Definition of “Takaful”

The work Takaful is derived from the Arabic root word Kafala meaning “mutual guarantee.” It is an Islamic system of mutual corporation built around the concept of “Tabarru” (voluntary contributions.) Each participant contributes to a fund to cover any losses, while also benefiting from a share of any surplus declared.

How does "Takaful" work?

Your contribution for participation is pooled under one fund i.e. participant’s Takaful Fund and will be used to pay for any contingency should any of the members who participate in the scheme suffer any catastrophic loss, be it on their property or life. In other words, each member of the scheme essentially protects others by guaranteeing compensation from the Takaful Fund for the defined losses incurred by any members of the scheme.

Is "Takaful" Shariah compliant?

Takaful is based on the principle of cooperation (Ta’awun) and not sale or exchange which mitigates the objectionable aspects of gharar (uncertainty), maysir (gambling), and riba (interest). This is contrary to the conventional insurance, where policyholders pay premiums as a price for protection against loss. If a loss occurs, the policyholder will be protected. The policyholder will lose the premium to the insurance company if such a loss does not occur.

With Takaful your contribution is an agreement with other members (participants) of the fund to mutually help each other by way of providing financial assistance should any member of the fund suffer a loss or disaster. Moreover, the Takaful fund invests your contribution in a Shariah-compliant manner avoiding any interest-based instruments. In addition, any surplus will be redistributed to the Participants.

The Takaful operator therefore only Manages the Fund for the benefit of the participants.

The history of “Takaful”

Takaful is not something new to the Islamic world. It has been going on for centuries, ever since the days of the Holy Prophet Muhammad (Peace Be Upon Him) and the early Caliphs.

As we know that in those days there were ships and trade caravans and they used to be exposed to the same risks that we face today. Ships could be sunk, caravans could be raided or catch fire etc. Given these dangers to trading activity, the early pioneers of Takaful were wise enough to formulate a system of mutual protection so that the members of a particular caravan or trade delegation could be assured of recovery in case they suffered a loss due to unavoidable circumstances. Thus the members of these trading enterprises would enter into a formal pact stipulating that in case of loss to one party, the others would contribute to make up that loss.

The only essential difference between Takaful at that time and Takaful today is that whereas they used to pay only after the loss, we today charge a considerate amount of what is known as a contribution before the loss, and at the end of the year after all the claims have been settled, it is returned back to the participants.

This early practice of Takaful or mutual indemnification even found expression in the first Constitution of Medina (Mithaq al-Madina) in the days of the Prophet and was the second system that was formally institutionalized by the Caliph Umar, the first being the Baitul Mal or Public Treasury. These developments at the state level meant that Takaful came to be formalized into a more secure system, with more accountability and more checks and balances. During this period, a number of Takaful products were evolved based not only around “Diyah” or blood money, but also “Da’waniyah” which was a sort of professional indemnity to governors and state functionaries.

Thus the system of Takaful became an integral part of trade and commerce in those days and this situation continued for several centuries upto the end of the First World War. The fall of the Ottoman Caliphate shortly thereafter meant that Takaful, along with the other state institutions that had safeguarded Muslim interests fell on bad times. While Takaful receded to the background, conventional insurance imposed by the western colonial powers took its place, and this continued for several decades. It was only in the 1970s with the revival of Islamic banking modes in the Middle East that modern-day Takaful also developed. The first Takaful company was set up in Sudan in 1979 which was almost simultaneously followed by another set up in Bahrain. The rapid growth of Takaful ever since, even in the non-Muslim world, only goes on to prove that it has withstood the test of time and is a viable alternative to conventional insurance.

The concept of "Risk Management" in Islam

Risk traditionally means possibility of meeting danger or suffering, harm or loss. Risk is an element of life in this world for being ignorant of the future. Muslims are asked to work hard in order to be able to change their conditions as obvious in the verse of Holy Quran, “… Verily never will Allah change the condition of a people until they change it themselves (with their own souls)…” (Qur’an 3:11). However, it is true that only Allah knows one’s future and fate, Muslims should strive to achieve the goodness in this world and the hereafter. Submission to Allah, of course, has a positive effect on human behavior. For it will lead to peace and contentment. Undoubtedly, one has to submit every single thing to Allah, but it supposes to be after his hands stretch out to do the best effort as he can, to change himself, so that he would be able to manage and to cope with unforeseen calamities or misfortune.

Prophet Muhammad peace be upon him once asked a Bedouin who had left his camel untied, “Why do not tie your camel?” the Bedouin answered, ” I put my trust in Allah” the prophet then said, “tie up your camel first then put your trust in Allah”( Sunan al -Tirmizi, vol.4, No. 2517, p. 668). This conversation depicts not only how should Muslims accept their fate but it also indicates how do Muslims reduce the risk of loss and calamities.

Qur’an has presented stories of the previous prophets so that Muslims can take the lessons from their experiences. The story of the Prophet Joseph, for instance, tells us about financial planning. The story of Prophet Ya’qub, Joseph’s father, tells us about the management of risks as Ya’qub commanded his sons to enter Egypt from different gates. Qur’an states, “Further he said: “O my sons! Enter not all by one gate: enter ye by different gates. Not that I can profit you aught against Allah (with my advice): None can command except Allah: On Him do I put my trust: and let all that trust put their trust on Him” (Qur’an 12:67).

The history of the Prophet’s migration to Madinah gives us other lessons on how the Prophet (SAW) managed the risk. The Prophet reduced the risk of getting killed by asking Hazrat Ali (R.A.) to sleep in his bed during the night of emigration. It was reported that as night advanced, the Quraish posted assassins around the Prophet’s house. Thus they kept vigil all night long, waiting to kill him the moment he left his house early in the morning, peeping now and then through a hole in the door to make sure that he was still lying in his bed.

All these above examples depict that risk management is in the roots of Islam. We, as a Muslims, should put our trust onto Allah together with making use of all the available resources.