Takaful is an Arabic word that means “guaranteeing each other”. Takaful can be divided into two types, social and commercial. In this context, we are looking at the commercial model because as the name suggests, a social takaful is purely charitable without the commercial elements.
Takaful, which is often referred to as Islamic insurance, provide mutual financial aid and assistance to the participants in times of need and participants mutually agree to contribute for that purpose. The participants undertake to guarantee against any loss or damage incurred by any of them by providing material assistance in time of a misfortune. Takaful is based on the principle of mutual assistance (Ta’awun) and donation (Tabarru’) therefore; the risk is shared collectively and voluntarily by all participants.
Takaful
- Risks are shared by takaful fund participants
- Takaful funds are owned by participants and operator’s funds are owned by Takaful Institution
- Surplus (or deficit) belongs to (borne by) the participants
- Investments must comply with Shariah criteria
- Two accounts – tabarru’ fund and investment fund
- Investments and policies subject to Shariah Committee’s endorsement
Conventional Insurance
- Risks are assumed by the insurer
- Insurance funds are owned by the insurer
- Surplus funds belongs to the insurer
- Investments can be made in non-Shariah compliant sectors
Differences in Terminology:
Takaful
- Contributions
- Participants
- Sum covered
Conventional Insurance
- Premiums
- The insured
- Sum insured
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