013). As public companies, Islamic financial institutions (IFIs) must adhere to good corporate governance rules, such as appointing boards, proper reporting, and transparency (see Sections 134, 177, and 184).

Road Transport Act 1987

All motor vehicles must have insurance or Takaful before being used on public roads. There are two common types: comprehensive and third-party motor Takaful. Comprehensive motor Takaful covers almost all losses or damages to your vehicle and people involved in an accident. Third-party motor Takaful only covers losses or damages to other people and their property in an accident, not your own.

Compulsory motor insurance/Takaful protects people who are injured or killed in a vehicle accident by paying compensation to the victims. The driver who caused the injury or damage must pay compensation. However, the victim can receive compensation even if the driver doesn’t pay immediately. This system facilitates prompt payment to victims. According to Section 58, drivers must present their driving license and insurance certificate when requested.

Anti-Money Laundering & Anti-Terrorism Financing Act

Insurance and Takaful entities must comply with the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) rules to prevent money laundering. This includes maintaining records, conducting thorough customer due diligence, and reporting suspicious transactions to Bank Negara Malaysia (BNM). These rules are found in Part IV and the First Schedule of AMLA. Insurance and Takaful agents must also comply with AMLA requirements.

BNM Policy Documents & Guidelines

These include important documents such as:

Guidelines on Takaful Operational Framework (TOF) 2019.
Shariah and Governance Framework (SGF).

Roles of Authorities & Agencies

International Standards

AAOIFI: Accounting & Auditing Standards

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an independent, non-profit organization that develops rules and standards for accounting, auditing, governance, ethics, and Shariah compliance for Islamic financial institutions. Founded in 1991 and based in Bahrain, its main goal is to ensure consistency and clarity in Islamic financial practices and reporting worldwide.

AAOIFI Shariah Standards for Islamic Insurance:

Standard 26: Rules for Takaful (Islamic insurance).
Standard 41: Rules for Retakaful (Islamic reinsurance).

AAOIFI Financial Accounting Standards (FAS) for Takaful Operators:

FAS 12: How to present and disclose financial information.
FAS 13: How to explain how surplus or deficit is calculated and shared.
FAS 14: Rules for investing funds.
FAS 15: Guidelines for provisions and reserves.
FAS 19: Rules for contributions (payments) in Takaful.

IFSB (Islamic Financial Services Board)

The IFSB is an international body that creates rules to ensure the safety and stability of Islamic finance. It sets global standards for banking, capital markets, and Islamic insurance (Takaful). The IFSB office is located in Kuala Lumpur, Malaysia.

Important IFSB standards include:

IFSB 8: Rules for managing Takaful companies.
IFSB 11: Rules for the capital adequacy requirements of Takaful companies to maintain security.

Malaysian Regulators

Bank Negara Malaysia (BNM)

BNM plays a crucial role in regulating the Takaful industry by:

Issuing licenses to Takaful Operators (TOs) for general and family Takaful.
Ensuring TOs manage their business appropriately for the benefit of their customers.
Verifying that TOs adhere to Shariah principles in their operations.
Building public trust in Takaful and Islamic finance.
Encouraging effective marketing and robust company management.
Ensuring efficient use of money and resources.
Maintaining the stability and security of the financial system.

Relevant Industry Associations

MITBA: Insurance & Takaful Brokers Association

Established in 1974, the Malaysian Insurance and Takaful Brokers Association (MITBA) is the sole national association for insurance and Takaful brokers. It represents the industry and provides advice to its members, regulators, consumers, and other stakeholders on important insurance matters.

MTA (Malaysian Takaful Association)

MTA was incorporated in 2003 with the objective of promoting the establishment of a sound Takaful structure in Malaysia.

GTC (Global Takaful Group)

GTC was created to enhance cooperation between Takaful and Retakaful operators worldwide.

Shariah Governance in Takaful

Shariah Supervisory Board (SSB)

The role of SSB members is to review Takaful and Retakaful operations, oversee the development of Takaful products, and ensure that products and investments comply with Shariah rules. They verify if new transactions or products meet Shariah standards and investigate the financial institution’s operations to ensure Shariah compliance.

Shariah Supervisory Council (SSC)

The Shariah Supervisory Council (SSC) is vital for ensuring Takaful operators adhere to Shariah rules. Shariah governance refers to the rules and processes that Takaful operators use to follow Shariah principles. Good governance by the SSC helps ensure transparency, clear information sharing, and strict adherence to Shariah rules.

Importance of Shariah Governance

Islamic financial institutions, including Takaful operators, are companies, making their governance crucial. Today, they employ two types of governance: (a) corporate governance and (b) Shariah governance. Corporate governance is the traditional way companies are managed, focusing on relationships between different parts of the company. Shariah governance builds upon corporate governance by incorporating religious rules to ensure the company adheres to Shariah principles, avoiding elements like interest (riba), gambling (maysir), and uncertainty (gharar).

Shariah governance ensures that Takaful operators follow Shariah rules in their products and operations. It helps to:

Build trust and confidence among stakeholders.
Improve how external parties perceive Takaful operators.
Protect the good reputation and public trust in Takaful operators.

Malaysian Centralized Governance System

Malaysia has adopted a centralized model with two layers of Shariah boards to ensure comprehensive implementation of Shariah compliance and consistency in Shariah decisions:

Shariah Advisory Council (SAC): At the central level (BNM), Securities Commission, and Labuan Financial Services Authority. This is the highest authority for Shariah matters in Islamic Finance in Malaysia (see Sections 51-58 of CBMA 2009).
Shariah Committee (SC): At the Takaful Operator (TO) level. The SC is responsible for Shariah matters concerning the business, affairs, and activities within TOs (see Part IV IFSA 2013).

Important Policy Documents from BNM:

Shariah Governance 2019 (main focus).
Corporate Governance 2016.
Risk Governance 2013.

Other Relevant Guidelines:

Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings 2009 (IFSB, 2009).
Guiding Principles on Shari’ah Governance Systems for Institutions Offering Islamic Financial Services (IFSB, 2009).
Guidelines by AAOIFI.

External Factors Affecting Takaful & Insurance Policies

Subject Matter of Takaful & Insurance Practice

In Takaful (Islamic insurance), the subject matter is what the policyholder seeks to protect from unexpected risks—such as a life, a building, or a car. The person seeking Takaful must have a legitimate interest in the subject matter (known as “insurable interest”). Additionally, in Takaful, the subject matter must be something that Islamic law considers valuable (called mutaqawwim).

Requirements for Subject Matter

For a subject matter to be valid in Takaful, it must meet four requirements:

It must have commercial value.
It should be beneficial.
It must be legally owned.
It must not be declared impermissible or forbidden by Shariah law.

Issues in Subject Matter

Fetus as Subject Matter

Can a fetus be the subject matter of Takaful? Is it considered non-existent or uncertain? A fetus definitely exists in the womb, even though its identity and sex are unknown. Takaful is taken out to protect its existence, not its identity or sex. A baby can be covered by a policy if it benefits the baby. In such cases, a guardian may purchase the policy in the baby’s name but must fully manage it as the policyholder.

Life as Subject Matter

Can a life be the subject matter of Takaful? In family Takaful, a person’s life is considered valuable under Shariah because their loss can financially affect their dependents. This makes it a valid reason for Takaful coverage. However, if someone is bankrupt, seriously ill, imprisoned, held hostage, or facing the death penalty, they are seen as unable to contribute fairly to the Takaful system. In such cases, insuring their lives could be unfair to others unless a representative manages their participation.

Permissible Takaful Interest

In practice, permissible Takaful interest applies to life, property, and goods. In conventional insurance, this is called “insurable interest” because these are the things covered by insurance and Takaful contracts, including:

Takaful on Property.
Takaful on One’s Own Life.
Takaful on Another’s Life.

In family Takaful, the person who participates must have a permissible Takaful interest in the covered person. According to Paragraphs 3(6) to 3(8) of the Schedule, a person is considered to have a permissible Takaful interest if the person being covered is:

Their spouse or child.
Their ward who is under the age of majority at the time the Takaful contract is made.
Their employee.
Someone they are financially responsible for, either fully or partly, for maintenance or education at the time of entering the contract.

Paragraph 3(8) also states that if the person being covered is not a minor, their prior written consent is required before entering into a family Takaful contract on their behalf.

Risk Management in Takaful & Insurance Practice

Defining Risk

Risk generally refers to the chance of danger, harm, or loss occurring. It signifies the uncertainty or unpredictability of future events. For example, smokers face a risk of developing lung cancer because it’s uncertain whether it will happen, or flying on a plane involves some risk due to uncertainty about a possible crash.

In the Takaful (Islamic insurance) industry, risk often refers to the person or property being covered. For instance:

A person with a history of drunk driving is considered a high risk.
A building with faulty wiring is deemed an unacceptable risk.

Related terms include:

Peril: The cause of loss (e.g., fire or theft).
Hazard: Something that increases the chance of a loss happening.

Categories of Risk

There are four main categories of risk:

Pure Risk

These are risks where the outcome is either a loss or no loss; there is no chance of gaining. Examples include:

Personal Risk: Risks that directly affect a person, such as accidents, old age, and poor health.
Property Risk: Risks that involve damage or loss of property, such as fire damaging a building, theft of valuables like jewelry. This can include both direct and indirect losses.
Liability Risk: Risks where a person or company may be legally responsible for injuring someone or damaging someone else’s property.

Speculative Risk

Speculative risk involves a chance of losing, breaking even, or making a profit. This type of risk is common in activities like investing in the stock market, buying shares, or purchasing bonds.

Fundamental Risk

Fundamental risk is a risk that impacts the entire economy or many people simultaneously. Examples include natural disasters like earthquakes, famines, and tsunamis.

Particular Risk

A risk that affects individuals and not the entire community or country, e.g., motor accidents, theft.

Hazard vs. Peril

A peril is something that directly causes a loss, like old age, sickness, theft, or fire. Hazards are things or situations that make a loss more likely to happen, such as a car in bad mechanical shape, a weak wooden building, dishonesty, carelessness, or reckless behavior.

Example: [HAZARD: EXPLOSIVE, PERIL: FIRE EXPLOSION, LOSSES: PROPERTY, PROFIT REVENUE].

Peril

Refers to a cause of loss. Common perils include fire, flood, collision, earthquakes, sickness, and premature death. When a peril occurs, property may be destroyed or lost, and persons could be injured or killed. If your car is damaged in an accident, the accident is the peril or the cause of loss.

Hazard

There are four types of hazards:

Physical Hazard: Physical condition of the subject matter that increases the chance of loss (e.g., defective wiring in a building that increases the chance of fire).
Moral Hazard: Attitude of an individual that increases the chance of loss (e.g., deliberately setting a fire or making a false, inflated Takaful claim).
Morale Hazard: Carelessness leading to a loss because of the existence of Takaful. Failure to take reasonable care to protect one’s property due to a Takaful/insurance policy (e.g., homeowners might leave a door unlocked, allowing a burglar in, because their important household items are already covered by Takaful).
Legal Hazard: Likelihood of loss due to legal actions. New laws are constantly enacted to address a wider range of issues, which could create a host of legal hazards for individuals and organizations (e.g., damages in lawsuits like death due to an accident).

Risks Covered by Takaful

Although Takaful primarily covers pure risks, not all pure risks are eligible for coverage. To be eligible, risks must meet these criteria:

Large Number of Similar Exposure Units: The risk must apply to many similar cases so it can be measured economically. Example: Millions of cars can be covered, but a rare antique car usually needs special Takaful or insurance.
Loss Must Be Accidental and Unintentional: The risk involves a possible loss, not a certain or intentional loss. Example: Fire caused by faulty wiring is covered; intentionally setting a fire is not.
Loss Must Be Determinable and Measurable: The cause, time, and place of loss must be clear and verifiable. Subjective losses like stress or unhappiness are not covered.
Loss Should Not Be Catastrophic: Large-scale disasters (e.g., tsunamis) are usually excluded because Takaful operators cannot cover all losses; governments typically handle these.
Chance of Loss Must Be Calculable: There must be enough data to estimate how often and how severe the losses are for proper underwriting.
Contributions Must Be Economically Feasible: The cost of coverage should be affordable and reasonable for the risk. Example: Young, healthy people pay less; older people with health issues pay more.
Risk and Loss Must Be Permissible Under Shariah: The risk must comply with Islamic law. For example, Takaful can cover losses of halal businesses but not those involved in prohibited activities like nightclubs.

Contractual Factors Affecting Takaful

Takaful is a protection plan based on Islamic (Shariah) principles. Aqad means a contract, which is an agreement between offer and acceptance about something. By paying money into a shared Takaful fund (called tabarru’), a participant agrees to a contract (aqad) to help and support each other if any participant faces a covered loss.

Parties Involved in Takaful

The main parties in a Takaful contract are the operator and the participants. Other important people involved are the beneficiaries and nominees. All these parties rely on each other to ensure the Takaful system functions smoothly.

Takaful Operator

A Takaful operator manages the Takaful business and fund on behalf of the participants. To conduct Takaful activities, an individual, company, or cooperative must:

Have legal capacity to enter contracts.
Be licensed by the relevant authority (like BNM).
Maintain more assets than liabilities (be financially stable).

The Takaful operator manages the tabarru’ fund following Shariah rules to provide fair financial protection to those who genuinely need it against specified risks or losses.

Takaful Participants

A Takaful participant is someone who legally owns a Takaful certificate. Anyone in society who is legally capable can contribute money to a mutual fund to protect themselves or others against specific risks to life or property. Participants pay regular contributions to the Takaful operator to share the risk and provide mutual protection. A participant can be a person or a company, but they must have legal capacity and a valid interest in what’s being covered. If the participant is a person, they must meet certain conditions:

Age: Must be at least 16 years old to enter a Takaful contract. If under 16, protection must be arranged through a parent or guardian.
Medical Fitness: People with serious illness, mental incapacity, or who cannot manage their own affairs may not qualify.
Solvency: A bankrupt person cannot be a Takaful participant.

Nominee

A nominee acts as a trustee under Islamic law, based on the principle of al-amanah (trust). The nominee holds the trust but does not have the right to benefit from it and must return it to the rightful beneficiary without asking for any interest. Nomination means naming someone to receive the policy money if the policy owner dies. The nominee is not the owner of the policy because that would conflict with Islamic inheritance laws (al-mirath and al-wasiyah). Nomination is necessary, and the nominee receives the benefit as a gift (hibah).

According to the Shariah Advisory Council (SAC) in 2003, whether the Takaful benefit is a gift or part of the deceased’s estate depends on the wording of the nomination clause. Under Section 142 IFSA 2013, nomination can:

Assign Takaful benefits to someone as a conditional hibah (gift).
Designate the nominee to receive the benefits as an executor.

In a legal case (Re Ismail b Rentah), a nomination to a daughter was based on Islamic inheritance laws. The Karachi High Court ruled that nomination in a policy is not a gift or bequest, so it does not prevent the legal heirs from claiming the benefits under inheritance law (al-mirath).

Beneficiary

A beneficiary is someone who has the right to receive and use the benefits from a Takaful certificate.

Difference between Nominee and Beneficiary

A nominee is the person named in the certificate to receive or manage the benefits (usually death benefits) when the certificate holder passes away.
A beneficiary is the person who actually has the right to get and enjoy the benefits from the certificate.

Takaful Intermediaries

Besides Takaful operators who handle family Takaful, general Takaful, and Retakaful, there are also Takaful agents, brokers, and adjusters. Agents and brokers play an important role in making Takaful work well. They should not be overlooked but seen as key promoters and an important part of the company’s overall business.

Categories of Takaful Intermediaries

Takaful Agent
Takaful Broker
Takaful Adjuster

Duties of Takaful Intermediaries

Paragraphs 11 and 12, Schedule 9, state that intermediaries must:

Not induce clients to enter Takaful contracts through improper means.
Not use misleading, false, or deceptive information.
Not fraudulently conceal a material fact.

A Takaful agent must not use any marketing brochure or product illustration not authorized by the licensed Takaful operator.

Types of Intermediaries

Takaful Agent

A Takaful agent is defined in Section 2 of IFSA 2013. Part 2(4), Schedule 15, specifies that a Takaful agent is registered with any association of licensed Takaful operators.

An agent’s job includes promoting Takaful, explaining its importance clearly, and helping people complete the proposal form before they sign it. Agents work for the Takaful operator (TO) and help promote its reputation. Their share of profits can vary based on their performance—such as the number of policyholders they bring in and the total contributions they generate. An agent can only perform actions authorized by the Takaful operator (following the legal rule: “he who acts through another is himself performing the act.”)

Duties of an Agent:

Work carefully and skillfully, adhering to the agency agreement.
Keep information confidential, sharing it only with the Takaful operator.
Avoid taking secret profits or bribes.
Understand anti-money laundering laws to properly check clients, as required by Bank Negara Malaysia’s policies.

Rights of an Agent:

The agent has the right to be compensated for their work, usually through a commission.
The agent can carry out their duties in a suitable way, such as meeting customers in a café.
The agent can refuse any unreasonable control from the Takaful operator (TO).

Takaful Broker (Wasit)

A broker in insurance or Takaful is also a type of agent, but with a key difference: an agent works for the insurance/Takaful company, while a broker works for the client (participant) and represents their interests.

A broker must be:

Licensed by Bank Negara Malaysia (BNM).
Registered with MITBA (Malaysian Insurance & Takaful Brokers Association).

Brokers also provide financial advice related to Takaful.

Role of a Broker:

Provide expert advice and market knowledge.
Handle servicing and paperwork for Takaful contracts.
Help clients manage and reduce risks to avoid future losses.

Types of Broker Services:

Family Takaful & employee benefits (e.g., retirement and endowment schemes).
General Takaful for businesses (e.g., property damage, engineering, marine coverage).
Premium financing services (e.g., managing cash flow for company Takaful).

Why Use a Broker?

Clients can purchase Takaful directly, but brokers assist in risk management.
They compare different products to find the best fit.
They advocate for clients, ensuring affordable and innovative Takaful options.

Differences Between Takaful Agent and Broker:

Takaful Agent:
- Represents the Takaful operator through an official agreement.
- Works mainly for the Takaful operator, not for the client.
- Follows the operator’s standard way of doing business.
- Offers only the Takaful products from the operator they represent.
Takaful Broker:
- Has no direct agreement with any specific Takaful operator.
- Works for the client (participant), not the operator.
- Helps clients choose the best and most cost-effective coverage.
- Can offer wider options by comparing products from different operators.

Takaful Adjuster

An adjuster is a person who investigates Takaful claims, especially when there is a loss.

Main Duties of an Adjuster:

Investigate and report on complex claims, particularly those involving multiple Takaful companies.
Check all facts to determine if the loss is covered under the policy.
Attempt to minimize the loss where possible.
Visit the scene to inspect the damage or loss.
Confirm if the loss falls within the policy coverage.
Estimate the amount of loss and prepare a comprehensive report.
Collect accurate and reliable information.
Interview key people like managers or supervisors.
Provide a clear report with scene details, plans, and photographs.

An adjuster must know what information is needed to decide if the Takaful operator is liable to pay.