Fundamentals of Takaful

A set of question-and-answer flashcards covering prohibited elements in conventional insurance, definitions and principles of Takaful, differences between Takaful and conventional insurance, Takaful models, and product categories.

What three prohibited elements found in conventional insurance make it non-compliant with Islamic law?

Gharar (uncertainty), Maisir (gambling) and Riba (usury/interest).

In insurance terms, what is ‘Gharar’ and where does it arise in conventional policies?

Gharar is excessive uncertainty, arising because what is bought with the premium is undefined; uncertainty exists over premium payments, compensation and the aleatory nature of the contract.

What does ‘Maisir’ refer to in the context of insurance?

A gambling-like situation where participants purchase a contract hoping for profit and fearing loss.

How is ‘Riba’ defined, and which Qur’anic verses forbid it?

Riba is the practice of lending money at interest; it is forbidden in Surah al-Baqarah (verses 275-281) where God permits trade but forbids interest.

What is the chief aim of Takaful regarding Gharar, Maisir and Riba?

To eliminate or resolve these three impermissible elements, making risk-sharing Shariah-compliant.

From which Arabic root is the word ‘Takaful’ derived and what does it mean?

It comes from ‘kafala’ meaning bail, guarantee, warrant or mutual protection.

How is the basic Takaful arrangement structured among participants?

Participants mutually guarantee each other by contributing to a common fund that compensates any member who suffers a loss.

On which two key principles is the Takaful system based?

Ta’awun (mutual cooperation) and Tabarru’ (donation).

Define ‘Tabarru’’ in Takaful operations.

A voluntary donation: each participant agrees (aqad) to donate part of their contribution to the Takaful fund to aid members in need.

Define ‘Ta’awun’ in the context of Takaful.

Mutual cooperation achieved through pooled contributions that provide financial aid to participants who incur losses.

List four operational principles of Takaful.

(1) Policyholders cooperate for common good; (2) every policyholder donates to help others; (3) losses and liabilities are shared via community pooling; (4) uncertainty in subscription and compensation is removed; plus no unjust advantage and investments are Shariah-compliant.

How does the contractual nature of conventional insurance differ from Takaful?

Conventional insurance is a bilateral contract between insurer and insured, whereas Takaful is a shared relationship where participants collectively pool and share risk.

What is the primary purpose difference between conventional insurance and Takaful?

Conventional insurance is largely profit-oriented, while Takaful’s main purpose is mutual assistance, not profit maximisation.

How are risks shared differently in Takaful versus conventional insurance?

In Takaful, participants share the burden equally; in conventional insurance, the insurer assumes the risk on behalf of the insured.

Regarding assistance guarantees, how does Takaful compare with conventional insurance?

Takaful procedures guarantee help from the pooled fund, whereas conventional insurance provides no absolute guarantee the insurer will pay.

Which legal framework guides Takaful, and what drives conventional insurance rules?

Takaful is governed by Shariah principles; conventional insurance follows rules formulated primarily for profit considerations.

Name the two basic contractual models used in the Takaful industry.

Mudarabah and Wakalah models.

Describe the Mudarabah model used in Takaful.

One party supplies the capital (rabb-ul-maal) and the other supplies effort (mudarib); profits are shared per agreement, while losses are borne solely by the capital provider unless negligence occurs.

In a Mudarabah arrangement, who bears any financial loss?

The owner of the capital (rabb-ul-maal), unless the mudarib is negligent or violates the contract.

What is the Wakalah model in Takaful?

An agency contract where a principal authorises an agent to act on its behalf, typically for a fee or commission; it may be commutative or non-commutative.

What is meant by a ‘hybrid’ Takaful model?

A structure that combines elements of both Mudarabah and Wakalah contracts within the same Takaful operation.

Into which two broad categories are Takaful products divided?

Family Takaful and General Takaful.

Give three examples of Family Takaful products.

Term Life Takaful, Whole Life Takaful, Endowment Takaful (others include Universal and Education plans).

Give three examples of General Takaful products.

Motor Takaful, Property Takaful, Personal Accident Takaful (others include Fire Takaful, etc.).