Takaful – Islamic Insurance
Essentials of Islamic Banking and Finance
IRSHAD AHMAD AIJAZ
irshad786@gmail.com
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 1
Contents
 Introduction;
 Explanation;
 Concept of Takaful – Islamic insurance;
 Contract of Takafu;
 Types of Takaful;
 Different operating modes;
 Difference between Takaful and conventional insurance;
 Application;
 Q & A;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 2
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 mitigation of risk;
 Conventional Insurance has been declared Haram by a big
majority of Islamic scholars;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 3
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?
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Risk aversion;
Assuring others;
Risk sharing;
− Or the concept is true but the issues are in practical application of
the concept?
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 4
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);
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The participant contributes a small amount of premium in hope of
gaining a large sum is an element of Gharar – Qimar;
The participant loses the money paid for the premium when the
insured event does not occur is Gharar;
The company will be in deficit if the claims are higher than the
amount contributed by the participants is Gharar;
− Riba is also there in conventional insurance contract;
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 5
Explanation
 Just to refresh the concept of Gharar:
− Lexically Gharar means uncertainty and technically it is excessive
uncertainty in basics of the contract i. e. 'excessive uncertainty in
the subject matter or the period or the price in a contract;
 The element of Gharar in the commercial insurance is
obvious since:
− The insurer does not know how much he would owe to an
individual;
− Some times an insured also does not know how much he would
pay ultimately to the insurer;
− In case of no claim from the insured in general insurance, there
emerges Qimar (gambling);
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 6
Explanation
 Riba is also there in conventional insurance contract;
− Direct Riba in conventional insurance:
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Excess on one side in case of exchange between the amount of
premium and the sum insured;
− Indirect Riba in conventional insurance:
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The interest earned on interest based investments;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 7
Concept of Takaful – Islamic
insurance
 Since Gharar is not allowed in compensatory contracts, the basis of any
arrangement of risk mitigation may be accepted on voluntary bases;
 The voluntary basis of risk mitigation means joint pooling by a group of people
of amounts or valuables for meeting any unexpected events for any member of the
group;
 Takaful – which literally means “assuring each other” or “guaranteeing each
other”;
 This system is based on the principle of TA-AWUN (mutual assistance) and
Tabarru (Voluntarism);
 Taburro' ‫( ﺗﺒﺮﻉ‬contributions) from the participants (policy holders) to create a
fund which will provide financial help at the occurrence of certain losses;
 The principle of “fortunate many helping the unfortunate few” is a concept
recognized by Islam;
− The Quran states in Surah Al-Maidah verse # 2: <“And help one another in
righteousness and piety, but help not one another in sin and rancor”>;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 8
Contract of Takaful
 Key features of Takaful:
− Partnership among the participants;
− Appointment of an operator of the fund collected;
− The management contract between the participants and the
operator;
− Investments in Shari'ah compliant modes;
 The Practice of Takaful
− Takaful The contract of Takaful:
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Parties to the contract;
The subject matter;
Contribution;
Remuneration for the operator;
Compensation;
Re Takaful;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 9
Types of Takaful
 General Takaful:
− Creation of fund;
− The operator will charge an upfront fee;
− Segregation between the fund and the sponsors’ capital;
− The investment will be done on the Mudarabah bases; the profits
after deducting the operator’s portion will be pooled again in the
fund;
− Different reserves;
− Surplus distribution;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 10
Types of Takaful
 Family Takaful:
− Mudarabah (for long term investment) PA;
− Tabarru (a small portion for providing Takaful cover) PSA;
− Management expenses are deducted from PA;
− Operational cost is
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One who dies before maturity;
The total amount of installments and profit;
The outstanding installments that would be paid, if he survived till
the end will be given to the heirs;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 11
The types of Takaful
− One who lives until the maturity;
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He will be paid (1) his outstanding amount in PA (2) the net surplus
allocated allocated to him;
− One who cancels before maturity:
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He will receive the balance shown in PA;
The installments credited into PSA shall not be refunded;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 12
Different Models
 Many models of Takaful are practiced the world over;
− Pure Mudarabah model:
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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):
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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;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 13
Different Models
− Wakalah based on Waqf (trust):
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The share-holders create a Waqf fund to extend the help to those
who want cover against financial losses;
The participants donate to the fund and the operator manages the
fund. All underwriting results belong to the fund which itself has a
legal entity;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 14
Takaful Vs Conventional insurance
 Takaful – 6 Key Differences:
− Voluntary Contributions :
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Premiums are voluntary contributions (Tabarru) to collectively
insure the participants;
− Defined Rights (minimizing speculation):
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Policyholders collectively own the pool to cover losses. The
Company manages the pool according to certain takaful model and
receive fees;
− Eliminating Uncertainty:
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Payment of premiums to pool are voluntary for mutual assistance
without individual monetary gain;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 15
Takaful Vs Conventional insurance
− Eliminating the Interest:
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Investments are directed towards acceptable businesses / industries
and returns are Riba free;
− Equity and fairness:
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Policyholders are owners of the Pool and entitled to its profits.
Different Models treat this aspect with some variations;
− Social Goodness:
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Risk mitigation is based on mutual faithfulness with each other;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 16
Application
 Every policy holder would pay his subscription in order to
assist those who need assistance;
 Any member or participant suffering a catastrophe or
disaster would receive a certain sum of money or financial
benefit from a fund, as also defined in the pact, to help him
meet the loss or damage;
 Operation of Takaful Fund:
− The transactional aspect of the commercial activity of Takaful
must be subject to the Islamic contractual laws in order to ensure
its compliance with the Shari'ah;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 17
Application
− The Company involved in Takaful business, as the operator, will
accept payment of the Takaful installments or Takaful
contributions (premium) from the participants (clients) for the
Takaful plan or Takaful scheme they wish to participate;
− For the service rendered as manager of the Takaful Operations
the company will charge a management fee.
− The Takaful Fund, consisting of the contributions paid as
Tabarru, will be further invested by the Company based on the
principle of Al –Mudarabah, through which the element of
interest (riba) will be replaced;
− All premium holders will participate in profit and loss;
− Profit will be shared on agreed ratio;
Essentials of Islamic Finance – IU Gulshan Campus, Slide # 18