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Takaful, the Islamic alternative to conventional insurance, is based on the concept of Ta’awun (mutual assistance). Ta’awun reflects the fundamentals of the teachings of Islam with regard to equality and brotherhood of a community, and their responsibilities toward one another in both social and economic assistance.
The etymology of Takaful is from the Arabic root word Kafalah, meaning to jointly guarantee. In principle, the Takaful system is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants.
In short, it refers to a group of people pooling resources and efforts to support the needy participants within the group. It is the very concept of mutual help and mutual benefit — how the fortunate many can help the unfortunate few.
Section 2 of the Malaysian Takaful Act 1984 defines Takaful 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”.
An interesting feature of Takaful is that the fellow participants or policyholders act both as insurer and the insured, as they are mutually contributing to and mutually benefiting from the fund. Losses are divided and liabilities spread according to the community pooling system.
Tabarru’
In order to eliminate the element of uncertainty in a Takaful contract, the concept of Tabarru’ (to donate, contribute or give away) was incorporated. Under Tabarru’, a Takaful policyholder agrees to relinquish a proportion of his or her paid contributions to fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of Takaful is made only after the obligation of assisting the fellow participants has been fulfilled.
The underlying principle of Tabarru’ is that it does not derive advantage at the cost of others. Since policyholders mutually guarantee each other and mutually benefit from the fund, the claimant should abide by the true spirit of Tabarru’ and realize that the amount paid to them is actually derived from fellow certificate holders.
Logically, they should try to avoid activities that are potentially detrimental to the interests of other certificate holders. All participants must avoid cheating and other such money-making tendencies in view of making a claim for Takaful money.
Mudarabah
The relationship between the Takaful participants and the Takaful operator is one of partnership, known as Mudarabah. Fundamentally, a Mudarabah contract is between two parties with two specific roles, i.e. the policyholder as the provider of capital (Rab al maal) and the Takaful operator as the manager (Mudarib).
The Mudarib is entrusted to invest the money and to translate the capital provided into profit, to the best of his ability and expertise.
In investing the money, the Mudarib has to ensure that the investment portfolios are Shariah approved — free of riba (interest) and free of involvement in activities such as gambling, alcohol, pork, pornography and others that go against the principles of Islam.
A predetermined contract specifies how the profit surplus from the operations of Takaful managed by the Mudarib is to be shared.
Charity and social welfare
Apart from the underlying principle of joint benefit and shared risk, another important aspect of Tabarru’ is that one has to donate some part of the money in order to help and protect the unfortunate. As Takaful is about mutual cooperation, the Tabarru’ fund allows participants to fulfill their religious obligation to provide financial assistance to fellow participants.
If viewed from the social-economic standpoint, Takaful allows participants to fulfill the social obligations to the ummah. By signing up for Takaful, one is indirectly involved in charity and welfare by enabling financial assistance for the unfortunate and needy. Through Tabarru’ donations, it allows participants to achieve self-purification and peace of mind.
Investment and savings
Takaful, besides being a charity and social-welfare instrument, can also be viewed as an investment tool for the financial advantage of the participants. A Takaful company can mobilize the savings in a prudent and profitable manner.
With regular contributions over a fixed period, Takaful creates long-term savings and can even form a retirement fund. In other words, a Takaful company can also play the role of a savings institution and by joining a Takaful plan, participants enjoy the benefit of savings that have been accumulated in a Shariah compliant manner.
The emergence of Takaful companies in Malaysia has not only added color to the local Islamic finance landscape by providing a Shariah compliant alternative to conventional insurance, but also introduced a social-economic policy for the welfare of the less well-off. Takaful, with its strong emphasis on mutual help and assistance, can further enrich the growth of an equal and developed society.
Ulanddy Uyob
Legal, Shariah and Compliance
Hong Leong Tokio Marine Takaful
Level 5, Wisma Hong Leong
18, Jalan Perak
50450 Kuala Lumpur
Tel: +603 2164 2339
UlanddyU@hltm.hongleong.com.my
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