"Commercial insurance is originally haram as agreed upon by most contemporary scholars. It is well known that in most non-Islamic countries there are cooperative and mutual insurance companies. There is no harm from the Shariah point of view to participate in these services. So, it is unlawful for a Muslim living in a country where there is such a co-operative insurance company to make an agreement with a commercial insurance company. But, if a co-operative insurance company is not found one may enter into a contract with a commercial insurance company only by way of necessity. If a person is forced by law to insurance or by way of need, it is obligatory for him to be content with the minimum proportion of insurance that covers his need or to the minimum of such transaction he iss being forced to carry out." European Council for Fatwa and Research.

A Muslim must believe that any misfortune that befalls him is from Allah and therefore he must bear with faith and patience. Nevertheless he must also strive against calamities and should prepare for them.

One of such preparations is to buy protection or cover through a policy provided by a Shariah compliant company offering Islamic Insurance. The form of insurance acceptable in Islam is Takafful. It is a response to what Allah wants Muslims to do on a cooperative basis to achieve the Ummah's interest. It fulfills the social obligations towards financial assistance and is a service to the Muslim Ummah. It is basically a welfare scheme.

Takafful is an Arabic word meaning "Guaranteeing each other". It is an Islamic system of insurance based on co-operation and donation where a group voluntarily shares risk collectively. It is an agreement among a group of members or participants who agree to guarantee jointly among themselves against loss or damage to any of them as defined in the agreement. The Takafful agreement specifies the terms and conditions of the Takfaful. It states in clear terms how the Takaful operator will be compensated, how profits will be distributed, the procedure for exiting the group etc.

The Takfaful form of insurance is acceptable in Islam because unlike the conventional form of insurance, it is devoid of uncertainty, gambling and interest, all of which are unacceptable under Islamic law. Takafful makes use of the principle of Tabarru in the agreement to eliminate any uncertainties. Tabarru means to donate or contribute. Every participant agrees to give up a certain percentage of his Takafful contributions as Tabarru to enable him fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

The Tabarru contributions are made into the risk pool. From this pool, direct, indirect expenses and claims are paid. If there is a surplus, it is shared amongst participants. Deficits are also made up with additional contributions from participants or with an interest free loan from the operator.

Advantages of Takafful:

* Participants cooperate among themselves for their common good.

* Every participant pays his subscription to help those that need assistance.

* Losses are divided and liabilities spread according to the pooling system.

* It does not derive advantage at the cost of other individuals.

* Uncertainty is eliminated in respect of subscription and compensation.

Takafful Models

The two main business models used in the Takafful industry are the Mudaraba and the Wakala models. The Mudaraba model is commonly used in the Far East and involves the Takaful operator managing the operation in return for a share of the surplus on underwriting and a share of profit from investments. The Wakala model is more prevalent in the Middle East region. In this model, the Takaful operator acts as an agent for the participants and manages the Takaful fund in return for a defined fee.

Management of Takafful

The Takaful funds must be invested into Shariah Compliant investment vehicles such as Real-Estate, Asset-backed Investments (Islamic Financial Contracts), permissible Equities and lslamlc Funds. It is inappropriate for Takaful funds to be invested in vehicles that are not permissible in Islam. This defeats the objective of the participants who want an Islamic alternative to the conventional insurance because of their religious values.

Types of Business

Generally there are two types of Takaful business, namely: Family Takaful Business (Islamic Life Insurance) A family Takaful plan provides mutual aid for its participants in form of financial benefits paid from a defined fund should any of its members suffer a loss arising from a tragedy. This plan is usually a long-term contract.

General Takaful Business (Islamic General Insurance) This scheme, which is usually short-term, provides protection in the form of mutual financial help to compensate its participants for any material loss, damage or destruction to their properties or belongings.

* Takaful compensation can be used to cover

* Property e.g. houses, factories, mosques, offices etc

* Vehicles e.g. cars, motorcycles etc

* Goods

* Valuables

* Health e.g. accidents and life As Muslims, we stand to benefit from the proper establishment of Takaful according to the rules set by Islamic finance.

Islamic groups, associations and organizations can establish Takaful to guarantee themselves against losses.

Takaful is an example as to how the principles of Islamic Shari-ah can help to create new socioeconomic mechanisms based on equity, justice and fair play.

This article was culled from the publications of Deen Communication Limited

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