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.
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.