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Takaful Islamic Insurance

Takaful, or Islamic insurance, provides an alternative to conventional insurance that is compliant with Sharia law. It operates based on the principles of mutual guarantee and cooperation rather than speculation. There are two main types of Takaful - general Takaful which creates a fund from voluntary contributions to collectively insure participants, and the operator manages investments on a profit-sharing basis; and various hybrid models that incorporate elements of agency agreements and profit-sharing. The key differences from conventional insurance are that contributions are voluntary, rights are clearly defined to minimize speculation, investments are interest-free, and it aims to promote equity and social goodness through mutual risk-mitigation based on faith.

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56 views8 pages

Takaful Islamic Insurance

Takaful, or Islamic insurance, provides an alternative to conventional insurance that is compliant with Sharia law. It operates based on the principles of mutual guarantee and cooperation rather than speculation. There are two main types of Takaful - general Takaful which creates a fund from voluntary contributions to collectively insure participants, and the operator manages investments on a profit-sharing basis; and various hybrid models that incorporate elements of agency agreements and profit-sharing. The key differences from conventional insurance are that contributions are voluntary, rights are clearly defined to minimize speculation, investments are interest-free, and it aims to promote equity and social goodness through mutual risk-mitigation based on faith.

Uploaded by

Saif ul Nazir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Takaful – Islamic Insurance

Essentials of Islamic Banking and Finance

IRSHAD AHMAD AIJAZ


[email protected]
Introduction

 Insurance in conventional sense means:


− 'A way to provide security and compensation of what is valuable in the event of its
loss, damage or destruction';
− This is done based on the principle of risk taking and speculation;
− The role of probability is very important here;
− The transaction is structured on justification of risk;
 Conventional Insurance has been declared Haram by a big majority of
Islamic scholars;
Introduction
 Now the question in front of us is:

− What are the problems in conventional insurance?


− Is something wrong with the concept of insurance – the mitigation
of risk?
► Risk aversion;
► Guaranteeing others;
► Risk sharing;
Explanation
 The contract between the insurer and the insured is technically wrong
from the Shari'ah perspective because of:
− Gharar (uncertainty), Qimar (gambling) and Riba (interest);
► The participant contributes a small amount of premium in hope of gaining a large sum
► The company will be in deficit if the claims are higher than the amount contributed by the
participants
− Riba is also there in conventional insurance contract;
► Direct Riba in conventional insurance:
 Excess on one side in case of exchange between the amount of premium and the sum insured;
► Indirect Riba in conventional insurance:
 The interest earned on interest based investments;
Types of Takaful

 General Takaful:
− Creation of fund;
− The operator will charge an upfront fee;
− The investment will be done on the Mudarabah bases; the profits after deducting
the operator’s portion will be joint again in the fund;
Different Models

 Many models of Takaful are practiced the world over;


− Pure Mudarabah model:
► The participant and the operator enter into a Mudarabah contract
from the beginning of the relation, for indemnification and share of
the underwriting results;
− Wakalah Model (hybrid of Wakalah & Mudarabah):
► An agency agreement is made between an individual willing to
participate in the fund and the operator working as the manager of
the fund;
► The operator earns an upfront deductible fee and shares the profit of
investments, it does not share the results of underwriting;
Takaful Vs Conventional
insurance
 Takaful – Key Differences:
− Voluntary Contributions :
► Premiums are voluntary contributions (Tabarru) to collectively insure the participants;
− Defined Rights (minimizing speculation):
► Policyholders collectively own the pool to cover losses. The Company manages the pool
according to certain takaful model and receive fees;
Takaful Vs Conventional
insurance
− Eliminating the Interest:
► Investments are directed towards acceptable businesses / industries
and returns are Riba free;
− Equity and fairness:
► Policyholders are owners of the Pool and entitled to its profits. Different
Models treat this aspect with some variations;
− Social Goodness:
► Risk mitigation is based on mutual faithfulness with each other;

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