Takaful: A Practical Alternative

In the previous article, we saw that our scholars have differences in opinion regarding insurance. Some are of the opinion that is is Haram while others are of the opinion that it is Mubah. However, many Muslims who have Islamic consciousness or are involved in Islamic Jama’ah in general take the view that it is Haram.

If we take the view that the current insurance system is Haram, and since insurance permeates every level of society, what can be done? If we agree that the function of insurance is important, then something should be done about it; either to get rid of it or to study and see if we get rid of elements that render it Haram in the first place. Can the insurance system be replaced or modified to conform to Islamic law? It is easy to declare something to be Haram but that does not solve our predicament.

However, from the point of view of most Muslim jurists, the cooperative insurance system that exists in some countries can be a basis of Islamic insurance. This was answered during one of the questions raised by an Islamic bank regarding its intention to set up an insurance subsidiary to compliment its business. I quote, “cooperative insurance is not only permissible by the Shari’ah but also encouraged especially when looked at from the aspect of co-operation towards welfare. As such it is permissible for a bank to set up a co-operative insurance company to function for the benefit of many activities but there is a need to state as clearly as possible in the contract of insurance that the amount of money to be paid by the participant is on the basis of Tabarru’ (donation) to the said company which can be used for the purpose of assisting fellow participants who require assistance according to the terms agreed as long as these terms are not in conflict with the Shari’ah”. If cooperative insurance is allowed and the contract can be modified to conform to Islamic law, then how is the model?

Mudharabah models

Suppose we agree that the commercial model is better and Takaful companies whose operations are based on it is more competitive (at least for certain situations like in ASEAN), what kind of contract should we adopt? All the ASEAN countries adopt the Mudharabah or modified Mudharabah models. Currently there are three different types of models being adopted. The first model is the pure Mudharabah model where the Takaful company and the participant share direct investment income only and the participant is entitled to a hundred percent of the surplus. No deduction for operational expenses is made prior to the distribution of the investment income. (See diagram 1).

This model was chosen for family Takaful because it is basically life insurance coverage provided to the participants. The concept is that the fund is solely attributable to the participants.

The second model is a modified Mudharabah model where the investment income is ploughed back into the Takaful fund and the Takaful company share with the participant the surplus from the Takaful fund. One company deducts operational expenses and the other does not prior to the distribution of the surplus. (See diagram 2).

The third model is a modified Mudharabah where both the company and the participant share in both the investment income and the surplus. Deduction for operational expenses are made prior to the distribution of the surplus. (See diagram 3)

Implementation of one of the above three models would serve as a viable and welfare-enhancing alternative to modern-day insurance, and has already proven to be successful when applied in accordance to the Laws of Shari’ah