THE word Takaful is derived from the Arabic word Kafala which means to guarantee or to help or to take care of one’s needs on the basis of brotherhood or solidarity or mutuality.
Takaful Insurance is a system of Islamic Insurance based on the principle of Ta’awun (mutual assistance) and Tabarru (voluntary contribution), where risk is shared collectively by a group of participants who, by paying contributions to a common pool, agree to jointly guarantee themselves against loss or damage to anyone of them as defined in a pact or agreement.
This form of insurance observes the rules and regulations of Islamic Sharia law.
What is the origin of Takaful?
In the olden days of Marine Insurance, some Muslim merchants requested the opinion of Hanafi Jurist syed Ibn Abdin’s opinion on the validity of marine insurance in relation to Islamic laws.
After discussing the essence of Marine Insurance he concluded: “I see that it is not permitted to any merchant to get indemnity for his damaged property against the payment of a certain sum of money known as insurance premium; because this is a commitment for what shout be committed to.”
In 1976, an international conference on Islamic Economics was held in Makkah, which was attended by more than 200 Islamic jurists and economists and concluded that:
“The conference sees that the commercial insurance which is practised by the commercial insurance companies in this era does not conform to the shariah principle of cooperation and solidarity because it does not fulfill the shariah conditions which would make it valid and acceptable.”
Whereas commercial insurance aims to provide protection against uncertainty Islamic shariah law is against Uncertainty (Gharar), Gambling (Mainsir) and Usury (Riba).
Insurance companies are primarily driven to do business to provide insurance protection with a hope of making profit.
There is literally no insurer who wants to run business at a loss because shareholders
have invested their funds and expected a fair return on their capital.
Once profit is made it may be paid to shareholders in form of dividends or reinvested in the company, etc. It (profit) is never shared expressly or directly with policyholders.
However, Takafu is considered as a cooperative or mutual insurance, where members contribute or pool their resources together into a common pool (a principle which is also used in commercial insurance).
The purpose of this system is not profits, but to uphold the principle of “bear ye one another’s burden or help one another”.
In pursuit of “helping one another” as required by the Quran, members make contributions which are called premiums in commercial insurance.
At the end of the year whatever funds or ‘profits’ made are shared in proportionately using the agreed criteria in the pact.
The other key difference is on No Claims Discount (NCD) practised in commercial insurance.
NCD is a reward given in motor comprehensive insurance if the insured does not make a claim in a given year.
It is progressive from say 15 per cent to 30 per cent to maximum 60 per cent and in an event of a claim it scales down the following year.
In Takaful, this reward is not there. The focus is on the “profit” left at the end of the year which is proportionately shared among policyholders.
The main principles of insurance are indemnity, utmost good faith, insurable interest, contribution, subrogation, proximate cause and loss minimisation.
Under Takaful the principles include cooperation among policy holders for a common good, every policy holder pays contribution to help those that need it, and losses are divided and liabilities spread according to the community pooling system.
Other Takaful principles are; uncertainty is eliminated in terms of subscription and compensation; and it does not derive advantage at the expense of others.
Lastly as with the traditional forms of insurance, reinsurance of a Takaful operation may be used, known as “Retakaful”.
On a concluding note it is worth noting that whereas majority of Takaful companies are fully-fledged Takaful operators, conventional insurance companies have also entered the market.
In the Zambian market, this form of insurance has been introduced and has potential to grow.
Comments: webster@picz.co.zm or webster_tj@hotmail.com or facebook search for Insurance Talk-Zambia page or call/text 0977 857 055
(The author is a Chartered Insurer with ten years industry experience)