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Takaful (, sometimes translated as "solidarity" or mutual guarantee) Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.403 is a co-operative system of reimbursement or repayment in case of loss, organized as an
Islam Islam is an Abrahamic religions, Abrahamic monotheistic religion based on the Quran, and the teachings of Muhammad. Adherents of Islam are called Muslims, who are estimated to number Islam by country, 2 billion worldwide and are the world ...
ic or ''
sharia Sharia, Sharī'ah, Shari'a, or Shariah () is a body of religious law that forms a part of the Islamic tradition based on Islamic holy books, scriptures of Islam, particularly the Quran, Qur'an and hadith. In Islamic terminology ''sharīʿah'' ...
''-compliant alternative to conventional insurance, which contains ''
riba ''Riba'' (, or , ) is an Arabic word used in Islamic law and roughly translated as " usury": unjust, exploitative gains made in trade or business. ''Riba'' is mentioned and condemned in several different verses in the Qur'an3:130
'' (usury) and '' gharar'' (excessive uncertainty). Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.402 Under takaful, people and companies concerned about hazards make regular contributions ("donations") to be reimbursed or repaid to members in the event of loss, and managed on their behalf by a takaful operator. Like other Islamic finance products, Takaful is grounded in Islamic '' Muamalat'' (commercial and civil acts or dealings branch of Islamic law). In 2018, the takaful industry had grown to a size of $27.7 billion of "contributions" (from a 2011 figure of $12 billion). The movement has been praised as providing "superior alternatives" to insurance that "reinvigorate human capital, emphasize personal dignity, community self-help, and economic self-development"; but also criticized as having "dwindled" in scope to an industry of "conventional insurance with Arabic terminology and language of contract". Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.410


Principles

Theoretically, takaful is perceived as cooperative or mutual insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of "bear ye one another's burden". The principles of takaful are as follows: * Policyholders cooperate among themselves for their common good. * Policyholders' contributions are considered as donations to the fund (pool). * Every policyholder pays his subscription to help those who need assistance. * Losses are divided and liabilities spread according to the community pooling system. * Uncertainty is eliminated concerning subscription and compensation. * It does not derive advantage at the cost of others. Muslims scholar have "hardly any difference of opinion" on "the need for managing, redeeming and mitigating general, business and life risks covered by the insurance business". But whether conventional insurance is forbidden ('' haram'') is disputed.


Fiqh scholars

In its second session (December 1985), the Fiqh Academy of the
Organisation of Islamic Cooperation The Organisation of Islamic Cooperation (OIC; ; ), formerly the Organisation of the Islamic Conference, is an intergovernmental organisation founded in 1969. It consists of Member states of the Organisation of Islamic Cooperation, 57 member s ...
(also called the International Islamic Fiqh Academy) ruled conventional commercial (but not social) insurance '' haram'' (forbidden). Its ninth resolution stated:
The commercial insurance contract, with a fixed insurance premium, as practiced by commercial insurance companies, contains substantial ''gharar'', which renders the contract defective. Consequently, it is legally forbidden. El-Gamal, ''Islamic Finance'', 2006: p.147


Argument against conventional insurance

Islamic scholars began forbidding commercial insurance as early as the late nineteenth century CE. The majority of Islamic scholars believe commercial insurance is disallowed for Muslims because it contains * ''Al-Gharar'' (
uncertainty Uncertainty or incertitude refers to situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown, and is particularly relevant for decision ...
) * ''Al-Maisir'' (
gambling Gambling (also known as betting or gaming) is the wagering of something of Value (economics), value ("the stakes") on a Event (probability theory), random event with the intent of winning something else of value, where instances of strategy (ga ...
) *
Riba ''Riba'' (, or , ) is an Arabic word used in Islamic law and roughly translated as " usury": unjust, exploitative gains made in trade or business. ''Riba'' is mentioned and condemned in several different verses in the Qur'an3:130
( usury) They have two main concerns about conventional insurance: #The uncertainty "if and when the insured event will take place and, if it does take place, what would be the relationship of compensation to the insurance premium paid". (What if the holder of collision insurance policy never has a motor vehicle accident? they lose and the insurance company wins. Regarding life insurance, everyone dies, but what if the death occurs after the first payment of a premium for life insurance? they win and the insurance company loses.) This "makes the insurance business similar to gambling, where the gambler does not know the fate of the game". Thus, uncertainty in the conventional insurance business "is excessive and borders on prohibited gharar". #"Insurance companies invest surplus funds on the basis of interest and pay out a part of such earnings to policyholders as bonuses." According to the 'orthodox interpretation', this is riba. According to Jamal Zarabozo, the majority of modern Muslim such as scholars from Islamic Fiqh Council of the
Organisation of Islamic Cooperation The Organisation of Islamic Cooperation (OIC; ; ), formerly the Organisation of the Islamic Conference, is an intergovernmental organisation founded in 1969. It consists of Member states of the Organisation of Islamic Cooperation, 57 member s ...
, the Board of the Leading Scholars of
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, the Fiqh Council of
Mecca Mecca, officially Makkah al-Mukarramah, is the capital of Mecca Province in the Hejaz region of western Saudi Arabia; it is the Holiest sites in Islam, holiest city in Islam. It is inland from Jeddah on the Red Sea, in a narrow valley above ...
under the auspices of Muslim World League, Siddiq ad-Dharir, Wahbah al-Zuhayli, Muhammad Mustafa as-Sinqithi, Salaah al-Saawi, Abdullah al-Muslih, Sulaiman Thunayaan, Ali Abu al-Basl, Abdur Rawf al-Shaadhili, Faisal Maulawi, Mohammad Muslehuddin, Afzalur Rahman, and numerous other respected scholars and jurists agreed that commercial insurance were forbidden.


Defense of conventional insurance

A minority of Islamic scholars argue that insurance is not like gambling because in gambling, no risk is covered and no damage is mitigated. The gamblers play a game of chance for entertainment and profit in which they can win or lose, based on a conscious decision. Jamaldeen, ''Islamic Finance For Dummies'', 2012: p.295 Insurance provides coverage for events out of the insured policyholder's control. When the policyholder collects a payout, they are not a winner, but a loser who at least has some compensation. Furthermore, while insurance involves uncertainty, "statistical techniques and actuarial sciences have progressed to a stage where the insurance company can calculate its risks and benefits with great precision," so that the uncertainty involved in insurance can scarcely be called excessive in normal circumstances.


Scriptural basis

Islamic scholars supporting takaful point to Qur'an and several sayings (
hadith Hadith is the Arabic word for a 'report' or an 'account f an event and refers to the Islamic oral tradition of anecdotes containing the purported words, actions, and the silent approvals of the Islamic prophet Muhammad or his immediate circle ...
) of the Islam prophet
Muhammad Muhammad (8 June 632 CE) was an Arab religious and political leader and the founder of Islam. Muhammad in Islam, According to Islam, he was a prophet who was divinely inspired to preach and confirm the tawhid, monotheistic teachings of A ...
. Some examples are: ;Qur'an ''Basis of Co-operation'': Help one another in ''al-Birr'' and in ''al-Taqwa'' (both: virtue, righteousness and piety), but do not help one another in sin and transgression. ( Sūrat al-Māʼidah, Verse 2) ;Hadith *
God In monotheistic belief systems, God is usually viewed as the supreme being, creator, and principal object of faith. In polytheistic belief systems, a god is "a spirit or being believed to have created, or for controlling some part of the un ...
will always help his servant for as long as he helps others. (Narratives by Imam Ahmad ibn Hanbal and Imam Abu Daud.) *''Basis of Responsibility'': The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narratives by Imam al- Bukhari and Imam Muslim) * One true Muslim ('' Mu’min'') and another true Muslim are like a building, whereby every part in it strengthens the other part. (Narratives by Imam al- Bukhari and Imam Muslim) * ''Basis of Mutual Protection'': By my life (which is in God's power), nobody will enter
Paradise In religion and folklore, paradise is a place of everlasting happiness, delight, and bliss. Paradisiacal notions are often laden with pastoral imagery, and may be cosmogonical, eschatological, or both, often contrasted with the miseries of human ...
if he does not protect his neighbour who is in distress. (Narrative of Imam Ahmad bin Hanbal.) The fundamentals underlying takaful are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic law.


History & models

The concept of takaful has reportedly been practised in various forms since 622 CE. The first practitioner of Takaful were known as Zubayr ibn al-Awwam, companion of the prophet, as this practice were allowed according to classical scholar consensus, such as Ibn Taymiyyah in his Majmu Fatawa. In practice, Takaful were regarded as technically as zero interests banking with fundraising business model. In the eyes of scholars and researchers, al-Zubair
Entrepreneurship Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones. An entrepreneu ...
of Tafakul has become serious object of study by scholars of Islamic institutions regarding the conduct and ethics in business in accordance of Islamic
Fiqh ''Fiqh'' (; ) is the term for Islamic jurisprudence.Fiqh
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''Fiqh'' is of ...
, such as Dr Erwandi Tarmizi. Additionally, Modern researchers of Islamic banking, and Islamic financing theorists, has delved the business aspect of Zubayr during his lifetime as rolemodel. One of the principles of az-Zubayr business were the
ethics Ethics is the philosophy, philosophical study of Morality, moral phenomena. Also called moral philosophy, it investigates Normativity, normative questions about what people ought to do or which behavior is morally right. Its main branches inclu ...
of
Fundraising Fundraising or fund-raising is the process of seeking and gathering voluntary financial contributions by engaging individuals, businesses, charitable foundations, or governmental agencies. Although fundraising typically refers to efforts to gathe ...
based business according to
Sharia Sharia, Sharī'ah, Shari'a, or Shariah () is a body of religious law that forms a part of the Islamic tradition based on Islamic holy books, scriptures of Islam, particularly the Quran, Qur'an and hadith. In Islamic terminology ''sharīʿah'' ...
. This type of fundraising business consisted of Zubayr practice of accepting safety deposits as a
loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...
and
investing Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
the
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
, without accepting
interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...
as profit of the business, which regarded as usury in Islam teaching. According to Ali Ahmad Salih, professor of Middle East University in Jordan, this fundraising Takaful business of Zubayr ibn al-Awwam were centered in Medina with its branches spread in
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, Kufa and Basra. Ali Ahmad Salih pointed out the evidences based on the records of Hisham ibn Urwah narration in Tabaqat al Kubra which written by Ibn Sa'd. During
Abbasid Caliphate The Abbasid Caliphate or Abbasid Empire (; ) was the third caliphate to succeed the Islamic prophet Muhammad. It was founded by a dynasty descended from Muhammad's uncle, Abbas ibn Abd al-Muttalib (566–653 CE), from whom the dynasty takes ...
era, such Islamic banking system were apparent. there were even one business center named ''Dar-uz Zubayr'' in Basra that accept any deposits. Zafarul Islam theorized in his
Academic journal An academic journal (or scholarly journal or scientific journal) is a periodical publication in which Scholarly method, scholarship relating to a particular academic discipline is published. They serve as permanent and transparent forums for the ...
released by Aligarh Muslim University, that the deposit center were named after Zubayr ibn al-Awwam. Meanwhile, modern day Pakistani Islamic business theorist, Zubair Mughal, has further observed the model of Zubayr ibn al-Awwam practice of Tafakul to avoid the Gharar (risky business), gambling, and Riba, which all forbidden by Islamic law.


Modern era

Muslim jurists acknowledge that the basis of shared responsibility (in the system of ''aquila'' as practised between the Muslims of
Mecca Mecca, officially Makkah al-Mukarramah, is the capital of Mecca Province in the Hejaz region of western Saudi Arabia; it is the Holiest sites in Islam, holiest city in Islam. It is inland from Jeddah on the Red Sea, in a narrow valley above ...
and
Medina Medina, officially al-Madinah al-Munawwarah (, ), also known as Taybah () and known in pre-Islamic times as Yathrib (), is the capital of Medina Province (Saudi Arabia), Medina Province in the Hejaz region of western Kingdom of Saudi Arabia, ...
) laid the foundation of mutual insurance. "In the case of insurance, as with commercial banks, orthodox opinion prevailed," and with "a consensus among Muslim scholars" about the legitimacy of takaful and the illegitimacy of conventional insurance, the "movement for Islamizing the contemporary insurance business" started around the mid-1970s. In 1976, a fatwa was issued by the Higher Council of Saudi Arabia "in favor of an Islamic model" of insurance. The International Islamic Fiqh Academy, Jeddah of the
Organisation of Islamic Cooperation The Organisation of Islamic Cooperation (OIC; ; ), formerly the Organisation of the Islamic Conference, is an intergovernmental organisation founded in 1969. It consists of Member states of the Organisation of Islamic Cooperation, 57 member s ...
also approved takaful as a legitimate form of business in 1985. The Islamic Insurance Company of Sudan started as the first takaful company in 1979. By the mid-1990s, there were seven takaful companies in Sudan, Dubai, Saudi Arabia, Bahrain and Jordan. Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.408 The industry grew from $1.384 billion in 2004 to $5.318 billion in 2008. By the end of 2011, total takaful contributions amounted to $12 billion (as compared to $4 trillion for conventional insurance). In 2005, there were 82 companies around the world engaged in takaful business (77 dedicated takaful companies, and five "offering takaful products" from "Islamic windows"). By 2006, there were 133.Ernst & Young, World Takaful Report 2008 As with the traditional forms of insurance, reinsurance of a takaful operation may be used, known as "retakaful". Also in 2006, AIG, a non-Muslim US-based company (with more than 88 million customers in 130 countries), established a takaful subsidiary called AIG Takaful Enaya, headquartered in Bahrain. Jamaldeen, ''Islamic Finance For Dummies'', 2012: p.302 As of 2013 the leading takaful countries are "Malaysia and the Gulf states". It was reported in 2016 that out of total 308 takaful companies, 93 are takaful windows; however, these takaful windows own only 2.5% of the total takaful assets.


Models

There are several models (and several variations) of how takaful can be implemented: * ''Mudharabah'' model (profit-sharing): the managers (shareholders) are sharing profit and losses with the policyholders; used initially in Far East. * ''Tabarru'''-based: "donations" (''Tabarru), i.e. premiums, are accumulated into a fund to meet members' losses. Members are not allowed to take back any contributions or profits from investments. Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.405 * A combination of ''Tabarru and ''Mudharabah'': Bahrain, UAE and Middle East countries. * '' Wakala'' model: agency fee, received up front from the contributors and transferred to shareholders fund. * ''Al Waqf''-based model: Waqf is a distinct entity and a legal person. According to one critic, "except for names and terms, the essence" of both ''Al Waqf'' takaful and conventional insurance is the same, and as a consequence this structure "has come under a lot of criticism from Shari'ah scholars". Mainly used in Pakistan and South Africa.


The ''Mudharabah'' model (profit-sharing)

According to this principle the ''al-Mudharib'' (takaful operator) accepts payment of the takaful installments or takaful contributions ( premiums, known as ''ra's-ul-mal'') from investors or providers of capital or funds (takaful participants), acting as ''sahib-ul-mal''. The contract specifies how the profits (or surplus) from the operations of the takaful is to be shared in accordance with the principle of ''al-mudharabah'' between the participants (as providers of capital) and the takaful operator. The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30 and so forth, as mutually agreed between the contracting parties. In order to eliminate the element of uncertainty in the takaful contract, the concept of ''tabarru''' ("to donate, contribute, or give away") is incorporated. Relating to this concept, a participant agrees to relinquish (as ''tabarru) a certain proportion of his takaful installments (or contributions) that he agrees or undertakes to pay, should any of his fellow participants suffer a defined loss. This agreement enables him to fulfill his obligation of mutual help and joint guarantee. In essence, ''tabarru enables participants to perform their deeds in assisting 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 a takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst striving prudently to ensure the funds are sufficiently protected against over-exposure. Therefore, the provision of insurance coverage is in conformity with Shariah based on the Islamic principles of ''al-takaful'' and ''al-mudharabah''. ''Al-mudharabah'' is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of a takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.


Criticism

One complaint made against (most) takaful (by Muhammad Akram Khan) is that despite the talk of solidarity, (most) takaful-holders "do not have any 'voice'" in the management of the takaful. The "TO (takaful operator) makes all the crucial decisions, such as rate of premium, risk strategy, asset management and allocation of surpluses and profits". The shareholders of the TO, and "not the takaful-holders, appoint and dismiss managers of the takaful". Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.409 Similarly, Mahmud El-Gamal complains that "even companies that use the term ''takaful ta'āwun'' (cooperative mutual guarantee or insurance) are structured with stockholder rather than policyholder ownership", despite the 9/2 ruling of the International Islamic Fiqh Academy that permitted insurance as "cooperative insurance, built on the principles of voluntary contribution (tabarru') and mutual cooperation". El-Gamal, ''Islamic Finance'', 2006: p.170 An exception to this state of affairs can be found in Sudan, where the takaful-holders have more say in the management of the takaful business. Whether takaful is significantly different from conventional insurance has been questioned. Islamic economist Mohammad Najatuallah Siddiqui writes that:
"The form of organization chosen to take advantage of the law of large numbers does not change the reality. We can make insurance a not-for-profit activity (provided we can ensure efficient management), but it does not change the essential nature of what is being done."Siddiqui, Mohammad Najatuallah "Islamic banking and finance in theory and practice: A survey of the state of the art." ''Islamic Economic Studies'', 13 (2) (February): 1-48
According to Rakaan Kayali, the fact that benefits for the takaful members are distributed as funds allow, rather than defined by the policy, may lead to conflict among members—if, for example, one member's claim uses up takaful funds so that another member with an equally valid claim a short time later is not compensated, or not compensated in full. Additionally, there has been doubt cast on the legitimacy of claiming that takaful participants are making "donations". This is because the word "donations" implies giving with no expectation of worldly return. This is clearly not the case with takaful participants who are seeking insurance.


References


Notes


Citations


Books, documents, journal articles

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Sources

Chakib Abouzaid: Presentation of the World Islamic Insurance Directory at the World Takaful Conference (2006/07/08/09/10/11/12) www.takaful-re.ae {{Insurance Islamic banking Types of insurance Islamic banking and finance terminology