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What is Takaful?

Takaful is derived from the Arabic root word ‘kafala’ meaning guarantee. It is a form of joint guarantee whereby a group of participants agree to mutually guarantee each other against a defined loss. Takaful could also be described as a social scheme based on the principles of brotherhood, solidarity, mutual cooperation and assistance, protection and responsibility. It provides mutual financial aids and assistance to any member of the Takaful scheme who suffer specified perils from the pool of fund contributed by members for that purpose.

How does the takaful system operate

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 as described below:

  1. Between the Participants: Participants agree to provide mutual indemnity against specified perils and in consideration, undertake to contribute a specified sum of money as donation (tabarru’) into a common fund.
  2. 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).

How does a takaful operator differ from an insurance company

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.

Why is conventional insurance not in line with the shariah

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

What kind of products are provided by takaful operators

Takaful Operators offer both Family Takaful (Life Insurance) and General Takaful (General Insurance) products which caters for the needs of all sections of the public. Takaful products and services are generally similar to the conventional insurance products but must be in line with principles and practices of Shariah as well as ethical standards.

In this respect, the takaful products shall not involve elements which are not allowed by the Shariah such as gambling, alcohol, prostitution and pork.

Who can participate in takaful

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.

What are the similarities between insurance and takaful

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).

What are the documents that consitute a takaful contract

  1. 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.
  2. Takaful Policy: This is the document which indicates the amount of contribution, terms, conditions and procedure in case of any loss or damage suffered by the participant.