Takaful, an Islamic alternative to conventional insurance

Takaful is defined as “a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose.”

In practice, a group of individuals pool funds together with the intention of providing financial assistance to one another as insurance against a defined risk. The intention, or niyah, is that of mutual aid and stems from the fact that the funds are contributed as donations, partial or full, for the specific purpose of insuring against risks. The funds are used to compensate the Takaful Operator (the company that manages the funds on behalf of the participants), to pay claims against adverse events, and invested for returns. In case there are funds remaining after these activities, they are redistributed back to the original contributors.

It is easiest to understand takaful in contrast to conventional insurance.