What is Takaful Insurance?

Takaful means in Arabic “guaranteeing each other”. Takaful Insurance is an Islamic Insurance concept and is a Shari’ah compliance mutual risk transfer arrangement, involving participants and operators.

The difference between Takaful and conventional insurance rests in the way the risk is assessed and handled, as well as how the Takaful fund is managed. Further differences are also present in the relationship between the operator (under conventional insurance: insurer) and the participants (under conventional insurance: the insured). In risk assessment and handling Takaful does not allow what is called Gharar (uncertainty or speculation) and Maysir (gambling). In investment or fund management Riba (interest or usury) is also not allowed. These are the three main reasons why Muslim scholars regard conventional insurance as being against the principles of Shari'ah.

Maisir (gambling) is regarded as the excessive side of Gharar. Whilst the participants (insured) may have an insurable interest in the subject matter, if the risk transfer (risk sharing in Takaful) contains any speculative element, it is prohibited under the Islamic Insurance concept.

Riba (interest or usury) is totally prohibited under the Shari’ah law and under a Takaful arrangement. To avoid Riba, Takaful treats participants’ contribution to the risk sharing scheme not as a premium in the way conventional insurance does. In Takaful terms it is treated as being a contribution in the form of a donation with the condition of compensation. The funds secured from the participants' contributions or donations, must be managed and invested in accordance with the Shari'ah.

In Islam it is not the risk in human life that needs to be eliminated since this is a natural phenomenon in human life. It is the selling or exchange of risk or risk transfer to third parties using sales/exchange contracts that is not allowed. Helping each other in any situation including in the event of misfortune is highly encouraged in Islamic teaching as Allah mentioned in the Qur’an: "….Help you one another in Al Birr and Al Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression…." (Al-Maidah:2).

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