Sharia Insurance

Islamic finance has developed mainly in two directions, namely Islamic banking and Islamic insurance (Takaful or Sharia). While information about Islamic banking is widely available, little is known about the features, models and structures of Takaful, particularly in Indonesia.

All human beings are invariably exposed to the possibility of meeting catastrophes and disasters giving rise to misfortunes and sufferings such as death, loss of limbs, accident, destruction of business or wealth, etc. Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that one must find ways and means to avoid such catastrophes and disasters wherever possible, and to minimize his or his family's financial losses should such events occur. One possible solution is to buy insurance cover under the conventional system.

However, an overwhelming majority of Sharia scholars believe that conventional insurance is unlawful due to the involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty).Takaful, the Islamic alternative to insurance, is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a pact amongst a group of people who agree to jointly indemnify any loss or damage that they may suffer, out of the fund they donate collectively. This Takaful contract usually involves the concepts of Mudarabah, Tabarru´ (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.

Takaful products are available to meet the needs of all sectors of the economy, both at individual as well as corporate levels, and to cater for the short and long term financial needs of various groups of society.

The distinction between the conventional insurance and Takaful business is most visible when looking at investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Sharia compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreement. Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.

Sharia insurance (Takaful) is a system in which all participants “donate” partially or full contributions used to pay claims filed by several participants. The role of insurer is limited to managing the fund and all administration process.

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