The Concept of Takaful and the Structure of a Takaful Program

Insurance, no matter what kind, is pooling of risks and applying the law of large numbers. The peril will only affect a small portion of those whose risks are pooled. Hence, if our probability calculation is accurate, a small premium from every one in the pool will be sufficient to compensate fully the small portion who will suffer during the term of the policy [1].

The problem with conventional insurance is that it creates an "exchange contract" between the insurance company and the insured in the form of "policy". It simply says: you pay a premium of $ 100, and you will be covered from the specified risk (fire for example). If your house is destroyed by fire, the company will pay, say $500,000 as a compensation. This is problematic from Shari'ah point of view.

An exc...