In the Name of God, the Merciful, the Compassionate.
In modern times insurance has become inseparable from business and the global financial system.
Uncertainties of life demand that we need a form of cushioning to fall on whenever calamity, misfortune or disaster strikes in our day-to-day life on earth whether we are Muslims or non-Muslims. However, the elements of Riba, Gharar and gambling which are conspicuously present in our traditional insurance practices, meant that not all people view it as normal for participation, especially Muslims, except those we join under duress which is sine qua non.
So, we have been given the permissibility in fiqh Muamalaat to innovate a kind of insurance that suits our faith which is Shariah compliant, meaning devoid of the prohibited elements mentioned above including the illicit businesses that are part of the conduct of traditional insurance companies. Hence, Takaful has been designed to bridge the gap between faith and the international insurance business.
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Takaful is a Shariah-compliant alternative insurance to conventional insurance. Since Shariah intends to protect people from difficulties and hardships, as stated in Quran (2: 185) and (4:28), the takaful design is one element that is solving this purpose of ameliorating hardships whenever they arise. It is a way of getting cover against calamities, disasters, misfortunes and risks whilst remaining safely within the orbit of the Shariah. In other words, takaful insurance gives the insured safety whilst his faith is intact. The takaful model of insurance is considered the best worldwide according to recent research.
What is Takaful?
It is an Islamic insurance based on the principle of mutual assistance (Ta’awon) which provides mutual assistance in cases of loss of life, assets, and property and offers joint risk-sharing in the event of a loss incurred by one of the pool members. In a nutshell, it is a conventional insurance minusGharar, riba, gambling and illicit business conducts (shariah compliant). In all forms of takaful, be it general or family takaful, the participants agree to help one another with their contribution at the time when any participant member faces catastrophe or incurs a particular loss.
We can distinguish takaful insurance from conventional insurance with regard to objectives, structure, investments policies and returns;
Policyholders of conventional insurance transfer risk to a single party which is the insurance company and prohibited elements such as riba, Gharar, gambling and dealing in illicit businesses are part and parcel of it. The payment of premiums by policyholders in conventional insurance is against an unknown risk for general insurance. And with life insurance, policyholders get their premiums back with interest in case of survival and the insured amount in case of death before the maturity of the policy.
However, with takaful, participants give up their ownership right of the amount they donated to the waqf fund which will now bear the losses to any of them, and the participant members share the underwriting surplus/ underwriting losses.
The takaful company manages the business and shares the investment profits with the policyholders. In other words, takaful participants donate to the company through ‘Hiba, and Tabaru’ instead of paying premiums to the company.
A conventional insurance company is owned by only the shareholders and not policyholders, whilst with takaful the company is owned by participant members who are also the shareholders.
Underwriting surplus/underwriting losses fully belong to the participants. Therefore, after taking care of those members who incur calamities during the period, participant members will share the remainder of the underwriting surplus if there is any since the underwriting surplus/underwriting losses are owned by them.
The takaful system has its own built-in mechanism to counter any overpricing policies of insurance companies.
First by covering losses from underwriting or on investment through the absorption by the reserve, followed by interest-free loans from shareholders, and then followed by the general increase in pricing by the company.
The risk premium in the conventional system is commercially driven, motivated by the desire for maximum profit for the shareholders whilst in the takaful insurance adequacy of the scheme is the main consideration and the profit element is subject to the rules of equity, justice and ethics.
A life insurance policy under the conventional system revolves around the element of Riba, whereas the Islamic model of life policy is based mainly on the principles of Waqf (endowment fund), Tabarru (donation), and Mudarabah (partnership).
Under the conventional policies, payments to the agents are made from the assured; paid premiums, whereas under the family Takaful policy, the agents work for the company and thus they are paid by the company itself.
Under the conventional system, insurable interest is usually vested in the policyholder himself should he be alive upon the expiry of the policy period. But in the case of death of the assured within the period, the insurable interest is to be vested to the nominee or next of kin, who could be the husband/wife, parents or children or any other person or entity.
In contrast, under the takaful model, the insurable interest is to be vested to the assured himself or to his heirs, according to the principles of inheritance and wills.
The thought of a conventional life policy is that if the assured dies at any time before the maturity of the policy, the nominee is entitled to recover from the insurer the whole amount agreed in the policy, while if the assured is alive upon the expiry of the policy period, he is entitled to the whole amount agreed in the policy plus interest, dividends and bonus subject to the company’s policy. On the contrary, in the Takaful system, if the assured dies at any time before the maturity of the policy, the company gives to the beneficiary the amount projected in the policy, which includes his investment part along with profit, any amount from the Takaful fund and the donation from the company at its discretion. In the case where the policyholder is alive upon the expiry of the maturity period, the company gives him the investment part along with profit, and a proportional share in the underwriting surplus.
The features of Takaful model of insurance, are very attractive because, it has a feeling of transparency, a sense of belongingness, safety, honesty, equity, justice and ethics. This is why apart from the GCC region which are known to practice Islamic finance, Western countries such as UK, France, Spain and Australia have established thriving takaful firms. In fact, per the Australian Muslim Times (AMUSTNEWS), takaful is in high demand in Australia today. We hope and pray that this writes up may benefit readers by enabling them to understand the basics of Islamic insurance, especially the Ghanaian youth. May Allah increase us in knowledge. And Allah knows best.
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
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