Introduction of Takaful

The Islamic Insurance concept as known as Takaful (an Arabic word meaning “guaranteeing
each other“) is a shariah compliance mutual risk transfer arrangement which involves
participants and operators. Shariah is based on the Qur’an and Assunah. Takaful as a concept
that some extent is similar to conventional mutual risk sharing such as Mutual Insurance and
Protection and Indemnity Club (P and I Club). It is a mutual sharing of risk based on the concept
of Taawun (Mutual Protection).The difference between Takaful and conventional insurance
rests in the way the risk is assesed and handled, as wel as how the Takaful fund is
managed.Further differences are also present in the relationship between the operator (under
conventional insurance using the term : insurer) and the participants ( under conventional it is
the insured or the assured. In tisk assesment (underwriting) and handling, Takaful do not allow
what is called Gharar (uncertainty or speculation) and Maisir (i.e gambling). In investment or
fund management Riba (i.e usury) is also not allowed.

These three Gharar, Maisir and Riba are the areas that must be totally avoided by the Takaful
operation, and where it differs with the conventional insurance In order to avoid Gharar, there
must be a complete clarity or full disclosuer of any Takaful contract. Full disclosure is aplicable
on both sides, i.e on both the subject matter and terms of the contract (scope of cover, etc). It’s
not allowable in to enter into a takaful contract if there is any unknown element on the subject
matter and/or unknown exposure to the extent of the contract itself. As this ideal situation is
hardly exist, the Takaful contract then need to be made in a way that there is no exchange of
Gharar from one party to another. Maisir (gambling) is regarded as the excessive side of the
Gharar. Even as the participants (insured) may have an insurable interest in the subject matter,
if the risk transfer (risk sharing in Takaful) contains any speculative element, the it is prohibited
under the Takaful.

Riba (usury) is totally prohibited under the shariah law and under a Takaful arrangement. In
order to avoid the Riba, Takaful treats participants’ contribution to the risk sharing scheme not
as a premium in the way conventional insurance does. In Takaful terms it is treated as being a
contribution (Mushahamah) in the form of donation with a condition of compensation
(Tabarru). Furthermore, the pool of funds secured from those participants’ contributions or
donations must be managed and invested in accordance with the Shariah. In the same way that
Gharar and Maisir represent a continuous challenge for Takaful operators to ensure that pure
Takaful arrangements are free of them, Riba free investment and fund management is also
becoming a specialist discipline which requires more in depth elaboration.

Even as risks are nature of human life, it is impossible to eliminate this nature from human life.
What is not allowed in Islam is not the risk or uncertainty itself (so it need to be eliminated)-
but selling or exchange of risk or risk transfer to the third party using sales/exchange contract
that is not allowable. On the other hand helping each other in any situation including in the
event misfortune is highly encouraged by Allah mentioned in the Quran.

Explanation:

Islamic finance has developed mainly in two directions namely Islamic banking and Islamic
insurance (Takaful). While information about Islamic banking is being increasingly disseminated,
features, models and structures of Takaful are little known particularly in Pakistan. All human
beings are invariably exposed to the possibility of meeting catastrophes and disasters giving rise
to misfortunes and sufferings such as death, loss of limbs, accident, destruction of business or
wealth, etc.  Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that
one must find ways and means to avoid such catastrophes and disasters wherever possible, and
to minimize his or his family's financial losses should such events occur. One possible way out is
to buy an insurance cover as in the conventional system

Different views have been expressed about the status of conventional insurance from the point
of view of Islam. An overwhelming majority of the Shariah scholars believe that it is unlawful
due to involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty).@ Takaful, the
Islamic alternative to insurance, is based on the concept of social solidarity, cooperation and
mutual indemnification of losses of members. It is a pact among a group of persons who agree
to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they
donate collectively. The Takaful contract so agreed usually involves the concepts of
Mudarabah, Tabarru´ (to donate for benefit of others) and mutual sharing of losses with the
overall objective of eliminating the element of uncertainty. 

Takaful is not a new concept in Islamic commercial law.  The contemporary jurists acknowledge
that the foundation of shared responsibility or Takaful was laid down in the system of ‘Aaqilah’,
which was an arrangement of mutual help or indemnification customary in some tribes at the
time of the Holy Prophet (PCBUH).  In case of any natural calamity, everybody used to
contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of
blood money or any disaster was based on the concept of Takaful where in payments by the
whole tribe distributed the financial burden among the entire tribe. Islam accepted this
principle of reciprocal compensation and joint responsibility. 

The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to
the business or property. The policyholders (Takaful partners) pay subscription to assist and
indemnify each other and share the profits earned from business conducted by the Company
with the subscribed funds.  Takaful companies normally divide the contributions into two parts,
i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other
part for investment.  Accordingly, the clause of Tabarru´ is incorporated in the contract.  How
much of the contribution is meant for mortality liability and how much for investment account
is based on a sound technical basis of mortality tables and other actuarial requirements.  Both
the accounts are invested and returns thereof distributed on Mudarabah principle between the
participants and the Takaful operators. The profit attributable to the participants is credited
into the two accounts separately.  To describe from another angle, a Takaful contract may
comprise clauses for either protection or savings/investments or both the benefits of protection
as well as savings and investment. The protection part of Takaful works on the donation
principle according to which individual rights are given up to indemnify the losses reciprocally.
In the Savings part, individual rights remain intact under Mudarabah principle and the
contributions along with profit (net of expenses) are paid to the policyholders at the end of
policy term or before, if required by him.

The distinction between the conventional insurance and Takaful business is more visible with
respect to investment of funds.  While insurance companies invest their funds in interest-based
avenues and without any regard for the concept of Halal-o-Haram, Takaful companies
undertake only Shariah compliant business and the profits are distributed in accordance with
the pre-agreed ratios in the Takaful Agreement.  Likewise they share in any surplus or loss from
the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing
policies of the insurance companies because whatever may be the premium charged, the
surplus would normally go back to the participants in proportion to their contributions.

The terms ‘Family Takaful’, ‘Takaful Ta´awani’ or just ‘Takaful’ are generally used for family
solidarity in place of conventional life insurances. Other products available in various countries
are General Takaful, Education/Medical Takaful, etc. Based on the nature of relationship
between the company and the participants, there are various models like Wakalah (agency)
Model, Mudarabah Model and the combination of agency and Mudarabah models. In the
Sudanese Takaful Model that is preferable to majority of the contemporary Shariah experts,
every policyholder is also the shareholder of the Takaful Company. There is a Board that runs
the business on behalf of all the participants and there is no separate entity managing the
business. The legal framework in other Islamic countries normally does not allow this
arrangement and Takaful companies work as separate entities on the basis of Mudarabah (as in
Malaysia) and on the basis of Wakalah (as in the Middle East region).  In Mudarabah model that
is practiced mainly in the Asia Pacific region, the policyholders get profit on their part of funds
only if Takaful Company earns profit.  The sharing basis is determined in advance and is a
function of the developmental stage and earnings of the Company. The Shariah committee
approves the sharing ratio for each year in advance. Most of the expenses are charged to the
shareholders.  
In Wakalah Model, the surplus of policyholders’ funds investments – net of the management
fee or expenses - goes to the policyholders.  The shareholders charge Wakalah fee from
contributions that covers most of the expenses of business.  The fee rate is fixed annually in
advance in consultation with Shariah committee of the company. In order to give incentive for
good governance, management fee is related to the level of performance

The Takaful business has proved its viability in a period of only two decades.  It has been
growing at the rate of 10-20% p.a. compared to the global average growth of insurance 5% p.a.
A large number of Takaful Companies exist in the Middle East, Far East, Iran, Turkey, and Sudan
and even in some non-Islamic countries. There are over 60 companies offering Takaful services
(including Windows- 5%) in 23 countries around the world. Malaysia has developed Re-Takaful
business as well. Takaful products are available to meet the needs of all sectors of the
economy, both at individual as well as corporate levels to cater for short and long term financial
needs of various groups of the society

Islamic references to Takaful

This is in line with the command of Allah to assist other those in trouble. Allah says in Al Quran:

“
Help one another in furthering virtue and God consciousness (taqwa) and do not help one
another in furthering evil and enmity”1

In this verse, Allah says that we need to help each other in doing good deeds but not help each
other to commit sin and rancor. In Takaful there are rule and requirements of the Shariah
rulings that govern its operation.

Allah also says in Al Qur’an (surah Al Maidah: 90):

1
“O ye who believe! Intoxicants and gambling, (dedication of ) stone and (divination by) arrows,
are an abomination of satan’s handiwork: eschew such (abomination), that ye may prosper.” 2

“Allah hath permitted trade and forbidden usury.”(Surah Al Maidah: verse 2)

Types of Takaful:
2
 Takaful

Family takaful General takaful

Life Takaful Health care Saving Takaful Child education Banca Takaful
Takaful

Property Takaful Motor Takaful Travel Takaful

Miscellaneous Takaful

Family Takaful:
The participant of the family takaful transfers their risks pertaining to their life by acquiring the
membership of the Wafq fund. In addition to the protection element, participants also use
family takaful for their investment need through another fund called participent’s investment
account. Following are the various types of family takaful
Life Takaful
Life Family Takaful is a risk coverage plan that provides protection to participant
employees in the event of death or disability, so that a multiple of that employee's
yearly salary can be paid to his/her family or dependants to ease their financial
difficulties. The basic coverage can also be enhanced by adding coverage of risks that
are arising out of a natural calamity or by unpredictable accidents.

Health care

Health is an irreplaceable treasure of life, the one who is deprived values it more than
any material thing in the world. The Group Term HealthCare Takaful scheme was
designed to cater to the medical needs. It covers the hospitalization due to any reason,
major medical expenses, maternity/childbirth as well as day to day medical needs.
Moreover it provides hospitalization expense that are incurred during the medical
treatment. It covers treatment and medical expenses for problems that don't usually
require hospitalization like cough, fever etc.

Saving Takaful:

Saving plan is an investment type plan that participates in profit, which will be
distributed back to participants. This is an ideal plan which comprises the elements of
savings and returns on investment with individual protection. This plan is designed to
 optimize the returns on investment to the participants. This investment is done for the
future that returns from this plan can be imply on various prospect

 Children’s Marriage
 Retirement Income
 Buying a New House
 Pilgrimage for Hajj/Umrah
 Family Vacations, etc

Child education Takaful:

Child Education Takaful Plan provides you with protection and long-term savings to
finance the higher education expenses of your child. The plan will provide your child
with financial benefits if you suffer any set back covered under the plan. The plan also
gives your child long-term saving that your child can use to continue his/her studies

Banca Takaful:

Banca takaful is done by the takaful companies with the collaboration with any of the
financial institutes to sell its life insurance policies by the executive of the bank.

General Takaful:
In general takaful, the Wafq memberships are assigned to those who wants to migrate risks of
their assets like motors and houses etc. In the event of defining the loss to the assets, the wafq
pool compensates. The amount in the Wafq pool is managed by the company and invests it in
the Shari’ah compliant businesses and charges a fixed fee in return. The company act as
Mudarib and the profit is shared from the investment in the predetermined ratio

Property Takaful
House owners takaful covers your residential property against loss or damage caused by
perils such as flood or earthquake. The house owners takaful covers not only your
house, but also the garage, outbuildings, walls, gates and fences around your property,
as well as permanent fixtures and fittings. It does not cover buildings used for
commercial purposes, such as a restaurant, factory or place for storing merchandise.
Householders takaful cover the loss or damage to the content of your residential
property, and provide coverage for fatal injury to you as a participant.

Motor Takaful
When you participate in motor takaful, you contribute a sum of money to a general
takaful fund in the form of participative contribution (tabarru'). You undertake a
contract (aqad) for you to become one of the participants by agreeing to mutually help
each other, should any of the participants suffer a loss because of an accident involving
his vehicle. At maturity, you are entitled to a share of the surplus in the general takaful
fund, if you did not make any claim during the period of takaful. The surplus will be
shared between you and the takaful operator under the concept of surplus-sharing
according to a pre-agreed ratio.
 Travel Takaful

Travel Takaful has been customized to offer the personal accident during the travel. This
takaful is specifically cover loses that can b occur during the travel. It is designed
typically for those who use to travel alot.Takaful cover that fits your needs by providing
comprehensive coverage for;

 Accidental death and all the emergencies,

Miscellaneous Takaful

Takaful industry is expanding every day. So, they are making relevant products for the
related problems to compensate to the allied persons. Some of the supplementary
figure of the takaful are as follow

 Machinery Takaful
 Workmen compensation
 Personal Accident
 Hajj and umrah
 Marine takaful

References:
http://www.insuranceinfo.com.my/choose_your_takaful/protect_your_family/investment_li
nked.php

www.takaful.coop/doc_store/takaful/Re-takaful%20Paradigm

www.takaful.coop/doc.../takaful/Islamic%20Fin.%20Planning

www.pktcl.com/en/GlobalTakafulGroup.aspx

www.takafulhouse.ae/faq.htm

www.takaful.coop/doc_store/takaful/General%20Takaful%20.doc