ISLAM AND INSURANCE
"The Prophet (S.A.W) told a Bedouin Arab who
left his camel to the will of Allah:
TIE THE CAMEL AND THEN LEAVE IT TO THE WILL OF
"Help one another in furthering Virtue and God
Consciousness (taqwa) and do not help another in furthering evil and
From above quoted two Hadiths it is established and
Muslim jurists also generally accept that concept of insurance does
not contradict with Shariah.In view of the above as well as the real
need for insurance cover, Muslim jurists look further into the Islamic
system of insurance. Their conclusion was that Insurance in Islam
should be based on the principles of mutuality and cooperation. On the
basis of these principles, Islamic system of insurance embodies the
elements of shared responsibility, joint indemnity, common interest
WHAT IS TAKAFUL
The word Takaful means Joint Guarantee.
The provision of insurance as a form of business in
conformity with Shariah is based on the Islamic principles of AL-TAKAFUL
Al-Takaful means the act of a group of people
reciprocally guaranteeing each other, while Al-Mudharabah is the
commercial sharing contract between the providers of fund for a
business Venture and the entrepreneur.
DIFFERENCE BETWEEN TAKAFUL AND CONVENTIONAL
The present of three elements that can be found in
conventional insurances which do not confirm to the rules and
requirement of Islamic syariah. The three elements are:-
Al-Gharar means there are unknown or uncertain
factors in operation of a contract in both life and general insurance
Al-Maisir or gambling arises as the consequences of
the present of Al-Ghara, particularly in the case of life insurance.
Al-Riba or interest and other related practices in
the investment activities of the conventional insurance companies
which contravene the rules of the Syariah.
THE TAKAFUL CONTRACT: The
conventional insurance contract is a contract of buying and
selling.Where as the Takaful contract is based on the principles of
Al-Takaful and Al-Mudharabah.Takaful unlike conventional insurance is
based on the Islamic Transactions of PROFIT-(LOSS)-SHARING contract
under the principle of Al-Mudharabah.
TYPES OF TAKAFUL BUSINESS:
There are two types of Takaful Business.
Takaful business in replacement of conventional Life Assurance
General Takaful Business in replacement of conventional General (Non
DIFFERENT DERIVATIVES BEING USED IN TAKAFUL BUSINESS:
Islamic Insurance based on the Islamic Transactions
Contract agreement between insured and insurer based
The insurance company based on the principle of Al-Mudharabah
i.e the Takaful operator.
Provider of capital for Takaful Company.
Gross Takaful installment / contribution (Premium)
Certain Portion of Premium (Takaful contribution)
agree by the participants to pay for the losses.
7) AL-MUDHARABAH CAPITAL
Gross Takaful contribution provided by the
The Takaful agreement between Takaful operator and
participant is called Akad.
9) TAKAFUL CERTIFICATE
Insurance Policy issued by Takaful operator (Al-Mudharib)
to the participant.
The Operation Of General Takaful Company And Its
Concept Of Profit Sharing:
The operation of Takaful can be summarised as a
venture which embodies the virtues of cooperation, mutual help and
shared responsibility among the participants against the occurrence of
catastrophe or disaster to any of them.The basic objective of Takaful is
to pay a defined loss from a defined fund.The transactional aspect of
commercial activity of Takaful must be subject to the Islamic
contractual laws in order to ensure its compliance with Shariah.
The operation of Takaful may thus be envisaged as a
profit sharing business venture between Takaful operator and individual
participants.Profit at the agreed ratio to be paid to participants
provided they have not received or incurred claims during the period of
participation.In general Takaful business profit is shared between
Takaful operator and eligible participants on 50: 50/ 60: 40 basis.50%
or 60% of the profit is distributed amongst eligible participants (Those
who have not lodged any claim during the period) according to their
portion of contribution.50% or 40% of the profit is attributed to
Takaful operator company and is credited into its share holders fund
together with share holder funds own investment profit making it
company's total income.The Takaful certificate (insurance policy)
contains in condition called "Share of net Surplus" which
"If at the end of Takaful period any surplus in
Takaful fund will be shared between participants and Takaful company in
accordance with principle of Al-Mudharabah in proportion of 50:50
provided participants have not incurred any claim or not received any
benefit under the certificate whilst it is in force".
Surplus in Takaful operation is defined as the
participants pay tabarru to the Takaful fund which will be invested by
Takaful operator according to the principles of Shariah and all profits
from the investment shall be provided back to the fund. If after
deducting all operational cost including claims there is surplus, that
surplus will be shared between the participant and Takaful company on
agreed ratio.The operating expenses/expenditure of Takaful company will
be paid from its total income. Where as the management and
administrative expenses are to be paid by Takaful Company from its own
share of profit.
According to the theory and practice of Islamic
Banking it is prohibited to deduct management and companies
administrative expenses from the Al-Mudharabah capital or its realised
profits.These expenses are therefore to be borne and paid by the Takaful
company from its own share of profit from net surplus derived from
Therefore it is imperative for the Takaful operator
to maintain adequate Assets of the defined funds under its care whilst
simultaneously striving prudently to ensure the funds are sufficiently
protected against under over exposure and safe guard its role as a
trustee and custodian of Takaful Fund and also ensure profit at the end
of the year. In Takaful System profit is shared on ACTUAL basis and
therefore Takaful Accounting System is based on CASH AND ACTUAL basis.
GENERAL TAKAFUL SCHEME:
The General Takaful business provides Various General Takaful Schemes
as a form of cover against material loss or damage such as:
1) Fire Takaful
Miscellaneous and Accident Takaful
HOW TAKAFUL COMPANY WORKS:
1) There has
to be a Takaful Act like in Malaysia there is a Takaful Act 1984.
The Takaful company has to be registered under Takaful Act.
The Memorandum and Article of Association of Takaful company prefaces
that all business will be transacted in accordance with Islamic
principles, rules and practice.
A Religious Supervisory Council comprising of Muslim religious Scholars
is to be formed to ensure that the Takaful companies are not involved in
any elements which are not approved by Islam and also to advise such
companies on the operation of its Takaful business.
Re Takaful means Re insurance, the practice whereby
the Takaful underwriter transfers a part of company's liability to
another Takaful/Re Takaful operator, plays a very important role in the
The Takaful underwriter must ensure that the Re Takaful program must
1) Protect the
General Takaful Fund from heavy losses.
Provide capacity to the Takaful company.
Re Takaful operators follow the principles and
practice of conventional Reinsurance.
The establishment of Takaful companies to provide
cover for the Muslims which conforms to the rules and practices of the
Shariah, is a new development in the Muslim World.At present the Venture
is still at its initial stage of development.Major Work on Takaful has
been done in Malaysia. Relentless efforts have been carried out by
Syarikat Takaful Malaysia Berhard (STMB) in this respect.STMB, the
pioneer Takaful company is presently the largest Takaful operator in
Malaysia and is also a leading Takaful operator in the Asian Region. The
Takaful companies in Malaysia operates under Takaful Act 1984.
So far in other countries following Takaful companies
Insurance Company Ltd (Sudan)
Islamic Arab Insurance Company (Saudi Arabia)
Dar Al Maal Al-Islamia (Geneva)
Islamic Takaful Company (Luxembourg)
Islamic Takaful and Re Takaful Company (Bahamas)
Syarikat Al Takaful Al Islamiah (Bahrain)