Takaful Definition
Takaful originates from the Arabic word Kafalah (meaning "joint guarantee"), and is an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking) observing the rules and regulations of Islamic law (Shari’a), and explaining how it is the responsibility of individuals to cooperate and protect each other.
In principle, the Takaful Insurance system is based on mutual co-
- Policyholders cooperate among themselves for their common good.
- Every policyholder pays his subscription to help those who need assistance.
- Losses are divided and liabilities spread according to the community pooling system.
- Uncertainty is eliminated concerning subscription and compensation.
- It does not derive advantage at the cost of others.
Theoretically, Takaful is perceived as cooperative or mutual 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 principles of compensation and shared responsibilities among the community.
It is not a new concept, but one that has been practiced in various forms for over
1400 years. It is generally accepted by Muslim Jurists that the operation of conventional
commercial insurance does not conform to the rules and requirements of Shari’a, and
is thus strictly disallowed for Muslims, as it contains usury (riba), gambling (al-
Reinsurance and Takaful
Retakaful; the reinsurance of Takaful companies on Islamic principles is an area of much debate, mainly due to the lack of Retakaful companies in the market.
This has left Takaful companies with a dilemma of having to reinsure on conventional basis, contrary to customer’s preference of seeking cover on Islamic principles, which lead Shari’a scholars to allow Takaful operators to reinsure on conventional basis as long as no Retakaful alternatives are available.
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