CHAPTER11

COMPARISON BETWEENTAKAFULAND
INSURANCE
 DIFFERENCESBETWEENTAKAFUL AND INSURANCE

No Pertinent Issues Takaful Insurance

1 Essenceof Intention Intention is to create both spiritual Intention is to create legal

and legal relationship relation only

2 Subject matter Subject matter must be Shari’ah Subject matter must be Common
Justified Law justified

3 Guarantee The Takaful Operator is only the The company provides the
Fund Manager. The participant guarantee
mutually guarantees each other
No Pertinent Issues Takaful Insurance

4 Fund The fund belongs to the The fund belongs to the

Participant and managed by Company though separation of
the Takaful Operator for a assets is maintained between the
legitimate consideration for Shareholders and the
the services rendered policyholders

5 Payment of Paid contribution (portion for Paid premium creates an

contribution/premi Takaful charges are treated obligation against the Insurer on
um asdonation (Tabarru’) a sale and purchase contract

6 Forbidden elements Islamic model is based on Insurance policy evolves around

Islamic principles and free the element of Gharar, Riba
from any of the forbidden and Maysir
elements
No Pertinent Issues Takaful Insurance

7 Religious supervisory Religious supervisory ismade There is no religioussupervisory

mandatory by the Takaful Act 1984 in insurance

8 Profits The profit is shared betweenthe In insurance the profits is at the

Participant and the Company discretion of the Company

9 Contract A combination of tabarru’ contract An exchange contract (sale and

(donation) and agency of profit purchase) between the Insurer
sharing contract and the Insured

10 Indemnity The indemnity is provided by the The Company provides

Takaful Fund indemnity from the Company’s
fund
No Pertinent Issues Takaful Insurance

11 Operational principle Operational principle in Insurance is Operational principle in

Shari’ah compliance Insurance is not Shari’ah
compliance

12 Risk treatment Riskssharing concept among Concept of risks transfer

Participants

13 Taxation Taxation and Zakat Tax

14 Benefits Paid from the defined funds under
joint indemnity borne by the
participants
15 Profits/Bonus Specifies from the outset how the
profits are to be shared between
the participant and the company
Paid from the fund legally
owned by the company
May offer bonus or profit in
general terms only especially
with profit participating polices
No Pertinent Issues Takaful Insurance

16 Responsibility of Participants make contribution to the Policyholders pay premium to

policyholder/particip scheme. Participants mutually the insurer
a nts guarantee each other under the
scheme

17 Liability of the Insurer/ Takaful Operator acts as the Insurer is liable to pay insurance
Operator administrator of the scheme and benefits as promised from its
pays the Takaful benefits from the assets (insurance funds and
Takaful funds. shareholders’ fund)

In the events of deficiency in the

Takaful funds, Operator will provide
interest free loan to rectify the
deficiency

18 Investment fund Assets of the Takaful funds are There is no restriction apart from
invested in Shari’ah compliance those imposed for prudential
instruments reasons
 COMPARISON OF CONVENTIONAL INSURANCE AND
TAKAFUL
Takaful
Based on mutuality; hence the risk is not transferred
but shared by the participants, who form a common
pool. The company (takaful operator) acts only as the
manager of the pool. In effect, the policyholders are
both the insurer and the insured
The element of uncertainty, i.e. Gharar, is brought
down to acceptable level under shariah by
characterizing contributions as donation (Tabarru’),
not obligation, and for a good cause, i.e., to mitigate
the loss suffered by any one of the participants, as
opposed to payments linked to definite expectation
of insured benefits to be received
Conventional Insurance
A risk transfer mechanism whereby risk is
transferred from the policyholder (the insured) to
the insurance company (the insurer) in
consideration of an ‘insurance premium’ paid by
the insured
Contains the element of uncertainty, i.e., Gharar,
which is forbidden in Islam. The terms of the
contract are unclear as to certainty of when any
loss would occur and how muchcompensation would
be payable
 Takaful
The participant pays the contribution (Tabarru’) in
the spirit of purity and brotherhood to cover
mutual losses of members of the pool. Losses and
gains are mutually shared by the pool members
who contribute to the pool. That is, third parties
(insurer and reinsurers) are not affected by the
outcomeof risk events
Funds are only invested in non-interest-bearing,
i.e., Riba-free, insruments. Note that regular
income investment are still possible (such as under
Sukuk, Islamic bonds) as long as the income is not
interest-based
Conventional Insurance
Contains an element of gambling, i.e., Maisir, in
that the insured pays an amount (premium) in the
expectation of gain (compensation/payment
against claim). If the anticipated loss (claim) does
not occur, the insured losses the amount paid as
premium. If the loss does not occur, the insurer
losses a far larger amount than collected as
premium and the insured gains by thesame
Funds are mostly invested in fixed interest-
bearing instrument such as bonds, fixed interest
securities, etc. Hence, these contain the element of
riba (usury), which isforbidden inIslam
 Takaful Conventional Insurance

Surplus belongs to the participants and Surplus or profit belongs to both the shareholders
is accordingly returned to them and the with-profit policyholders. The insured is
covered during the policy period but is not
entitled to any return at the end of suchperiod