Introduction

Takaful comes from the Arabic root-word ‘kafala’ — guarantee. Takaful means mutual protection and joint guarantee. Operationally Takaful refers to participants mutually contributing to a common fund with the purpose of having mutual indemnity in the case of peril or loss. Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in need / in hardship.

Takaful is the practice whereby individuals in the community jointly guarantee themselves against loss or damage. It was first established in the early second century of the Islamic era with the purpose of promoting mutual solidarity and co-operation among the Muslim community.

The main characteristic of Takaful is al-Musharakah which means sharing. Thus, the word Takaful means shared responsibility, shared-guarantee, collective assurance and mutual undertakings.

Islamic insurance embraces the concepts of mutual protection and shared responsibility which was seen in the practice of paying blood money (diyah) under the Arab tribal custom. This was accepted into Islamic practice on the verdict of the Prophet (peace be upon him). It therefore potrays the sincerity and willingness of the group to help and assist anyone among them in times of need.

"Takaful" bears many similarities to co-operative or mutual insurance.

In quran:
“Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do not help one another in furthering evil and enmity”. Al Maidah: verse 2 (5:2).

In Hadith:
“Tie the camel first, then submit (tawakkal) to the will of Allah”

The hadith implied a strategy to mitigate/reduce risk. Takaful provides a strategy of risk mitigation/reduction by virtue of collective risk taking that distributes risks and losses to a large number of participants. This mitigates the otherwise very damaging losses, if borne individually.
Islamic finance has developed mainly in two directions namely Islamic banking and Islamic insurance (Takaful). While information about Islamic banking is being increasingly disseminated, features, models and structures of Takaful are little known.

       Basic Elements of Takaful

► Mutuality and cooperation.
► Takaful contract pertains to Tabrru’at as against mu’awadat in case of conventional insurance.
► Payments made with the intention of Tabarru (contribution)
► Eliminates the elements of Gharrar, Maisir and Riba.
► Wakalah/Modarabah basis of operations.
► Joint Guarantee / Indemnity amongst participants – shared responsibility.
► Constitution of separate “Participants’ Takaful Fund”.
► Constitution of “Shariah Supervisory Board.”
► Investments as per Shariah.

       Main Drivers of Takaful

► Piety (individual purification)
► Brotherhood (mutual assistance)
► Charity (Tabarru or contribution)
► Mutual Guarantee
► Community well-being as opposed to profit maximization.

       Principles of Takaful

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden." Commercial insurance is strictly not allowed for Muslim as agreed upon by most contemporary scholars because it contains Al-Gharar (Uncertainty), Al-Maisir (Gambling), and Riba (Interest).

The principles of Takaful are as follows:
► Policyholders co-operate among themselves for their common good.
► Every policyholder pays his subscription to help those that need assistance.
► Losses are divided and liabilities spread according to the community pooling system.
► Uncertainty is eliminated in respect of subscription and compensation.
► It does not derive advantage at the cost of others.

       Overview of Takaful

All human beings are invariably exposed to the possibility of meeting catastrophes and disasters giving rise to misfortunes and sufferings such as death, loss of limbs, accident, destruction of business or wealth, etc. Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that one must find ways and means to avoid such catastrophes and disasters wherever possible, and to minimize his or his family's financial losses should such events occur. One possible way out is to buy an insurance cover as in the conventional system.

Different views have been expressed about the status of conventional insurance from the point of view of Islam. An overwhelming majority of the Shariah scholars believe that it is unlawful due to involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty). Takaful, the Islamic alternative to insurance, is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a pact among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively.

The Takaful contract so agreed usually involves the concepts of Mudarabah, Tabarru´ (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.

Takaful is not a new concept in Islamic commercial law. The contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was laid down in the system of ‘Aaqilah’, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet (pbuh). In case of any natural calamity, every body used to contribute something until the loss was indemnified.

Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.

The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to the business or property. The policyholders (Takaful partners) pay subscription to assist and indemnify each other and share the profits earned from business conducted by the Company with the subscribed funds. Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru´ is incorporated in the contract. How much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements. Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators. The profit attributable to the participants is credited into the two accounts separately. To describe from another angle, a Takaful contract may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment. The protection part of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally. In the Savings part, individual rights remain intact under Mudarabah principle and the contributions alongwith profit (net of expenses) are paid to the policyholders at the end of policy term or before, if required by him.

The distinction between the conventional insurance and Takaful business is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreement. Likewise they share in any surplus or loss* from the pool collectively. Takaful system has a builtin mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.