Part 1 of 4

وَتَعَاوَنُوْا عَلَى اْلبِرِّ وَالتَّقْوَى وَلاَ تَعَاوَنُوْا عَلَى اْلاِثْمِ وَاْلعُدْوَانِ

“… And help one another in righteousness and piety, but help ye not one another in sin and rancour ….” (Quran, Al-Maidah [5]:2)

1. CONCEPT OF TAKAFUL

The term “takaful” is derived from its Arabic root word “kafala” which literally means “to guarantee”. In term of usage and implication, the term “kafala” certainly denotes the agreement by one party to indemnify another for any liability that has been pre-agreed upon¹. Takaful in islamic finance is the term used to describe insurance that is compliance with the Shariah or islamic law. Takaful operators (insurers) then have to conduct their business in a way that is shariah-compliant by avoiding the three prohibited elements (al-Riba, al-Gharar, and al-Maisir) that will make the operations void. The easiest part is to avoid riba, by investing the takaful fund in non-interest bearing instruments.

Meanwhile, if we refer to Quran on the principle of ta’awun (Al-Maidah [5]:2) which is to help one another in righteousness and piety, we then can invite people, especially those who face the same danger or take the same risk to come together and form a group that will be willing to help one another. In other words, if anyone among them incurs a loss caused by an event that has been agreed upon, all the members of the group will contribute to compensate this unfortunate individual.
Based on this understanding, a fund can be created from the contributions of each member on the basis of donation or tabarru’ which comes from the same root word as al-birr or righteousness as is used in the above verse of the Quran. The takaful insurance company can be an operator who makes arrangements for the group to come together and agree not only to contribute to the fund and at the same time agree to donate at least part of the fund to any member of the group who has become victims of any peril or mishap that has been identified earlier. It will eliminate al-Gharar and al-Maisir.

It means that Takaful is a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose. The basic objective of takaful is to pay for a defined loss from a defined fund which is exactly like mutual insurance as was practiced in the early days of insurance and even today by certain groups².

2. TWO TYPES OF TAKAFUL

At least, there are two types of takaful insurances. First, Takaful Life Insurance. Life insurance is a policy that someone can enter with an insurance company, which promises a certain amount to his/her beneficiary(ies) in the event of his/her death. In this type of takaful insurance policy that has a defined period of maturity, insureds commonly make periodic level premium contributions that will be used primarily for meeting their individual savings target and in part for assisting financially the bereaved family of the decreased insured. The premium amounts vary from insured to insured depending primarily on the sum (face amount) that each insured targets to accumulate at the end of coverage period and on the age, gender, and health condition of that insured³.

Takaful life insurance is also used for other purposes, including generating a fund for children’s education, securing a fund in case of mortgagor’s premature death and protecting business interest againts key employee’s death.

Second, Takaful Non-Life Insurance. In non-life insurance, takaful insurers offer coverages, commonly on an annual renewel basis, for fire insurance and allied lines, automobile insurance, liability insurance, marine insurance, worker’s compensation, fidelity insurance, and even crop insurance.

It means that takaful life insurance works both as: (1) a savings instrument where participants set their own target amount to accumulate over a certain period, and (2) a protection mechanism in which all participants guarantee each other againts certain events that would alter their financial status. In the contrary, takaful non-life insurance works more like a joint guarantee in which all participants contribute their own shares premiums into a pool and mutually agree to indemnify those participants who suffer from an insured peril.

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¹ Alhabshi, Syed Othman, Shaikh Hamzah Abdul Razak. TAKAFUL: Concept, History, Development, and Future Challenges of its Industry. INCEIF, Malaysia: November 2008. Page 3.
² Annuar, Hairul Azlan, et.al. The Impact of the Wakalah System on the Performance of Takaful Business in Malaysia. Refereed paper of International Islamic Banking Conference 2003. Page 4.
³ Maysami, Ramin Cooper, W. Jean Kwon. An Analysis of Islamic Takaful Insurance: A Cooperative Insurance Mechanism. Journal of Insurance Regulation: 1999. Page 115-116.

[to be continued ...]