Islamic finance has developed mainly in two directions namely Islamic banking and Islamic insurance (Takaful). While information about Islamic banking is being increasingly disseminated, features, models and structures of Takaful are little known, particularly in Pakistan.
Purpose of this brief article is to describe the main features and models of Takaful system operating in various parts of the world and its growing industry and prevalent in Pakistan.
All human beings are invariably exposed to the possibility of meeting catastrophes and disasters giving rise to misfortunes and sufferings such as death, loss of limbs, accident, destruction of business or wealth, etc. Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that one must find ways and means to avoid such catastrophes and disasters wherever possible, and to minimize his or his family’s financial losses should such events occur.
One possible way out is to buy an insurance cover as in the conventional system. Different views have been expressed about the status of conventional insurance from the point of view of Islam. An overwhelming majority of the Shariah scholars believe that it is unlawful due to the involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty).
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 pact 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.
Takaful is not a new concept in Islamic commercial law.
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 (PBUH).
In case of any natural calamity, everybody used to contribute something until the loss was indemnified. 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 (community).
Islam accepted this principle of reciprocal compensation and joint responsibility. The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to the business or property. The policyholders (Takaful partners) pay the subscription to assist and indemnify each other and share the profits earned from business conducted by the Company with the subscribed funds.
Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru (Tabarru’ means a form of sincere donation given to a party without expecting any kind of exchange or return from the party. It is considered as a unilateral contract which only requires one party to express the contribution without requiring any kind of exchange). It is incorporated in the contract. How much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements.
Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators.
The profit attributable to the participants is credited into the two accounts separately. To describe from another angle, a Takaful contract may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment.
The protection part of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally.
Takaful is slowly and gradually is becoming the primary way to protect themselves against any uncertainty or losses considering it to be Islamic and Riba free, the Islamic banking and Insurance sector has been growing rapidly expanding its share in the global as well as Pakistani market.
