Takaful for the Good of All
Today insurance plays a very important role in commercial and personal finance, but while most of us take insurance for granted, for people of the Muslim faith conventional insurance is incompatible with their religious beliefs. Under Islamic jurisprudence (Shari'ah), conventional insurance is not permissible. Therefore an innovative concept, based on solidarity, cooperation and mutuality which have been the keystones of Islamic society from the days of the holy Prophet, began to develop in the early 70's in Kingdom of Saudi Arabia, Sudan, Middle East and Far-East Asia and it was called Takaful.
It is important to understand that Islam is not against the concept of insurance but the basis of operation of conventional insurance, which does not meet the requirement of Shari'ah. In fact, the concept of insurance which simply means the pooling of common resources to help the needy is very much in line with the teaching of Islam which propagates solidarity, mutual help and cooperation among members of the community. The essence of insurance could be seen in the system of mutual help in the Arab tribal custom of blood money or diyah. Under this system, a victim or the injured party would be compensated by the members of the community whose action had resulted in the loss of life or impairment of the victim. Therefore the principle of compensation and group responsibility was accepted by Islam and the holy Prophet. Muslim scholars have acknowledged that the basis of shared responsibility is embedded in the system of aqila as practiced by Muslims of Mecca (Muhajirin) and Medina (Ansar), and laid the foundation of mutual insurance.
It needs to be emphasized that the operational framework of conventional insurance is against the tenets of Shari'ah, but not the basic concept of the insurance. Takaful which means 'the act of a group of people reciprocally guaranteeing each other' - is based on the concept of mutual cooperative insurance. The Takaful framework is based on solidarity, responsibility and brotherhood among members who agree to share the defined losses to be paid out of defined assets. The operational framework of Takaful avoids elements of Riba (interest or usury) and Gharar (unknown or ambiguous factor in the operation of contract). Riba and Gharar are the basic reasons why Muslim scholars regard conventional insurance as being against the principles of Shari’ah.
The core principles of Takaful are:
- Policyholders cooperate among themselves for their common good.
- Every policyholder pays subscription to help those that need assistance.
- Divide losses and liabilities among the community by a pooling system.
- Eliminate uncertainty in respect of subscription and compensation.
- Not derive advantage at the cost of others.
- Invest funds in Shari'ah complaint instruments.
From an operation viewpoint, under Takaful the members agree to devise schemes under which they themselves are insured and are insurers. Each member pays a premium as a contribution to a common fund referred as Takaful fund or policyholder’s fund. The Takaful operator, which invariably is an insurance company, manages this Takaful fund. The Takaful operator has to ensure the member’s level of contribution commensurate with the degree of risk. Therefore, the Takaful operator can apply scientific principles in the assessment of the contribution. The members allow the Takaful operator to take Tabarru (donation) to pay the losses suffered by other members in the pool. If there is any surplus left from the contribution after deduction of Tabarru and charges, that surplus belongs to the members.
Takaful is a unique way of managing the insurance needs of the Muslim community in a manner consistent with religious beliefs.