Islamic insurance is a misunderstood term. Some deny its existence altogether. Sumaira Dada discusses the Islamic mode of insurance, Takaful
What is Takaful?
Takaful is an Arabic word that means ‘guaranteeing each other.’ It is a scheme of mutual support that provides insurance to individuals against hazards of falling into unexpected and dire needs.
Is there a need for Islamic insurance?
Yes, there definitely is a need for Islamic insurance:
- One of the ways to reduce the risk of loss in business due to misfortunes is through insurance. The concept of insurance, where resources are pooled to help the needy, does not contradict Shariah.
- This is not a new concept; in fact, it had been practiced by the emigrants of Makkah and the Ansar of Madinah following the migration of the Prophet (sa) over 1400 years ago. (Practices, such as A’Qila – communal assistance for killings, Hilf – mutual assistance, Tawun – self help, and Tabbaru – donation were prevalent at that time).
- Conventional insurance involves elements of uncertainty (Al-Gharar) in the contract of insurance, gambling (Al-Maisir) as a result of the presence of uncertainty, and interest (Al-Riba) in the investment activities of the conventional insurance companies. All these contradict the Shariah. Takaful, thereby, provides an alternative.
How does Takaful run?
- A group of people form a pact and agree to guarantee jointly among themselves against loss or damage that may be inflicted upon any of them.
- A fund is set up, where every group member contributes a sum of money.
- Should any member or participant suffer a catastrophe or disaster, he would receive a certain sum of money or financial benefit from the fund, as defined in the pact, so as to help him meet the loss or damage.
What is Tijari Takaful?
The Takaful system can be operated within the Tijari (commercial) aspect of the private sector. Here, Takaful is based on the Islamic commercial profit-sharing principle of Mudharabah.
How does Tijari Takaful run?
- A group of people join to form a Takaful fund.
- A Takaful operator or Al-Mudharib is designated to manage the contributions to the fund.
- The funds are invested by the Takaful operator.
- The obligation to assist fellow participants financially is fulfilled.
- Thereafter, the profit that arises after the fulfillment of obligations is shared, according to a mutually agreed ratio.
Theoretically, scholars suggest that the cooperative insurance can be the basis of the Islamic insurance. The model envisaged by scholars is that the management and control of a Takaful company are in the hands of the members, who are also the policyholders. The insured and the insurers are, therefore, the same people. Its main purpose is mutual security, not profit-making. However, not all companies strictly follow this recommendation. Whereas companies in Sudan follow the cooperative insurance model, companies in the ASEAN (Association of Southeast Asian Nations) region are primarily commercial in nature.
Takaful-a local form existing in Pakistan
Though not entirely conforming to Shariah laws, a local form of mutual insurance based on the principle of co-operation (Ta’wun) exists in Pakistan. The form is comprised of a ‘committee’ (literally, a group of people) where participants contribute a certain sum of money, and the entire pool periodically accrues to each member in turn. This total amount could be used by the participant to pay off a debt in lump sum or to cover expenses. Nevertheless, this is an informal system that does not have legal protection or cover and, therefore, is open to abuse.
Note: The prevalent system of Islamic banking the world over is truly not the ultimate and ideal solution. It is only a step towards creating an interest free environment to provide Muslims with an option. Much needs to be achieved keeping in view the injunctions of Quran.