Takaful (Islamic Insurance)
Takaful (Islamic Insurance)
Zubair Mughal
Takaful is an Islamic alternative to the conventional Insurance. The words ‘Takaful’ has
been derived from the Arabic verb ‘Kafala’ which is also referred to as ‘Kafalat’ in urdu
language, its mean means to guarantee, to help, to take care of one another’s needs. The
Takaful system has been structured keeping in view the Islamic system of Dait (Blood
Money) which is the philosophy behind mutual assistance/Kafalat. Before going into
further details about Takaful, we shall have a look at the conventional insurance system
and the factors that led to it being considered Haram or illegal in the society. If the
importance of insurance is observed in detailed, the following aspects emerge;
1-To bear the risk/threat
2-To protect others
3-To share the loss
Keeping in view the basic elements of insurance, it is evident that nowhere in Islam the
above mentioned aspects are prohibited and that there is no reason to be considered
haram or illegal since Islam itself encourages to help others. Narrated by Hazrat Abu
Huraira (R.A.) that the Prophet Muhammad (PBUH) said: “Whosoever removes a
worldly hardship from a believer, Allah will remove from him one of the hardships on the
Day of Judgment.”(Sahih Muslim, Hadith. 59)
Islam teaches us not only to have total dependence on Allah but also emphasizes on self
protection against risks and threats. Narrates by Hazrat Anas Bin Malik (R.A.), one day
Prophet Muhammad (PBUH) noticed a Bedouin leaving his camel without tying it. He
(PBUH) asked the Bedouin, “Why don’t you tie down your camel?” The Bedouin
answered, “I put my trust in Allah.” The Prophet (PBUH) then said, “Tie your camel
first, and then put your trust in Allah.” (Sunan At-Tirmidhi,.1981). Islam infact even goes
to the length of ensuring that incase of one’s death, there should be enough to support the
widow for at least a year. Therefore, it is decided that the philosophy of Insurance does
not contain any flaws from the Shariah perspective and it can not be considered Haram or
illegal. Research has shown that the fault lies not in the philosophy itself, but in the
methodology carried out by the insurance companies due to which it is looked upon
narrow mindedly.
1-Riba (Interest/Usury)
2-Gharrar (uncertainty)
3-Maysir
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Conventional insurance contains both direct and indirect forms of Riba. The direct Riba
is in the of Premium and indirect Riba in the shape of interest earned on interest based
Investments e.g. by giving loans to financial institutes and banks on interest or by
investing in interest based activity at stock exchange etc. thus promoting interest.
Second factor is Gharrar, where the person being insured does not know when he would
bear the loss and to what amount, or the insurer can ascertain the amount and time with
respect to profitability. Third element is Maysir, which involves a chance of total loss to
one party in the contract, where profit to one person is directly related to another person’s
loss. While the relationship of claim between the insurance company and its client is
related to each others profit and loss. Thus, by removing these three harmful elements of
Riba, Gharrar and Maysir from the conventional insurance, we can call it ‘Takaful’. Now,
we shall examine how these elements have been removed in the Takaful system.
The first ever Takaful Company in the world was established 27 years ago in Sudan in
1979 by the name of Sudan Islamic Insurance. It would be interesting to know that the
founder of the company was a Pakistani. Following suite, in the same year another
company by the name of Islamic Arab Insurance company (IAIC) was formed in United
Arab Emirates but it took sometime for the company to establish.
There are approximately more than 108 Takaful and 6 Re-Takaful companies operating
globally with an approximate sum of $ 3 Billions Takaful contribution. Out of these
companies 60% are General Insurance Companies while the remaining 40% are working
as Life and Family Insurance Companies. Geographically, 56% of them are located in
South East Asia, 36% in Middle East, 17% in Africa and !% in Europe and America. For
the 23% of the Muslim population of the world, the existence of 260 Billion US dollars
worth of Islamic Financial Market is a very encouraging factor for the Takaful
Companies.
The systems used by Takaful companies in the world can be divided into three models;
1) Mudarba Model (Sudan, African states)
2) Wakalah Model (Malaysia and other countries)
3) Wakalah Waqf Model (Pakistan)
SECP is the regulatory authority for Takaful companies in Pakistan and has formulated
rules and regulations for the companies by making amendments in the Insurance
ordinance 2000 while keeping in view the Islamic perspective/principles of Wakalah and
Waqf.
Pak Kuwait Takaful was the first Takaful Company in Pakistan to be introduced.
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Another company by the name of Takaful Pakistan came into existence formed by Capt.
Jamil Akhtar with the mutual collaboration of House Building Finance Corporation (
HBFC, Emirates Global Islamic Bank, Arif Habib, Sitara Chemical, Emirates
Investments Group (U.A.E.) and Al-Buhaira National U.A.E. Pak Qatar Takaful also
recently start their operation in General & Life Takaful Business in Pakistan.
All the Takaful companies operating in Pakistan are based on the Wakalah Waqf model.
The operational methodology/system of the model can be explained through the
following example; Some individuals form a Fund on the basis of Waqf and subsequently
donate/contribute in the fund, hence giving it the name Participation Takaful Fund ( P.T.F
) with an understanding that if any calamity/risk befalls any of the participants of the
fund, a decided amount would be donated (Tabbaru) to the effected. The fund would be
monitored by an organization (Takaful Company) on the pattern of Waqf, to safeguard
the deposits and to increase the profitability of the fund. Subsequently, the company
would be paid its Wakalah agency fee. The example of a Waqf is similar to that of a
Mosque Waqf Committee which receives its contributions from people for the
maintenance of the Mosque. Likewise, Takaful Company also acts as a Waqf operator. It
will receive donations from the people and strengthen the fund. Incase of a calamity to
either of the members of the Fund, the company would pay the compensation.
Furthermore, it would do its level best to make the Waqf Fund/Takaful contribution more
profitable and for that, it would receive its Wakalah fees which would be its profit.
The element of Riba (Interest) is removed from the whole system in such a manner that
the Takaful company would invest in interest free institutions to make the fund more
profitable while adhering to the rules and regulations of the Shariah and instead of
premium, it would receive Tabbaru. As far as Gharrar is concerned, Takaful company is a
Waqf and it does not have any direct relationship with the profit and loss of the person
insured, instead the Takaful participants would share the risk from their given donations
through mutual consent. Thus, the non compliant elements of the Shariah are removed
along with the objections on Islamic banking that if Islamic banking defies interest then
how come it practices conventional insurance which contains the elements of interest.
Now a new market will emerge in Pakistan, which would support the Islamic Financial
system. Those who abstained from Conventional Insurance by calling it un-Islamic, also
their savings will increase due to Takaful. With the increase in Takaful funds, the funding
resources of Islamic Banks and Islamic Financial institutions will also increase alongside.
since Takaful companies have to invest without interest, their best choice would be the
Islamic Banks or Financial institutions or they would opt for Sukuk (Islamic Bond),
which would help in promoting the Sukuk market in Pakistan. Actually, the promotion of
‘Takaf’ is related to the expansion of Sukuk market because whenever the issues of
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underwriting hedge, Insurance of underlying assets etc. will arise, only Takaful will cover
them due to which both will be promoted dually. Thus the Sukuk would be more easily
available as compared to the shares to the general public in the market and they would be
assets backed. Consequently, the creative evolution of money in the country will come to
a halt because of the asset base which would definitely be helpful in the stability and
positive economic growth of the monetary system and short term Sukuk would be the
cause of formation of Inter bank market between Islamic Banks and Financial Institutes.
We can compare Takaful with a social organization where the Micro Takaful Ideology
should be kept in view and used as a weapon to eliminate poverty in Pakistan.
To eliminate the poverty from the country, while keeping in view the economic, social
and geographical conditions of Pakistan, if Zakat, Waqf and the ideology of Micro
Takaful are brought forward together, then it would be no less than a revolution.
If Dr. Younas persists that the interest based micro finance system is the only solution for
the elimination of poverty, then was the same existent at the time when there was no
Zakat receiver. If we try and find solutions to our social and economic problems in the
light of the Holy Quran and Sunnah, then there is success both in the world and hereafter.
With the Shariah compliant combination of Micro Takaful, Zakat and Waqf and with
both positive and constructive thinking, beneficial results with regards to poverty
elimination can be achieved. The question remains, who would think in a positive and
broad minded manner when there is no Nobel Prize given on Islamic economics and
finance, but only a question.
( The writer is Chief Executive Officer, AlHuda Centre of Islamic Banking & Economics
www.alhudacibe.com )
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