Takaful in Islamic Perspective

Takaful emerged within the ancient Arab clans as a pooled responsibility that forced those who committed crimes against members of another tribe to pay compensation to victims or their inheritors. 

The idea later extended to many aspects of life, including maritime trade, in which members donated to a fund as a risk management tool to cover anyone in a community who experienced maritime travel disasters. The concept of Takaful is where the participants agree that a specified fund should be established accordingly, under the takaful agreement, the participants agree to voluntarily give up a part or all of the takaful commitment as tabarru' (to donate, contribute, give away) to the established fund. That allows it to serve its responsibility of mutual assistance and joint guarantee if any of its fellow members experience a specified loss. 

The difference between conventional insurance and takaful is the contract itself where conventional insurance is based on buying and selling of non-shariah while takaful is based on tabarru`(contribution/donation of participants), mudharabah(profit-sharing among participants and operator) and wakalah(agency). Insurance is associated with maisir(gambling) and gharar(uncertainty) due to the nature of the result of an insurance contract which is unknown. The insured individuals are guaranteed a fixed return at the end of the period if they pay the premium installment fee associated with riba(interest) that is illegal in Islam which restricts predetermined return. Meanwhile, takaful is free from all of these prohibited factors in Islam.

Takaful is interest-free. It is based on Al Mudarebah's profit-sharing financing strategy. The Takaful company invests the accumulated money on the basis of profit and loss and earns the gains while in traditional insurance the insurer loans money in the form of security, loan, mortgage, finance, etc. to the private sector as well as to the state and charges a fixed interest. The added return of this value is not permissible for a Muslim residing in a Muslim state. Riba − This is also referred to as "value" and is described as making money on money. Shari'a law forbids any interest-bearing operation. Takaful companies are limited to a process free of interest. It ensures that a takaful institution should ensure that both its policyholder and shareholder investments are invested in resources that do not have riba and that no bank dealt with by the takaful entity should be engaged in riba operation. The prohibition of Riba(Usury) also mentioned in the Holy Quran; “O you who believe, devour not usury, doubling and quadrupling, the sum lent. Fear Allah and observe your duty to Him, that you may really prosper.” (Quran 3:310).

Gharar − This is also known as uncertainty. Selling any deal containing uncertainty, suspicion, and possibility is contradictory to Shari'a law. Uncertainty in business contracts is forbidden in Islam. 

The policyholders' fund is designed in takaful so that when damage occurs, the contributors assist each other. There is no assurance for the policyholder from the insurer. Policyholders are organized into a mutual support contract; because they contribute their contributions to the fund, there is no probability or uncertainty element involved and they could earn a profit from the cost or profit-sharing concept. There is simply no exchange of risk (as the policyholder holds the risk), but the policyholders share the risk equally among them. The insured person, therefore, enters into a bilateral contract with the insurer in conventional insurance and therefore pays a monthly premium. His gain from this premium relies on a disaster or loss that might or might not happen in the future.

Such financial transaction uncertainty is not permitted in the Sharia. The policyholder loses his or her entitlement to the fee for a promise of future benefits to be received under certain conditions. The company owns the premium and any gains that accrue to the company's earnings from these premiums. Therefore, any bilateral agreement in which a party's responsibility for the payment is either unclear or contingent on a future event in the Sharia is not permissible. According to a hadith narrated by Muslim, "The Prophet prohibited the pebble sale and the gharar sale".

Al-maisir − it's also called gambling. If he/she does not claim or the loss does not occur, the policyholder ends up losing the premium paid. The policyholder, on the other hand, maybe allowed to claim a greater amount than he/she deserves compared to the premium. 

In a takaful business, policyholders are considered to contribute an amount of money to aid one another in the event of any loss. Under the takaful contract, tabarru` collects the takaful benefit or `manfaat`(compensation) that unfortunate contributor obtains. This is in line with Dr. Qaradawi's words when he said that tabarru' in his book is termed 'donation with compensation condition.' Therefore, tabarru' would encourage participants to carry out their actions with sincerity to aid fellow participants who might experience a tragedy or disaster. In view of this, it can be noted that the role of the takaful payment paid by the participants is not identical to the premium paid by the insured under traditional insurance, as the latter paid the premium as a guarantee for some unknown case, while the former paid with the purpose of donation. 

Abdullah Abid Bin Nuzilan is a third-year student, Faculty of Science and Technology at Universiti Sains Islam Malaysia

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