Takaful (, sometimes translated as "solidarity" or mutual guarantee)Khan, What Is Wrong with Islamic Economics?, 2013: p.403 is a co-operative system of reimbursement or repayment in case of loss, organized as an Islamic or sharia-compliant alternative to conventional insurance, which contains riba (usury) and gharar (excessive uncertainty).Khan, What Is Wrong with Islamic Economics?, 2013: p.402
Under takaful, people and companies concerned about hazards make regular contributions ("donations") to be reimbursed or repaid to members in the event of loss, and managed on their behalf by a takaful operator.Ajmal Bhatty, President & Chief Executive Officer, Tokio Marine Middle East, Takaful Summit 2011. Like other Islamic finance products, Takaful is grounded in Islamic Muamalat (commercial and civil acts or dealings branch of Islamic law).
In 2018, the takaful industry had grown to a size of $27.7 billion of "contributions" (from a 2011 figure of $12 billion). The movement has been praised as providing "superior alternatives" to insurance that "reinvigorate human capital, emphasize personal dignity, community self-help, and economic self-development"; but also criticized as having "dwindled" in scope to an industry of "conventional insurance with Arabic terminology and language of contract".Khan, What Is Wrong with Islamic Economics?, 2013: p.410
Principles Theoretically, takaful is perceived as cooperative or mutual insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of "bear ye one another's burden". The principles of takaful are as follows:
Policyholders cooperate among themselves for their common good. Policyholders' contributions are considered as donations to the fund (pool). Every policyholder pays his subscription to help those who need assistance. Losses are divided and liabilities spread according to the community pooling system. Uncertainty is eliminated concerning subscription and compensation. It does not derive advantage at the cost of others.
Muslims scholar have "hardly any difference of opinion" on "the need for managing, redeeming and mitigating general, business and life risks covered by the insurance business". But whether conventional insurance is forbidden (haram) is disputed.
Fiqh scholars In its second session (December 1985), the Fiqh Academy of the Organisation of Islamic Cooperation (also called the International Islamic Fiqh Academy) ruled conventional commercial (but not social) insurance haram (forbidden). Its ninth resolution stated: The commercial insurance contract, with a fixed insurance premium, as practiced by commercial insurance companies, contains substantial gharar, which renders the contract defective. Consequently, it is legally forbidden.El-Gamal, Islamic Finance, 2006: p.147
Argument against conventional insurance Islamic scholars began forbidding commercial insurance as early as the late nineteenth century CE. The majority of Islamic scholars believe commercial insurance is disallowed for Muslims because it contains Al-Gharar (uncertainty) Al-Maisir (gambling) Riba (usury) They have two main concerns about conventional insurance: The uncertainty "if and when the insured event will take place and, if it does take place, what would be the relationship of compensation to the insurance premium paid". (What if the holder of collision insurance policy never has a motor vehicle accident? they lose and the insurance company wins. Regarding life insurance, everyone dies, but what if the death occurs after the first payment of a premium for life insurance? they win and the insurance company loses.) This "makes the insurance business similar to gambling, where the gambler does not know the fate of the game". Thus, uncertainty in the conventional insurance business "is excessive and borders on prohibited gharar". "Insurance companies invest surplus funds on the basis of interest and pay out a part of such earnings to policyholders as bonuses." According to the 'orthodox interpretation', this is riba.
According to Jamal Zarabozo, the majority of modern Muslim such as scholars from Islamic Fiqh Council of the Organisation of Islamic Cooperation, the Board of the Leading Scholars of Saudi Arabia, the Fiqh Council of Mecca under the auspices of Muslim World League, Siddiq ad-Dharir, Wahbah al-Zuhayli, Muhammad Mustafa as-Sinqithi, Salaah al-Saawi, Abdullah al-Muslih, Sulaiman Thunayaan, Ali Abu al-Basl, Abdur Rawf al-Shaadhili, Faisal Maulawi, Mohammad Muslehuddin, Afzalur Rahman, and numerous other respected scholars and jurists agreed that commercial insurance were forbidden.
Defense of conventional insurance A minority of Islamic scholars argue that insurance is not like gambling because in gambling, no risk is covered and no damage is mitigated. The gamblers play a game of chance for entertainment and profit in which they can win or lose, based on a conscious decision.Jamaldeen, Islamic Finance For Dummies, 2012: p.295 Insurance provides coverage for events out of the insured policyholder's control. When the policyholder collects a payout, they are not a winner, but a loser who at least has some compensation. Furthermore, while insurance involves uncertainty, "statistical techniques and actuarial sciences have progressed to a stage where the insurance company can calculate its risks and benefits with great precision," so that the uncertainty involved in insurance can scarcely be called excessive in normal circumstances.
Scriptural basis
Islamic scholars supporting takaful point to Qur'an and several sayings (hadith) of the Islam prophet Muhammad. Some examples are: Qur'an Basis of Co-operation: Help one another in al-Birr and in al-Taqwa (both: virtue, righteousness and piety), but do not help one another in sin and transgression. (Sūrat al-Māʼidah, Verse 2)
Hadith God will always help his servant for as long as he helps others. (Narratives by Imam Ahmad ibn Hanbal and Imam Abu Daud.) Basis of Responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narratives by Imam al-Bukhari and Imam Muslim) One true Muslim (Mu’min) and another true Muslim are like a building, whereby every part in it strengthens the other part. (Narratives by Imam al-Bukhari and Imam Muslim) Basis of Mutual Protection: By my life (which is in God's power), nobody will enter Paradise if he does not protect his neighbour who is in distress. (Narrative of Imam Ahmad bin Hanbal.)
The fundamentals underlying takaful are very similar to co-operative and mutual principles, to the extent that the co-operative and mutual model is one that is accepted under Islamic law.
History & models
The concept of takaful has reportedly been practised in various forms since 622 CE. The first practitioner of Takaful were known as Zubayr ibn al-Awwam, companion of the prophet, as this practice were allowed according to classical scholar consensus, such as Ibn Taymiyyah in his Majmu Fatawa. In practice, Takaful were regarded as technically as zero interests banking with fundraising business model. In the eyes of scholars and researchers, al-Zubair Entrepreneurship of Tafakul has become serious object of study by scholars of Islamic institutions regarding the conduct and ethics in business in accordance of Islamic Fiqh, such as Dr Erwandi Tarmizi. Additionally, Modern researchers of Islamic banking, and Islamic financing theorists, has delved the business aspect of Zubayr during his lifetime as rolemodel. One of the principles of az-Zubayr business were the ethics of Fundraising based business according to Sharia. This type of fundraising business consisted of Zubayr practice of accepting safety deposits as a loan and investing the money, without accepting interest as profit of the business, which regarded as usury in Islam teaching.
According to Ali Ahmad Salih, professor of Middle East University in Jordan, this fundraising Takaful business of Zubayr ibn al-Awwam were centered in Medina with its branches spread in Alexandria, Kufa and Basra. Ali Ahmad Salih pointed out the evidences based on the records of Hisham ibn Urwah narration in Tabaqat al Kubra which written by Ibn Sa'd.
During Abbasid Caliphate era, such Islamic banking system were apparent. there were even one business center named Dar-uz Zubayr in Basra that accept any deposits. Zafarul Islam theorized in his Academic journal released by Aligarh Muslim University, that the deposit center were named after Zubayr ibn al-Awwam. Meanwhile, modern day Pakistani Islamic business theorist, Zubair Mughal, has further observed the model of Zubayr ibn al-Awwam practice of Tafakul to avoid the Gharar (risky business), gambling, and Riba, which all forbidden by Islamic law.
Modern era Muslim jurists acknowledge that the basis of shared responsibility (in the system of aquila as practised between the Muslims of Mecca and Medina) laid the foundation of mutual insurance. "In the case of insurance, as with commercial banks, orthodox opinion prevailed," and with "a consensus among Muslim scholars" about the legitimacy of takaful and the illegitimacy of conventional insurance, the "movement for Islamizing the contemporary insurance business" started around the mid-1970s. In 1976, a fatwa was issued by the Higher Council of Saudi Arabia "in favor of an Islamic model" of insurance. The International Islamic Fiqh Academy, Jeddah of the Organisation of Islamic Cooperation also approved takaful as a legitimate form of business in 1985. The Islamic Insurance Company of Sudan started as the first takaful company in 1979. By the mid-1990s, there were seven takaful companies in Sudan, Dubai, Saudi Arabia, Bahrain and Jordan.Khan, What Is Wrong with Islamic Economics?, 2013: p.408 Prominent contributors to the development of Takaful in Saudi Arabia include businessman Saleh Malaikah, known for his involvement in the sector through Rusd Holding Group.
The industry grew from $1.384 billion in 2004 to $5.318 billion in 2008.Ernst & Young, World Takaful Report 2010 By the end of 2011, total takaful contributions amounted to $12 billion (as compared to $4 trillion for conventional insurance). In 2005, there were 82 companies around the world engaged in takaful business (77 dedicated takaful companies, and five "offering takaful products" from "Islamic windows"). By 2006, there were 133.Ernst & Young, World Takaful Report 2008 As with the traditional forms of insurance, reinsurance of a takaful operation may be used, known as "retakaful". Also in 2006, AIG, a non-Muslim US-based company (with more than 88 million customers in 130 countries), established a takaful subsidiary called AIG Takaful Enaya, headquartered in Bahrain.Jamaldeen, Islamic Finance For Dummies, 2012: p.302 As of 2013 the leading takaful countries are "Malaysia and the Gulf states". It was reported in 2016 that out of total 308 takaful companies, 93 are takaful windows; however, these takaful windows own only 2.5% of the total takaful assets.
In 2024, the UK Government announced plans to introduce an Alternative Student Finance (ASF) system based on Takaful principles, offering interest-free funding for higher education to students whose religious beliefs prohibit the use of conventional loans.
Models There are several models (and several variations) of how takaful can be implemented: Mudharabah model (profit-sharing): the managers (shareholders) are sharing profit and losses with the policyholders; used initially in Far East. Tabarru'-based: "donations" (Tabarru'''), i.e. premiums, are accumulated into a fund to meet members' losses. Members are not allowed to take back any contributions or profits from investments.Khan, What Is Wrong with Islamic Economics?, 2013: p.405