In today’s uncertain world, protecting our lives, businesses, and families from financial shocks is not just a luxury—it becomes a necessity. Therefore insurance has been introduced. But for Muslims seeking financial products aligned with their faith, conventional insurance poses serious Shariah concerns. This is where Takaful, the Islamic alternative to insurance, steps in as a solution rooted in mutual cooperation, ethics, and fairness. (Al-Shamrani, 2014)
A Brief History of Takaful
The concept of Takaful has deep roots in Islamic tradition. Historically, mutual risk-sharing practices existed during the time of the Prophet Muhammad (ﷺ), particularly in the form of “Aqilah”, a system where the tribe of a person who caused accidental death would collectively pay the blood money (diyah) (Al-Shamrani, 2014).
The modern form of Takaful began with the establishment of the Islamic Insurance Company in Sudan in 1979, recognized as the first Takaful company (Obaidullah, 2005). and Malaysia in 1984. But the major role in the development of takaful was played by the declaration of Grand Council of Islamic Scholars in Makkah, Saudi Arabia and Majma Al-Fiqh in 1985 when the conventional commercial insurance was declared Haram (forbidden) and only insurance based on the application of Shariah-compliant cooperative principles and charitable donations, was declared Halal (permissible).It was developed based on classical Islamic principles and in response to the prohibition of conventional insurance.
In subsequent years, Malaysia emerged as a leader in Takaful regulation, with Bank Negara Malaysia setting comprehensive guidelines under the Takaful Act 1984 (BNM, 2013).
Why Do We Need Takaful?
Conventional insurance contracts violate Shariah principles. Because Sahriah prohibits those contracts the conventional insurance mechanism is based on. These are:
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Riba (Interest): it refers to unlawful gain or interest—an increase in wealth without corresponding value.There are two main types of Riba:
1:Riba al-Fadl – Excess in exchange of similar ribawi (usurious) items like gold, silver, wheat, barley, dates, or salt on a spot basis.
2: Riba al-Nasi’ah – Excess due to time delay or deferment.
In the context of insurance, Riba appears in two ways: 1: Through interest-based investments or interest on policy loans. 2:Through mismatch in timing and amounts between premiums paid and claims received, involving elements of both Riba al-Fadl and Riba al-Nasi’ah. (Islamic Banking and finance: principles & practices, MARIFA).
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Gharar (Uncertainty): it is defined as “that whose consequences are unknown” The insured pays premiums without certainty of benefit, while the insurer profits regardless of outcome. It is understood that uncertainty cannot be totally avoided in any business; it is excessive uncertainty that is prohibited in Sharia. The uncertainty in insurance is that both the timing and the amount of an insured event are unknown at the time of the policy. (Islamic Banking and finance: principles & practices, MARIFA)
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Maysir (Gambling): A zero-sum game where gain or loss is based on chance and without value creation. Insurance involves elements of gambling due to uncertain outcomes. (Islamic Banking and finance: principles & practices, MARIFA).
Takaful addresses these by operating on mutual donation (tabarru’) and cooperation (ta’awun), where participants support one another rather than transact for profit. This aligns closely with the Qur’anic command:
“And cooperate in righteousness and piety, but do not cooperate in sin and aggression…” (Qur’an, 5:2)
The Prophet Muhammad said:
“The believers, in their affection, mercy and sympathy to each other, are like the body: if one of its organs suffer and complains, the entire body responds with insomnia and fever”. (Sahih Muslim, Hadith: 2586)
Furthermore, Takaful promotes financial inclusion by providing ethical protection for underserved populations, especially through micro-Takaful initiatives.
Difference between Takaful and Conventional Insurance
Takaful vs. Conventional Insurance
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Aspect
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Conventional Insurance
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Takaful
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Contract Type
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Risk transfer contract
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Risk sharing contract
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Ownership of Fund
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Owned by insurance company
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Owned collectively by participants
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Profit Motive
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For-profit entity
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Non-profit mutual assistance
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Surplus
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Retained by insurer
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Shared among participants or donated
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Risk Nature
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Speculative (may involve gharar)
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Cooperative, transparent, Shariah-compliant
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Shariah Compliance
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Contains riba, gharar, and maysir
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Structured to avoid all prohibited elements |
Source: Shari’ah Standard No. (26): Islamic Insurance
Types of Takaful Modules
There are two prominent models used in Takaful, based on how the pool is established and how benefits are distributed to policyholders:
1: Tabarru’ Model:
The pool is created through donations (Tabarru’) from policyholders. The pool then voluntarily undertakes to cover claims for the members who suffer a loss. Claims are paid from this pool as a gesture of mutual assistance. AAOIFI’s Shariah Standard (26) on Takaful is based on this model.
2: Waqf Model:
A Waqf fund is established with initial capital from the Takaful operator. Participants join the fund under predefined terms and contribute donations (Tabarru’) to it. The Waqf fund is then used to provide Takaful benefits to its members. Dr. Muhammad Ismatullah (2010) favored this model in his book and strongly advocated for its adoption.
Iltizam bit Tabarru by the participant/policyholder underlies all Takaful models, where participants commit to donating their contributions for mutual benefit rather than purchasing coverage (MARIFA, n.d.).
Models of Takaful operations
Different operational models are used globally depending on Shariah interpretation and regulatory preferences. These models actually are the contractual relation between the “Takaful Fund” and “Takaful Operator”.
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Mudarabah Model
The Mudaraba model is based on a profit-sharing contract where one party provides capital (Rab al-Mal) and the other provides expertise (Mudarib). In Takaful, the operator acts as the Mudarib (fund manager), while the Takaful/Tabarru’ fund represents the Rab al-Mal.
Profits from investments are shared between the operator and the fund according to a pre-agreed ratio. Any loss or deficit is borne solely by the fund, as the capital provider. The operator does not receive a salary but earns a share of the profit. As a Wakil (agent), the operator is also responsible for distributing profits to participants based on their contributions and the terms of the Takaful contract.
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Wakala Model
The Wakalah model is based on an agency contract, where the Takaful operator acts as an agent (Wakil) on behalf of participants to manage the Takaful/Tabarru’ Fund. The operator is entitled to a pre-agreed management fee for its services.
For investment purposes, the operator also acts as an agent of the fund. All profits and losses from the fund’s operations and investments belong solely to the Takaful/Tabarru’ Fund. The operator, as Wakil, is responsible for allocating and distributing profits to participants based on their contributions.
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Hybrid model (Wakala + Mudarabah)
The Hybrid model combines both Wakalah and Mudaraba contracts. Under this model, participants and the Takaful operator enter into two agreements: a Wakalah contract for fund management and a Mudaraba contract for investment activities.
The operator earns a Wakalah fee from participants’ contributions and also receives a pre-agreed share of profit generated from Shariah-compliant investments. However, the operator does not share in any reserves or surplus that remain after claims are paid.
Takaful Products
The product of Takaful business can be divided into two key areas: General takaful and Family takaful.
General Takaful: General Takaful entails indemnification for actual injury, and comprises insurance against fire, car accidents, airplane accidents, liability, and breach of trust. It provides protection on a short term basis, normally covering a period of one year. It commonly provides protection for property loss or damage, liability arising from damage caused by the insured to a third party and accidental death or injury to a third party.
Family Takaful: Family Takaful offers a combination of protection and long term savings, usually covering a period of more than one year. It provides financial benefits if the insured is inflicted by a tragedy, as well as potential investment profits. Risks covered include premature death, illness and permanent disability, and regular income during retirement.
Conclusion: More Than Insurance, A System of Care
Takaful is more than a product—it is a moral framework built on solidarity, ethics, and mutual care. As the demand for ethical financial products rises, so does the relevance of Takaful. For Islamic finance professionals, regulators, and scholars, this is the time to deepen awareness, promote innovation, and refine models to serve modern needs.
By choosing Takaful, individuals and businesses are not just protecting assets—they are participating in a system that embodies their values.
References
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Obaidullah, M. (2005). Islamic Financial Services.
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Al-Shamrani, A. S. (2014) Islamic financial contracting forms in Saudi Arabia: Law and practice.
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Bank Negara Malaysia (2013). Takaful Operational Framework Guidelines.
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Qur’an, Surah Al-Ma’idah, 5:2.
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MARIFA, Islamic Banking and finance: principles & practices.
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Muslim ibn al-Hajjaj Nisaboori, Sahih Muslim, Hadith number: 2586, Darussalaam for Publication and Distribution 1999, 1041.
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Accounting and Auditing Organization for Islamic Financial Institutions. (2014). Shari’ah standards (No. 26, Takaful). Bahrain: AAOIFI.
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Ismatullah. M, (2010) Takafu ki Sharee Haisiyat, Idaratul Ma’arif Karachi.
