Question 1

What is Takaful?

Accepted Answer

Takaful is derived from the Arabic root word 'kafala' meaning guarantee, responsibility, amenability, or surety. In practice, takaful takes the meaning of joint guarantee, shared responsibility, solidarity, and mutual undertaking among the participants to provide mutual financial assistance to any member of the takaful scheme who suffers specified losses/misfortunes from the pool of funds contributed by the participants for the purpose.

Simply put, takaful involves the creation of a commonly defined fund by way of defined contributions from defined participants to pay defined losses.

Question 2

How does the Takaful system operate?

Accepted Answer

Takaful relies on the concept of donation (tabarru') or contributions (premiums) made by participants (insureds) which are pooled in a common fund managed by a takaful operator. Should any member suffer financial loss from any defined perils, he will be indemnified accordingly from the pool. The participation in Takaful is a two-tier contract: Between the participants: Participants agree to provide mutual indemnity against specified perils and in consideration, undertake to contribute a specified sum of money as a donation (tabarru') into a common fund. Between the Takaful Operator and the participants: The Takaful Operator agrees to provide custodianship, trusteeship, and managerial services to manage the takaful fund on behalf of the participants based on the principles of agency (wakalah) or profit-sharing (mudharabah) or endowment (waqf).

Question 3

Who can participate in Takaful?

Accepted Answer

It is open to all and sundry and since it is primarily based on the concept of mutual guarantee and cooperation, it is beneficial to all members of the society without any form of religious, racial, or ethnic discrimination.

Question 4

How does a Takaful operator differ from an insurance company?

Accepted Answer

Insurance is a risk transfer mechanism from the insured to the insurance company, for a price called premium. The insurance company will compensate the insured in the event of covered losses or damages sustained by him. Takaful is a risk sharing mechanism among the participants through the concept of donation. It is fundamentally different from conventional insurance whereby the takaful operator does not own the takaful fund (the risk fund). The contributions paid by the participants as a risk-sharing mechanism to the takaful fund belongs to them (to cover the risks). The takaful operator only manages the fund for a fee and a share of the surplus, if any. For this purpose, all eligible participants who have not made a claim will be entitled to a share of the profit of the takaful fund (if any), payable after the end of the policy period. Essentially, this means that all the participants of takaful will either enjoy the benefits of insurance through claims made; and if no claims are made, they are entitled to a share of surplus from the takaful fund. In conventional insurance, whatever profit of the insurance fund belongs entirely to the insurance company.

Question 5

Why is conventional insurance not in line with the Shariah?

Accepted Answer

Conventional insurance is an exchange contract (buying and selling) that contains the elements of interest or usury (riba), gambling (maisir), and major uncertainty (gharar fahish) which makes it unacceptable under Islamic principles.

Question 6

What kind of products are provided by Takaful operators?

Accepted Answer

Takaful Operators offer both Family Takaful (Life Insurance) and General Takaful (General Insurance) products which cater to the needs of all sections of the public. Takaful products and services are generally similar to conventional insurance products but must be in line with the principles and practices of Shariah as well as ethical standards. In this respect, the takaful products shall not involve elements that are not allowed by the Shariah such as gambling, alcohol, prostitution, and pork.

Question 7

What are the similarities between insurance and Takaful?

Accepted Answer

Both insurance and takaful have similar basic principles. For instance, the participant must have a legitimate financial interest in the risk being covered, meaning that a takaful participant must suffer a financial loss when the covered event occurs. Similarly, takaful schemes use the principle of indemnity to compensate for the loss that occurs to a takaful participant. Both insurance and takaful contract is a contract of utmost good faith (trust) which requires the participants to disclose all material information required before entering the contract of takaful. In Nigeria, both insurance companies and takaful operators are regulated by the National Insurance Commission of Nigeria (NAICOM).

Question 8

What are the documents that constitute a Takaful contract?

Accepted Answer

Proposal form: The participant has to fill and sign the proposal form based on the principle of utmost good faith, which is considered as the basis of the contract. Takaful policy: This is the document that indicates the amount of contribution, terms, conditions, and procedure in case of any loss or damage suffered by the participant.

Takaful, explained

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