Brian Kettell continues his regular series for beginners with the first part of an introduction to Takaful
Tie your camel first and then put your trust in Allah. This hadith implies the need for Muslims to mitigate risk.
The case of insurance is testament to the ability of Islamic finance to evolve in its interpretation and practices. For years it had been an article of faith that insurance was not compatible with Islam because it contained elements of gharar (uncertainty), maisir (gambling) and riba (interest). Since insurance was all about uncertainty and chance occurrences, insurance, in the eyes of Muslims, looked like a catalogue of prohibited practices: inequality between premiums paid and benefits collected (or not collected) from the insurance company; premiums placed in interest bearing instruments; late payment of premiums resulting in interest and late fees; uncertainty over subject matter and duration of contracts etc. However, in recent years, Islamic doctrine has come to terms with most forms of insurance.
Definition of Takaful
Takaful is an Arabic word meaning 'guaranteeing each other' or joint guarantee. The Tabarru' system is the main core of the takaful system, making it free from uncertainty and gambling. Tabarru' means 'donation; gift; contribution'. Each participant that needs protection must be motivated by the sincere intention to donate to other participants faced with difficulties. Islamic insurance is the system whereby each participant contributes to a fund that is used to support each other, with each participant contributing sufficient amounts to cover expected claims. Takaful emphasises unity and cooperation among participants.
The objective of Takaful is to pay a defined loss from a defined fund. So Takaful is insurance practised under Shari'ah principles.
Insurance as a concept that does not contradict the practices and requirements of the Shari'a. In essence insurance is synonymous with a system of mutual help. However, Muslim jurists are of the opinion that the operation of conventional insurance does not conform to the rules and requirements of Shari'ah, as it involves the elements of uncertainty (gharar) in the contract of insurance, gambling (maisir) as a consequence of the presence of uncertainty, and interest (riba) in its investment activities.
Takaful is not a new concept, as it had been practised by the Muhajirin of Mecca and the Ansar of Medina following the Hijra of the Prophet (PBUH) over 1,400 years ago.
How does Tabarru eliminate the problems of conventional insurance?
Tabarru' is the agreement by a participant to relinquish, as a donation, a certain proportion of the takaful contribution that he agrees or undertakes to pay, thus enabling him to fulfil his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.
The concept of tabarru' eliminates the element of uncertainty (gharar) in the Takaful contract. The reasoning for this is that the gharar does not exist in the tabarru' relationship, according to the Maliki School of Islamic jurisprudence. The sharing of profit or surplus that may emerge from the operations of Takaful is made only after the obligation of assisting the fellow participants has been fulfilled. Thus, the operation of Takaful may be envisaged as a profit-sharing business venture between the Takaful operator and the individual members of a group of participants.
Insurance can only have a place in the Shari'ah if it is approved by the Shari'ah Board (sometimes called the 'lawful authority', meaning that it has to be practised based on shared responsibility, mutual co-operation and solidarity, to safeguard against a defined risk.
Why Islamic insurance is called Takaful?
The term takaful is an infinitive noun (masdar), which is derived from the root word kafl, which means guarantee or responsibility. Meanwhile, takaful, whose chief characteristic is al-musharakah, means 'sharing'.
Thus, the word Takaful means shared responsibility, shared guarantee, collective assurance and mutual undertakings. Technically, Takaful, from the economic point of view, means a mutual guarantee or assurance based on the principles of al-aqd (contract) provided by a group of people living in the same society against a defined-risk or catastrophe befalling life, property or any form of valuable asset. Hence a Takaful is sometimes known as co-operative insurance with mutual agreement.
Muslim jurists have concluded that insurance in Islam should be based on the principles of mutuality and cooperation. Such insurance encompasses the elements of shared responsibility, joint indemnity, common interest and solidarity.
The Islamic roots of TakafulOne day the Prophet (PBUH) saw a Bedouin leaving a camel and he asked the Bedouin, "Why don't you tie down your camel?" The Bedouin answered, "I put my trust in Allah." The Prophet (PBUH) said, "Tie your camel first, then put your trust in Allah." What the Prophet (PBUH) did here was to teach the Bedouin to reduce the risk of losing his camel. Similarly in many actions of the Prophet (PBUH), it is well documented that he took steps to reduce risks.
One example of this was that during the Hijrah, fearing danger, he hid in a cave instead of going straight to Medina. He commanded his companions to migrate to Medina by batches instead of in one large group. Again this was to reduce risks. When he went to war, he put on his armour instead of wearing light clothes.
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 during the numerous sea voyages.
Where does insurance fit within Islam?
It is a Muslim's belief that everything that happens in this world is by the will (Qadha and Qadar) of Allah.
Similarly any accident or misfortune that befalls anyone that results in the loss of life or belongings is by the will of Allah (SWT). If that is the case, one might ask, why should there be Takaful? Should Muslims then not leave it to Allah (SWT) and accept whatever accident, misfortune or catastrophe that befalls them?
While this may be a valid point of view, Muslims are also taught to avoid or reduce the possibility of any misfortune by taking positive steps wherever possible.
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.
In the modern world, one of the ways to reduce the risk of loss due to accident or misfortune is through insurance.
The parties to a Takaful
Defining the parties of a Takaful
In Takaful, there are usually four parties involved, namely:
Participants
Takaful operators
Insured
Beneficiaries
The nature of Takaful is that, anybody in society who has the legal capacity may contribute a sum of money to a mutual cooperative fund with the view to ensuring material security against a defined risk.
Those who contribute to the mutual fund are known as participants, while those who among the participants face the risk and are assisted by the fund are known as the insured.
Those who actually benefit from the fund are known as the beneficiaries from the cooperative fund. The monetary contribution made by the participants to the fund is known as a mutual contribution. The fund, managed by a registered or licensed body or corporation, is known as a Takaful operator, who binds himself bilaterally to manage the fund according to Shari'ah principles and also to provide financial security.
The contribution made by the participants is normally put into two funds; one of them is an investment fund managed according to the principles of al-mudarabah (profit and loss sharing) while the other is treated as charity according to the principles of al-tabarru.
It is this division of responsibilities, which is why the Takaful company is usually called a 'Takaful operator' rather than an insurance company.
Takaful in practiceTheoretically, 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 another's burden'. The policyholders are in fact the managers of the fund and the ones in ultimate control. However, the commercialization of Takaful has produced several types of Islamic insurance, each reflecting a different experience, environment and perhaps a different school of thought.
Who are the Takaful companies?
The most well known and pioneering Islamic companies include:
The Sudanese Islamic Insurance Co. was the first Islamic Insurance company, founded in 1399 AH/1979 in Khartoum, by the Faisal Islamic Bank of Sudan
The National Company for Cooperative insurance was founded in Riyadh, Kingdom of Saudi Arabia, in 1401 AH/1981, by a Royal decree and is a wholly government owned company
The Arab Islamic Insurance Co. (AIIC) was established in 1399 AH/1979, in Dubai, by the Dubai Islamic Bank
The Islamic Company for Insurance and Reinsurance was founded in 1405AH/1985 in Bahrain
The International Islamic Insurance Company was founded in 1412AH/1992, in Bahrain. The Bahrain Bank had an important role in its foundation and in the investment of its funds
Islamic Insurance Limited was founded in 1416AH/1995, in Jordan by the Jordanian Islamic Bank
Islamic issues with conventional insurance
Both insurance under common law and Takaful operating under Islamic principles share the common goals of providing a reasonable financial security against unpredicted catastrophe, disaster or risk befalling ones life or property. Although both insurance and Takaful strive for a common ideal based on the contractual principles, there are some aspects of both systems which differ.
Issues in conventional insurance
Conventional insurance contains elements contradictory to Islamic Shari'ah, particularly those of uncertainty (gharar), gambling (maisir) and interest (riba). The conventional insurance contract contains uncertainty, it is argued, due to uncertainty as to whether the premium will be paid as promised, as to the exact amount of the premium to be paid in the future not being known and as to the exact time it will be paid also not being known. Any form of contract which is lopsided in favor of one party at the expense and potential unjust loss to the other is classified as gharar.
In addition, if a claim is not made, the conventional insurance company may simply keep the premiums whilst the participant may not obtain any financial profit whatsoever. The loss of premiums on cancellation of a life insurance policy by the policyholder, or the double standard condition of charging a customer for a short period in general insurance, whilst only a proportional refund is made if the insurance company terminates the cover, is also considered as unjust.
Conventional insurance also involves gambling, it is argued, because the participant contributes a small amount of premium in the hope of gaining a large sum if the insured loss actually takes place. In addition the participant simply loses the money paid for the premium if the insured event does not occur.
Apart from the above, conventional insurance also involves interest because an element of interest exists in conventional life insurance products. Payments to the beneficiaries of life insurance usually receive income from annuities based on investing in interest bearing instruments. This element of Riba is strictly forbidden in Islam.
Banker Middle East 2006
