Principles of Takaful
The operational framework of Takaful avoids elements of Riba (interest and 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:
- Members cooperate among themselves for their common good.
- Every member pays a subscription to help those members that might need assistance.
- Divide losses and liabilities among the members through a pooling system.
- Eliminate uncertainty in respect of subscription and compensation since the subscription is based on donations
- Not to derive advantage at the cost of others.
- Invest in Shariah-compliant funds.
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 to as the Takaful Fund. The Takaful operator, which invariably is an insurance company, manages this Takaful Fund on behalf of the members. The Takaful operator has to ensure that the member’s level of contribution commensurate with the level of risk.
The Takaful operator can apply scientific principles in the assessment calculation of contribution. The members allow the Takaful operator to take Tabarru (donation) from Takaful Fund 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, it will be distributed amongst the members In case of deficit, Takaful Operator shall arrange for a interest free loan “Qard Hassan” to cover such deficit. Such a loan can be repaid in future from surplus (if any) generated in the following year/years .
Takaful is a unique way of managing future financial needs and safe guarding against unforeseen events in a Sharia’h Compliant way.