ISLAMIC INSURANCE

OR TAKAFUL
MUHAMMAD UMAR
18221554-007
“BS 8th ACCOUNTING & FINANCE”
 HISTORICAL BACKGROUND OF
WESTERN CONCEPT OF INSURANCE
● Takaful started some 30 years ago in the Middle East with the launching of two
companies in 1979:

○ The Islamic Arab Insurance Co. (IAIC) in the UAE and

○ The Islamic Insurance Co. of Sudan

● But it took some time for the movement to take shape.
● Later in 1984, Malaysia played a pioneering role in setting the first Legal framework
specific to Takaful (Takaful Act Malaysia).
● This was instrumental in the successful launching of the Takaful movement in Malaysia
and in other countries of South East Asia.

1. Ottoman Empire- First introduce western concept of insurance- Maritime Code 1863.
2. Ottoman Law of Insurance 1874-only life insurance is haram or unlawful.
3. Since then, western concept of insurance is practiced almost in all countries in the world
 Risk And Insurance:
• Risk and uncertainty are fundamental facts of
life. All human activities are subject to risk, which
may lead to financial or physical losses to him.
Insurance is a device to cover the losses arise due to
occurrence of some undesired event.
 Definition of Insurance

Insurance is an economic device

whereby the individual substitutes a small
certain cost (premium) for a large uncertain
financial loss (the contingency insured against)
that would exist if it were not for the insurance.
CLASSIFICATION OF INSURANCE
BUSINESS
By Type of Products

i) Life insurance
ii) General insurance
iii) Liability insurance
Nature of Insurance Contract

• Aleatory Contract
• Unilateral Contract
• Conditional Contract
• Contract of Adhesion
 Definition of Tkawful
DEFINITION
Takaful, also called Islamic insurance, is a system of cooperative insurance for
followers of Islam. Members of a tkawful contract contribute to a pool of money that’s
used to financially support a member when they experience a covered loss.
The concept of tkawful originates from the beginning of Islam. Community members
used social insurance practices to pool resources and help cover losses.

The takawful system is based on Sharia, or Islamic religious law, which is the code of
conduct and religious guidelines for Muslims. Specifically, takaful follows Islamic
principles including welfare, shared responsibility, and cooperation.

Alternate name: Islamic insurance

 How Does Takaful Work?
Unlike conventional insurance, participants in a takaful contract are both the
insurers and the insured. Each member of the takaful group agrees to make
regular contributions or premiums. The money is put into individual
accounts and invested in Sharia-compliant investments. Part of joining the
takaful contract is agreeing to donate a portion of the funds from your
account if another member faces a loss. Likewise, your co-members agree
to help cover you if you face losses.1
In practice, takaful can look a lot like conventional insurance. For example,
say you protect your home with property takaful. A storm causes damage
to your home and leaves it uninhabitable.
It may seem like takaful is the same as conventional insurance, such as car
insurance or homeowners coverage. However, a takaful agreement is Sharia-compliant, while
conventional insurance is not. Conventional insurance violates three specific concepts in
Sharia: gharar, maysir, and riba.
Gharar: This is the concept of uncertainty, risk, or fraud in financial and business transactions.
Under conventional insurance, you pay premiums for the promise that you’re covered if you
experience a specific loss. However, you may never experience a loss or need to file a claim.
Gharar is violated because both parties are uncertain whether you’ll use your insurance product
or not.
Maysir (Maisir): Maysir, or gambling, is prohibited in Islam as wealth should derive from
productive work rather than winnings from games of chance or luck. Conventional insurance is
often considered a type of gambling in Islam because of the uncertain risk and reward of a
policy. For example, a person could only have insurance for a few months before experiencing
a loss and getting the full value of the policy. On the other hand, someone may never need to
use their policy and pay premiums for years without a benefit.
Riba: Meaning “interest” or “usury,” riba is prohibited in contracts by Islamic religious law.
Many conventional insurance companies invest premiums into bonds and funds that bear
interest, which violates guidelines against riba.
 Types of Takaful
Conventional insurance policies consist of policyholders and the
insurance company. The policyholders pay the insurance company to
insure them against risk. In takaful, however, the contract participants are
both the insurer and the insured. To manage the takaful contract and
coverage, several models of contracts are used:
1. Wakalah (agency)
2. Mudharabah (profit-sharing)
3. Hybrid Model
 Types of Takaful Explanation
Wakalah
This model works by the Islamic insurance company, or takaful operator, becoming an agent for the takaful contract.
The agent manages the funds for participants. Participants pay the agent a fee for their services.
Mudharabah
While wakalah contracts are fee-based, mudharabah contracts are a profit-sharing venture between takaful participants
and the contract manager. The takaful participants provide capital in the form of their premium payments. The
manager of the contract provides expertise and managerial skills to invest the participants’ money into Sharia-
compliant investments.
Profit made by the investments is shared among the participants and the manager at an agreed-upon rate. The shared
profit pays for the manager’s time and experience rather than a straight fee. The manager doesn’t receive
compensation if the investments don’t make a profit.
Hybrid Model
The mixed, or hybrid, model of takaful combines elements of both wakalah and mudharabah. In this model, the takaful
manager receives a set wakalah fee as well as a portion of any profits from takaful fund investments.
 Takaful vs. Conventional Insurance
Takaful
• Risk is shared between participants.
• Any investments must be compliant with Sharia law.
• Profits from fund investments are returned to takaful
participants.
Conventional Insurance
• Risk is transferred to the insurance company.
• Investments do not need to meet religious standards.
• Profits of the insurance company may be distributed
to third-party shareholders, who may or may not be
policyholders.
 Models Of Tkawful
Mudarabah Model, Family Takaful
Profit Attributed
To Shareholders

Company’s Admin
Company & Manag. Expenses

Takaful Contract 30%

Investment Profit
based on Mudarabah 70%

PA PA Payment from
FTF PA
Payment from
PSA PSA PSA
Wakalah General Model
Hybrid Model