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Takaful And Its Mechanism

Takaful:
The word takaful comes from the Arabic root word Kafala, meaning "guarantee". Takaful, therefore is the practice whereby individuals in the community jointly guarantee themselves against loss or damage. For example, individuals can make charitable donations to a common fund from which they may each draw in the event that they suffer loss to their houses or livelihoods. It was first established in the early Islamic era with the purpose of promoting mutual solidarity and co-operation among the Muslim community.
In takaful the elements of riba (interest), maisir (gambling), gharar (uncertainty) are removed from the operations.

The Concept of Islamic Insurance:
The first Islamic insurance company was set up in Sudan in 1979. Today there are many Islamic insurance operators in Muslim as well as non-Muslim countries. The main concept of Islamic insurance is that it is an alternative to conventional insurance, with characteristics and features that comply with shariah requirements. This is done by eliminating the objections against conventional insurance. “The term takaful is an infinitive noun which is derived from the Arabic root verb kafal’ or kafala, meaning to guarantee or bear responsibility for.” The main features of Islamic insurance are:

• cooperative risk sharing by using charitable donations to eliminate gharar and riba;
• clear financial segregation between the participant (insured) and the operator (insurance company);
• shariah-compliant underwriting policies and investment strategies.

Cooperative Risk Sharing:
The characteristics of a cooperative include self-responsibility, democracy, equality, equity, solidarity, honesty, openness, social responsibility, and caring for others. While mutuality or cooperative risk sharing is at the core of Islamic insurance, it cannot alone create an Islamic insurance operation. Islamic insurance is based on more than one contractual relationship: The first relationship is a mutual insurance contract between policyholders (contributors) and each other. This is similar to a pure mutual insurance relationship, taking into consideration the concept of donation (tabarru) instead of premiums and an ethical framework of Islamic transactions. The main features behind cooperative insurance are:
• Policyholders pay premiums to a cooperative fund with the intention of it being a donation to those who will suffer losses (tabarru). Policyholders are entitled to receive any surplus resulting from the operation of the cooperative insurance fund.
• Policyholders are liable to make up for any deficits that result from the operation of the cooperative insurance fund.
• The amount of contribution (premium) differs from one participant to another, based on the degree of risk in general insurances and actuarial principles in life assurance.
• There is no unified system to operate the treatment of surplus and deficit. There is therefore more than one model accepted by shariah scholars being used in practice.

Clear Segregation Between Participant and Operator:
In conventional insurance, the insurance company is a profit-making organization that aims to maximize profit by accepting the financial burden of others’ losses. The insurance company is owned by shareholders who are entitled to receive any profit and are responsible for financing any deficit. Under Islamic insurance, the system is that the insurance company’s role is restricted to managing the portfolio and investing the insurance contributions for and on behalf of the participants. The relationship between the participants and the insurance company (as an operator, not as an insurer) is different. There are four different models in operation: The mudarabh model, the wakalah model, the hybrid mudarabh–wakalah model, and the pure cooperative model (non-profit). “The overarching goal of Takaful is brotherhood, solidarity, protection and mutual cooperation between members”

Shariah-Compliant Policies and Strategies:
Ethical insurers invest money in a responsible way in industries that are ethically sound and do not harm the environment or people. Islamic insurance is similar, except that the ethical considerations are extended to those which do not contravene the religion of Islam and are monitored by a shariah board, which is part of the company structure. In particular, the investment and underwriting policies need to be free of any involvement with the prohibited activities of gambling, alcohol, pork, armaments, tobacco, and interest bearing activities, loans, and securities.

Mechanism of Takaful:
The meaning of the word Takaful is Islamic insurance which arises from Islamic banking. In this system, there are certain rules and regulations which are to be followed in order to keep the whole system interest-free and pure. This system has taken several forms since it was first practiced in Arabian places like Medina and Mecca. Below is the general diagram of takaful mechanism.
graph4
The basic concept behind this system of insurance is to keep oneself protected from any disastrous situations. For instance, if someone’s family member dies, any sort of accident takes place, anyone starts to face financial crisis at some point in their lives, or any other sort of unforeseen loss or damage occurs, Islam suggests its followers to indulge themselves in a system which can protect them under such circumstances. But this system needs to be completely pure, where no interest is charged from any one and in any form. All the profits earned are through hard work and not by illegal means or businesses of such goods and/or services that are strictly prohibited in Islam.
In addition to this, Takaful also teaches the society the moral and ethical standards which are necessary for all of us to live in a peaceful society. It tells us how to mutually co-operate with others and help them when they need our help. And this is to be done without any lust for money, interest or profits from any other illegal means. When a group of Muslims indulge themselves in this system of insurance, they agree to the terms and conditions which were provided by Islam and the Prophet Muhammad (p.b.u.h.) a long time ago. As mentioned before, there are three elements in Takaful that have no place whatsoever – Riba (interest), Gharar (uncertainty) and Maisir (gambling). The policyholders or the members, who agree to donate each other in the hour of need, equally share the money from the investments that are made between them. This capital is not to be invested in businesses or monetary systems which carry out un-Islamic means and ways to earn money. In fact, this money can be used in other businesses which are pure of such acts, for example, the food industry, education, health, etc. Earning profits is not prohibited in Islam; in fact, Prophet Muhammad (p.b.u.h.) himself encouraged such investments which eventually benefit the whole society, city or even country via various ways. For instance, it can create job opportunities, reduce poverty, increase the standard of living of people, and eventually help nations to prosper.

Conclusion: Islamic insurance has grown out of the need of many stakeholders in the Islamic world to have protection for assets and liabilities. This protection was required in a similar fashion to that provided by conventional insurance, which, for a variety of reasons, was often viewed as prohibited in Islam. Takaful or Islamic insurers have been structured in such a way that Islamic scholars are satisfied that the main objections to insurance, which are riba, gharar, and maysir, have been addressed. Islamic insurance is the fastest-growing area of insurance throughout the world, including in Western countries. In order to call a company Islamic, there are features that need to be built into the structure:
• cooperative risk sharing, by using charitable donations to eliminate gharar and riba;

By: Arslan Ziad

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