ISLAMIC BANKING SERVICES: TAKAFUL

Insurance may be termed as a mechanism to hedge against different kinds of risks that may affect one’s interest in a particular asset, for instance, a motor car, or bike, or a house property etc.   The owner of the asset apprehends some kind of risk or danger to his asset that might erode the value of  his asset, or even completely destroy it,  and so, would like to take a monetary cover against such possible dangers, losses etc.

For example take the case of a motor car.   The owner of a car may insure it against theft which is fairly common.   The car owner would approach an Insurance Company, say AIG, who would insure the car against the risk of theft, by charging a fee called the insurance premium, to the owner.   Typically this facility (insurance) would come attached with strings that are called exclusions.   That is,  in the event of the car being stolen, the insurance claim of the owner would be settled subject to fulfilment of certain conditions.   In other words the claim would not be settled if the laid down criteria is not complied with.

Islamic Insurance, or Takaful, is a bit different from the conventional insurance.   Under this system, a group of persons,  having common interests, may come together to form a partnership, to protect their mutual interests, with the help of a contributory fund.   This fund is contributed to by all the partners, with the intention of making good, loss suffered by any one of them.  

How it Works:  For example, imagine a group of fishermen in Bahrain that regularly export fish to the United States and Europe.   There are many inherent risks in this business associated with the weather, product, etc.   In order to cover the risks associated with their business, these fishermen come together to form a partnership, to which they contribute funds, Tabarru,  according to a mutually agreed ratio.   These funds are then utilized to reimburse any of the partners that might suffer a loss in his business, on account of a reason that falls within the scope this arrangement.   This kind of arrangement offers protection to the individual fisherman that he alone may not be in a position to afford.   Pooling of resources by the partners ensures a higher level of protection to individual members.   It is a kind of self help program, or Ta’awum.   The partners appoint an agent to manage this partnership and administer the fund.

Other important details of this kind of insurance are that, in the event of the loss suffered by a member or members is more than the amount available in the pool, then the entire group of partners is obliged to settle the claim of such member(s)!   That is, the liability of the members is not limited to the amount of their contributions.   This would make the partnership appear to be a kind of a family venture, where each family member is committed to the welfare of the  other,  by a special bond.

Funds contributed by the members, (Tabarru), are invested in approved investments and the profits are shared in accordance with mutual agreement between them.   Such a arrangement corresponds to the Mudarabah contract;  the other type of arrangement being agency contract or Wakalah.   The rationale of the above arrangement, as can be seen, is basically to cooperate to prosper.

In conclusion, it may be said that like all other Islamic Banking and Financial activities, Insurance or Takaful also relies upon religious texts and their interpretations.   Further, there is a heavy slant towards the moral and ethical aspects of business, that impose special responsibility on those participating in such ventures.   The ultimate aim of such activities being the good of society at large.

Author’s note:  The above article is not an exhaustive study of the subject of Takaful, and intended to provide a glimpse into the practice.