CHAPTER 1

Introduction to Takaful
CHAPTER 1 : Introduction to takaful
Objectives
Introduction
Definition
Origin and Development of takaful
Origin and Development of insurance
Non-conforming elements according to
Islam
Objectives
- Define and explain the word Takaful
- Looks at the origin and development of Takaful
- Understanding the Islamic perspective on
Insurance
- Identifying and understanding the elements that
makes Takaful different to Conventional
Insurance.
- Differentiate three non-conforming elements in
Takaful.

Introduction
There has been movement around the world
sparked by muslim's cries to practise Islam
as a whole through the concept of Islam Ad
Deen (Islamic way of life). Therefore,
alternatives have been introduced to the
world which hold the shariah principles and
practice as their foundation.

Introduction (cont.)
An alternative to the concept of insurance,
is the Islamic doctrine of al-Takaful, as
adopted by the Islamic insurance operators.

Definition of Takaful
The term 'takaful' is derived from the root
word 'kafala' which means 'guarantee' or
'safeguard'. The word 'takafal' whose chief
characteristics is 'al-syarikah' means
'sharing'. Therefore, the word takaful means
'shared responsibility or shared guarantee,
responsibility, assurance or surety'.

Definition of Takaful (cont.)
Technically, takaful means 'mutual
guarantee provided by a group of people
living in the same society against a defined
risk or catastrophe befalling one's life,
property or any form of valuable things'.
Takaful is also known as a cooperative
insurance.

Origin and Development
of Takaful
Practices of the doctrine of al-'aqilah
among the ancient Arab tribes as a tribal
custom.
Practices of the Holy Prophet (s.a.w.)
Practices of the Companion
Development in the 14
th
20
th
century

Doctrine of al-Aqilah
It was a common practice of the ancient
Arab tribes that, if any member of a tribe
was killed by a member of another tribe, the
heir of the victim would be paid an amount
of blood money as compensation by the
close relatives of the killer.
Doctrine of al-Aqilah (cont.)
Those close relatives of the killer, called as
'Aqilah, were supposed to pay the blood
money on behalf of the killer. The central
idea of 'Aqilah was that the ancient Arab
tribes had to be ready to make financial
contributions on behalf of the killer to
compensate the heir of the victim.
Doctrine of al-Aqilah (cont.)
Such readiness to make monetary
contribution could be similar to the
premiums in insurance practices, while the
compensation paid under al-'Aqilah could
be similar to the indemnity in today's
insurance practices, as it is a kind of
financial protection for the heir against an
unexpected death of the victim.
Practices of the
Holy Prophet (s.a.w.)
The acceptance of the Aqilah following a
verdict given in a dispute between two
women from the tribe of Huzail.
Relevant provisions in the first constitution
of Madinah in 622 B.C.
Practices of the
Holy Prophet (s.a.w.) (cont.)
Through the practice of al-Diyah

Article 3 provided that al-Diyah or blood
money was supposed to be paid by the
Aqilah to the heirs of the deceased (victim)
in order to rescue the killer from legal
burden.
Practices of the
Holy Prophet (s.a.w.) (cont.)
Through the payment of Fidyah (ransom)

Should anyone be made a prisoner of war
by the enemy, the al-Aqilah of the prisoner
shall contribute ransom to be paid to the
enemy, in order to enable the captive to be
freed.
Practices of the
Holy Prophet (s.a.w.) (cont.)
By way of other forms of social insurance

Articles 4-20A provided that the society
shall be responsible to establish a joint
venture with a mutual understanding
towards providing necessary aid and help
for the needy, ill and poor.
Practices of the Companion
During the reign of the second Caliph,
Sayyidina Umar, a Diwan of Mujahidin was
established where whose names was
recorded in the Diwan owed each other
mutual co-operation to contribute blood
money for manslaughter committed by
someone from their own tribe.
Development in the
14
th
21
st
century
During the 14
th
to 17
th
century, a Sufi order
called Kazeruniyya will enter an agreement
with merchants where the merchant
promised to pay an agreed amount to the
Order upon safe arrival to destination for
protection against peril during sea voyage.

Development in the
14
th
21
st
century (cont.)
During the 19
th
century, Ibn Abidin became the
first person to discuss insurance as a legal
institution and no longer as a customary practice.
In the 20
th
century, Islamic jurist, Muhammad
Abduh issued Fatwas legalising insurance
practices using Mudharabah contract and
legitimizing a transaction similar to endowment
life insurance.
Development in the
14
th
21
st
century (cont.)
In Malaysia, Takaful Act 1984 was introduced
which is based on Shariah principles.
Syarikat Takaful Malaysia Bhd was established on
29
th
November 1984
Takaful Nasional Sdn Bhd (formerly known as
MNI Takaful) was established on 15
th
October
1993.
Then two more companies was established
namely, Mayban Takaful and Takaful Ikhlas Sdn.
Bhd.
Origin and Development
of Insurance
Idea of insurance began with the Babylonians and
their civilization in 3,000 years B.C.
Code of Hammurabi compiled by King of
Babylon in 2250 B.C. contained 282 clauses
Contract of Bottomry - commercial contracts
involving money transactions, in which people
lent their money to the merchants for a certain
percentage of interest.
Contract of Bottomry
Introduced by Babylonian merchants about 4000
3000 B.C.
Money or goods were advanced to the merchants
for the purpose of trade, either as pure loan in
consideration of interest in which the lenders had
the right to claim a fixed rate of interest from the
merchant over and above the loan or both as a loan
for interest and as capital for a share of profits
from from the trade.
Contract of Bottomry (cont.)
Such a transaction between the lender and the
borrower was on the basis of mutual
understanding, that, in consideration of payment
of the interest, the borrower should be protected
from liability against unexpected and accidental
happenings in the trade.
Payment of interest premiums
Borrower insured
Lender - insurer
Origin and Development
of Insurance (cont.)
Adopted by the Phoenicians around 1600-1000
B.C.
Practiced by the Greeks in 4
th
century B.C.
Practiced by the Hindus in India in 600 B.C.
Was later developed by Rome with modifications,
which limited the cases of loss for the lenders, but
provided protection for the borrowers against any
liability.
It was practiced mainly in regards to land.
Origin and Development
of insurance (cont.)
Later was developed in Italy with marine
insurance in the 14
th
and 15
th
century.
In 16
th
century, Sir Thomas Greesham
established the first Royal Exchange as a
foreign money market.
Resulted in London being the centre for
international insurance.
Origin and Development
of insurance (cont.)
Lloyds of London originated in a coffee house in
London in 1688. Incorporated by Parliament in the
Lloyds Act 1871.
In Federation of Malaya, insurance law was drawn
from the legislation enacted in UK in 1909.
Due to the comprehensive recommendations from
Mr. Caffin (Insurance Commissioner of Australia)
in 1960, Insurance Act 1963 was enacted by the
Malaysian Parliament on 21
st
January 1963.
Then Insurance Act 1996 came into force on 1
st

January 1997.
Non-conforming Elements
According to the ulama, the concentional
insurance is called muamalah fasid as
there are three elements found which do not
conform to the rules and requirements of
Islamic syariah.
Al-gharar
Al-maisir
Al-riba
Al-Gharar
Defined as a contract where the results are
not known or hidden, or one of the two
possibilities where the frequent occurrence
is the one that is more feared.
Also means there are unknown or uncertain
factors in operation of a contract in both life
and general insurance policies.
Al-Gharar (cont.)
Gharar is the sale of probable items whose existence or
characteristics are not certain, due to risky nature which
makes the trade similar gambling.
Ahmad and Ibn Majah narated on the authority of Abu-Said
AlKhudriy(mAbpwh):
Nabi Muhammad (saw) has forbidden the purchase of the
unborn animal in its mothers womb, the sale of the milk
in the udder without measurement, the purchase of spoils
of war prior to their distribution, the purchase of charities
prior to their receipt, and the purchase of the catch of a
diver.
Al-Gharar (cont.)
There are four types of gharar :
Gharar in the outcome
Gharar in the existence
Gharar in the result of exchange
Gharar in the contract period

Al-Gharar (cont.)
Gharar in the outcome.
When the contract is made, neither the
insurer nor the insured knows the outcome
of the contract. The insured does not clearly
know whether he will get compensation or
not as an exchange to the premium that he
has paid. Similarly, the insurer does not
know the outcome.

Al-Gharar (cont.)
Gharar in the existence
In the insurance contract, the insured does
not know the existence of the compensation
since it depends on the outcome that may or
may not occur.
Al-Gharar (cont.)
Gharar in the result of exchange
When the contract is made, neither the insurer nor
the insured knows the outcome of the exchange.
The insured does not know whether he or she will
get the compensation as exchange to the premium
that he pays. Similarly, the insurer does not know
how much premium he gets. Sometimes he will
receive the premium only once or a few times, but
he has to indemnify an amount that does not
commensurate with the premium.
Al-Gharar (cont.)
Gharar in the contract period
According to some scholars, when a contract is
deferred, the period must be made known. If not,
the contract is considered void. The same situation
arises in the insurance contract whereby
compensation is based on a time frame that is not
known and cannot be known especially in life
insurance.
Al-Maisir
Maisir is akin to gambling.
The insurance contract is equated with gambling
where if the peril happened the insurer will lose.
On the other hand if th peril does not not occur,
the insured will lose.
Some scholars argued that the source of the money
that is being paid as compensation is not
determined.
Arises as the consequences of the presence of Al-
gharar, particularly in life insurance.
Al-Riba
Means usury and is forbidden in Islamic economic
jurispridence.
Refers to excessive or exploitative charging of
interest and also refers to the concept of interest
itself.
In the contract of exchange between the insurer
and the insured, there is difference both in
quantity and amount (Insurance companies give
out loans and charge interest)
Al-Riba
According to scholars, as insurance contract is a
contract of exchange, therefore exists riba al-fadhl
and riba al-nasiah simultaneously.
Riba al-fadhl exists when the compensation
awarded does not equate the premium paid.
Whilst, Riba al-nasiah coexist with riba al-fadhl
when premium payment and compensation does
not occur at the same time.

Al-Riba
Riba in insurance was argued could be partially
solved if the claims amount were restricted to the
sum of the premiums paid,
but limiting it to this amount would make
insurance of limited or questionable use to the
buyers.
Another riba transaction in insurance is relating to
investment (interest on fixed deposits) and liability
side(interest on policy loans).