CHAPTER 1

Introduction to Takaful

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 Chapter Outline
Introduction
The Historical development of Takaful
The Islamic perspective on Insurance
The elements that makes Takaful different to
Conventional Insurance.
Non-conforming elements in Takaful

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 Introduction
Takaful, the Islamic alternative to insurance, is based on
the concept of social solidarity, cooperation and mutual
indemnification of losses of members.
It is a part among a group of persons who agree to jointly
indemnify the loss or damage that may inflict upon any
of them, out of the fund they donate collectively.
The Takaful contract so agreed usually involves the
concepts of Mudarabah, Tabarru´ (to donate for benefit
of others) and mutual sharing of losses with the overall
objective of eliminating the element of uncertainty.
The fundamental concepts of Takaful is risk sharing, not
risk transfer
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 Historical Development of Takaful
Pre-Islamic Practices of Kafalah
The Principle of Mutually and Islam
The Practice After the Advent of Islam
 

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 Pre-Islamic Practices of Kafalah
o The term 'takaful' is derived from the root word 'kafala'
which means 'guarantee' or 'safeguard'. The word 'takafal'
whose chief characteristics is 'al-syarikah' means 'sharing'.
Therefore, the word takaful means 'shared responsibility
or shared guarantee, responsibility, assurance or surety'.

o Technically, takaful means 'mutual guarantee provided by

a group of people living in the same society against a
defined risk or catastrophe befalling one's life, property or
any form of valuable things'. Takaful is also known as a
cooperative insurance.
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 Pre-Islamic Practices of Kafalah
The contemporary jurists acknowledge that the foundation
of shared responsibility or Takaful was laid down in the
system of ‘Aaqilah’, which was an arrangement of mutual
help or indemnification customary in some tribes at the time
of the Holy Prophet.
In case of any natural calamity, every body used to
contribute something until the loss was indemnified.

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 Pre-Islamic Practices of Kafalah
Similarly, the idea of Aaqilah in respect of blood money or
any disaster was based on the concept of Takaful wherein
payments by the whole tribe distributed the financial burden
among the entire tribe. Islam accepted this principle of
reciprocal compensation and joint responsibility.
Such readiness to make monetary contribution could be
similar to the premiums in insurance practices, while the
compensation paid under al-'Aqilah could be similar to the
indemnity in today's insurance practices, as it is a kind of
financial protection for the heir against an unexpected death
of the victim.

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 The Principle of Mutually and Islam
The spirit of mutually in takaful reflects the ancient Arab tribal
custom of al-aqilah.
The underlying principle in mutual takaful is that the individual
members are themselves the insurers as well as the insured.
Each tribe tried to protect and safeguard the life and property of
members
This group loyalty and inter-dependence of its member
developed into mutually and manifested itself in the form of
collective responsibility of tribe to pay compensation for the
killing of a member of another tribe by one of its own members.

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 The Principle of Mutually and Islam
The principle of compensation in cash or kind had 4 outstanding
benefits:
It reduced bloodshed and blood feuds in the country.
It replaced individual responsibility with the ultimate collective
responsibility of the tribe for the actions of its members, and thus
helped achieved social security for individual members of each tribe.
It reduced the financial burden of the individual by transferring it
to the group.
It developed a spirit of cooperation and brotherhood among the
members as reflected in mutually to share the individual burden
among the group.

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 The Practice After the Advent of Islam
Through the practice of al-Diyah
Al-Diyah or blood money was paid by the ‘Aqilah to the heirs
of the deceased (victim) in order to rescue the killer from legal
burden.
Through the payment of Fidyah (ransom)
Should anyone be made a prisoner of war by the enemy, the
al-Aqilah of the prisoner shall contribute ransom to be paid to
the enemy, in order to enable the captive to be freed.
By way of other forms of social insurance
The society shall be responsible to establish a joint venture
with a mutual understanding towards providing necessary aid
and help for the needy, ill and poor.
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 Historical Development
of Insurance
 Idea of insurance began with the Babylonians and their
civilization in 3,000 years B.C.
 Contract of Bottomry - commercial contracts
involving money transactions, in which people lent
their money to the merchants for a certain percentage
of interest.
 Money or goods were advanced to the merchants for the
purpose of trade, either as pure loan in consideration of
interest in which the lenders had the right to claim a fixed
rate of interest from the merchant over and above the loan or
both as a loan for interest and as capital for a share of profits
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 Contract of Bottomry
Such a transaction between the lender and the
borrower was on the basis of mutual understanding,
that, in consideration of payment of the interest, the
borrower should be protected from liability against
unexpected and accidental happenings in the trade.
Payment of interest – premiums
Borrower – insured
Lender - insurer

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 Historical Development of insurance
Practiced by the Greeks in 4th century B.C.
Practiced by the Hindus in India in 600 B.C.
Was later developed by Rome with modifications,
which limited the cases of loss for the lenders, but
provided protection for the borrowers against any
liability.
- It was practiced mainly in regards to land.
Later was developed in Italy with marine insurance in
the 14th and 15th century.
In 16th century, Sir Thomas Greesham established the
first Royal Exchange as a foreign money market.
Resulted in London being the centre for international
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insurance.
 Historical Development of insurance
Lloyds of London originated in a coffee house in
London in 1688. Incorporated by Parliament in the
Lloyds Act 1871.
In Federation of Malaya, insurance law was drawn
from the legislation enacted in UK in 1909.
Due to the comprehensive recommendations from
Mr. Caffin (Insurance Commissioner of Australia) in
1960, Insurance Act 1963 was enacted by the
Malaysian Parliament on 21st January 1963.
Then Insurance Act 1996 came into force on 1st
January 1997.
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Non-conforming Elements in
Conventional Insurance
According to the ‘ulama, the concentional insurance is
called ‘muamalah fasid’ as there are three elements
found which do not conform to the rules and
requirements of Islamic syariah.
 Al-gharar
 Al-maisir
 Al-riba

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 Al-Gharar
Gharar as a sale of probable items whose existence or
characteristics are not certain due to the risky nature that
makes it similar to gambling.
The element of gharar exists in both the life and general
insurance policies, whereby the subject matter of the
contract or ma’qud ‘alayhi is not certain until the
insured event has taken place.
This is particularly true since the amounts being paid by
the two parties are not known at the contract session.
The shari’ah requires that all particulars relating to the
contract must be known to the parties at the time of
contract, otherwise the contract will become invalid.
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 Al-Gharar
There are two types of gharar:
Gharar fahish (Major Gharar) is a great uncertainty
and the product cannot be measured, so the contract is
ambiguous.

Gharar Yasir (Minor Gharar) is a small gharar, for

example; a hotel charges the customer the same prices
even though the criteria of the customers are different.

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 Al-Gharar
There are four sources of gharar in Insurance/ Takaful:
Gharar in the outcome
Gharar in the existence
Gharar in the result of exchange
Gharar in the contract period

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 Al-Gharar

Gharar in the outcome.

When the contract is made, neither the insurer nor the
insured knows the outcome of the contract. The insured
does not clearly know whether he will get compensation
or not as an exchange to the premium that he has paid.
Similarly, the insurer does not know the outcome.

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 Al-Gharar
Gharar in the existence

In the insurance contract, the insured does not know the

existence of the compensation since it depends on the
outcome that may or may not occur.

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 Al-Gharar
Gharar in the result of exchange
When the contract is made, neither the insurer nor the
insured knows the outcome of the exchange. The insured
does not know whether he or she will get the
compensation as exchange to the premium that he pays.
Similarly, the insurer does not know how much premium
he gets. Sometimes he will receive the premium only
once or a few times, but he has to indemnify an amount
that does not commensurate with the premium.

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 Al-Gharar
Gharar in the contract period
According to some scholars, when a contract is
deferred, the period must be made known. If not, the
contract is considered void. The same situation arises
in the insurance contract whereby compensation is
based on a time frame that is not known and cannot
be known especially in life insurance.

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 The element of gharar is present in following
circumstances:
Buying and selling of goods and services that are
not in existence
Buying and selling of goods and services that are in
existence but cannot be delivered or handed over to
the buyer or purchaser
Buying and selling of goods and services that are in
existence and can be delivered or handed over to the
buyer but its mode, time of delivery, the quantum are
unknown and uncertain.

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 Al-Maisir
Maysir, or gambling, means to court such risk as it involves
both the hope of gain as well as the fear of loss, and which
is not a necessary part of any of the normal activities in life.
Islam also prohibits all kinds of gambling and games of
chance.
The nature of insurance is said to contain an element of
maysir because policy holders are held to be betting
premiums on the condition that the insurer will make
payment (indemnity) contingent upon the circumstance of a
specified event.
On the other hand, the insured does not get anything from
his premiums if the insured event does not happen at all.

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 Al-Riba
Riba is defined as ‘a monetary advantage without
counter-value which has been stipulated in favour of one
of the two contracting parties in an exchange two
monetary values.
Two forms of Riba:
Riba Al-Nasi’ah
 Arising from the delay of time by the borrower to repay
what he owes the lender
Riba Al- Fadl
 Involving an additional amount levied by the lender to
the borrower either in a loan contract or an exchange
transaction

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 Al-Riba
Riba is clearly affecting the two parties to the contract
since there is no equality between installments paid by
the insured party and the compensation paid by the
insurance company.
What the company actually pays may be more, less or
equal to that which is paid by the insured and equality is
very unlikely.
Moreover, since the payments aredeferred, the
compensation which is greater than the instalments paid
by the insured constitutes surplus riba (riba al-fadl) and
credit riba (riba al-nasiah).

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 Fatwas on Prohibition of Insurance
In 1965, the Congress of Islamic Research in Cairo
had discussed the legitimacy of insurance in the
Islamic world.
The National Fatwa Committee Malaysia deliberated
on the question of life insurance on 15 th June 1972
“ Life insurance as presently practised by insurance
companies is a fasid transaction as it is contrary to
the Shariah principles of contract because it contains
the following elemets: gharar, maisir, riba. As such,
from the shariah point of view , insurance is haram”.
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 Fatwas on Prohibition of Insurance
In the First International Conference on Islamic
Economics held at Mecca, Saudi Arabia in 1976,
international consensus was reached that insurance
for profit is contrary to shari’ah.
 This was confirmed by the Islamic Fiqh Academy
at Jeddah in 1985: “The contract of commercial
insurance with periodical fixed premium provided
by the present day insurance companies is a
contract which is void and therefore haram in
accordance with the requirement of shari’ah.”
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 Fatwas on Prohibition of Insurance
The European Council for Fatwa and Research has
reaffirmed the rulings: “Commercial insurance is
originally haram as agreed upon by most
contemporary scholars. It is well-known that in most
non-Islamic countries there are cooperative and
mutual insurance companies. There is no harm from
the shari’ah point of view to participate in these
activities.”

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 Reasons:
Insurance contract contain usury: as it promises than
the premium paid
Insurance companies invest the premiums in interest
bearing investments.
Insurance is a kind of gambling as one can lose the
premium to insurance companies
Insurance contain the element of gharar and the
contract is uncertainty
Insurance companies can earn profits or loss as a
result of death or accident or risk to people.
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 Islamic Insurance/Takaful
In view of the above rulings and the real need for
insurance, Muslim jurists have decided that insurance in
Islam should be based on the principles of mutuality and
cooperation.
On the basis of these principles, Islamic system of
insurance embodies the elements of shared responsibility,
joint indemnity, common interest, solidarity, etc.
This concept of insurance is acceptable in Islam because:
1. The participants will cooperate among themselves for
their common good.

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 Islamic Insurance/Takaful
1.Every participant will pay his contribution in order to
assist any fellow members who needs assistance.
2.His contribution is considered as a donation (tabarru’) to
the members in the group.
3.The donation contribution is intended to divide losses and
spread liability according to the community pooling
system.
4.The element of uncertainty will be eliminated insofar the
terms in the contribution and compensation are made
clear to the participants.
5.It does not aim at deriving advantage at the cost of other
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individuals
 Tabarru’ Concept
In the Arabic language the word tabarru’, which means
‘donation’
The fundamental difference between conventional insurance
and takaful (Islamic insurance) is the element of donation.
 Tabarru is used to refer to donation-based contracts as to
provide Shariah-compliant insurance for Muslims.
The utilisation of tabarru` contracts makes the transaction
permissible and valid according to Shariah law because
when a contract is charity based and not exchange-based
By this way, both elements of gharar and maisir are
eliminated.

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