Takaful - insurance with an Islamic perspective

Earlier this week, i wrote a newsarticle about the Dubai Islamic Investment Group who had acquired a 51% controlling stake in the Kuwait-based Al Fajer Retakaful Insurance Company KSCC. The takaful insurances made me curious, which brought me to this article.

History

Takaful is an Arabic word meaning ‘guarenteeing each other’ or ‘joint guarentee’. Muslim jurists acknowledge that the basis of shared responsibility in the system of “aquila” as practised between Muslims of Mecca and Medina laid the foundation of mutual insurance. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages (marine insurance).

The fundamentals of insurances are now based on the sayings of Prophet Mohammed and by these means under Islamic Law.

Principles

The principles of Takaful insurances 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.

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 anothers burden.” Commercial insurance is strictly not allowed for Muslim as agreed upon by most contemporary scholars because it contains the following elements: Al-Gharar (Uncertainty),  Al-Maisir (Gambling) and Riba (Interest).

Although, the European Council for Fatwa And Research modified that rule a little. It said: “Commercial insurance is originally haram (unlawful red.) as agreed upon by most contemporary scholars. It is well known that in most non-Islamic countries there are cooperative and mutual insurance companies. There is no harm from the Shari`ah point of view to participate in these services. So, it is unlawful for a Muslim living in a country where there is such a cooperative insurance company to make an agreement with a commercial insurance company. But, if a cooperative insurance company is not found one may enter into a contract with a commercial insurance company only by way of necessity. If a person is forced by law to insurance or by way of need, it is obligatory for him to be content with the minimum proportion of insurance that covers his need or to the minimum of such transaction he’s being forced to carry out.” 

The Takaful Models

- Mudharabah model (profit and loss sharing) This is a contract between capital providers with management, where any profi t is shared according to ratio or percentage agreed by both parties but any losses are borne entirely by the capital provider. In practice, participants provide capital to the Takaful operator. 
- Musharakah model (joint venture) Both parties provide capital and/or management. Profi t is split either based on capital or upon negotiation, and any loss is distributed in proportion to capital contributions. 
- Kafalah model (surety) A guarantor to become the surety in the event the debtor fails to honour his obligation. This type of contract can be used for the development of the Takaful scheme for bonds products. 
-  Wakalah model (agency) The principal appoints and authorises someone to act on his behalf. The authorisation could be either specific or general. The Wakeel (agent) could then charge a fee to the principal. This model is suitable for most Takaful products including products for corporate risks such as a ‘Rent-a-Captive’ concept. 
- Ju’alah model (commission) Similar to the Wakalah contract except that the payment to the agent is measured on his output and performance. This contract could be used to develop distribution channels for Takaful. The most important element of a Takaful model is that there must be a subject matter of contract upon which contracting parties mutually agree by an ijab (proposal) and a qabul (acceptance).

(Sources: ICMIF Takaful, The Actuary, Wikipedia)

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