Takaful is an Islamic insurance alternative that is based on principles of mutual cooperation and responsibility. It provides a way for Muslims to protect against risks in accordance with Sharia law. Takaful operates through pools funded by contributions from policyholders. Any surpluses are distributed among members, while deficits are covered by a special reserve without interest. Takaful structures use agency or partnership contracts to manage funds and ensure operations comply with Islamic laws and avoid interest, gambling, and uncertainty.

1. TAKAFUL : EXPLORING THE FUNDAMENTAL
OF ISLAMIC INSURANCE

2. INTRODUCTION
 A broad spectrum of conventional insurance products is available to mitigate
whether such products are generally off-limits as it is involve in transactions or
activities that sharia (Islamic law) prohibits.
 Most Muslims avoid in conventional insurance products and interested in new
spectrum of insurance products known as takaful.
 The features, structures and principles of takaful are being recognized from
conventional insurance.
 The Islamic insurance has taking over the industry in many ways and in an economy
growth.

3. WHY TAKAFUL ARE NECESSARY?
REMEMBER: Because the issue is not that insurance products reduce risk.
APPECIATING THE NEED FOR TAKAFUL
• Before TAKAFUL appeared on the market, many people in the Muslim community
believed that trying to reduce risk went against Islam.
• Their perception was that because every worldly action comes from Allah’s will,
people shouldn’t try to reduce or avoid the results of these actions.
• However, although Islam does prohibit attempting to avoid risk altogether, it doesn’t
prohibit reducing risk.
• The elements of uncertainty (gharar), gambling (maysir), and interest (riba) make
conventional insurance products prohibited risk-sharing instruments for Muslims.

4. Lacking Certainty (Gharar)
Conventional insurance is a contract between the insurer and the insured, but this
contract doesn’t explicitly describe its outcome for either the insurer or the insured.
 BUT, Sharia doesn’t allow the sale of the contracts that are based on uncertainty.
 REASONS:
• The conventional insurer faces uncertainty; when & whether the insured will make a claim.
• Insured also may/may not incur loses or damages to prompt a claim.
• The insurer can’t predict what the outcome may be for either party
THEREFORE, the Islamic scholars agree that conventional insurance
contracts are based on uncertainty, which means they aren’t sharia-compliant.

5. • Going hand-to-hand with uncertainty is the fact that conventional
insurance has characteristics of gambling.
• The conventional insurer receives huge amounts of money from the
insured in the form of premium payment.
• When few claims are filed, the insurer wins and the insured lose their
premiums.
• When loads of claims are filed, the insured get some payback for their
premiums and now the insurer may be in trouble.
Gambling with Premiums (Maysir)

6. CONTROVERSY ?
 Some people argue that conventional insurance isn’t the same as
gambling because:
 BUT, Most islamic scholars don’t split these hairs.
 They are agree that conventional insurance products involve
gambling and aren’t sharia-compliant.
GAMBLING CONVENTIONAL INSURANCE
Speculative risk – made based on a
conscious decision (keputusan
dalam kawalan dan sedar)
Insurance – events that are out of
someone’s control (diluar kawalan
seseorang)
The two is that a gambler may win
or lose
Someones carrying insurance
doesn’t ever really win; the insured
always lose but at least get their loss
or part of it covered.

7. Collecting Interest (Riba)
• Another reason that Islamic Law prohibits conventional insurance products is
that their transactions involve interest.
• Interest generally comes into play in two way:
Make sure insurer can pay their insured potential future claims, so they rarely let the
premiums they collect sit in a cash account.
If the insured files a substantial claim, they may receive an amount from the insurer that
totals more than thr premiums they has paid. Most of the ISLAMIC SCHOLARS consider
any excess amount paid by conventional insurer to be interest.
KEEP IN MIND!!
 Someone who purchases a Takaful product can also receive an amount that exceeds
the total contributions insured pays in.
 In this case, the excess amount is not considered interest or Riba.

8. • Takaful comes from the Arabic root kafala, which means “guarantee”
or “mutually guaranteeing”.
• Although many people may refer to takaful as Islamic Finance which is the
term more accurate indicates a mutual or joint guarantee.
• Theoretically, it is common pool of funds that members contribute in order to
share a certain risk and to help each other (not to make profit).
• While, in commercial practice the definition may be tweaked to accommodate
various takaful structures.
• In doing so, I draw some clear lines between takaful and conventional
insurance products (principles, people involved and features that define a
takaful product.
EXPLORING TAKAFUL

9. Grasping the principles behind takaful
(a) Cooperative risk sharing
 In conventional insurance, risk is transferred from one party to another.
By taking out an insurance policy, an individual essentially is asking the
insurance company to accept the complete risk.
 While with takaful, risk is shared among the members of the fund. For
example, if an event occurs that causes harm or damage to one member, all
members bear the brunt of that event and contribute to overcoming it
(members cooperate based on equality, solidarity, social responsibility and
honesty)

10. (c) Mutual Protection
 This principle has been practiced at least since the time of the Prophet
Muhammad s.a.w. In the later section “Examining the Evolution of
Takaful”. I describe how ancient tribes created a blood money system that
offered such protection to every tribe member.
 Each member protecting participates in protecting all the other members
against loss or damage.
(d) Solidarity among participants
 People who choose to contribute to a takaful fund share common interests
(the desire to protect themselves and all other members fro harm deriving from loss or damages)
and common responsibilities (sharing the risks involved with the fund and responsibility
of alleviating other members misfortunes).

11. Identifying the Parties Involved
1) Stockholders (shareholders)
- Stockholders are the owners of takaful business interprise – the
folks who provide the capital to start the business which
requires management and incurs administrative, marketing and
other operating expenses which they covers such expenses at
the time of startup and for the life of the fund.
- Stockholders are paid explicit fees on an going basis and receive
a cut of the company’s profit on an ongoing basis.

12. 2) Takaful Operator
- Takaful operator manages the fund which are financial institutions and
also they have expenses related to staffing, administration, marketing and
so on.
- In conventional insurance, members or policyholders don’t participate in
an insurance fund, so an insurance company’s primary jobs are to invest
premiums, investigate claims, determine appropriate pay outs and
maximize profits.
- While, takaful operator’s are primary job is to manage the policyholders’
fund.
3) Sharia Board
- Sharia board makes sure the company is making sharia-compliant
investments, approves new products and also determines whether the
business activities are sharia-compliant.

13. 4) Policyholders (takaful fund contributors)
- A policyholders has the right to receive a share of any fund surplus that
exists at the end of financial year.
- Company determines that surplus amount after paying all its expenses
and distributing profits to the stockholders then the takaful operator
exempts or lowers the amount of contributions from policyholders in
following period.
- Instead if deficit occur, the funds stockholders alleviate the deficit by
offering the fund an interest-free loan. The following year, is expected to
pay back this loan and deduct the amount from any surplus it has in that
financial year. If deficit two or more years in a row, participants should
expect their contributions amount to increase in subsequent years.

14. Takaful have other key features that set them apart from
conventional insurance products:
(a) The takaful company exists for reasons other than to profits its
stockholders
• In conventional insurance, the insurance company exists to maximize profits,
that the primary goal.
• But for takaful company, profit isn't the goal of a takaful fund at all.
• Instead the takaful focus on squarely on helping its member share their risks,
thereby potentially reducing the risk facing any one individual member.
KEY FEATURES OF TAKAFUL

15. (b) Takaful stockholders are paid fees in addition to share profits
• Investors in conventional insurance companies receive dividends, takaful
stockholders are paid an explicit fee from the fund addition to getting a
share of any profit.
• This explicit fee covers the setup costs as well as the operating expenses
and investments-related expense that the stockholders provide on an
ongoing basis.
(c) Takaful companies must make sharia-compliant investments
• The funds in a takaful company need to be invested in sharia-compliant
ways.
• Through discussion of sharia compliant investment options, including
equity funds and sukuk (the Islamic alternative to conventional bonds).

16. (d) Takaful companies are governed by a sharia board
• Takaful company must have a sharia board that supervises company
operations and approves new product developments.
There are significant ways in which takaful products to achieve sharia
compliance:
• Contributions by policyholders are considered gifts not premiums.
• Policyholders join the pool and cooperate among themselves for their common
good.
• Policyholders don’t financially benefit from other policyholders money.
• When a takaful company invests any of the funds it collect from its
policyholders, it select only sharia-compliant investment vehicles.
• The entire takaful operation takes place without the involvement of interest.

17. INTRODUCING TAKAFUL STRUCTURES
Takaful products usually built on one of three structures that use two primary
Islamic contracts as their foundation:
 Principal-agent relationship (wakala) model : A limited liability
company represents its policyholders in order to manage their funds. (Policyholder
is considered the principal , the takaful operator is the agent or wakil)
Partnership (mudaraba) model : The takaful policyholders acts as the
investing or silent partner (rab al mal) and the takaful operator is the working
partner.
Combination of principal-agents and partnership model : In this
scenario, the takaful operator acts as both the agent (wakil) and the fund
manager(mudarib) for the fund. The takaful operator manages the fund based on
the wakala contract and invests the fund based on the mudaraba contract.

18. The Differences Conventional & Islamic Insurance
Conventional Insurance Takaful
Contract on which the
product is based
A basic sales contract is in play. The
insurance company is the seller, and
the insured is the buyer.
The contract used (wakala,
mudaraba or a combination of two)
depends on the model of takaful
that the company selects.
Transfer of risk
Risk transfers between the
policyholders and company.
Risk is shared among the
policyholders.
Nature of company
investments
The investment of premiums is
unrestricted
The company makes only sharia-
compliant investments.
Who gets the surplus
The entire surplus belongs to the
company and is distributed among
stockholders
A portion of the surplus must be
shared among the policyholders.
Who is responsible for
excess liability
The insurer needs to pay from its own
assets and from owners equity to cover
exces liability.
In theory, the policyholders must
pay any excess liability. (in reality,
stockholders usually make an
interest - free loan to the company
to cover this expense)

19. THE EVOLUTION OF TAKAFUL

20. The BIRTH of Takaful?
The people of Mecca and Medina back then (now: Saudi Arabia)
practiced a mutual insurance system called AQILA
How was AQILA SYSTEM worked?
If a person from one tribe killed a person from a different tribe, the killer’s
tribe was on the hook to pay blood money to the deceased person’s family.
Aqila system was a fund pool that paid blood money when
someone was killed (paid by the killer’s tribe)

21. However, scholars believe that the core concept of
modern takaful was introduced by merchants who
traded among the Persian Gulf, Asia, and South Asia in
the ninth century.
WHAT THEY HAD INTRODUCED:
A groups of people would pool their funds and agree to share the
risk of misfortunes (i.e. robberies and natural disasters)
Despite that, no record indicates that:
Takaful existed between the 9th century
The birth of modern takaful in the 20th century

22. REASON OF MODERN TAKAFUL EMERGED:
 Muslim scholars actively find an alternative to conventional
insurance (which isn’t sharia-compliant)
 They witnessed & participated in the development of modern
Islamic banking
 Thus, insurance question was a logical one to consider

23. Eyeing the Future Growth of the Takaful
Industry

24. WHY?
 Most countries require auto insurance coverage of some kind, and many nations accept
motor takaful & conventional auto insurance.
 Various takaful products have become available as sharia-compliant alternatives to
conventional insurance.
Takaful is still in its infant stage,
BUT
it’s the fastest-growing sector of the global insurance industry
 The current takaful market is concentrated in Malaysia and the Middle East
 An estimated 130 takaful companies are in business worldwide
 Almost half of them are concentrated in the Gulf Cooperation Council (GCC)
nations of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab
Emirates.

25.  Despite such a rosy outlook for the industry, takaful operators are
facing challenges presented by their higher costs because of the lower
economies of scale
 However, takaful companies have an important competitive advantage:
☺ Customer loyalty (which is built on takaful’s sharia compliance)

26. THANK YOU !