What is Takaful

The term Takaful is an infinitive noun which is derived from the Arabic root verb kafal’ or kafala , meaning to guarantee or bear responsibility for. In a word, Takaful can be considered as the Islamic alternative to Insurance. From the economic point of view, Takaful means a mutual guarantee or assurance based on the principles of al-aqd (contract) provided by a group of people living in the same society against a specific risk that befalls an individual’s life or possessions. Takaful can also be defined as a mutual pact among a group of members or participants whereby all mutually share the consequences of risk that may be inflicted upon any one of them. The basic goal of Takaful is to share burdens and to do so with fairness for all parties involved and not to maximize profits as business. Unlike the conventional stock insurers, Takaful operators are not owners of the Takaful funds that are managed by them and hence should take extreme care when making investment decisions so as not to expose these funds to high risk or volatile situations. According to Islamic jurists, the elements that violate Shariah rules in conventional insurance contracts include gharar, riba and maysir.

Prohibited Elements in Insurance

Gharar / Uncertainty
The element of gharar (which means uncertainty, risk or deception) exists in a business context whenever commercial contracts fail to remove uncertainty, ignorance or an insufficient level of knowledge by one party to a transaction. When the insurance contract is made, gharar exists because neither the insurer nor the insured knows the exact outcome of that contract. The insured does not clearly know whether or not he/she will get compensation as an exchange to the premium that he/she has paid. Similarly, the insurer does not know the financial outcome nor the amount of premium he will actually collect. Sometimes, insurance premiums are paid only once or a few times prior to a valid claim; but an insurer must cover a claimed amount unequal to the premium collected. While many Muslim jurists will allow gharar yasir (minor uncertainty), there is unanimous condemnation of gharar fahish (excessive uncertainty). A degree of uncertainty (gharar) is integral to insurance transactions as they relate to future, unknowable events. However, scholars have judged that the benefits of insurance outweigh its defects for Muslims who engage in Takaful transactions and make tabarru (donations) along with their contributions, then the gharar may be forgiven.

Riba / Usury
There are many Qur’anic verses that prohibit riba . All scholars believe that any premium (interest) on lending, whether on principal or late payment, is riba. Other forms of riba mentioned in hadiths of Prophet Muhammad (peace be upon him) relate to exchange of goods where there is a difference in time and/or quantity. In barter exchanges, if an excess value is demanded at the time of delivery, irrespective of quantity, this is called riba al nasiah (i.e. Interest due to delivery or late payment). If the quantity exchanged is not the same, this is called riba al fadl (i.e. Interest due to extra payment on unequal quantity/quality). However, since there is a difference both in the quantity and amount in the contract of exchange between the insurer and the insured, insurance policies contain an element of riba- the insured often receives substantially more than he/she has paid in the premium (even on occasion to the extent of realizing profit). This is possible partly because conventional premiums are invested at compound interest. The prohibition of riba is accepted by all Muslim jurists and is considered to be an absolute prohibition covering both simple and compound interest as well as loans for production or consumption. In deference to any argument that it is not possible to avoid the issue of riba in insurance operations, a dozen Takaful operators around the world have successfully sustained their insurance business for nearly three decades without resorting to extensive reliance upon riba-based operations or investments.

Maysir / Gambling
Maysir (a form of gambling) means (a) getting something in return for nothing; i.e. receiving profit without putting forth any effort and (b) an activity where the sole intent is a “windfall”, typically like a lottery where winnings far exceed the price of participation. Islam prohibited all forms of business dealings where monetary gains emanate from chance and speculation. Furthermore some scholars argued that the source of the money that is being paid as compensation is not specified in the transaction documentation. The maysir aspect in modern insurance was removed early on in its development by the introduction of the concept of insurable interest. However, insurable interest itself, though clearly attributable, may not always be clearly quantifiable. Conventional insurance contracts still involve some maysir because an insurer loses if the covered event (i.e. accident) befalls an insured and triggers a claims payment, whereas the insured loses if that accident does not occur through his premiums foregone. Consequently, Muslim jurists conclude that insurance in Islam should co-join the interests of the insurer and the insured, be based on principles of mutuality and cooperation and, encompass the elements of shared responsibility, joint indemnity, common interest and solidarity. The solution is Takaful.