All human beings are invariably exposed to the possibility of meeting catastrophes and disasters giving rise to misfortunes such as death, loss of limbs, accident, destruction of business or wealth, etc. Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that one must find ways and means to avoid such catastrophes and disasters wherever possible, and to minimize one’s financial losses should such events occur. One possible way out is to buy an insurance cover, as in the conventional system.
Different opinions have been expressed about the status of conventional insurance from the point of view of Islam. An overwhelming majority of Shariah scholars believe that it is unlawful due to the involvement of riba (interest), maisir (gambling) and gharar (uncertainty).
The agreed Takaful contract usually involves the concepts of Mudarabah, Tabarru’ (to donate for benefit of others) and mutual sharing of losses, with the overall objective of eliminating the element of uncertainty.
Takaful is not a new concept in Islamic commercial law. Contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was laid down in the system of “Aaqilah,” which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet. In the case of a natural calamity, everybody used to contribute something until the loss was indemnified.
Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful, wherein payments by the whole tribe distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.
The profit attributable to the participants is credited into the two accounts separately. Thus a Takaful contract may comprise clauses for either protection, or savings/investments, or both the benefit of protection as well as savings and investment. The protection part of Takaful works on the donation principle, according to which individual rights are given up to indemnify the losses reciprocally. In the savings part, individual rights remain intact under the Mudarabah principle and the contributions along with profit (net of expenses) are paid to the policyholders at the end of the policy term or before, if required by him.
The distinction between conventional insurance and Takaful is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful agreement. Likewise they share in any surplus or loss from the pool collectively. The Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies, because whatever may be the premium charged, the surplus will normally go back to the participants in proportion to their contributions.
In the Sudanese Takaful model, which is the preferred choice of the majority of contemporary Shariah experts, every policyholder is also the shareholder of the Takaful company. There is a board that runs the business on behalf of all the participants and there is no separate entity managing the business. The legal framework in other Islamic countries does not normally allow this arrangement and Takaful companies work as separate entities on the basis of Mudarabah (as in Malaysia) or Wakalah (as in the Middle East).
With the Mudarabah model, which is practised mainly in the Asia Pacific region, policyholders receive profit on their part of the funds only if the Takaful company earns profit. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the company. The Shariah committee approves the sharing ratio for each year in advance. Most of the expenses are charged to the shareholders.
With the Wakalah model, the surplus of the policyholders’ funds investments – net of the management fee or expenses – goes to the policyholders. The shareholders charge a Wakalah fee from the contributions to cover the expenses of the business. The fee rate is fixed annually in advance in consultation with the Shariah committee of the company. As an incentive for good governance, the management fee is related to performance.
Islamic banks and financial institutions require Takaful services for their operations. Although the insurance business in Pakistan falls under the jurisdiction of the Securities and Exchange Commission of Pakistan (SEC), institutions operating Islamic banking have to deal with insurance. As such, the Central Bank should desire that Takaful is introduced into the country at the earliest possible opportunity. In the revised Insurance Act, the Government of Pakistan has added provisions for Takaful companies in the country. In addition, Pak Kuwait Investment Corporation has recently been allowed by the SEC to establish a Takaful company in Pakistan under the name of First Takaful Insurance Company, with an authorized capital of Rs100 million (US$1.67 million). This is a promising start, but much remains to be done to implement a Takaful system in Pakistan.