The word Takaful is derived from the Arabic verb Kafala, which means to guarantee, to help, to take care of one's needs. Takaful is a system of Islamic insurance based on the principle of Ta'awun (mutual assistance) and Tabarru (voluntary contribution), where the risk is shared collectively by the group voluntarily.
It is an agreement amongst a group of members who agree to jointly guarantee each other against the possibility of loss or damage to any one of them as defined in the agreement.
It is operated on the basis of shared responsibility, brotherhood, solidarity and mutual cooperation or assistance, and there is a strict prohibition to involve therewith any element, which contravenes Shariah principles.
In Pakistan the concept of Takaful gained firm footing in September 2005 when the Ministry of Commerce notified and enforced the regulatory framework for Takaful companies to operate in Pakistan, called "Takaful Rules 2005". Since then 5 companies, all of which are joint ventures with local and international sponsors, are in various stages of operations, licensing and registration process.
Islamic Insurance is gaining popularity primarily because according to Shariah the commercial insurance contract is prohibited (Haraam). It is prohibited because conventional insurance is a "risk-transfer mechanism" (ie the insured transfers his risk to the insurance company in exchange for a premium) which, under Shariah, is considered a "contract of exchange" or a sale contract ie through the buying and selling of insurance.
As such it has to meet the conditions for sales under the Islamic Financial Law (Fiqh ul Mu'aamalaat). As the conventional insurance contract fails to meet these requirements it has therefore been declared Haraam due to three main elements that exist in the policy: Riba (interest); Gharar (uncertainty); and Maysir/Qimaar (chance of total loss to any one party in the agreement and corresponding gains to the others).
The uncertainty or Gharar in the case of conventional insurance relates to the object/subject matter of trade. The object of trade must satisfy the following conditions:
The object must be something that can be given in trade ie something tangible ('peace of mind is not tangible')
-- The time of surrender/delivery must be known
-- The quantity of the object must be known
-- The place of surrender/delivery must be known
-- Therefore, since nothing tangible is being exchanged and because it is uncertain when and where a claim will occur and how large/small it might be, the Gharar that exists in conventional insurance is excessive and inexcusable under Shariah.
The effect of Maysir is very similar to Gharar such that it involves the chance of total loss to one party. The basic difference between the two terms is that while one (Gharar) is uncertainty, the other (Maysir) is based upon or the result of that uncertainty (Gharar).
For example the insured pays a small sum of money in the expectation that in the event of a loss he/she may get a much greater amount, but may lose all the money paid by way of premium when the uncertain event that has been insured against does not occur.
Conventional insurance also contains Riba (interest) both directly as well as indirectly. Direct Riba is when there is an excess on one side in the exchange between the amount of premium and the insured sum. Insurance is the sale of money for money, of a greater or lesser amount, with a delay in one of the payments.
Indirect Riba, on the other hand, is the interest earned on interest-based investments. This form of Riba exists in commercial insurance in the form of profits earned through investments of the premiums/funds in interest-bearing financial instruments such as stocks, bonds, and saving accounts, part of which is then used for the payment of claims to policy holders.
Takaful is an Islamic alternative to a conventional insurance programme based upon a Shariah compliant, approved concept. The alternative contract which conforms to the principles of Islamic dealings is the contract of co-operative insurance, which is founded on the basis of charitable donations and Shariah compliant dealing.
-- Insurance products should be founded on the basis of Tabarru, an Arabic noun meaning 'conditional donation, gift, contribution'.
-- The insurance company must conduct all its affairs in line with the Shariah;
-- The participants contribute to a common fund for the purpose of mutual indemnity in case of risk and harm.
One of the first entrants in Islamic insurance is Takaful Pakistan Limited. The Company will be entering the market with an initial paid up capital of Rs 300 million and an authorised capital of Rs 500 million. The Takaful Pakistan team comprises highly qualified and experienced professionals, supervised by a distinguished Shariah Advisory Board of international repute (under the patronage of Justice Taqi Usmani).
According to Rohail Ali Khan, General Manager of Takaful Pakistan, the Company shall be adopting a proactive approach to introduce Shariah-compliant Takaful products for the benefit of all citizens of Pakistan, both Muslims as well as non-Muslims alike.
He was of the view that the potential for growth in Takaful is enormous. Total Takaful contributions volume (premiums) in 2004 stood at around $3 billion globally. Given the phenomenal growth of Takaful, particularly in Malaysia and the Middle East, it is expected that a global estimate of $12.5 billion would be reached by the year 2015. Presently, there are some 80 plus Takaful Insurance companies operating globally, including some established even in countries like New Zealand and Sri Lanka.
Industry analysts are of the view that Takaful can compete with conventional insurance if it provides customers competitive rates, superior client-servicing, complete transparency and 100% Shariah-compliance. There are viable prospects for Takaful insurance business in Pakistan as a significant section of our population is waiting for such an opportunity.
Not only is the competitive rating and the prospects of surplus sharing inherent in the Takaful concept going to attract the masses, a large section of the population that still considers insurance as 'un-Islamic' and go for it only when absolutely necessary, eg to comply with statutory or banks' requirement for taking loans, opening L/Cs, etc will feel inclined to take Takaful insurance for peace of mind as well as conscience. Thus an untapped and somewhat dormant niche market would open up. This will result in substantial growth in the insurance business as a whole too.
Thus, Takaful in Pakistan is well poised to prove itself to be a just, equitable and mutually profitable system that shall also blend ideally with the products being offered by the Islamic banks which are gaining fast popularity and acceptance not only in Pakistan but around the world as well.