Last Updated : 18 Mar 2010

Source By : www.takaful-malaysia.com
Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years. It originates from Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee" against a defined loss.

It is a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era, when Muslim Arabs began expanding their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to suffer huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, all the traders mutually agreed to contribute to a fund before they started their journeys. The fund was used to compensate anyone in the group who suffered losses through any mishap. This was then copied by the Europeans who later used the concept to develop marine insurance.

Principles of Takaful

The principles of Takaful are as follows:

• Policyholders co-operate among themselves for their common good.
• Every policyholder pays his subscription to help those that need assistance.
• Losses are divided and liabilities spread according to the community pooling system.
• Uncertainty is eliminated in respect of subscription and compensation.
  
• It does not derive advantage at the cost of others.
  

Theoretically, Takaful is perceived as cooperative insurance, whereby through the tabarru’ principle, participant in a takaful scheme agrees to relinquish, as a donation, a certain portion of the contribution into a takaful fund to assist other participants faced with difficulties. Tabarru' means donation, gift or contribution and it embraces the elements of shared responsibility, joint indemnity and mutual protection. Tabarru' is the core of the takaful system that makes the uncertainty element allowable under the takaful contract.

The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden." Commercial insurance is strictly not allowed for Muslim as agreed upon by most contemporary scholars because it contains the following elements:

• Al-Gharar (Uncertainty)
• Al-Maisir (Gambling)
• Riba (Interest)
  

There are three models and several variations on how takaful can be implemented.

1. Mudharabah (profit-sharing) Model
2. Wakalah (agency) Model
3. Combination of both
   

The takaful operator is the administrator of the fund and manages the fund in trust on behalf of the participants, and the contract between the participants and the operator is governed under the contract of mudharabah or wakalah.
Mudharabah gives the right to the contracting parties to share the profit, while liability for losses is borne by the participants; and under the wakalah model, the takaful operator earns a fee for services rendered while liability for losses is borne by the participants. The fee may be varied based on the performance of the takaful operator. It can be a fixed amount or based on an agreed ratio of investment profit or surplus of the takaful funds.



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