Takaful

What is Takaful?

Takaful is a system of Islamic insurance based on the principle of mutual assistance and voluntary contribution, where risk is shared together by a group of participants, who by paying contributions to a common fund, agree to jointly guarantee themselves against loss or damage to any one of them as defined in the pact. The word Takaful is derived from the Arabic verb Kafala, which means to guarantee; to take care of one’s needs.

Idea behind Takaful

Insurance is “a contract in which an individual or entity receives financial protection against losses from an insurance company.” In Islam, this core principle of insurance is not forbidden; rather it is encouraged based on an essential aspect of Islamic belief, Tawakkul, which means “complete ‘reliance’ on Allah (God) and ‘trust’ that He alone is sufficient for all of one’s needs.” However, this “reliance” and “trust” does not mean that Muslims should abandon their own faculties by never studying for an exam and only praying that Allah will earn them an A+. Muslims are obligated to make a best-faith effort to achieve their aims and then rely on and trust Allah with sincerity of faith.

One of the most famous traditions (hadith) on the subject states that when Prophet Muhammad (pbuh) saw that a Bedouin had left his camel untied, the Prophet (pbuh) asked him, “Why don’t you tie down your camel?” The Bedouin answered, “I placed my trust in Allah.” The Prophet (pbuh) replied, “Tie your camel and place your trust in Allah.” Making a best effort to protect one’s family and assets through the means of insurance, for example, is akin to the proverbial tying of the camel.

Principles of Takaful

The foundational principles of any Takaful operation are

  • Participants cooperate among themselves, making voluntary contributions to a pooled fund for the purposes of mutual assistance.
  • Uncertainty is eliminated in respect of subscription and compensation.
  • Losses are divided and liabilities spread according to the community pooling system.
  • Surplus is returned to participants or donated to charity, including in the event of liquidation.
  • Funds are invested based on Islamic guidelines that avoid interest and prohibited industries

Difference between Takaful and Insurance

Conventional insurance is structured as a contractual agreement (policy) between an insurance company and a consumer where in exchange for a fee (premium) the insurance company agrees to compensate a policy holder in the event of loss. The concept of paying another party a fee in order to “transfer risk” is prohibited under Islam because it introduces gharar (extreme uncertainty as to essential elements of an agreement) and maisir (gambling) to the transaction.

Takaful, however, involves sharing risk wherein participants voluntarily agree to subsidize each other’s risk through a pool of voluntarily contributed funds. In a Takaful structure, the insurance company does not assume the risk of the participants, but simply plays the role of an operator (wakeel) who oversees the management and administration of the pooled funds. In the event one of the participants experiences a loss (claim), funds from the pool are used to help offset the financial burden of that loss. Since the insurance company is not being contracted to assume losses (which may or may not happen) and participants are making a voluntary contribution to a pool, rather than paying another party to transfer risk, Takaful structures do not involve gharar or maisir.

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