The Garden of Knowledge

بسم الله الرحمن الرحيم

 09 Rabi ul Awwal 1444/13 September 2024

All praise is due to Allah, the Cherisher, Sustainer, Nourisher and Provider of the entire creation. May peace, blessings and salutations be upon our Beloved Prophet Muhammed ﷺ.

What is Takaful and why is it permissible?

Takaful is an Arabic word stemming from the verb “kafala”, which means to take care of one another’s needs or “guaranteeing each other”.

 Takaful refers to Mutual Indemnification based on the premise of Ta’awun (mutual assistance) and Tabarru’ (donation) whereby compensation for misfortune from risks associated with it is shared amongst a group. It includes the concept of pooling of resources and sharing of losses which is the heart of Takaful. Takaful is based on the concept of Tabarru’ which   eliminates Takaful as a contract of exchange. Your donations are regarded as contributions towards the Takaful fund.

The contract is a unilateral contract instead of bilateral where the contributions are given as donations.

Why is it permissible?

Absence of interest (riba)

This absence marks the biggest difference between conventional finance and Islamic finance. While interest plays a central role in modern-day economics, banking and finance, the Qur’an contains a clear instruction not to engage in any transaction that involves interest. The following citations from the Qur’an and the Prophetic teachings show how interest has been prohibited in the strongest terms in Islam:

وَأَحَلَّ ٱللَّهُ ٱلۡبَیۡعَ وَحَرَّمَ ٱلرِّبَوٰا۟ۚ

And God has permitted trading and prohibited Riba [interest]. Al-Baqarah, Ayah 275

Absence of gharar (excessive uncertainty): the need for contractual certainty

This principle requires there to be as much clarity as possible regarding the contractual terms between the two parties in a commercial transaction, so as to minimise the chances of a contractual dispute between the parties. As such there must not be gharar in a transaction.

There is no verse in the Quran which specifically forbids Gharar however it makes mention of ensuring justice in all dealings.

وَلَا تَأْكُلُوٓا۟ أَمْوَٰلَكُم بَيْنَكُم بِٱلْبَـٰطِلِ وَتُدْلُوا۟ بِهَآ إِلَى ٱلْحُكَّامِ لِتَأْكُلُوا۟ فَرِيقًا مِّنْ أَمْوَٰلِ ٱلنَّاسِ بِٱلْإِثْمِ وَأَنتُمْ تَعْلَمُونَ

Do not consume one another’s wealth unjustly, nor deliberately bribe authorities in order to devour a portion of others’ property, knowing that it is a sin. (Surah Baqarah Verse 22)

Absence of Maysir (Gambling)

Many proponents against insurance is that it should be rejected as it is a form of gambling where the payment is based on pure chance. As we know Maysir has been prohibited in the Quran:

يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوٓا۟ إِنَّمَا ٱلْخَمْرُ وَٱلْمَيْسِرُ وَٱلْأَنصَابُ وَٱلْأَزْلَـٰمُ رِجْسٌ مِّنْ عَمَلِ ٱلشَّيْطَـٰنِ فَٱجْتَنِبُوهُ لَعَلَّكُمْ تُفْلِحُونَ

O believers! Intoxicants, gambling, idols, and drawing lots for decisions are all evil of Satan’s handiwork. So shun them so you may be successful. (Surah Ma’idah Verse 90)

However the Taburru which is made eliminates both concepts of Gharar and Maysir

It is a donation which is given to the Waqf fund thus making the contract a unilateral contract and not bi-lateral.

Why is there a need?

• Takaful contains element of Mutual co-operation.

وَتَعَاوَنُوا۟ عَلَى ٱلْبِرِّ وَٱلتَّقْوَىٰ ۖ وَلَا تَعَاوَنُوا۟ عَلَى ٱلْإِثْمِ وَٱلْعُدْوَٰنِ ۚ وَٱتَّقُوا۟ ٱللَّهَ ۖ إِنَّ ٱللَّهَ شَدِيدُ ٱلْعِقَابِ

And Cooperate with one another in goodness and righteousness, and do not cooperate in sin and transgression. And be mindful of Allah. Surely Allah is severe in punishment. (Surah Maidah Verse 2)

• Takaful also addresses the alleviation of hardships and provision of material (security) funds and assistance for those who face unexpected risks and perils. This is to ensure that those left behind are provided with a reasonably comfortable life.

وَٱلَّذِينَ يُتَوَفَّوْنَ مِنكُمْ وَيَذَرُونَ أَزْوَٰجًۭا وَصِيَّةًۭ لِّأَزْوَٰجِهِم مَّتَـٰعًا إِلَى ٱلْحَوْلِ غَيْرَ إِخْرَاجٍۢ ۚ فَإِنْ خَرَجْنَ فَلَا جُنَاحَ عَلَيْكُمْ فِى مَا فَعَلْنَ فِىٓ أَنفُسِهِنَّ مِن مَّعْرُوفٍۢ ۗ وَٱللَّهُ عَزِيزٌ حَكِيمٌۭ

Those of you who die leaving widows should bequeath for them a year’s maintenance without forcing them out. But if they choose to leave, you are not accountable for what they reasonably decide for themselves. And Allah is Almighty, All-Wise. (Surah Baqarah Verse 234)

• Takaful embodies concept of Tawakul wherby one strives hard in overcoming unexpected future risks and at the time placings ones trust in Allah.

حَدَّثَنَا أَبُو حَفْصٍ، عَمْرُو بْنُ عَلِيٍّ حَدَّثَنَا يَحْيَى بْنُ سَعِيدٍ الْقَطَّانُ، حَدَّثَنَا الْمُغِيرَةُ بْنُ أَبِي قُرَّةَ السَّدُوسِيُّ، قَالَ سَمِعْتُ أَنَسَ بْنَ مَالِكٍ، يَقُولُ قَالَ رَجُلٌ يَا رَسُولَ اللَّهِ أَعْقِلُهَا وَأَتَوَكَّلُ أَوْ أُطْلِقُهَا وَأَتَوَكَّلُ قَالَ ‏ “‏ اعْقِلْهَا وَتَوَكَّلْ ‏”‏ ‏.‏ قَالَ عَمْرُو بْنُ عَلِيٍّ قَالَ يَحْيَى وَهَذَا عِنْدِي حَدِيثٌ مُنْكَرٌ ‏.‏ قَالَ أَبُو عِيسَى وَهَذَا حَدِيثٌ غَرِيبٌ مِنْ حَدِيثِ أَنَسٍ لاَ نَعْرِفُهُ إِلاَّ مِنْ هَذَا الْوَجْهِ وَقَدْ رُوِيَ عَنْ عَمْرِو بْنِ أُمَيَّةَ الضَّمْرِيِّ عَنِ النَّبِيِّ صلى الله عليه وسلم نَحْوُ هَذَا ‏.‏

Anas bin Malik narrated that a man with a camel said: “O Messenger of Allah! Shall I tie it and rely(upon Allah), or leave it loose and rely(upon Allah)?” He said: “Tie it and rely(upon Allah).” Other chains report similar narrations. – Jami` at-Tirmidhi 2517   

عَنْ أَبِي هُرَيْرَةَ، قَالَ قَالَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏ “‏ مَنْ نَفَّسَ عَنْ مُؤْمِنٍ كُرْبَةً مِنْ كُرَبِ الدُّنْيَا نَفَّسَ اللَّهُ عَنْهُ كُرْبَةً مِنْ كُرَبِ يَوْمِ الْقِيَامَةِ وَمَنْ يَسَّرَ عَلَى مُعْسِرٍ يَسَّرَ اللَّهُ عَلَيْهِ فِي الدُّنْيَا وَالآخِرَةِ وَمَنْ سَتَرَ مُسْلِمًا سَتَرَهُ اللَّهُ فِي الدُّنْيَا وَالآخِرَةِ وَاللَّهُ فِي عَوْنِ الْعَبْدِ مَا كَانَ الْعَبْدُ فِي عَوْنِ أَخِيهِ وَمَنْ سَلَكَ طَرِيقًا يَلْتَمِسُ فِيهِ عِلْمًا سَهَّلَ اللَّهُ لَهُ بِهِ طَرِيقًا إِلَى الْجَنَّةِ وَمَا اجْتَمَعَ قَوْمٌ فِي بَيْتٍ مِنْ بُيُوتِ اللَّهِ يَتْلُونَ كِتَابَ اللَّهِ وَيَتَدَارَسُونَهُ بَيْنَهُمْ إِلاَّ نَزَلَتْ عَلَيْهِمُ السَّكِينَةُ وَغَشِيَتْهُمُ الرَّحْمَةُ وَحَفَّتْهُمُ الْمَلاَئِكَةُ وَذَكَرَهُمُ اللَّهُ فِيمَنْ عِنْدَهُ وَمَنْ بَطَّأَ بِهِ عَمَلُهُ لَمْ يُسْرِعْ بِهِ نَسَبُهُ ‏”‏ ‏.‏

Abu Huraira reported Allah’s Messenger (ﷺ) as saying: He who alleviates the suffering of a brother out of the sufferings of the world, Allah would alleviate his suffering from the sufferings of the Day of Resurrection, and he who finds relief for one who is hard-pressed, Allah would make things easy for him in the Hereafter, and he who conceals (the faults) of a Muslim, Allah would conceal his faults in the world and in the Hereafter. Allah is at the back of a servant so long as the servant is at the back of his brother, and he who treads the path in search of knowledge, Allah would make that path easy, leading to Paradise for him and those persons who assemble in the house among the houses of Allah (mosques) and recite the Book of Allah and they learn and teach the Qur’an (among themselves) there would descend upon them tranquility and mercy would cover them and the angels would surround them and Allah mentions them in the presence of those near Him, and he who is slow-paced in doing good deeds, his (high) lineage does not make him go ahead. -Sahih Muslim 2699a

What is General Takaful?

General Takaful provides protection to participant for losses arising from pure perils such as accident, fire, flood etc. Furthermore, the contract are usually short term (one year or less).

General companies also offer health coverages though they are more common of family operators. General Takaful typically comprises any cover that is not determined to be family cover.

 It is usually referred to as Property and Casualty cover in the United States and Non-life cover in Europe. The GCC countries continue to dominate the general takaful industry. General Takaful includes motor, fire, house owners, engineering, marine and miscellaneous accident and cover. Presently, General Takaful products can be divided into two broad areas: personal and commercial lines. Takaful cover for large commercial risks or special risks is developing.

What is Family Takaful?

In general, the objective of the life insurance product, which is mainly to assist those who are afflicted with various forms of calamities, is also shared by the takaful industry. Consequently, Shariah-compliant takaful instruments to protect participants against various misfortunes, such as death, disability and sickness, are being structured and introduced as the demand grows for an alternative to conventional life insurance.

In Malaysia, most of the life takaful products (also known as family takaful) are structured in the form of unit-linked or investment-linked policies. This essentially means that the investment risks are borne entirely by the policyholders (participants).

A certain portion of their takaful contribution is allocated to the risk (tabarru) fund for the purpose of takaful protection against unfortunate events such as death, disability or sickness. There is a close resemblance, in terms of product structure, between conventional life investment-linked insurance and family takaful products since both have basically “transferred” the investment risks to policyholders/participants and, by doing so, have clearly segregated the cost of providing protection, either in the form of tabarru or the cost of insurance.

The fundamental principle of takaful, i.e., tabarru, makes it convenient for the family takaful operator (hereafter TO) to adopt the investment-linked life insurance model.

Unlike conventional insurance, which is structured on the basis of muawadah, i.e., a contract of exchange between policyholders and life insurance companies in the form of buying and selling insurance coverage, takaful reflects a reciprocal relationship and agreement of mutual help between participating members, who undertake to mutually guarantee and indemnify each other in a particular defined event. The act of guaranteeing each other implies mutual help and mutual indemnity on the basis of brotherhood deeply rooted in the tabarru principle, which tolerates the presence of gharar (uncertainty).

Changing the contract of life insurance to family takaful leads to a fundamental difference in ownership of the funds, particularly the risk fund. In conventional life insurance, the risk fund belongs to the life insurance company. This is because the exchange contract executed between the company and the policyholders effectively means that each policyholder has transferred his right over the premium paid (insurance price) to the insurance company against a consideration of an insurance policy that has been sold by the company, which will indemnify him should any mishap occur in the future.

On the other hand, in takaful, the risk fund is exclusively and collectively owned by the participants, who have been contributing into the charitable pool (tabarru) for mutual help and indemnification. In most takaful models, a contract of agency (wakalah) issued to reflect the relationship between the participants and the TO; the latter acts as an agent to manage the takaful fund on behalf of the former in return for a fee. In terms of the prudential requirements for managing this fund, they are similar to those for a conventional risk fund.

Operationally, it is more convenient for family TOs to adopt the life insurance investment- linked model; first, because segregation between the investment fund and the risk fund works very well with the concept of takaful as described earlier. Second, the existing system development, operational procedures, risk management, regulations and other relevant areas that have already been put in practice, and with which practitioners are familiar, can be easily adopted by TOs. This explains why almost all family takaful products in the market today adopt the investment-linked concept.

IRP 109: Pricing of Family Takaful products; A Shariah Perspective by Youness Soualhi and Fares Djafri – gives insight into how the pricing works and differs.

May Allah accept our efforts from us and grant us understanding In Sha Allah!