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Saturday, November 21, 2009

The concept of takaful and comparison with conventional insurance

Takaful is an Arabic word mean "guaranteeing each others". In takaful business, the understanding of the definition is imperative and of perennial concern to takaful practitioners. It must be entrenched in the minds of all participants who take up takaful protection that the participation into takaful scheme must be performed with utmost sincerity in order to help those faced with difficulties.

The concept introduced by Takaful is similar that of conventional insurance. Both of them are financial instruments that assist the unfortunate groups who are confronted with financial predicaments. These instruments are modern methods of shifting risks with a reward awarded to the parties that are willing to accept the exchange in these risks.

The Comparison between Takaful and Conventional Insurance

The insurance concept, of "The fortunate many helping the unfortunate few" is a concept recognized by Islam. The surah Al-Maidah from the 2nd verse in the Al-Quran states:
"Help ye one another in righteousness and piety, but help ye not one another in sin and rancor" is regarded as the main source of how this concept of helping one another is inculcated by Islam.
It is the characteristics that demarcate Takaful from Conventional Insurance? In June 15 1972 Malaysian National Fatwa Committee conducted a research on the conventional insurance contract. The Malaysian National Fatwa Committee in its fifth conference decided that life insurance implemented by the current insurance companies as a muamalah is fasid (illegal/damaged) and is not in compliance with the Islamic principles under the 'aqd aspect because it contains elements of gharar (uncertainty), maisir ( gambling), and riba'.

Elements of Gharar, Maisir, and Riba’ in the Insurance Contract

A. Gharar

Gharar means "Uncertainty".
The definition of uncertainty in the muamalah transaction is:
"When there is a matter that wants to be concealed by one party where it can raise a sense of inequality as well as tyranny to another party".

According to Ibn Rush, Gharar means:
"The lack of information known about a certain product (object), the existence of uncertainty towards the presence of that object, and the lack in quantity and conciseness on the information about the object".

Ibn Taimiyah stated that Al-Gharar means:
"When a party obtains his rights and the other party does not get what are rightfully his".

Al-Gharar is stated in the Kitab Qalyubi wa Umairah which mentions that the Mazhab Imam A-Shafie as defining gharar as:
"An (‘aqd) that has a hidden outcome from us or a situation between two possibilities where the frequent one happens to be the most feared."

Prof Madya Dr. Saiful Azhar Rosly states that:
"Al-Gharar is defined as a contract that refers to a risk and uncertainty raised from one’s manipulation that causes anguish towards a person that has been oppressed. For example in the used car business, the customer is not told of the true condition of the car. After the trade of the car is completed, the gharar in the object of trade can be made a reason to cancel the contract. This is because gharar is a result of an oppressive act done intentionally."

An insurance contact contains gharar because:
"When a claim is not made, one party (insurance company) may acquire all the profits (premium) gained whereas the other party (participant) may not obtain any profit what so ever."

This reasoning is in consonance with the definition of gharar given by Ibn Taimiyah:
"Gharar found in the contract exists because one party acquired profit while the other party did not."

According to a report made by the Islamic Insurance Company Set up Action Committee in Malaysia,
"It is clear that in the insurance contract practiced today contains elements of gharar because Ma’qud Alaih (object) is not clear, and it is connected with :-

The uncertainty of whether the payment will be accepted as promised.

The unknown amount to be paid.

The unknown time it will occur.

The committee stated that the existence of gharar in an insurance contract is due to "trade". In Islam, if a subject is involved in the trade of muamalah then it must satisfy the basic principles found in trade. Some of the principles are:

The buyer and seller

(Ijab and Qabul) Sighah

(Object/Subject Matter) Ma’qud Alaih

What remains a questions now is the existence of uncertainty in the "object" found in the insurance contract due to the unfulfilled conditions determined by the Syariah. For Islam, the conditions for each of the principles are important and must be fulfilled. A few of the principles an object must satisfy include:

The object can be given in the aqad.

The time surrender is determined.

The quantity of the object is determined.

The place of surrendering the object is determined.

The object does not consist any elements prohibited by the Syara’.

The same condition applies to a couple who are getting married. They must meet the basic principles of marriage. For instance a groom, bride, guardian, 2 male witnesses who are fair (Adil), and the ijab qabul. But, if one of the conditions are not satisfied then the marriage will not be valid.

What separates Takaful and Insurance is the aspect of "Belief". Let us compare what is the difference between a married couple and a couple that live together without the bond of marriage except by a contract that is legal in the eyes of the law? Surely there exists a distinction even though the contract made by the couple is complete with all the rights mentioned in the contract, however in Islam this still remains illegal as it is against the Syariah Principles.

B. Maisir (Gambling)

The muslim scholars stated that Maisir and Gharar is related. This means that if a transaction consists elements of gharar hence there exists an element of gambling.

These two are so interrelated.

Maisir (Gambling) exists in an insurance contract when:
The participant contributes a small amount of premium in hope to gain a large sum.

The participant loses the money paid for the premium when the insured event does not occur.

The company will be in deficit if it the claims are higher the amount contributed by the participants.

C. Riba

The element of riba exists in the policy loan business offered to the participant in a life insurance product. In this policy loan, the insurance company will charge interest to the participant who made the loan. It is clear here that the interest paid is a form of riba that is prohibited in Islam.

The riba element also exists from the profit of the investment fund that will be used for the payment of claims to the policyholders. This is because most of the insurance funds are invested in financial instruments such as bonds and also stocks which contain the element of riba’.

The solution to the Conventional Insurance

Islamic intellects have mutually agreed Takaful to be the substitute of conventional insurance. The tabarru' system will become the main core of the Takaful concept. This system makes insurance comply with the Islamic muamalah. Thus takaful is free from the elements of gharar and maisir.


Tabarru' is an Arabic noun that means "donation; gift; contribution". Within the business context, each participant that needs protection from Takaful must be present with a sincere intention to donate in order to help other participants if they are faced with difficulties. In precise words, all participants agree to help one another.

The emphasis on this issue can be observed from a fatwa by Dr. Yusuf Al-Qardhawi that insisted Islamic insurance may exist in condition that each participant contributes into a fund used to support one another.

Today, most companies that practice Takaful is involved in the world of business. Due to that reason, the conditional tabarru' is introduced where each participant who involves in takaful need to donate sufficient amount to cover expected takaful claims. Thus, if a participant is of high risk to the company, then the rate of tabarru' contributed must be balanced with that risk.


The presence of the tabarru' principle within the takaful confriguration ensure that takaful is within the ambit of Syariah and at the same time eliminate the elements of gharar and maisir.

The use of Tabarru' in takaful contract has ensured that Islamic Insurance does not contradict Syara'. Gharar and Maisir can be eliminated with the existence of this principle. The existence of the Syariah Board (Religious Supevisory Council) ensure that each investment fulfills the Syara' laws likewise in product development. Therefore, there will not exist doubts in the Islamic Insurance muamalah and its transparence gives way to each race to together use the protection provided by Takaful.

Written by : Wan Haizan Wan Harun

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Consulting and Training - Islamic Finance and Management

Consulting and Training - Islamic Finance and Management