ISLAMIC INSURANCE (TAKAFUL)

DIBF 06202
Presented By ;
Mr. Thabiti Mohamedi Ally
Faculty Of Business Administration
Muslim University Of Morogoro
Lecture one
Concept of insurance
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Introduction to
conventional
insurance

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 Literally, insurance as practiced in conventional

financial system refers to a financial protection system
which involves the execution of contracts (insurance
contracts) between the insurer and the insured in which
Insurance the insurer agrees to underwrite the subject risk of such
contracts.

 Insurance is a social device for spreading the chance of

financial loss among a large number of people.

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 By insurance a person can protect himself and his

dependents from loss arising from future uncertain
events like fire, accidents, early death and so on.
Insurance The function of insurance is to spread this loss over a
large number of person through the mechanism of
cooperation.

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 Pooling of losses: Spreading the loss incurred by the

few over the entire group

 Risk transfer: A pure risk is transferred from the

Characteristics insured to the insurer, who typically is in a stronger

of insurance financial position

 Indemnification: The insured is compensated and

restored to his or her financial position prior to the
occurrence of the loss

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 Insurer: is the part to an insurance arrangement who is

responsible to indemnify for the losses.

 Insured: a person who receive benefit and

compensation from insurance company
Basic terms  Premium: a financial cost of obtaining an insurance
used in cover, it is paid as a lumpsum or in installments during
insurance the duration of the policy.

 Policy: is the written contract or certificate of insurance

 Exposure to loss : is the area in which the risk of loss

exist.
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I. Insurance provide Security and safety

II. Insurance eliminate dependency

Advantages of III. Insurance protects mortgaged property
Insurance to IV. Life Insurance promote saving
Individual V. Peace of mind

VI. Insurance provide profitable investments

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I. Means of Economic Security

II. Insurance increase business efficiency

Advantages of III. It enhance credit
Insurance to IV. Business Continuation
Business V. Welfare of Employee

VI. Helps in establishing International Trade

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I. Source of Employment

Advantages of II. Wealth of the society is protected

Insurance to the III. Reduction in inflation

Society IV. Economic growth of the country

V. Capital Formation

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The purpose of any insurance is to provide economic

protection against the losses that may be incurred due to
chance events such as:
Nature of  Death
insurance  Disability
 Medical expenses
 Home or automobile damage, etc.

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 The basis of insurance is to spread risks borne by few to

many of them.
Basis of  In case a person actually suffers a loss he is compensated out
Insurance of the same pool of funds contributed.

 Insurance companies are in charge to collect contributions

in form of premiums.

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i. Principle of Utmost Good Faith

ii. Principle of Insurable Interest,

Seven iii. Principle of Indemnity,

principles of iv. Principle of Contribution,

insurance v. Principle of Subrogation,

vi. Principle of Loss Minimization, and

vii. Principle of Causa Proxima (Nearest Cause)

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  The valid contract of the insurance, should contains the
following elements:

I. offer

II. Acceptance

III. Lawful objectives

Insurance IV. Consideration (something to give and take)
contract V. Free consent of both parties(without any pressure
or coercion or force)

VI. Capacity (age)

VII. Legality and fixed time period with terms
VIII. Conditions and limitations if any.
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Conventionally there are essentially two different kinds

Categories Of of insurance namely,

Insurance 1. life insurance and

2. general insurance

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insurance

Life insurance General insurance

Fire Marine Health Auto

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Introduction to
takaful (Islamic
insurance)

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 The conventional insurance contract is basically

constructed between the insured and insurance company.

 Takaful differs from conventional insurance in the sense

Introduction that the takaful operator is not the insurer insuring the
participants.

 Takaful participants mutually insure one another while

the takaful operator simply functions as the administrator
and manager of the takaful fund.

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 The present approach to risk mitigation is to buy an

insurance policy whereby an insured will transfer his risk

Why to the insurance company which in exchange of a

conventional premium accepts the responsibility of indemnifying the

insurance is not insured in case the risk insured for materialises.

accepted by  This method of risk mitigation has been declared to be

shariah haram by most Muslim scholars as it contractually
contains haram elements such as riba , gharar and maysir.

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 Conventional insurance contains riba in two situations:

Riba in  No equality between insured’s instalments and

conventional insurer’s compensation

insurance  Receives profit from its involvement in riba-related

transactions.

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 Riba is evident in conventional life policies in two

situations; firstly, the amount of money received by the
insured, either on the occurrence of the insured event or
upon maturity of the policy, is always in excess of total
Interest or usury premiums he has actually paid. 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.

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 Gharar, or uncertainty in Islamic jurisprudence, refers to

purposive cheating and deception as well as ignorance of

Gharar or the object of sale and undeliverability of the object.

uncertainty Professor Al-Zarqa’ defines 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

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 Maysir, or gambling, means to court such risk as it

involves both the hope of gain as well as the fear of loss,

Maysir and which is not a necessary part of any of the normal

(gambling) activities in life.

 Islam also prohibits all kinds of gambling and games of

chance

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 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
Cont.… 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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 Takaful is the type of Islamic insurance wherein

members contribute money into a pool system to
guarantee each other against loss or damage.

 The word takaful is derived from Arabic verb “kafala”

Meaning of which means to take care one’s need.
takaful  Therefore, the pact between at least two parties agreeing
to jointly guarantee one another in the event of a loss, as
a consequent of being afflicted by a calamity defines the
term “Takaful”

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According to Islamic Financial Services Act 2013,

Takaful means:

 “An arrangement based on mutual assistance under

Meaning of which Takaful participants agree to contribute to a
takaful common fund providing for mutual financial benefits
payable to the Takaful participants or their beneficiaries
on the occurrence of pre-agreed events”.

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Mutual
brotherhood
Philosophy and responsibility

concept of  takaful

takaful
Solidarity of
society

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Takaful is a protection scheme whereby a group of

participants mutually agree among themselves by
contributing as TABARRU’ or DONATION in the
Takaful funds to guarantee each other against a defined
Basis of takaful loss or damage that may befall upon any of them.

It emphasizes unity and co-operation among participants.

The concept of tabarru’ eliminates the element of

uncertainty in the Takaful contract

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1. Ta’awun: Takaful is based on the concept of Ta’awun

meaning mutual assistance.
o Participants mutually agree assist each other
financially in case of certain defined needs.
o Allah (s.w) has commanded in his holly book,
Basis of takaful (Al-qur’an, 5:2)

2. Ownership: under the principle of milkiyyah

(ownership) the participant is the sole owner of the
certificate’s benefits. Upon the demise the benefits are
entrusted to the nominee.

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3. Shared Responsibility and guarantee: participants are

mutually agreed to provide compensation in the events
of misfortunes.

4. Responsibility and mutual protection: The

participants of takaful scheme all agree to be mutually
Basis of takaful responsible or shared responsibility.

5. Masalih al- mursal (public interest): The main purpose

is to reduce the burden of the members of the
community caused by occurrence of certain loss or
damage

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 Takaful offers both the monetary profits through this

protection scheme as well as spiritual profit. Some of
benefits are as follows:

i. It allows the participant to fulfill his social obligation

Benefits of towards community and family.
takaful ii. Takaful also enables financial assistance for the
unfortunate and needy through the concept of
TABARRU. Also allow participants to achieve self-
purification and peace of mind.

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iii. It Promotes moral values and ethical dealings in all its

business activities and operations as it is free from
prohibited elements such as Riba Gharar and Maysir

iv. It provides protection and security for the family and

Cont.…. the group against any misfortune.

v. It enhance community development and nation

building through zakat as well as corporate tax paid
by Takaful operators

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 The objectives of both takaful and conventional

Objectives of insurance is to provide protection in the events of

both takaful and unforeseen events and contributions must be made to

insurance start coverage but the only difference is the methodology

applied toward that protection

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Any takaful company operating in takaful fund must

operate under the following principles:

a) It must operate according to Islamic cooperative

principles
Guidelines to b) A reinsurance commission only received or paid to
takaful operator Islamic insurance or reinsurance company

c) The insurance company must maintain two separate

funds ; a participant and policyholder fund ,and
shareholders fund

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The end Wabillah Tawfiiq

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