Takaful, an Arabic word meaning “guaranteeing each other”, is the same as insurance but approved under Islamic jurisprudence or Sharia guidelines. It represents the concept of insurance based on mutual co-operation and solidarity of people by participating in a takaful scheme.
Why was there a need to develop takaful (insurance)? This is because traditional insurance has certain features that contradict some of the essential values of an Islamic financial contract. This should be seen in the context of the fact that Muslims are directed by their faith to follow a path of righteousness in going through the activities of their daily lives. For example gambling and exploitation is strictly forbidden. Riba or usury is an extreme form of exploitation. Charging interest may not be exploitative but it can certainly lead to such forms of exploitation and hence is forbidden altogether. Moreover, a genuine sense of fair play is fundamental in an Islamic financial arrangement. A lender who lends purely to profit by charging interest is exploiting his position as owner of the principal amount without sharing in the risks associated with the use of that principal in business etc by the borrower. The traditional contracts of insurance are built on such features. Firstly, the investments and operations are based on debt and equity, debt being interest based. Also, where a loan is granted on traditional insurance contract, interest is charged. This is not permitted in an Islamic contract. Secondly, the situation is liable to exploitation where even though the contracts are priced at marketable level, the profit from insurance operations built from policyholders’ money is owned by the shareholders. This point is also seen as policyholders gambling away their hard-earned savings for no return where there is no claim, whereas in a takaful contract a “no claim” scenario always leads to refund of some of the money to the policyholder.
The concept of protection is deeply embedded in the Islamic thought process through the system of blood money, an Arab tribal custom as well as through endorsement of the principle of compensation and group responsibility by the Holy Prophet. Islamic scholars recognise the system of Al-Aqila, which was encouraged by the Holy Prophet and practiced by Muslims of Makkah and Medina at the time, as the foundation of mutual protection or insurance or takaful.
For more information on this subject, please refer to the section on the concepts of protection in Islam
A takaful contract must be based on principles of co-operation, protection and mutual responsibility and must avoid acts of interest (riba), gambling (al-maisir) and uncertainty (al-gharar).
A takaful company conducts all its affairs in a manner that meets the Islamic Sharia tradition whether it is to do with investing its funds, in carrying out its business in all classes of insurance or in any other related financial field. The company’s Memorandum and Articles of Association underlines this approach.
The company normally has a committee of prominent Sharia scholars. Their direct guidance and advice is essential at all stages of takaful operations, from the point of sale activities to payment of benefits, from accounting to investing the funds, from public dealing to serving the community through insurance and non-insurance activities such as supporting charitable work, etc. All operations and contracts are set-up to ensure that any element of speculation, uncertainty and gambling is eliminated or minimized from them. This is essential for maintaining the Caring and Co-operative principles of takaful.
A takaful company does not have policyholders. It has Contributors or Participants as they are participating jointly in a takaful fund for their mutual benefit. They are owners of the fund and the Company manages and operates takaful fund on their behalf.
The company ensures that interests of the participants (the insured) are based on mutual co-operation and solidarity. In the event a contributor suffers financial loss, he or she is paid an amount from takaful fund in accordance with the basis and underwriting principles of insurance. All the scientific methods that are normally used in insurance applications such as financial and medical underwriting, mortality and morbidity rates etc. are applied in takaful operations.
In upholding the principles of co-operation, participation in a takaful system is deemed to be on a voluntary basis. By signing a takaful contract, each contributor agrees to uphold this spirit of co-operation and mutual solidarity and help each other through the takaful system. Each participant’s contribution is therefore part of a collective donation without prior expectation of individual fixed returns. This is essential to rid the system of doubt or give any semblance of gambling. In the Far East (Malaysia, Indonesia and Brunei) this act of donation is known as tabarru. In the Middle East it is usually known as ta’awun contribution or takaful donation.