Takaful
The word Takaful is derived from the Arabic verb “Kafal”, it means to aid or help out. This forms the basis of Takaful that is about shared responsibilities, solidarity and mutual cooperation. Takaful is not a new or modern phenomenon, this concept has been practiced in various forms for centuries ever since the days of Islam. In those days there were trade caravans that were exposed to the similar risks to those faced today in trading activities. Muslim scholars acknowledge that the basis of shared responsibility in the system of Al Aaqilah as practiced between Muslims of Makkah and Madinah laid the foundation of mutual insurance. It consisted on contributions from tribes’ members to share joint responsibility to indemnify the victim or the victim’s family and relatives against financial liability arising from defined events. That system was accepted by Prophet Muhammad (pbuh) under the principle of mutual protection and cooperation in virtue and good deeds. Other early traditions practiced by Islamic and pre-Islamic Arab tribes also constitute the origins of Takaful; these include Diya, Kafalah, Aqd muwalat, Ju’hala, Daman Khatar Al-Tariq and Hilf. Diya is the indemnity paid as “blood-money” to the next-of-kin or the injured party of a murder victim; Kafalah is a suretyship whereby a third party guarantees the performance of another party involved in a contract, it was used to assist victims of hazards on trade routes; Aqd muwalat is a contract to bring an end to mutual enmity or revenge; Ju’hala is a contract to be pay for a work that involves a significant part of uncertainty; Daman Khatar Al-Tariq is a guarantee against travel hazards; and Hilf is an agreement for mutual assistance among people. In all these agreements, Arab tribes and traders covered the losses and liabilities of individuals in the form of solidarity and brotherhood, and provided mutual financial aid and assistance in case of need.
The underlying features of Takaful primarily lie on solidarity and mutual protection. From this joint benefit and shared responsibility culture, Takaful brings equity to all the parties involved in the operation. The purpose of this system is not profits or gains but to uphold the principle of mutual assistance and shared responsibilities to take precautions against risks and misfortunes for all individual constituting the group. And by mitigating the burden of individuals whose risks are divided among their fellow members of the society, Takaful brings a peace of mind to all the participants and improves their quality of life. In addition, Funds collected through Takaful premiums are channelled into Shari’ah compliant investments that involve environmentally friendly and socially responsible business activities. Most of the profits from these funds are shared among the participants. Besides, Takaful involves each participant giving away as donation (Tabarru) a certain proportion of the full amount of the contributions required to be paid. Therefore, by joining Takaful, every participant is indirectly involved in charity and social welfare.
The underlying features of Takaful primarily lie on solidarity and mutual protection. From this joint benefit and shared responsibility culture, Takaful brings equity to all the parties involved in the operation. The purpose of this system is not profits or gains but to uphold the principle of mutual assistance and shared responsibilities to take precautions against risks and misfortunes for all individual constituting the group. And by mitigating the burden of individuals whose risks are divided among their fellow members of the society, Takaful brings a peace of mind to all the participants and improves their quality of life. In addition, Funds collected through Takaful premiums are channelled into Shari’ah compliant investments that involve environmentally friendly and socially responsible business activities. Most of the profits from these funds are shared among the participants. Besides, Takaful involves each participant giving away as donation (Tabarru) a certain proportion of the full amount of the contributions required to be paid. Therefore, by joining Takaful, every participant is indirectly involved in charity and social welfare.
Differences between conventional insurance and Takaful
Takaful distinguishes itself from conventional insurance with many different features, the main distinction being the fundamental principles that govern each practice. Takaful is governed by the principles of Shari’ah, where transactions involving Riba, Gharar and Maysir are prohibited. Riba in conventional insurance is found in both transactions involving unequal exchange between contributions and indemnities and also in the income derived from interest gained from interest-bearing investment. In fact, there is a disparate value of money between premiums and compensations as payment received against the insurance may be higher than premium. And the way insurance funds are managed can also originate an unknown part of profits earned through investments of the premiums in interest-bearing financial instruments such as bonds and savings accounts. Conversely, Riba is avoided in Takaful using contracts for profit shares rather than fixed interest and investment in Shari’ah compliant schemes. The practice of conventional insurance also involves the use of Gharar due to uncertainties on how much will be paid, when it will occur and whether the payment will be accepted. When a claim is not made the insurance company may even get all the profits while the participant may not get any profit at all. Takaful contracts, on the other hand, have to follow specific rules to avoid Gharar, such as making sure that the matter of insurance is a legitimate and essential need, that the insurer is able to safeguard the interests of the insured and that the insurance is transacted on a co-operative basis under which ownership of the premium is with all contributors to the Takaful fund; they collectively bear the risk and can share profits or losses from the pool. Furthermore, conventional insurance is declared Maysir because the policyholders are seen to bet premiums on the condition that the insurer will pay indemnity on the happening of a specified event. The gain of one party is contingent upon the loss of the other because the insured would lose the money paid for the premium when that event does not occur and the insurer would suffer a deficit if the claims happen to be higher than the premium paid. In the case of Takaful, however, collected premiums are in a common fund. If the participant draws out of it by way of benefit in the case of a claim, it is drawing out of a fund of which he is a member and to which he has contributed.
Another essential difference is that conventional insurance by its conception is a risk-transfer mechanism. Takaful on the other hand does not entail a risk transfer mechanism, but rather a social function of mutual risk-sharing. The contract of Takaful is not a sale or an exchange, but is rather a membership contract to a common pool, of which every member is entitled to certain benefits but also exposed to some risks of loss. This also what makes Takaful system commercially more viable, as the remaining money after all claims does not belong to the shareholders, but rather to the participants and it should thus be given back. In addition, motivations of conventional and Islamic insurance companies are different; while conventional companies are directed by the search of profit. Takaful companies are also directed by ethical means for the overall benefit of society and the environment. Regulation in Takaful is undertaken through Shari’ah supervisory bodies that ensure that all operations are conducted in line with the Shari’ah principles and fulfil Islamic objectives of social welfare.
Besides, the distribution of profits in case of conventional insurance is a managerial decision from the insurer company which is not necessarily favorable for all parties. While, in case of Takaful, distribution mechanism is defined in advance and the operator has no claims in underwriting surplus; this reduces the possibility of conflict between shareholders and policyholders. Finally, in case of dissolution of a conventional insurance company, reserves and surplus belong to the shareholders. While in case of dissolution of a Takaful operator, capital is distributed back to participants or donated to charity.
Another essential difference is that conventional insurance by its conception is a risk-transfer mechanism. Takaful on the other hand does not entail a risk transfer mechanism, but rather a social function of mutual risk-sharing. The contract of Takaful is not a sale or an exchange, but is rather a membership contract to a common pool, of which every member is entitled to certain benefits but also exposed to some risks of loss. This also what makes Takaful system commercially more viable, as the remaining money after all claims does not belong to the shareholders, but rather to the participants and it should thus be given back. In addition, motivations of conventional and Islamic insurance companies are different; while conventional companies are directed by the search of profit. Takaful companies are also directed by ethical means for the overall benefit of society and the environment. Regulation in Takaful is undertaken through Shari’ah supervisory bodies that ensure that all operations are conducted in line with the Shari’ah principles and fulfil Islamic objectives of social welfare.
Besides, the distribution of profits in case of conventional insurance is a managerial decision from the insurer company which is not necessarily favorable for all parties. While, in case of Takaful, distribution mechanism is defined in advance and the operator has no claims in underwriting surplus; this reduces the possibility of conflict between shareholders and policyholders. Finally, in case of dissolution of a conventional insurance company, reserves and surplus belong to the shareholders. While in case of dissolution of a Takaful operator, capital is distributed back to participants or donated to charity.
