Takaful insurance
Takaful insurance practices existed in the Arab world before the era of Islam, and they were not
objected to in Islam. The recent practice of takaful emerged in 1979, and there
are now more than 300 takaful operators across the globe. The objections to
riba al-Hadith, maysir, and gharar are valid when a contract is commutative, as
it is in conventional insurance. Therefore, the objections of riba al-Hadith,
gharar, and maysir do not exist about takaful.
The word
Takaful is derived from the Arabic root word kafala, which means a guarantee.
Takaful means mutual protection and joint guarantee. Takaful is a
Shariah-compliant arrangement whereby individuals in the community jointly
guarantee to protect themselves against future loss or damage. There are three
key parties involved in any takaful arrangement are, the participants, the
takaful fund, and, the takaful operator (the company or professional managing
the fund).
What distinguishes Takaful Insurance from Insurance?
Insurance is a
sale and purchase agreement in which a client pays a premium to the insurance
company in exchange for coverage. The sum assured could be the value of a car,
a house, or a piece of equipment. It could also be the contractual amount that
a company is required to pay to the client's family if the
client dies. There is a contract of tabarru, which means the donation, in takaful.
As a result, we can say that takaful is a tabarru-based contract, whereas
traditional insurance is a compensation contract.
For example, suppose a company has 100 employees, all of whom own a car. For example, the premium for an insured car is $20,000 per year. Instead of paying the insurance company $ 2 million (100 x 20,000), the employee established their own takaful fund and invested its money. They agree that if any of their vehicles are damaged or stolen, the takaful fund will compensate the vehicle's owner. The risk has not been transferred to any person or legal entity in this case (as is the case when transferring risk to an insurance company). Instead, the risk is shared by all of the employees, who each contributed USD 20,000 to the takaful fund. As the number of takaful participants grows from 100 to 1000, 10,000, 100,000, or more, the task of collecting contributions from participants and paying compensation from the takaful fund grows in size, necessitating the use of experts. As a result, the takaful fund participants decide to hire a company that has experience collecting contributions to takaful funds and arranging compensation payments. In exchange for the company's services, the participants agree to pay a fee. They hire the company to pay compensation from the takaful fund and, if the fund is depleted, to solicit additional contributions from the participants. As a result, the takaful fund is owned by the participants, while the company only manages it.
Takaful and insurance differences
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Insurance |
Takaful |
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Insurance is a sale and purchase agreement in which a client pays a premium to the insurance company in exchange for coverage (a sum assured).
The sum assured could be the value of a car, a house, or a piece of equipment
(among other things). It could also be the contractual amount that a company is required to pay to the client's family if the client dies. |
There is a contract of tabarru, which means the donation, in takaful.
Participants contribute to a common fund, which compensates them if any of the covered events occur. As a result, we can say that takaful is a
tabarru-based contract, whereas traditional insurance is a compensation contract (aqd mua'wza). All contracts for sale and purchase are aqd mua'wza. |
|
Insurance is a mechanism for risk transfer. |
Takaful is a mechanism for risk sharing. |
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Element of Riba is there |
Free of Riba |
|
Insurance is a sale and purchase transaction in which the client
purchases a sum assured by paying a premium to the insurance company, and
there is always some uncertainty. |
Uncertainty cannot be removed from takaful. However, the
agreement can be changed from a sale and purchase agreement to a tabarru
contract in which each participant contributes to a common fund (the takaful
fund) owned by all participants. Uncertainty in a tabarru contract is
permitted and does not render it objectionable. |
|
Riba, gharar, and maysir are prohibited elements in an insurance
contract. |
In a takaful contract, it is ensured that the prohibited elements
of riba, gharar, and maysir are not present. |
|
Insurance companies invest in takaful funds to increase
their profits. |
All investments in takaful companies are made in permissible areas, which means the income generated is also permissible. This income is
then used to pay the claims of participants. |
|
Underwriting is the process by which an insurance company determines whether or not a potential client is eligible for coverage. When premiums collected exceed the cost of paying claims, an underwriting profit is said to exist. This profit is owned by the insurance company in
traditional insurance. |
This profit is known as the surplus in the wakalah model of takaful and belongs to the takaful fund owned by the participants. |
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There is no such supervision in traditional insurance, and no laws govern it. |
The Shariah board oversees the operator's activities from a
Shariah standpoint, such as vetting products, ensuring Shariah compliance of
investments, and ensuring Shariah compliance of distributing surplus among
participants. |
Potential of
Takaful Market
The takaful
market is currently concentrated in Malaysia and the Middle East, where it is
experiencing rapid growth. There are currently more than 130 takaful companies
operating globally, with nearly half of them based in the GCC countries of
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. The growth rate of
takaful in these countries outpaces that of the region's conventional insurance
market. In terms of takaful, the market is expected to be worth $4 billion in
the next few years at the current rate of growth, up from about $170 million
today.
In some
Muslim-majority countries, such as Nigeria, Pakistan, Egypt, and Bangladesh,
the takaful market is still in its infancy. These are almost entirely untapped
markets, with insurance penetration hovering around 2% of GDP. Some estimate
that the global takaful industry is growing at a rate of 20% per year, far
outpacing the 2.5 percent annual growth rate of conventional insurance premiums.
According to Moody, global takaful premiums will reach $7 billion or more in the coming years.
No insurer can afford to ignore the world's 1.5 billion Muslims as a potential customer base. In contrast to most Western countries, the majority of the world's Muslim population is young. In fact, 60 percent of the world's Muslim population is under the age of 25. This young population is beginning to attain a certain level of affluence, and if captured early, it has the potential to be a customer base that can be retained for 40 years or more. The fact that most Muslims are uninsured is also a significant draw for potential takaful operators. Premiums in the developed world, including Japan and the Asian "Tiger Economies," average 9.3 percent of GDP Premiums account for only 3% of GDP in the Middle East, Africa, South, and East Asia. Takaful growth forecasts vary, but most market forecasters expect the current level of worldwide contributions written by takaful insurers, estimated at roughly $2.0 to $2.6 billion in 2006, to skyrocket to $7.0 billion or more by coming years.
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