Takaful Insurance Introduction and Overview

Takaful Islamic Insurance  Introduction and Overview

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Takaful Introduction and overview 
Takaful is derived from the Arabic word “Kafala” which means “guaranteeing each other” or “joint guarantee”. It is not a new concept; it has been practiced in various forms for over 1,400 years, back to the practice of “Aqilah” by ancient Arabs in which there was a mutual agreement among the tribes that, if anyone is killed unintentionally by a person of a different tribe, the killer’s relatives take the responsibility to make a mutual contribution towards paying the blood money to the victim’s relatives. This was later extended to cover many other situations, for example in sea trade to cover anyone in the group who had an accident during sea voyages (Khorshid, 2004; Sadiq, 2006).

There are several indications from theQur’anand theSunnahthat encourage and support the concept of takaful . For example, in the Qur’an(Surah al-Maidah): “Help ye one another in righteousness and piety, but help ye not one another in sin and rancour” (Qur’an, 5:2).

Takaful Islamic Insurance

And in theTraditions of the Prophet(the Sunnah), people are encouraged to help each other particularly in hard times:

The believers, in their affection, mercy and sympathy to each other, are like the body; if one of its organs suffers and complains, the entire body responds with insomnia and fever (Muslim). All these evidences support the importance of mutually guaranteeing of each other and therefore support the main principle of insurance in Islam or takaful . The AAOIFI’s accounting, auditing and governance standards for Islamic financial institutions provide:

Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions (Rabiah Adawiah Engku Ali and Odierno, 2008).

How does takaful work. Essentially, in takaful insurance, participants agree to guarantee each other by making a contribution (as a donation) to a mutual fund or pool. This pool creates the takaful fund. The amount of contribution depends on the type of cover, nature of the risk and the period of the cover. The takaful fund is managed on behalf of the participants by a takaful operator who charges an agreed fee which could be a fixed fee or a percentage of the profit or even both. The takaful fund is used to pay any claims by participants and any surplus, after reducing any expenditure and reserves, belongs to the participants and may be distributed among participants in the form of cash dividends or discounts towards future contributions (IIBI, 2010; Rabiah Adawiah Engku Ali and Odierno, 2008).

Takaful compared to conventional insurance. There are several differences between takaful and conventional insurance. The main difference is that in takaful , the participants make a donation to the takaful fund to provide protection for each other against risks, whereas in conventional insurance the premium is paid to the insurance company which bears all of the risk.

Takaful Islamic Insurance

In addition, any surplus in the takaful fund is distributed among participants and shareholders on the basis of Mudaraba, WakalaorWaqfmodels (Khorshid, 2004; Rabiah Adawiah Engku Ali and Odierno, 2008; Sadiq, 2006), whereas all profits in conventional insurance belong to the shareholders of the insurance company only. As such, takaful is based on mutual cooperation whereas conventional insurance is based more on profits and commercial aspects. The third major difference is that takaful companies adopt Shariah principles in all aspects of their operations, avoiding prohibited concepts, such asriba[1] (interest), maysir[2] (gambling) and gharar[3] (uncertainty). takaful companies are subject to the governing laws as well as to the Shariah Supervisory Board. On the other hand, conventional insurance companies are only subject to the governing laws.

If there is any shortfall in the takaful fund, this would be covered by an interest-free loan (Qard Hasan) by the participants, whereas in conventional insurance the company covers the risks. With regard to the investment, the takaful fund should invest in investment channels that are Shariah compliant (Kassim, 2007; Haron and Taylor, 2009).



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To cite this document:
Tahani Coolen-Maturi, (2013) "Islamic insurance (takaful): demand and supply in the UK", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 6 Issue: 2, pp.87-104, doi: 10.1108/17538391311329806.