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Takaful Insurance - Explained

The word takaful is derived from the Arabic verb kafala which simply means to take care of one’s need. In other words “A” for example, guarantees to take over the liability of “B” in the event of a calamity afflicted upon the latter. Under this simple illustration it is only a one-sided relationship in the sense that only “A” would be the party that assumes the responsibility. However, following the above example, if “B” were at the same time would reciprocate to take care of the needs of “A” then a kind of joint guarantee between them is established. Therefore the pact between at least two parties agreeing to jointly guarantee one another in the event of a loss, as a consequent of being afflicted by a calamity defines the term Takaful.

As a concept of joint-guarantee, takaful can be applied and adopted both by the public and private sectors. For the public sector, the concept can be used to develop and implement the social security scheme for the public, commonly known as takaful al-ijtima‟i. This form of takaful is usually undertaken by the government such as the SOCSO, EPF and LTAT schemes where its organization and structure are set by the authorities usually by special legislations. The takaful al-ijtima‟i or social security type of scheme is normally run at the behest of the authorities. Services and products provided are generally standard without the freedom of choice to the consumers. A person who aspires for products or services over and above the standard offered cannot do so even he has the means. Islam does not forbid such freedom as long as the means of choosing do not contradict its teachings.


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Likewise, the joint-guarantee as embedded in the concept of takaful can be translated into practical operation in the form of business or commercial transaction within the tijari or private sector as one of the Islamic financial players in a market economy of which the subject is to be covered in this section. In this manner, like banking, takaful can be the alternative to the conventional insurance. Under the tijari sector the public as consumers will have the right to choose the types of product and service suitable to their taste and need.

Takaful Insurance: The Models

The operation of takaful within the tijari sector can be structured on a number of business models as shown below:

i. Wakalah model

ii. Mudarabah model

iii. Mudarabah + Wakalah model also known as hybrid model

iv. Waqf model

What is important though, the foundation of any of the above models as depicted in its respective contracts is based on Shariah. The choice of models by a takaful operator demonstrates the flexibility of Shariah. After all, its objective is the attainment of the well-being of mankind as outlined in the Maqasid Shariah.

When Malaysia commenced takaful operation in accordance with the Takaful Act 1984, the al-Mudarabah model was introduced by the operator, Syarikat Takaful Malaysia Sendirian Berhad, which in 1995 was transformed into a public company and hence named Syarikat Takaful Malaysia Berhad. Brunei too adopted the Mudarabah model when takaful was first introduced in 1993 with the incorporation of Takaful IBB Sendirian Berhad. To date this is the only model practiced in the country following the emergence of new operators there. On the contrary, when Sudan launched its takaful operation based on the ta‟awuni or cooperative principle, it adopted the Wakalah model, as seen in the business flow of her takaful debutant, Islamic Insurance Co. Ltd of Sudan. However, with the advent of takaful business in the late 1990s in the Gulf and Middle East, the Hybrid model began to take shape. Currently, all newly established takaful operators, including in Malaysia, have chosen the Hybrid model.

On the other hand waqf is a relatively new model and so far no operator is known to have used it. The principle of waqf as a model for takaful operation was first raised and discussed in Pakistan. Nonetheless, at this juncture practically all takaful operators in Pakistan are implementing the Hybrid model.

EXCERPTS FROM: Mohd Fadzli Yusof, Fundamentals of Takaful (Kuala Lumpur: IBFIM, 2011), pp 29 to 44