Sharing the risk with the purpose of helping each other is recommendable as Allah mentioned in

the al-Quran (5:2):

“Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do
not help one another in furthering evil and enmity”

Prophet Muhammad said: “Tie the camel first, then submit (tawakkal) to the will of Allah”
“Help (ta’awan) one another in furthering virtue (birr) and Allah consciousness (taqwa) and do
not help one another in furthering evil and enmity”
(surah al-Ma’idah; 5:2)
Takaful is a form of mutual help (ta’awun) in furthering good/virtue by helping others who are in
need / in hardship.
Takaful is defined in section 2 of IFSA 2013 as:
“takaful” means an arrangement based on mutual assistance under which takaful participants
agree to contribute to a common fund providing for mutual financial benefits payable to the
takaful participants or their beneficiaries on the occurrence of pre-agreed events;
There are three aspects of mutuality embodied in takaful, namely mutual help, mutual
responsibility and mutual protection from losses. Therefore, takaful is a system whereby
participants contribute regularly to a common fund and intend to jointly guarantee each other, to
compensate any of the participants who are inflicted with a specific risk.
The word takaful is derived from the Arabic verb “kafala” which simply means “to take care of
one's need” or responsibility, guarantee, amenability, suretyship.

4 Concepts in Takaful
4.1 Tabarru’
TABARRU' is an Arabic word that means donation or gifts, where the Participant shall agree to
relinquish as donation all or certain portion of his contribution thus enabling him to fulfil his
obligation of mutual help and joint guarantee.
The participants of takaful plan make an ‘aqad (agreement) to deposit as donation a certain
portion of takaful contributions or installments into a risk fund.
The participants give certain portions of their contributions as a donation with the purpose of
providing mutual indemnity to takaful participants, where the donation acts as a mutual help and
joint guarantee should any of the fellow participants suffer a defined loss or suffer unexpected
financial losses due to some contingencies.
This is a relationship among all of the participants, not only between the insured and the insurer
which is the case in a conventional insurance scheme, where the insured purchases the insurance
policy from the insurance company.
This concept serves as the key element that distinguishes takaful and a conventional insurance.
On the surface, both takaful and conventional insurance seems to be the same because the
insured and the participants contribute money and in return will be insured against certain risks.
However, the underlying principle of tabarru’ differentiates the two whereby the participants in
takaful contribute a donation to the pool of money to help those in need and will be assisted from
the same pool of money which is contributed by the donations of other participants too.
Essentially the participants are insuring themselves and the takaful operator simply functions as
administrator of the takaful fund.
Also, it is important that the participants when signing up for a takaful plan, is conscious and is
well-informed about the concept of takaful. Here, the agents of a takaful house must be very
knowledgeable when it comes to explaining the product. As takaful and conventional insurance
is similar on the surface, only to be mainly differentiated by concept of tabarru’, the agent must
not mislead the customers. Conventional insurance contains many prohibited elements in Islam
and the intention of the customer when signing up must be that of helping his brothers and sisters
by way of donation and pooling it to the fund and one day be indemnified by other participants
too; and not with the intention of hoping to gain something in return by paying the premium as in
the case of conventional insurance.
On the surface it seems like the customer is doing a lawful thing, i.e. indemnifying by way of
takaful but the intention at that moment was contrary to the principles of Islam. Intention is a
very important factor. As seen in the Hadith of Prophet Muhammad, as narrated by Umar al-
Khattab:
“Deeds are judged by intentions and every person is judged according to his intentions”

Mutual indemnity

Takaful
Participants Participants
Donation fund Donation

Mutual indemnity

Fig: concept of tabarru’

4.2 Ta’awun
Besides Tabarru’, takaful is the principle of mutual cooperation and risk – sharing. Mutual
cooperation or ta’awun is achieved through contributions from takaful participants to the tabarru’
fund which allows participants to provide financial assistance to fellow participant suffering a loss.

Takaful system can be described as a co-operation among participants who mutually protect and
guarantee the interest of one another, by jointly sharing responsibility to pay for potential losses that
may occur, through donations into a common fund.

Ta’awun is the core principle of mutual assistance and brotherhood. This is encouraged by Allah as
seen in al-Quran (5:2).

Also in a hadith, Prophet Muhammad, as narrated by Abu Huraira, to have said:

“…whoever removes a worldly hardship from a believer of Allah (swt) will remove from him one of
the hardships hereafter. Whosoever alleviates the needy person, Allah (swt) will alleviate from him
in this world and the next…”

Takaful is built on the principle of mutual cooperation where each participant participates in each
other’s loss, while takaful operator facilitates this cooperation using its exercise, under the
operation of the takaful business.
Essentially, a cooperative risk-sharing plan, takaful system aims to provide insurance protection
against risks such as premature death, illness, disability and property damage.
It embraces the elements of mutual help, mutual protection and shared responsibility among
participants, supported by tabarru’ principles.
Dr Yusuf Qardawi asserts that a cooperative system established to assist its members who
suffer from misfortune must meet the following conditions:
(i) Brotherhood: Every member makes his share of payments into a common fund as a
donation, in the spirit of brotherhood. Financial assistance is provided to members who
suffer a loss from this common fund.
(ii) Halal: Any investment of the money from the common fund must be done in halal
business activity which is free from usury or interest.
(iii) Compensation: A member shall not seek a pre-determined amount of compensation in
the event of a loss rather than indemnified for his total or partial loss.

4.2 Mudharabah
MUDHARABAH is defined as the commercial profit sharing contract between the provider or
providers and the entrepreneur for a business venture whereby both parties agree on a profit
sharing arrangement.
Every takaful participant will have two accounts in parallel. One is a donation account and the
other is an investment account based on mudharabah concept. It is illogical for the participant to
just donate the money and allow it to stay stagnant. Money needs to grow. This investment is a
side activity to optimise the fund.
By the principle of Mudarabah, the Takaful operator accepts payment of the contributions from
participants on the basis of equity partnership that is a risk-sharing mechanism where the profit is
shared between the Takaful operator and the participants in a predetermined manner. The
contract specifies how the surplus from the operations of Takaful is to be shared, in accordance
with the principle of Mudarabah, between the participants as the providers of capital and the
Takaful operator as the entrepreneur.
The sharing of surplus that may emerge from the operations of Takaful is made only after the
obligation of assisting the fellow participants has been fulfilled. Shareholders of the Takaful
Operator as Mudharib bear expenses for the investment activities and the participants as Rabbul-
Maal bear the expenses for the underwriting operations.
Financial losses are required to be covered only by the participants, such as in form of a
reduction in of their capital or by paying higher contributions; while the Takaful Operator may
only lose its time and effort of labour spent in managing the underwriting operations.

4.3 Wakalah
WAKALAH means agency in Arabic. Under the structure, an agency relationship is agreed
between two parties to conduct a certain business undertaking. Based on this premise, the model
describes an agency agreement between the operators, acting as the agent or “wakil” to the
participant as the principal to manage the participation of the latter in a variety of takaful
products provided by the operator.
The principal appoints or authorizes the agent to manage the takaful fund for two main duties,
namely, takaful activities and investment. As an agent, the operator is entitled to an agency fee
and performance fee. The fee serves as an income for the operator.

9 Main Drivers of Takaful

  Piety (individual purification)
 Brotherhood (mutual assistance)
 Charity (Tabarru’ or contribution)
 Mutual Guarantee
 Community well-being

10 Objections to Conventional Insurance

It is to be noted that it is not the insurance as a whole is rejected or objected, it is just that the
operation of conventional insurance contains many of the prohibited elements in Islam that is
objected. Takaful and conventional insurance like said before is prima facie similar.

10.1 Definition of Insurance Contract

“An agreement whereby one party, the insurer, in return for a consideration, the premium,
undertakes to pay to the other party, the insured, a sum of money or its equivalent in kind on
the happening of a specified event, which is contrary to the insured’s financial interest”
Scholars view the insurance contract as an exchange contract – money is being exchanged for
money over time.
This brings about the problem of gharar (which leads to maysir) and in investments aspect, riba.
The prohibited elements of:
(i) Gharar
(ii) Maysir
(iii) Riba
And the management of fund in terms of:
(iv) Investment of fund – must be in halal sector
(v) Distribution of profit – must be made known
Note that the Scholars do not object to insurance per se but only to certain weaknesses in the
insurance contract.

10.2 Gharar (uncertainty)

Conventional insurance contract is basically a contract of exchange (mu’awadaat) i.e. buying
and selling whereby policy (indemnity) is sold as goods, with the premium as the price or
consideration.
The consideration must be certain for exchange contract.
Gharar in insurance contracts pertains to “deliverability” of subject matter, i.e. uncertainty as to:
 Whether the insured will get the compensation promised?
 How much will the insured get?
 When will the compensation be paid?
The element of gharar exists in both life and general insurance policies, whereby the subject
matter of the contract is not certain until the insured event has taken place.
The amount being paid by the two parties are not known during the contract session. This is the
case since an accident may occur immediately after the insured makes the first payment or the
insured may make all the payments without any accidents happening.
The insured agrees to pay a certain sum to the insurance company but the insured is not informed
of how the amount of the compensation that the insurance company will pay him is derived nor
is he certain of the amount.
Islamic law requires the subject matter of the contract to be certain and be made known to the
parties at the time of contract otherwise the contract will be invalid.
Thus it involved an element of uncertainty in the subject matter of the insurance sales contract,
which renders it void under Islamic law.
10.3 Maysir (gamling)
Maysir resembled with ‘risk taking’ whereby insured get a huge amount without any equivalent
input. Insurance include Maysir where insured makes a bet on the happening of loss.
The nature of conventional insurance is said to contain this element because policyholders are
held to be betting premiums on the condition that the insurer will make payment (indemnity)
contingent upon the circumstances of a specified event.
On the other hand, the insured does not get anything from the premiums if the insured event does
not happen at all. The gain of one party is contingent upon the loss of the other.
Essentially, the insured is betting his on his ‘risk’.

10.4 Riba (interest)

Firstly, Insurance funds are invested in financial instruments which contain the element of Riba.
Secondly, the amount of money received by the insured, either on the occurrence of the insured
event or upon maturity of the policy, is mostly in excess of total premiums he has actually paid.
Riba is clearly affecting the two parties to the contract since there is no equality between
instalments paid by the insured party and the compensation paid by the insurance company. It is
an act of making money with money which the source is unjustified.
What the company pays may be more, less or equal to that which is paid by the insured and
equality is very unlikely.

10.5 Must be Halal (Investment of fund)

Insurance companies invest in such type of assets that are totally prohibited in Islam such as
alcohol, gambling, bonds etc. while the Takaful companies invest in interest free funds that are
halal.

10.6 Distribution of Profit

In Takaful every policy holder has the right to know about the distribution of profit among
partners but in conventional insurance there is no hard and fast rule about that, it’s totally depend
upon management of company
The fundamental difference between takaful and conventional insurance lies in the type of
contract. In takaful, it is based on tabarru’ (donation contract) which is unilateral in nature. All
takaful participants will mutually insure each other based on the spirit of brotherhood and mutual
assistance. The takaful operator merely serves as an administrator of the takaful fund and whose
responsibility includes managing and investing the fund according to the shariah principles.
In conventional insurance, it is a bilateral contract between the insured and the insurance
company (insurer). The insured purchases the insurance policy from the insurer and pays regular
instalments (premiums) in return for the guarantee to pay compensation. This is contingent on
events that may or may not occur.

Takaful Conventional Insurance

Type of contract  Donation contract which is  Bilateral contract between the

unilateral in nature.
 A combination of tabarru’
contract and profit-sharing
contract of mudharabah
(parallel)
insured and the insurer.
 Contract of exchange (sale and
purchase) between the two.

Duty-bound The participants are duty bound The policyholders are duty-bound
to make contributions to the to make regular payments of
scheme and are expected to premiums to the insurer.
mutually share the surplus.

Profit earning The takaful operator earns a The insurance company makes a
return for rendering a service of profit when there is an
managing the takaful programme underwriting surplus.
(wakalah);
And from the mudharabah profit-
sharing scheme as mudharib.

Counter value The counter value (‘iwad) is No clear valid counter value.
effort and/ or undertaking of risk Source of profit is anticipating
(hoping) that the uncertain future
will be in their favour (that total
premiums will exceed total claims)
Operator/Insurer Takaful operator acts as an Insurer is liable to pay the benefits
pays benefit administrator of the takaful fund as promised insurance funds and/or
and pays benefits from it. If there shareholders’ fund.
is any insufficiency in the takaful
fund, the takaful operator must
provide interest-free loans to
rectify the deficiency.

Indemnification Indemnification is based on Indemnification component is a

mutual contribution, mutual commercial relationship between
assistance, brotherhood and the insurance company and the
reciprocal donation (tabarru’). insured.

Relationship There is no insured-insurer There is a clear insured-insurer

relationship between the takaful relationship here.
operator and the participant in
takaful. The participants are both
insured and insurer at the same
time. They all mutually
indemnify each other and the
operator is merely an
administrator of fund.

Investment Takaful funds must be invested in There is no restrictions in

sector shariah-compliant instruments. investment of funds.

Prohibited Contains elements of gharar,

elements maysir and riba. Also the
None present. investment is not halal and the
distribution of profit is not made
known.