Takaful

 

 

Heera Finance Pvt. Ltd. is working towards introducing mutual insurance, Takaful. Takaful is an alternative form of insurance cover in which an individual can protect himself against losses that might occur due to a specified misfortune. There are many Takaful providers in the world today in Malaysia, Singapore, Indonesia, Sudan, the Arabian Gulf, to name a few. Takaful allows Muslims to observe the differences between the halal and the haram, the compulsory and the disliked, the prohibited and the permissible. In today's world, where insurance is often a necessity, Muslims have a duty to find an acceptable alternative.

What is Takaful?
The word takaful comes from the Arabic language meaning "guaranteeing each other". Takaful therefore is the practice whereby individuals in the community jointly guarantee themselves against loss or damage. For example, individuals can make charitable donations to a common fund from which they may each draw in the event that they suffer loss to their houses or livelihoods. 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. As mentioned in the Qur'an:
"And help one another in righteousness and piety and do not help one another in evil deeds and enmity”
(Al Maidah verse 2)

Takaful is a noun stemming from the arabic verb "Kafal" which means which means guarantee or responsibility or more generally "taking care of one's needs". 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.
Takaful is based on shared aims and co-operation, with each individual benefiting from any surpluses gained. In takaful there are no policyholders; there are contributors who participate jointly in a fund for their mutual benefit. They are owners of the fund and the takaful company manages the fund on their behalf. Thus, if the company makes a profit this is shared between the contributors, and if any of the contributors were to suffer financial loss they are paid from the takaful fund.

Differences between Takaful and Conventional Insurance?
Takaful differs from conventionally understood insurance cover. In the latter, the insured person sells his risk at a price to a counter-party, thus including an element of "gharar" (uncertainty) in the contract. Under Shari'ah, a contract of uncertainty exists when the counter-parties do not know the nature of the countervalue that they are trading. A house may burn down, costing the insurer a large sum of money, or it may not burn down in which case the insured person has paid a premium and received nothing in return.
Conventional insurance is not transparent, as companies discriminate when assessing risks factors. For instance, different premiums are quoted, based on age, gender and financial status. Insurance companies also invest in ventures that may involve interest or some form of activity which goes against the teachings of the Shari'ah. Conventional insurance is not mutually beneficial, as certain individuals (shareholders, for example) benefit at the expense of others. In other words, commercial insurance companies exist to serve the interest of shareholders first, not policyholders.
However, the act of taking measures against possible dangers or consequences does not go against the teachings of Islam. As described in the Qur'an, Prophet Yusuf (Alaihis Salaam) 'filled the grain silos from the surplus of seven years of good harvest as a protection to ensure the availability of continuous food during the seven lean years.'
The guiding principle behind commercial insurance is that it is based largely on commercial factors. Takaful on the other hand is guided by the principles of Islam, which aims to establish a social order based on universal brotherhood. In Islam
'A Muslim is the brother of another Muslim; he neither wrongs him, nor leaves him without help, nor humiliates him’

How Does Takaful Work In Practice?
Takaful works on the basis of an agreement made by the participants of the insurance scheme. Each agrees that he or she is one of the insured as well as one of the insurers. Each pays a premium to the scheme which is then invested by the scheme in an Islamically acceptable way. A takaful company cannot for example invest in companies that deal in interest, alcohol, gambling or uncertainty. The profits made from the permitted investments are divided among the participants in the scheme. However, the participants also agree to give up a portion of their contributions in the event that a policyholder suffers financial loss or a catastrophe befalls him.
There are two models of takaful that can be adopted, the Wakala model and the Mudarabah model. The Wakala model works on the concept that the operator of the company is paid a fee, which is deducted from the participant's contribution. The Mudarabah model is where the operator is entitled to a fixed percentage of any investment profits or surplus. In this model, management or operating expenses cannot be charged to the takaful fund. Expenses are borne entirely by the operator from the shareholder fund.