INDIVIDUAL ASSIGNMENT REPORT

PIB3023 – INSURANCE AND TAKAFUL

AF101 – ISLAMIC BANKING AND FINANCE

TITLE: ARTICLE OF HOW IS TAKAFUL DIFFERENT FROM OTHER INSURANCE

PREPARED BY:

NAME NUMBER ID SECTION

NOR KHAIRIYATUL WAFA’ BINTI ROSDI KBJ212510900 1

PREPARED FOR:

MADAM ZALIKHA BINTI RAMLI

 TABLE OF CONTENTS

TITLE PAGE NUMBER

1.0 INTRODUCTION: SUMMARY OF ARTICLE 1

2.0 COMMENT 2

3.0 RECOMMENDATION / SUGGESTION 3–4

4.0 CONCLUSION 5

5.0 REFERENCE 6

6.0 APPENDICES 7–8

1.0 INTRODUCTION: SUMMARY OF ARTICLE

Based on the relevant article which came from PRUDENTIAL BSN TAKAFUL, the main
issue here is related to the question ‘’ How is Takaful Different from other Insurance?’’. Takaful
and Insurance are important as the essential function to provide the financial safety net if
something unexpected happens to us. For example, in the situations that you are developing
a critical illness, getting into accident or even death. Generally, Takaful is like an Islamic
insurance and however fundamentally different from Insurance in its own aspect such as its
principles and how it operates. Takaful is used by Muslims and open to non-Muslims.
Basically, Insurance is an agreement between insured and insurer which is known as a policy.
The premiums or fee that was paid by insured (you) to insurer (company) are invested by the
insurance company. It is non-Shariah compliant business where include with elements of
gambling, interest, and uncertainties. Therefore, Takaful operators will only invest our
contributions in Shariah-compliant businesses. With this, you can get peace of mind if you
want to ensure your Takaful subscription is Shariah-compliant. In addition, Takaful as similar
as conventional Insurance where there are many kinds of different types of Takaful plans
covering life protection/ family Takaful, medical, education and investment. Besides, the
arrangement in Takaful scheme is based on concept of Ta’awun (co-operation and mutual
assisstance). At PruBSN, Tabarru’ funds are mutually and collectively owned by all Takaful
participants. Plus, with surplus sharing you don’t have to wait until the end of your Takaful
coverage period to receive any surplus contributions and you will still partake in the sharing
even if claims have been made. Ultimately, Takaful provides us with a financial safety net in
the event of unforeseen circumstances. Thus, Takaful can ensure you and your loved ones
receive necessary compensation and care.

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2.0 COMMENT

A basic definition of Takaful is a joint guarantee. It is a system of insurance based on

Islamic principles. The concept of Takaful revolves around a group of participants mutually
guaranteeing each other against loss or damage. Each participant fulfils their obligation by
contributing a certain amount of donation (tabarru’) into a fund. A third party – the Takaful
operator, manages this fund.

In the event of loss or damage suffered, the Takaful operator will disburse the funds
according to its participants. Any surplus is paid out only after the obligation of assisting the
participants has been fulfilled. Takaful operates as protection and profit-sharing venture
between the Takaful operator and the participants through this principle.

Other than the main feature mentioned above, there are a few other differences between
the two policies. In conventional insurance, the risk is transferred from the insured to the
insurer. Takaful, on the other hand, is based on shared risk. Each participant donates to a
Takaful fund and in the event of loss, the participant will receive the amount of its claim.

Furthermore, unlike conventional insurance, the participants in Takaful retain an

ownership interest in the fund. Contributions from the participants are later invested into ‘halal’
or Sharia-compliant funds to derive investment income. In the event when the fund generates
a surplus, it is then shared among the participants and, in some cases, with the Takaful
operator. This creates a ‘win-win’ situation for all participants.

As Malaysians, we can be proud that our country happens to be a pioneer and global
leader in Islamic finance. Takaful Act was enacted in 1984 whereas Syarikat Takaful Malaysia
Bhd was established in November 1984. It is the first-ever Islamic insurance company. Despite
being based on Islamic principles, Takaful isn’t a religious product, and it is available to
everyone, including non-Muslims. In fact, Takaful and Islamic finance products are increasing
in terms of popularity amongst non-Muslims.

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3.0 RECOMMENDATION / SUGGESTION

➢ Prohibitions of Gharar, Maysir and Riba

The most glaring difference between Takaful and conventional insurance is Takaful
complies with Sharia law. Takaful is void of any elements of gharar, maisir, or riba. Takaful
was created as an alternative to conventional insurance mainly to avoid these prohibited
elements.

1- Gharar: An insurance contract contains gharar because, when a claim is not made, one
party (insurance company) may acquire all the profits (premium) gained whereas the other
party (participant) may not obtain any profit whatsoever. Ibn Taimiyah, a leading Muslim
scholar, further reasoned “Gharar found in the contract exists because one party acquired
profit while the other party did not”. The prohibition on gharar would require all investment
gains and losses to eventually be apportioned in order to avoid excessive uncertainty with
respect to a return on the policyholder’s investment.

2- Maysir: Islamic scholars have stated that maysir (gambling) and gharar are inter-related.
Where there are elements of gharar, elements of maysir is usually present. Maysir exists in
an insurance contract when the policy holder contributes a small amount of premium in the
hope to gain a larger sum the policy holder loses the money paid for the premium when the
event that has been insured for does not occur the company will be in deficit if the claims are
higher than the amount contributed by the policy holders.

3- Riba: Conventional endowment insurance policies promising a contractually-guaranteed

payment, hence offends the riba prohibition. The element of riba also exists in the profit of
investments used for the payment of policyholders’ claims by the conventional insurance
companies. This is because most of the insurance funds are invested by them in financial
instruments such as bonds and stacks which may contain elements of Riba.

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 ➢ Takaful overview

Section 2 of Act 312, Takaful Act 1984 (Takaful Act, 1984), interprets takaful and
takaful business respectively as 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. Also,
business of takaful whose aims and operation do not involve any element which is not
approved by Shariah.

Takaful is a promise between members of a group whereby the members firstly agree
to establish a mutual fund and donate money into the fund, and secondly to provide a
joint guarantee or protection among themselves against defined loss and/or damage.
Consequently, if any member of the group suffers any of the defined loss and/or damage
the member would receive compensation usually in the form of money or benefits drawn
from the mutual fund. The principles that make takaful Shariah compliant are tabarru’
(donation), and ta’awun (mutual co-operation). The tabarru’ from the takaful participants
represents donation to the mutual fund and ta’awun when the group utilizes the mutual fund
to compensate members in need.

➢ The origin of takaful

In the context of modern insurance scheme in Malaysia, began in June 1972 when
the National Fatwa Committee of the Malaysian Islamic Affairs Council declared that the
conventional insurance is not in compliance with the Shariah. The key non-compliance is
that conventional insurance contains elements of riba, gharar and maysir that are
prohibited by the Shariah. In 1985 a similar declaration was made by the Fiqh Academy
of the Organization of Islamic Conferences. Consequently, Muslims in Malaysia and
elsewhere need to seek alternative insurance that is in compliance with the Shariah i.e. takaful.

Under the Takaful Act 1984, a takaful operator is required to have a Shariah Advisory
Board comprising of experts and Shariah scholars to ensure that the activities conducted
by the operator in managing the takaful fund, etc. Are in compliance with the Shariah.

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4.0 CONCLUSION

Additionally, takaful is considered one of the critical avenues in protecting an individual’s

life, wealth, and pride. Thus, wealth protection plays an important role in risk management,
especially for affected heirs and family. With the availability of takaful, immediate wealth is
ready for distribution in the case of death of the participant. In conclusion, the existence of
takaful fulfils the objectives of the shariah through its underlying principle of mutual
cooperation and unity. Participating in a Takaful plan depending on our needs contributes to
effective wealth management for both the short and long term.

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5.0 REFERENCE

https://www.prubsn.com.my/en/takaful-articles/how-is-takaful-different-from-other-
insurance/

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6.0 APPENDICES

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