Takaful

Takaful is an insurance system compatible with Islamic law, based on the principle of cooperation between a group of members of society with homogeneous risks whose financial consequences are collectively shared among them. The word “Takaful” is derived from the Arabic verb “Kafel” which means taking care of one’s needs.

The participant in this Takaful scheme is obligated to pay a certain amount of money in cooperation to cover the financial consequences arising from the damages that may be caused to any of the participants when the insured risk occurs, in accordance with the rules provided for the company’s system and the conditions contained in the insurance policies, that does not contradict Islamic Sharia. Unlike a traditional insurance policy, which is centred around the individual, mutual assistance is the essence of Takaful.

Conventional insurance is prohibited from a Sharia point of view as it contains Maysir (gambling or speculation) and Gharar (uncertainty, deception, and risk).

Characteristics of Takaful:

1. The insurance fund is managed by a selected body from the participants, or it is managed by a joint-stock company that manages and invests the fund’s assets.

2. The most prominent difference between Takaful and traditional commercial insurance, is that the first is based on the idea of cooperation, while the second is based on the idea of profit for the company, and this profit is the difference between the contributions collected from clients and the compensation given to those who have suffered damage.

3. According to the Takaful system, financial surpluses are distributed at the end of each fiscal year to the participants after deducting administrative expenses, as the company does not keep any cash surpluses.

4. In Takaful, insurance companies invest the surplus funds according to Islamic investment formulas.

5. Main Takaful Markets: The Gulf Cooperation Council and the ASEAN Region (Association of Southeast Asian Nations).

Differences between commercial and Takaful insurance:

1. The insurance premiums are the property of the company, but in Takaful insurance, the role of the insurance company is to manage the insurance process, funds, and investment in a legitimate manner consistent with Islamic Sharia.

2. In commercial insurance, the main goal of the insurance company is to achieve the greatest profit for the shareholders, while in Takaful insurance, the main goal is to achieve safety and protection through cooperation between the participants to face the risks that fall to any of them.

3. The insurance surplus in commercial insurance is the right of the shareholders in full, while in the Takaful insurance it is considered the right of the participants after deducting a percentage of the managing company in exchange for the management. This makes the Takaful premium actually lower than that of commercial insurance.

	Takaful	Commercial insurance
Premium	The participant / the insured pays a premium, which is determined according to technical methods.
Purpose and Goal	Achieve safety and protection for participants	Profitability for shareholders and security for policyholders
Surplus distribution	The surplus will be distributed to the participants	No
Investments	Investments must comply with Islamic Sharia	Investments are not required to comply with Islamic Sharia