Tuesday, March 11

Takaful vs. Insurance.

The article, Conceptual and Operational Differences between General Takaful and Conventional Insurance by Mher Mushtaq Hussain and Ahmad Tisman Pasha, argues that there is a need to ensure the differences between the insurance business under the Islamic system and conventional system. The issues in the article, in my opinion, are structured in a comprehensible and effective manner. It first presents the idea of the need for insurance by describing risk, explaining the fundamental concept of an insurance agreement, and how engaging in an insurance contract results in minimizing the risk involved. Subsequently, the author gives a rather deep facts on Islamic insurance (Takaful) by defining and listing out its various models. The article is then followed by the many differences in the conceptual and operation framework between Takaful and conventional insurance mainly due to elements found in insurance contracts which are prohibited in Islamic transactions, such as uncertainty (gharar), interest (riba), and gambling (maysir).

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In the first section of the article, the authors clarified the need for insurance. To begin with, they set out to show the perspective of Qada’ and Qadar whereby individuals live their life without knowing their future and what it holds for them. This, undeniably, produces risks to individuals as they are exposed to the possibility for a fatality or an injury to occur. However so, according to the authors, Islam requires one to not disregard his or her future and find ways and means to keep away from troubles and misfortunes. Thus, according to Hussain and Pasha, insurance is regarded as the most reliable tool an individual can use to plan for his future as it reduces the risk of loss from unexpected and undesirable incidents. An insurance agreement is a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium. The authors claim that in conventional setup this agreement is unproblematic; however, its acceptance to Islamic law (Shari’ah) is debatable as there are the involvement of gharar, riba, and maysir.

The prohibited elements invites a question of clear differentiation between the Islamic insurance (Takaful) and conventional insurance in the next segment of the article. A Takaful agreement is basically a type of insurance system devised to comply with the Shari’ah laws, in which money is pooled and invested. The authors explain that Takaful is the Islamic alternative for conventional insurance which is based on the idea of social solidarity, cooperation and joint indemnification of losses of the members. It is an agreement among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them out of the fund they donate collectively. The objective of Takaful under the Islamic system is to help the policy holder through bad times. In the article, various models in different Muslim countries in engaging in Takaful agreement such as the Mudarabah, Wakalah and Wakalah-Waqf model are asserted. A brief description on these three models is as the following:

Mudarabah Model
Takaful contract is considered as a basis for sharing profit and loss between the Takaful operator and the policyholders. The Takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment.

Wakalah Model
A contract of agency, which replaces surplus sharing with a performance fee, is established. The Takaful operator in this case acts as an agent (wakil) for participants and manages the Takaful/Retakaful fund in return for a defined fee.

Wakalah-Waqf Model
A Waqf fund is created as a separate legal entity with the contribution of the participant’s amount deposited. The amount deposited to this fund is considered as a Tabarru (to donate for benefits of others) which aims in providing relief to participants against defined losses.

In the third part of the article, the authors stress on the conceptual framework between Takaful and conventional insurance. Takaful is basically based on the concept of Taawun (mutual help or co-operation), social solidarity, and joint indemnification of losses. Participants in the operation mutually agree to collect contributions from individuals to jointly share the responsibility of losses or damages that may inflict upon any of them in the near future. The foundation of shared liability was laid down in the system of Aaqilah, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet (S.A.W). Thus, risks in Takaful are not exchanged by way of contribution payments made to the operators in the insurance company as it is distributed among the participants who agreed to jointly assume it. The operators, basically, play the role of fund managers on behalf of the participants. Under the conventional insurance, however, insurance is a contract between two parties whereby losses are indemnified by the insurance company according to the terms and conditions of the policy.

The operational framework between Takaful and conventional insurance is covered in the final part of the article. According to Hussain and Pasha, the operational framework of conventional insurance is based on ‘risk assumption’ whereas the Takaful operates under a mutual co-operation basis. The distinction between Takaful and conventional insurance is visible with respect to the investment of funds, nature of contract, and profit distribution which undeniably involves the elements of gharar, riba, and maysir. One of the issues highlighted by the author in this segment is that, when compared to Takaful insurers, conventional insurers may invest in assets which are forbidden by the Shari’ah, such as investments in stocks of companies producing non-halal goods, as there are no religious boundaries. The discussion on whether conventional insurance is in line with the Shari’ah is clearly manifolded in this section of the article. It is obvious that the conventional insurance is contrasting to Takaful in many different ways.

I agree with the author’s view of the concept of Takaful whereby it is designed to function as any conventional insurance, but, operated differently to avoid the prohibitive elements of gharar, riba and maysir. In my opinion, the Takaful is basically the Islamic alternative for conventional insurance which strictly adheres to principles of co-operation, protection and mutual responsibility. In conclusion, the authors were successful in revealing the distinction between Islamic insurance and conventional insurance in a way that it doesn’t leave the impression of Takaful as just another derivation from the conventional system of insurance. The differences between the two insurance relays back to divine sources of revelation or the Shari’ah, specifically to the general rulings which went through various scholars’ interpretation.

I recommend that when an individual enters into a Takaful scheme, he doesn’t have the intention of making money or profit out of an unknown outcome like one would do under the conventional insurance scheme. His intention should be to share his wealth by contributing money as Tabarru towards a fund that is managed to providing assistance to somebody. He should know that when his time comes to face death, the Takaful operator who manages the fund would ease the burden of his family in the same manner as he acted towards others in similar circumstances. As it is known, God will always help his servant for as long as he helps others. Thus, the goal of an individual entering a Takaful contract should be to please God and achieve prosperity in the hereafter. Insha’Allah.

  1. “Insurance”. Oxford Dictionaries. April 2010. Oxford University Press.
  2. “Takaful”. Oxford Dictionaries. April 2010. Oxford University Press.
  3. Swartz N. P. & Coetzer P. (October 2010) Takaful: An Islamic Insurance Instrument. Journal of Development and Agricultural Economics, p. 333-339.
Hasta la vista. Adios.
See you later. Goodbye.

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