Nurizzaatirah Rosli on Takaful

The word Takaful is derived from the Arabic verb ‘kafalah’ which means to take care of one’s need.

It can be defined as the pact between two parties or more who agree to joint guarantee one another in the event of loss or damage that might be inflicted upon anyone of them.

The differences between Takaful and conventional insurance

There are several contradiction between Takaful and insurance.

The fundamental difference between Takaful and conventional insurance is rooted in the type of contract adopted.

In the conventional insurance contract, it is constructed between two parties which are the insured and the insurance company.

The one who is insured will be paying regular instalments to the company to get the compensation guarantee for any calamity or misfortune that might happen.

From the Shariah perspective, the contract is strictly unacceptable.

Takaful is different

Takaful

Takaful is different from the insurance in the sense that the Takaful operator is not the insurer that insuring the participants.

The participants of the pooling system are mutually insuring one another. In this context, the Takaful operator acts as the administrator of the Takaful fund who is responsible in managing and investing the fund in a Shariah manner.

There are several elements involved in the conventional insurance that are contradicting with the principles used in Takaful operation.

Al-Maysir in conventional insurance

One of the elements is al-maysir, otherwise known as gambling. The policyholders lose the premium paid if they do not claim or the loss does not occur.

The policyholder may be entitled to receive a larger amount than what they deserve as compared to the premium.

In other words, the insurance company promises to pay a certain amount of money, which is the premium, if the risk does not occur while there is no such case in Takaful since the policyholders are deemed to donate a sum of money to help each other in the case anyone of them experience a misfortunate event.

Gharar in conventional insurance

The second element is gharar, which is uncertainty.

It is strictly prohibited in Islam to sell any contract that involves uncertainty, doubt and probability.

The issue in conventional insurance is neither the one who is insured nor the insurer knows when the loss will occur, what will be the amount to bear and whether the loss will ever happen in the first place. Shariah prohibits uncertainty in buying and selling contracts.

Alternatively, not just Muslims but also non-Muslims can also opt for Takaful.

The policyholder fund is purposely structured to aid each other in the event of loss. There is no guarantee from the company to the policyholder.

The policyholders are grouped in a mutual assistance contract where there is no probability or uncertainty factor involved as they donate their contributions to the fund.

In fact, they could receive a surplus from the profit and loss sharing principle.

Unlike the conventional insurance, there will be no risk transfer in Takaful but only risk sharing among the policyholders.

Riba’ in conventional insurance

In conventional insurance, another element which is not permitted according to Shariah is riba’.

It comes into the existence where most of the conventional insurers invest in interest-bearing assets such as the government or company bonds.

Takaful business is an interest-free system which simply means that a Takaful entity must ensure that both its policyholder and shareholder funds must be invested in the Shariah compliant investments that do not have the element of riba’.


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