Takaful in light of the Shariah

As we highlighted in the section on Islamic finance and insurance, there are 3 main principles that cause conventional insurance to fall outside of shariah boundaries. Let’s examine how Takaful resolves these issues.

1. Prohibition of Riba (Interest)

Takaful funds are invested in shariah-compliant investment portfolios that are free from riba. Moreover, because takaful contributions are intended as donations for a specific purpose, they are not loans with interest; while claim payments are usually larger than contributions, the excess amounts paid are considered donations from others in the community, and not interest on a loan.

2. Prohibition of Gharar (uncertainty)

Gharar is broadly defined as “uncertainty and risk-taking as well as excessive speculation, gambling and ignorance of the material aspects of contracts”. Gharar invalidates financial commutative (muawada) contracts, in other words, contracts that exist with a commercial purpose. Gharar does not invalidate gratuitous contracts based on donations (tabarru). If we take the example of a lottery, it is considered a commercial contract with excessive gharar and is therefore invalid and impermissible. A donation for a specific purpose (such as takaful contributions) is a gratuitous contract as there is no expectation of return as long as the specific purpose is fulfilled. Hence, gharar does not invalidate takaful contracts and they are permissible.

3. Prohibition of Maisir (gambling)

One of the criticisms by scholars against conventional insurance is that it contains an element of gambling (maisir). While there are differences of opinion in this matter, scholars are in agreement that takaful is free from maisir. As takaful is based on mutual aid and contributions are donated for the specific purpose of mutual aid, there is no possibility of loss and all participants’ interests are aligned.

The fundamental principles of Takaful are widely accepted by Islamic scholars worldwide, including The Islamic Fiqh Academy, the Higher Council of Saudi Ulemas, the Fiqh Council of the World Muslim League, and the First International Conference for the Islamic Economy. In practice, the operational models of various Takaful companies still require regular auditing to ensure compliance with shariah principles.