About Takaful

FAQ on Takaful

What is Islamic Insurance?

Takaful is commonly referred to as Islamic insurance; The word Takaful originates from the Arabic word Kafalah, which means “guaranteeing each other”.  The policyholders contribute collectively and mutually assist in order to share the harm or loss that may fall upon the group.The concept is in line with the principles of compensation, mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.All Takaful companies are fully Sharia’a Compliant and Takaful products and operations are supervised by a Sharia’a Board.

Is Takaful for non-Muslims?

Takaful is not only for Muslims. It is based on a cooperative concept that is beneficial to all members of the society without any discrimination on the basis of ethnicity, creed or colour.

What are the key differences between Conventional Insurance and Takaful?

Issue Conventional Insurance Takaful Insurance
Insurance Contract Risk transfer mechanism: risk is transferred to specialized party (insurance Co.) Risk Share mechanism  /Mutuality and participant responsibility
Economic Objective Profit maximization for the benefits of shareholders Mutual Interest / Joint guarantee
Insurance company role Insurer Operator
Laws Secular Regulations Sharia regulation
Ethical Framework Codes of conducts for business benefits /maximize the long term value of shareholders Islamic business ethics /social responsibility
Contract Forms Commercial Insurance Contract Cooperative plus islamic contracts of Wakala /Mudaraba/Kafala
Underwriting Policy Insurance ability /Profit making /underwriting techniques Sharia framework (Haram Businesses restricted) / insurability / underwriting techniques
Investments Equity /debt – no restrictions Sharia Compliant Investments
Surplus Shareholders account Participants account or sharing system

Why is conventional insurance not permissible in Islam?

Conventional insurance contains elements contradictory to the Islamic Sharia. These elements are Uncertainty (Gharar), Gambling (Maysir) & Interests (Riba).

What is Gharar (Uncertainty)?

The insurance contract contains uncertainty due to:

  • Uncertainty whether payment will be accepted as promised.
  • The amount to be paid is not known
  • The time it will occur is not known

Any form of contract which is lopsided in favor of one party at the expense and unjust loss to the other is classified as Gharar.

What is Maysir (Gambling/Speculation)?

  • The participant contributes a small amount of premium in hope to gain a large sum
  • The participant loses the money paid for the premium when the insured event does not occur
  • The company will be in deficit if claims are higher than contributions

What is Riba (Interests)?

  • An element of interest exists in conventional insurance products – as the insured is entitled to get much more than he has paid in an event of a claim
  • Insurance funds invested in financial instruments such as bonds and stocks contain an element of Riba.

What is a Mudaraba Model?

Mudaraba is a Takaful model based on profit-sharing between the policyholders and Takaful Operator in accordance with a pre agreed ratio.

What is a Wakala?

Wakala is a contract that appoints someone to be the Participant’s Wakeel (Agent) for a certain fee.

What is a Wakala Fee?

It is the fee charged by the Takaful Operator from the participant to manage the Participant Takaful Fund.

Are Takaful contributions higher than conventional Insurance premiums?

There is no price difference. Takaful products cannot be compared to conventional insurance products, given the additional values offered.

What is Surplus Sharing?

Surplus refers to the excess of contributions over claims, plus investments return. Surplus sharing refers to the act of distributing the excess made among the participants of the Fund.

What is the relationship between members of a Takaful Fund?

The relationship among the members of the Fund is that of co-operation for Mutual Benefit. The individual members contribute to an organized and well managed fund whose core objective will be for the welfare of the entire group. Thus the relationship is one of strength & togetherness.

What do I benefit from purchasing a Takaful insurance policy?

The participants have the opportunity to obtain two forms of benefits. First the monetary benefits through the Takaful plan itself. Secondly the “benefits” in the spiritual sense, through the act of Tabarru’ (donation).