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Sunday, November 22, 2009

Socio Benefits Of Takaful / Islamic Insurance


Takaful derives from the Arabic root word ‘Kafalah’ which means to jointly guarantee among themselves, against loss or damage that may be inflicted upon any of them as defined in the pact. Should any member or participant suffer a catastrophe or loss, he/she would receive a certain sum of money or Financial benefit from a fund in order to help him/her reduce the difficulties. Section 2 of Malaysian Takaful Act 1984 defines Takaful as “a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose”. In short, it refers to a group of people, pooling their efforts to support the most needy among them. It is similar to the very concept of insurance i.e. the fortunate many helps the unfortunate few. It refers to the very concept of mutual help and mutual benefit - everyone is expected to help everyone else in virtue and good deeds. This social cooperation stems from the religious duty by virtue of a celebrated Quranic teaching and the practice of the Holy Prophet (saw)1:
“……….help ye one another in righteousness and piety but help ye not one another in sin and rancour” (5:2)

“The relationship between the believer to another believer is just like a body, if one part suffers from illness, the other will equally feel the same”(Hadith narrated by Al- Bukhari and Muslim)
From the above, the fellow participants undertake to contribute some money to the fund in view of any calamity or disaster which will certainly create pain and suffering for the victim and the family. The money can channeled to the unfortunate in order to minimize or reduce the risk one will have in life.

In Takaful, one interesting feature is that the fellow participants/policyholders are acting both as insurer and insured as they are mutually contributing to and mutually benefit from the fund. As such, the contract governing each of the policyholders is one of gratuity/donation (Tabarru’). A Tabarru’ contract requires each policy- holder to willingly relinquish a portion of his/her paid premium or contribution to other policyholders who may need the financial assistance.
As such, the Takaful operator only acts as a manager to administer the fund in a good and profitable manner. The legal relationship between the policyholders and the company is one of partnership. The Islamic contract is known as Mudarabah. Here, the policyholders are regarded as the provider of capital (Rabb al-mal) while the company is the manager (al-Mudarib). The company as the manager is entrusted to invest the money in a good and prudent manner. In investing the money, the company has to give paramount concern to the legality aspect i.e. the investment must be Islamically approved (Halal). The company certainly cannot be involved in interest-based investment portfolios since Islam strictly prohibits interest (Al-Baqarah (5):verse 275) and other unapproved activities such as gambling, alcoholic drink production and immoral industries. The takaful operator and the policy holders as business partners will share a profit based on the performance of the business. The ratio of profit sharing will be determined in advance, such as 50-50, 60-40 or 70-30. The takaful concept is similar to cooperative insurance with the exception that takaful investment money should not be invested in certain business activities.

Interestingly since each policy holder mutually guarantees eachother and mutually benefits from the fund, the claimant should abide by the true spirit of Tabrru’ and realize that the amount paid to them, is actually derived from fellow policy holders. Logically, they should try not to be involved in any activities which are potentially detrimental to the interests of other policyholders. All participants must avoid cheating and other such money making tendencies in view of making a claim for Takaful money.

From the foregoing discussion, one could easily sum up that Islamic insurance mainly reaffirms the social-ethical values that used to be predominant in the early civilisation of human life. The society in those days was willing to physically help each other such as the construction of schools, houses etc. In the modern life, when the society is more complex and busy, the physical help is impossible, in turn; the help is financial such as collecting donations for fire or war victim, etc. Takaful, besides being a social-welfare and social security programme, above that, it is also an investment tool for the economic advantage of the participants. The virtues of Takaful to the participants are enormous and the following are the discussion connected therewith.

The Socio-Economic Benefits of Takaful

Takaful intends to provide the Muslim community and other interested par ties with a five in one advantage as categorically spelt out as follows:-

Insurance Coverage/Protection Benefits

Takaful plans provide cover in the form of mutual financial aid from payment of Takaful benefits to the policy-holder or heir (s). The benefits can be divided into two i.e. Family Takaful Plan (similar to Conventional Life Insurance) and General Takaful Plan (General Insurance. Family Takaful offers a maturity plan of 10, 15, 20, 25, 30, 35 or 40 years. Supplementary contracts in the form of hospitalisation, accident and permanent total disability may be incorporated in the plan. Other supplementary contracts in the form of ‘family rider’ may also be attached to the Family Takaful Plan such as Takaful Mortgage Plans, Takaful Plans for Education and Group Takaful Plan.2
The various types of General Takaful scheme for both individuals and the corporate sector provided by a Takaful company are shown as follows3:
a) Fire Takaful scheme-basic fire, house owners, house holders, industrial all risks.
b) Motor Takaful Scheme - motor car, motorcycle.
c) Accident/miscellaneous Takaful scheme-personal accident/group personal accident, personal accident for pilgrims, all risk, workmen’s compensation, public liability, money equipment all risks, employers’ liability, plate glass, fidelity Takaful, sprinkler likage.
d) Marine Takaful scheme-cargo.
e) Engineering Takaful scheme-machinery breakdown, erection all risks, boiler, pressure vessel, contractors all risk, bond.

Mobilisation of Savings

The birth of Takaful companies is complimentary to the establishment of Islamic banks. It adds to the colour of Islamic finance by giving more alternatives to the Muslims to save their money in a safe and more systematic manner. Previously, Muslims in Malaysia used to park their money under the mattress, in the pillows, even in earthen jars and buried them for safety so as to avoid interest. With the existence of Takaful, a Takaful company can mobilize the savings in a safe and profitable manner. As such, Takaful intends to advocate the custom of regular savings for a fixed period with a view to creating a kind of retirement or long-term contingency fund.In sum, a Takaful company plays the role as savings institution and a custodian of money deposited in its custody to serve the future interest of the Muslim community (Ummah).

Islamically approved (Halal) Investment Opportunity

In connection to the above (savings tool), a Takaful company will mobilize the savings of the contributors in Islamic-approved counters (Stocks and Shares). In other words, by joining a Takaful plan, the policy holder gains the added benefit of a golden opportunity to invest the money in accordance with Islamic principles.

Participate in the economy in a collective way (Jama’ah)

Takaful also invites Muslims, and non-Muslims for that matter, to participate in the economy in the collective and systematic way. As indicated earlier, it refers to a group of people pooling their resources in the spirit of joint benefits and shared responsibilities. In Malaysia, especially in the rural areas, we have the concept of “gotong-royong” (mutual help). For instance, the daughter of one family is going to get married. So, all the residents without being asked will try to assist in whatever way, their labor preparing food, another may donate materials like grain, sugar etc, while others might prepare the dais-the stage where the new bride and groom are shown to the visitors. By this illustration it shows one thing i.e. the need to collectively participate in the social activity organized by one fellow resident so that the burden can be minimized, while at the same time it is out of respect and love to one’s fellow Muslims (as indicated by the Hadith quoted earlier).

Likewise if at the social-level, one can easily collectively help and protect another for the good cause, why not in the economic sphere as well. In addition, in Takaful, those fellow residents do not have to physically go into the “battle field” himself/herself rather they can delegate that collective work to the company. In another words, by joining a Takaful scheme, every policy holder has already served the same function as the illustration above. Each policy holder has already collectively pooled their money in advance in anticipation that the money will be channeled to a good cause, i.e. to assist any person in need of help. In addition, Takaful does not only collectively help others, but also oneself. If one suffers misfortune, it will be a great relief if someone else could share in alleviating it. Ultimately, Takaful is meant for that purpose, i.e. financial, rather than emotional consolation.

Opportunity to perform good deeds and to do charitable works

By joining takaful, one is indirectly involved in charity and welfare. In this challenging, by force or voluntarily, one is too busy with never ending mundane pursuits for survival and convenience, to nthe extent that there is practically no time to physically be involved in charitable and social welfare, although by natural instinct is reflected in one’s intention.4 So, by participating in a Takaful Scheme, that noble intention could be a reality as part of the contribution money (premium) is donated to the Special fund and will be used for any claim by other fellow participants (or the dependants) who are suffering from loss or misfortune. So, this portion of the money does not belong to the policyholder, as upon entering into the Takaful contract, he/she has already promised to donate it to this Special fund.

As such, there will be no issue or objection raised if he/she is not given that portion of money when the Takaful policy expires or when the policy holder should survive after the expiration of the policy or in the case when he/she does not suffer from any loss from the defined risk stated in the policy. Furthermore, those who want to make a claim from this Special fund will have to do it in a bonafide manncr, without any ulterior or hidden motives of self unjust enrichment as he/she should knows that the money that he/she might get from the Takaful operator is adonation exclusively designated to those who really suffer from misfortune. This is in view of the concept of “fortunate many assists the unfortunate few”, Stemming from this awareness and consciousness, there should be no unreasonable claims from the participants seeking the compensation money from the operator.As a result, Takaful operators have fewer claims and this will give more surplus to be distributed to the policy-holder and the company at the end of the year based on the pre-agreed profit sharing ratio.


The underlying features of Takaful or Islamic insurance primarily lies on its philosophical and ideological Quranic ordain to “mutually help each other in righteousness and piety”.From this joint benefit and shared responsibility(al-kafalah)culture,begets another important principle of Tabarru’ that one has to donate some part of the money in order to help and protect the one who needs it.With the presence of tabarru’, it makes the business of Takaful devoid of uncertainty (al-Gharar) and gambling tendencies(al-Maisir).In essence, Tabarru’ would enable the Takaful participants who suffer a misfortune as defined in the policy.The sharing of the profit or surplus is allocated only until and after the obligation of helping the unfortunate few has been completed.At the outset,Takaful is a type of co-operative insurance based on profit sharing and interest-free investment.

1. In Islamic law (Shariah), the Quran (Holy Book for Muslims) and the Prophet Muhammad’s Prophet (peace be upon him) “The Holy (peace be upon him) statements on specified issues, called Hadith, form a primary source of Islamic law which are legally binding on the Muslims.
2. The model is taken from the practice of Takaful operations in Malaysia, particularly Syarikat Takaful Malaysia (STM). For details, see BIRT, Takaful (Islamic Insurance): Concepts and Operational System: From the Practitioner’s Perspective, KL, 1996. See various pamphlets of STM.
3. ibid, pp. 17-18
4. Every religion encourages its followers to involve in good deeds because the reward is overwhelming. Islam is no exception and puts greater emphasis as evident in the Quranic verse quoted earlier (Al-Maidah: Verse 2) and the traditions of the Holy Prophet (peace be upon him) “The Holy Prophet said: “…whosoever removes a worldly grief from a believer, Allah (swt) will remove from him one of the grieves of the day of Judgement. Whosoever alleviates a needy person, Allah (swt) will alleviate from him in this world and the Hereafter” (Narrated by Muslim). In another Hadith, the Holy Prophet is reported to have said “The one who looks after the welfare of the widow and the poor is like a warrior fighting in the cause of Allah (swt) or like a person who fasts during the day and prays during the night” (Narrated by Bukhari).

(This work is made possible by a shortresearch grant from the Research Centre, IIUM)

By Dr. Norhashimah Mohd Yasin

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Consulting and Training - Islamic Finance and Management

Consulting and Training - Islamic Finance and Management