The operational framework of Takaful avoids elements of Riba (interest or usury) and Gharar (unknown or ambiguous factor in the operation of contract). Riba and Gharar are the basic reasons why Muslim scholars regard conventional insurance as being against the principles of Shari’ah.
The core principles of Takaful are:
From an operation viewpoint, under Takaful the members agree to devise schemes under which they themselves are insured and are insurers. Each member pays a premium as a contribution to a common fund referred as Takaful fund or policyholder’s fund. The Takaful operator, which invariably is an insurance company, manages this Takaful fund. The Takaful operator has to ensure the member’s level of contribution commensurate with the degree of risk. Therefore, the Takaful operator can apply scientific principles in the assessment of the contribution. The members allow the Takaful operator to take Tabarru (donation) to pay the losses suffered by other members in the pool. If there is any surplus left from the contribution after deduction of Tabarru and charges, that surplus belongs to the members.
- Policyholders cooperate among themselves for their common good.
- Every Policy holder pays subscription to help those that need assistance.
- Divide losses and liabilities among the community by a pooling system
- Eliminate uncertainty in respect of subscription and compensation
- Not derive advantage at the cost of others.
- Invest funds in Shari'ah complaint instrument.
Takaful is a unique way of managing the insurance needs of the Muslim community in a manner consistent with religious beliefs.