Takaful is one of the mechanisms introduced by Islam primarily to strengthen the vertical man-to-God relationship (habluminallah) and the horizontal man-to-man relationship (habluminannas) in this universe. It is embedded with a two primary concepts of ta’awun (mutual assistance) and tabarru’ (mutual charity), which is naturally will enhance the social bonding of the society.
Under the practice of takaful, members of the society mutually and voluntarily agree to contribute money to support a common goal which to provide mutual financial aids to the members with the unexpected-financially-handicapped.
There are injunctions from the Holy Qur’an and Hadith of the Prophet Muhammad (PBUH) which stressed to taking care about the others. ALLAH SWT mentioned as:
“ (He) who has fed them against hunger and made them safe from fear”[1]
While, there are few Hadiths of the Prophet Muhammad (PBUH) in tandem with this principle as in the lines below:
“A person is not a believer if he sleeps comfortably on a full stomach while his neighbours suffers from hunger”
“Indeed a believer is one who can give security and protection to the life and property of mankind”
“A Muslim is the brother of a fellow Muslim. He should neither commit oppression upon him nor ruin him; and he who meets the needs of a brother, ALLAH will meet his needs and he who relives his brother from hardship, ALLAH will relieve him from the hardship to which he could be put on the day of judgement”
As a reality of life, human beings are exposed to all sorts of uncertainty and unpredictability which is usually a cause of loss. Typical uncertainty and unpredictability include theft, accident, sickness, flood, premature death and fire.
Hence, people need a mutual-plan a head so that they can mitigate the impact of backwards from their expectations. In this case, we are left in the dark on the degree of the losses which probably affect us if the uncertainty and unpredictability really happened. So, there is an essential role of takaful which is the best concept of hedging or mitigation our risk which is attributed from the uncertainty and unpredictability. Takaful does not only provide the mutual assistance and protection among the participants of the scheme, also further minimising a conflict of interest in the society. With the lesser conflicts, it will further stretghen the ‘social bonding or glue’ to the society. Then, it will later shape a better-order of the society’s interaction, which a cause to the people to live in peace and harmony.
By practice, the term of takaful is derived from the Arabic root word of kafala which means responsibility, guarantee, amenability or suretyship. Hence, takaful literally relates to shared responsibility, shared guarantee, collective assurance and mutual undertakings.
Takaful schemes are distinctive from the conventional insurance as it is free from elements of gharar (uncertainty) in respect of premium and coverage, maisir (gambling) and riba (interest).
In according to Investopedia, it is explained takaful as “an alternative to commercial insurance companies, which go against the riba (interest), al-maisir (gambling), and al-gharar (uncertainty) principles, that are outlawed in Sharia”.
Referring to section 2 of the Malaysian Takaful Act 1984A, it is defined as a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose.
As stipulated by Accounting, Auditing and Governance Standards for Islamic Financial Institutions, 2004 - 05, AOOIFI, takaful interpreted as a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions.
Thru this takaful practice, participants will contribute such portion of money called as premium into a ‘pooling system’ in order to protect each other against unexpected loss or damage among the participants of the scheme.
There is a basis from the angle of Shariah related to takaful as stipulated in the Holy Qur’an and the Hadith of the Prophet Muhammad (PBUH). ALLAH SWT mentioned as a stressed-point to a form of mutual help (ta’awun) in further virtue by helping others who are in need.
“Help you one another in righteousness and piety, but help not one another in sin and rancour; fear God: for God is strict in punishment”[2]
While there was saying of the Prophet Muhammad (PBUH) is being a ground of a collective-risk-mitigation thru a strategy of risk reduction by a collective risk taking that distribute risks and harm to a large number of participants, which is the otherwise so damaging harm if borne individually borne.
“Tie the camel, then submit (tawakkal) to the will of God”
There are wisdoms behind the enactment of takaful in Islam as stipulated in the lines below
- The participants will mutually cooperate and assist among themselves for their common good.
- Each participant will make his contribution in order to hold hand of any fellow participants who needs assistance.
- The contribution by participants is considered as a donation (tabarru’) to the participants in the scheme.
- The contribution is intentionally to distribute losses and spread the liability according to the practice of pooling system.
- The elimination of the element of uncertainty insofar the contribution and compensation are made clear to the participants.
- It does not take advantage at the cost of other participants.
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