Sep 15 - 21, 2008

Capt. M. Jamil Akhtar Khan is the CEO of Takaful Pakistan. With a background in the Merchant Navy, Capt. Jamil commanded vessels of the national flag carrier PNSC before switching over to insurance. Before joining Takaful Pakistan he served with New Jubilee Insurance where his interest in Takaful was evoked. He is regarded as a pioneer in the introduction of Takaful to Pakistan, not only by facilitating its adoption by the corporate sector, but also by helping frame the rules governing Takaful in his country with the Ministry of Commerce, resulting in the Takaful Rules, 2005.


Takaful is not something new to the Islamic world. It has been going on for centuries, ever since the days of the Holy Prophet Muhammad (Peace Be Upon Him) and the early Caliphs. We know that in those days there were ships and trade caravans and they used to be exposed to the same risks that we face today. Ships could be sunk, caravans could be raided or catch fire, etc. Given these dangers to trading activity, the early pioneers of Takaful were wise enough to formulate a system of mutual protection so that the members of a particular caravan or trade delegation could be assured of recovery in case they suffered a loss due to unavoidable circumstances. Thus the members of these trading enterprises would enter into a formal pact stipulating that in case of loss to one party, the others would contribute to make up that loss.

The only essential difference between Takaful at that time and Takaful today is that whereas they used to pay only after the loss, we today charge a considerate amount of what is known as a contribution before the loss, and at the end of the year after all the claims have been settled, the balance (or 'Surplus' as it is called) is returned back to the participants.

This early practice of Takaful or mutual indemnification even found expression in the first Constitution of Medina (Mithaq al-Madina) in the days of the Prophet and was the second system that was formally institutionalized by the Caliph Umar, the first being the Baitul Maal or Public Treasury. These developments at the state level meant that Takaful came to be formalized into a more secure system, with more accountability and more checks and balances, much earlier than the present day form of 'conventional' Insurance. During this period, a number of Takaful products were evolved based not only around diya or blood money, but also dawaniya which was a sort of professional indemnity to governors and state functionaries.

Thus the system of Takaful became an integral part of trade and commerce in those days and this situation continued for several centuries up to the end of the First World War. The fall of the Ottoman Caliphate shortly thereafter meant that Takaful, along with the other state institutions that had safeguarded Muslim interests, fell on bad times. This was the time when virtually not a single Muslim state remained independent. They were all colonized by either the British or the French or the Portuguese, etc. That was also the time of rapid growth due to the industrial era. The fast evolving international trade and commerce gave birth to modern day banking and insurance to supplement the Western-style commerce and trade. While Takaful receded to the background, conventional insurance imposed by the Western colonial powers took its place, and this continued for several decades. When the Muslim and other Third World countries eventually started gaining independence after the end of the Second world war, they adopted the same systems of banking and commerce that were left as a legacy by their erstwhile colonial masters.

It was only in the 1970s with the revival of Islamic banking modes in the Middle East that modern-day Takaful also developed. The first Takaful company was set up in Sudan in 1979 which was almost simultaneously followed by another set up in Bahrain. The rapid growth of Takaful ever since, even in the non-Muslim world, only goes on to prove that it has withstood the test of time and is a viable alternative to conventional insurance.


The word Takaful is derived from the Arabic root word kafala 'mutual guarantee or protection' and this drives home the basic difference between Takaful and Conventional Insurance. This difference is two-fold. One is the difference in concept and the other is the difference in contract.

The conceptual difference is that conventional insurance by its very definition is a risk-transfer mechanism. Takaful on the other hand does not entail risk transfer, but rather the socially more responsible task of risk-sharing. As for the contractual difference, if one looks at any insurance policy, it is a contract because it fulfils the ingredients of a contract since there exist two parties to the contract; there is an insurable interest involved and there is a consideration by way of premium. Therefore it is a contract of sale. In consideration of premium, the risk is transferred to the insurance company and in case of loss, the insurance company pays cash in compensation for such loss, the value of the item concerned. Thus it is also a contract of exchange where money is exchanged for money.

Takaful on the other hand is not a risk transfer mechanism. The contract of Takaful is not a contract of sale or of exchange, but is rather a membership contract. One pays a contribution to become a member of a common pool and by virtue of becoming a member of that fund, such a person is entitled to certain benefits under the rules of that fund. By this means Takaful distributes risks and losses to a larger number of participants which could mitigate the otherwise very damaging losses if borne individually.

When we compare these two forms of insurance, conventional insurance and Takaful, we would soon come to realize why one is prohibited and the other permitted. In Islam, money for money exchange is prohibited because there is an element of direct interest that comes into play since there is always a lesser or greater amount on one side of the balance sheet. Thus if you were to pay a premium of say 100 Euros and get a claim for 10,000 Euros, you are getting far more than you have given and in the same currency that you exchange. So it is an exchange of the same species and it is getting more than what you have given. Hence it is direct Riba. There is also indirect riba in case of investments where conventional players can invest in riba-bearing instruments, while Takaful companies can only invest in Shari'ah-compliant, non-interest-bearing instruments. However, it must be stressed that investment is not the core business of an insurance company. It is a side business. The main core businesses are risk management, underwriting, claims handling, Marketing, Clients' servicing, etc.

Besides, there is also an element of maisir or gambling in conventional insurance. This is because the insured would lose the money paid for the premium when the event which has been insured against does not occur and because the company would suffer a deficit if the claims happen to be higher than the premium paid. Since the gain of one party here is contingent upon the loss of the other or vice versa, it is, to put it in simple terms, gambling, and hence prohibited. As Lord Mansfield observed in Carter v. Boehm 1766): "Insurance is a contract upon speculation. Good faith forbids either party from concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing to the contrary". In the case of Takaful, however, there is no such conflict of interests as it is a common fund. If you draw out of it by way of benefit in the case of a claim, it is drawing out of a fund of which you are a member and to which you have contributed.

What differentiates Takaful from conventional insurance and makes it commercially more viable even to non-Muslims is the fact that there is also the surplus element at the end of the year in the case of Takaful. The remaining money after all claims have been met does not belong to the shareholders, but rather to the participants and therefore has to be given back. In the case of conventional insurance, this concept is lacking. Thus Takaful is more participatory and all concerned could benefit from this fair and equitable arrangement.


As Muslims we believe that one's destiny is ordained by Allah. At the same time we are told by the Almighty in the Qur'an laysa lil insani illa ma sa 'aa (Man can have nothing but what he strives for). Thus God ordains that we strive to safeguard our interests. There is also a tradition that once an Arab bedouin proceeded to a tent along with the Prophet (P.B.U.H.) leaving his camel untied. When Prophet (P.B.U.H.) asked him why he did so, he replied "I place my trust in Allah" whereupon the Prophet (P.B.U.H.) immediately admonished him "Tie your camel first, then place your trust in Allah". Thus there are precautions we have to take while placing our trust in Allah. For instance, we lock our cars while parked and shut our doors and windows when going out. One could even find a tradition to justify life insurance. According to a hadith related by Anas bin Malik, the Prophet (P.B.U.H.) is reported to have said : It is better for you to die leaving your offsprings wealthy rather than leaving them poor, asking for help from others". This shows that to make provision for our offspring even in our absence is a responsibility we should bear. Today's Shari'ah scholars are unanimous in declaring that there is nothing unislamic in Takaful, be it general or life.


There are basically three different types of Takaful models, namely, the Mudaraba model, the Wakala model and the Wakala-Waqf model. The Mudaraba model is based on Mudaraba, an Islamic mode of equity partnership and is basically a profit-sharing mechanism where the surplus is shared between the Takaful company and the participants in a predetermined manner. The sharing of such surplus and the profit so generated may be in a ratio of 5:5, 6:4 etc as mutually agreed between the contracting parties. Generally these risk-sharing arrangements allow the Takaful operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums. This model started off in Malaysia, the reason being that in Malaysia they started with Life Takaful and the Mudaraba model was considered more appropriate for life investments. This same model was continued when they entered general Takaful.

Meanwhile, the scholars in the Middle East formulated the Wakala or Agency model which is still the predominant form of Takaful in that part of the world. The Wakala model is a fee-based mechanism where the Takaful operator is only entitled to take out a fee upfront as the contribution, though it may also charge a fund management fee and performance incentive fee. Unlike the Mudaraba model, it is not entitled to any part of the surplus, all of which belongs to the participants. It does not participate or share in any underwriting results as these belong to the participants as surplus or deficit.

In Pakistan, one benefit of being a late starter is that its scholars have been able to have a close look at both models and have refined these further to constitute what is known as the Wakala-Waqf model. The scholars and professionals who formulated this model felt that there should be a separate legal entity on whose behalf the Takaful operator should act as an agent (Wakil) and were inspired by the Islamic institution of Waqf or Perpetual Endowment to serve the purpose. The Waqf is created by the shareholders of the Takaful company who would put in the seed money. Such seed money must remain as Waqf and cannot be used for claims, though its investment income could be utilized for that purpose. The contributions received would also be a part of this fund and the combined amount would be used for investment, with the profits so earned being deposited into the same fund. Losses to the participants are paid by the company from the same fund while operational expenses incurred for providing the service are met from the separate Shareholders' Fund. Here, both the Takaful operator and the participants share a relationship through the Waqf. Since the Takaful operator will manage the enterprise on behalf of the Waqf it is entitled to a Wakala or agency fee. The participants are also governed by the Waqf rules, so that whatever claims they have, they get it by way of benefit by virtue of being a member of that Waqf.

Although these various models are peculiar to certain countries or regions due to the historical developments we have outlined above, we also see some significant shifts of late. For instance, in Malaysia, a new player, Takaful Ikhlas works on the Wakala model, showing that they are flexible and are moving from a Mudaraba-based to Wakala model as they find it more viable, and there is no reason why they would not be able to effect further refinements to this model as the Pakistani experience has shown.


Many are the developments that are taking place in the Takaful industry worldwide. For instance, we have BancaTakaful which is somewhat similar to bankassurance where banks and insurance companies synergize, with banks selling insurance products over their counters and insurance companies tailoring their products to blend with banking products such as investment instruments.

In similar fashion, Takaful companies tailor their products to blend with banks' modes of financing like in the case of Takaful Pakistan which has taken the initiative in providing coverage to banks to cover their Murabaha contracts. This is because in Murabaha which is a much practiced mode of trade financing involving cost plus profits in selling, there is an exposure to risk since the property would belong to the bank before it is transferred, by way of sale to the purchaser and if any loss takes place before such transfer it is at the expense of the bank concerned. The person affecting such transaction(s) acts as an agent of the bank.

Other recent developments include Micro-Takaful for crops which covers those entering into Salam contracts for financing crops and Istisna contracts for SMEs. Micro-Takaful could also be tailored to suit the needs of the underprivileged sections of society including blue collar workers in the urban areas, especially in the area of heath and education. Takaful firms could also tie up with banks operating in the rural sector, providing cover not only for the micro-credit/finance offered by them, but also for the underlying assets.

Recent times have also seen the emergence of ReTakaful as a viable and Shari'ah-compliant alternative to Reinsurance. Just as much as Reinsurance allows insurance companies to achieve greater capacity and balance by the geographical spread of risk, so do ReTakaful companies in similar manner. A few years ago, there existed only a handful of ReTakaful firms and hardly one or two of them were rated. Thus they could provide only a very limited capacity, prompting the Shari'ah scholars of the day to permit Takaful firms to resort to conventional reinsurers as a provisional measure.

Today, however, most of the leading reinsurance companies like Munich Re, Hanover Re and Swiss Re have set up ReTakaful facilities. The renowned German Reinsurers Munich Re and Hanover Re have set up ReTakaful offices in Kuala Lumpur and Bahrain respectively while the well known Japanese Reinsurers Mitsui Sumitomo and Tokyo Marine have set up theirs in Singapore. Thus it is no exaggeration if we say that Takaful has today come of age.


Takaful has ever since its modern-day introduction caught on in many countries and not just in the Middle East or South East Asia. Among the latest entrants are Russia and South Africa. Russia set up its first Takaful company in 2005 spearheaded by Renet Dekin while 2006 saw South Africa's first Takaful company being formed based on the Wakala-Waqf model. More recently we saw the emergence of Salaam Halal, Britain's first independent Takaful operator as well as British Islamic Insurance Holdings (BIIH). In Sri Lanka we would find that Amana Takaful has taken the initiative in introducing many a Takaful product to the market. What is particularly remarkable is that as much as 35 percent of the firm's clientele are non-Muslims. Indeed it is a commendable fact that during the first five years of its existence, the firm showed triple digit growth which is a record and they have continued to demonstrate commercial viability by distributing a surplus to their shareholders.

Today there are around 150 Takaful companies operating in over 40 countries and their average growth rate which is around 25 percent is higher than that of conventional insurance companies. Given the mushroom growth of new Takaful entrants, institutional sponsorships, extensive use of technology, move towards adoption of uniform accounting standards and development of Takaful-specific ratings, one can feel assured that not only does Takaful have a bright future, there may be a time not in distant future when Takaful shall be universally accepted as the only form of insurance the equitable way!



The surplus is shared between the participants with a Takaful operator. The sharing of such profit (surplus) may be in a ratio 5:5, 6:4, etc. as mutually agreed between the contracting parties. Generally, these risk sharing arrangements allow the Takaful operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums.


Cooperative risk sharing occurs among participants where a Takaful operator earns a fee for services (as a Wakeel or Agent) and does not participate or share in any underwriting results as these belong to participants as surplus or deficit. Under the Al-Wakala model, the operator may also charge a fund management fee as well as performance incentive fee.


It is a WAKALAH model with a separate legal entity of WAQF in-between.

The relationship of the participants and the operator is directly with the WAQF fund. The operator is the 'Wakeel' of the fund and the participants pay contribution to the WAQF fund by way of Tabarru.

The contributions received would also be a part of this fund and the combined amount will be used for investment and the profits earned would again be deposited into the same fund which also eliminates the issue of Gharrar.

Losses to the participant are paid by the company from the same fund.

Operational expenses that are incurred for providing Takaful services are also met from the same fund.