Takaful
Encyclopedia
Takaful is an Islamic insurance
concept which is grounded in Islamic muamalat (Islamic banking
), observing the rules and regulations of Islamic law
. This concept has been practised in various forms for over 1400 years. Muslim jurists acknowledge that the basis of shared responsibility (in the system of aquila as practised between Muslims of Mecca
and Medina
) laid the foundation of mutual insurance.
. Based on the hadith
and Qur'an
ic verses mentioned below, Islamic scholars have decided that there should be a concerted effort to implement the concept of takaful as the best way to resolve these needs.Some examples are:
Theoretically, takaful is perceived as cooperative or mutual insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of "bear ye one another's burden". Commercial insurance is strictly disallowed for Muslims (as agreed upon by most contemporary scholars) because it contains the following elements:
There are three models (and several variations) of how takaful can be implemented:
and other areas of the Middle East), has seen a proliferation of new companies offering Islamic insurance products in these markets. The majority of these companies are full-fledged takaful operators, but conventional insurance companies have also entered the market with takaful "window" operations. As with the traditional forms of insurance, reinsurance of a takaful operation may be used, known as "retakaful".
s, known as ra's-ul-mal) from investors or providers of capital or funds (takaful participants), acting as sahib-ul-mal. The contract specifies how the profits
(or surplus) from the operations of the takaful is to be shared in accordance with the principle of al-mudharabah – between the participants (as providers of capital) and the takaful operator. The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30 and so forth, as mutually agreed between the contracting parties.
In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru ("to donate, contribute, or give away") is incorporated. Relating to this concept, a participant agrees to relinquish (as tabarru) a certain proportion of his takaful installments (or contributions) that he agrees or undertakes to pay, should any of his fellow participants suffer a defined loss. This agreement enables him to fulfill his obligation of mutual help and joint guarantee.
In essence, tabarru enables participants to perform their deeds in assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit (or surplus) that may emerge from the operations of a takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care, whilst striving prudently to ensure the funds are sufficiently protected against over-exposure. Therefore, the provision of insurance coverage in conformity with Shariah is based on the Islamic principles of al-takaful and al-mudharabah.
Al-mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of a takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
concept which is grounded in Islamic muamalat (Islamic banking
Islamic banking
Islamic banking is banking or banking activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money...
), observing the rules and regulations of Islamic law
Sharia
Sharia law, is the moral code and religious law of Islam. Sharia is derived from two primary sources of Islamic law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Fiqh jurisprudence interprets and extends the application of sharia to...
. This concept has been practised in various forms for over 1400 years. Muslim jurists acknowledge that the basis of shared responsibility (in the system of aquila as practised between Muslims of Mecca
Mecca
Mecca is a city in the Hijaz and the capital of Makkah province in Saudi Arabia. The city is located inland from Jeddah in a narrow valley at a height of above sea level...
and Medina
Medina
Medina , or ; also transliterated as Madinah, or madinat al-nabi "the city of the prophet") is a city in the Hejaz region of western Saudi Arabia, and serves as the capital of the Al Madinah Province. It is the second holiest city in Islam, and the burial place of the Islamic Prophet Muhammad, and...
) laid the foundation of mutual insurance.
Islamic references
These fundamentals are based on the sayings of the Islamic prophet MuhammadMuhammad
Muhammad |ligature]] at U+FDF4 ;Arabic pronunciation varies regionally; the first vowel ranges from ~~; the second and the last vowel: ~~~. There are dialects which have no stress. In Egypt, it is pronounced not in religious contexts...
. Based on the hadith
Hadith
The term Hadīth is used to denote a saying or an act or tacit approval or criticism ascribed either validly or invalidly to the Islamic prophet Muhammad....
and Qur'an
Qur'an
The Quran , also transliterated Qur'an, Koran, Alcoran, Qur’ān, Coran, Kuran, and al-Qur’ān, is the central religious text of Islam, which Muslims consider the verbatim word of God . It is regarded widely as the finest piece of literature in the Arabic language...
ic verses mentioned below, Islamic scholars have decided that there should be a concerted effort to implement the concept of takaful as the best way to resolve these needs.Some examples are:
- Basis of Co-operation: Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety), but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2)
- GodGod in IslamIn Islamic theology, God is the all-powerful and all-knowing creator, sustainer, ordainer, and judge of the universe. Islam puts a heavy emphasis on the conceptualization of God as strictly singular . God is unique and inherently One , all-merciful and omnipotent. According to the Islamic...
will always help his servant for as long as he helps others. - Basis of Responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected.
- One true Muslim (Mu’min) and another true Muslim are like a building, whereby every part in it strengthens the other part.
- Basis of Mutual Protection: By my life (which is in God’s power), nobody will enter ParadiseParadiseParadise is a place in which existence is positive, harmonious and timeless. It is conceptually a counter-image of the miseries of human civilization, and in paradise there is only peace, prosperity, and happiness. Paradise is a place of contentment, but it is not necessarily a land of luxury and...
if he does not protect his neighbour who is in distress. The basic fundamentals underlying takaful are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic law. - Some Muslims believe insurance is unnecessary, as society should help its victims. Others believe that Muslims should not ignore the fact that they live, trade and communicate with open global systems, and the need for banking and insurance. They believe in creating Muslim-friendly banking systems and a workable insurance framework by which Muslims can compete with non-Muslims in business and have coverage in daily life.
Principles
The principles of takaful are as follows:- Policyholders cooperate among themselves for their common good.
- Every policyholder pays his subscription to help those who need assistance.
- Losses are divided and liabilities spread according to the community pooling system.
- Uncertainty is eliminated concerning subscription and compensation.
- It does not derive advantage at the cost of others.
Theoretically, takaful is perceived as cooperative or mutual insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of "bear ye one another's burden". Commercial insurance is strictly disallowed for Muslims (as agreed upon by most contemporary scholars) because it contains the following elements:
- Al-Gharar (uncertainty)
- Al-Maisir (gambling)
- RibaRibaRiba means one of the senses of "usury" . Riba is forbidden in Islamic economic jurisprudence fiqh and considered as a major sin...
(usuryUsuryUsury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
)
There are three models (and several variations) of how takaful can be implemented:
- Mudharabah model (profit-sharing)
- Wakala model
- A combination of both
Takaful companies
The growth in demand for Islamic insurance over recent years (particularly within the GCC countriesCooperation Council for the Arab States of the Gulf
The Cooperation Council for the Arab States of the Gulf , also known as the Gulf Cooperation Council , is a political and economic union of the Arab states bordering the Persian Gulf and constituting the Arabian Peninsula, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates...
and other areas of the Middle East), has seen a proliferation of new companies offering Islamic insurance products in these markets. The majority of these companies are full-fledged takaful operators, but conventional insurance companies have also entered the market with takaful "window" operations. As with the traditional forms of insurance, reinsurance of a takaful operation may be used, known as "retakaful".
The Mudharabah model (profit-sharing)
According to this principle the al-Mudharib (takaful operator) accepts payment of the takaful installments or takaful contributions (premiumPremium
Premium may refer to:* Premium , a promotional item that can be received for a small fee when redeeming proofs of purchase that come with or on retail products....
s, known as ra's-ul-mal) from investors or providers of capital or funds (takaful participants), acting as sahib-ul-mal. The contract specifies how the profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
(or surplus) from the operations of the takaful is to be shared in accordance with the principle of al-mudharabah – between the participants (as providers of capital) and the takaful operator. The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30 and so forth, as mutually agreed between the contracting parties.
In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru ("to donate, contribute, or give away") is incorporated. Relating to this concept, a participant agrees to relinquish (as tabarru) a certain proportion of his takaful installments (or contributions) that he agrees or undertakes to pay, should any of his fellow participants suffer a defined loss. This agreement enables him to fulfill his obligation of mutual help and joint guarantee.
In essence, tabarru enables participants to perform their deeds in assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit (or surplus) that may emerge from the operations of a takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care, whilst striving prudently to ensure the funds are sufficiently protected against over-exposure. Therefore, the provision of insurance coverage in conformity with Shariah is based on the Islamic principles of al-takaful and al-mudharabah.
Al-mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of a takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.