News and Articles

DISCLAIMER

This is a general guide developed by the Securities and Exchange Commission of Pakistan, mainly focusing on Takaful (Islamic insurance) and its most common products available in the market. Nothing in this guide is intended to be, or should be construed as, an invitation, offer, or inducement to any person to enter into an insurance contract or as advice on the merits of, or a recommendation in relation to, any particular product or service provider.

The purpose of this guide on the topic of Takaful is to help policyholders understand the subject. The guide complements the SECP's efforts for investor education and financial literacy.

This guide is not intended as a comprehensive reference work on the subject of Takaful, nor is it a substitute for the individualized advice that may be provided by qualified business and legal professionals. Rather, we intend it to be a concise and practical description of essential Takaful components together with suggested approaches to understanding the products. Further details on the topics covered by this guide can be found in the extensive literature that exists on this subject.

This guide has been developed by the Insurance Division of SECP.

Any questions or comments on the content of this guide should be addressed to:

Insurance Division
Securities and Exchange Commission of Pakistan
4th Floor, State Life Building No. 2
Wallace Road, I.I. Chundrigar Road

Karachi-74000, PAKISTAN

 

 

1. INTRODUCTION

Islamic finance has developed mainly in two directions, namely Islamic banking and Islamic insurance (Takaful). While information about Islamic banking is being increasingly disseminated, features, models, and structures of Takaful are little known, particularly in Pakistan. The purpose of this brief guidebook is to describe the main features and models of the Takaful system operating in various parts of the world in general and Pakistan in particular.

All human beings are invariably exposed to the possibility of meeting catastrophes and disasters, giving rise to misfortunes and sufferings such as death, loss of limbs, accidents, destruction of business or wealth, etc. Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that one must find ways and means to avoid such catastrophes and disasters wherever possible and to minimize his or his family's financial losses should such events occur.

One possible way out is to buy an insurance cover, as in the conventional system. Different views have been expressed about the status of conventional insurance from the point of view of Islam. An overwhelming majority of Shariah scholars believe that it is unlawful due to the involvement of Riba (interest), Maisir (gambling), and Gharar (uncertainty).

2. DEFINITION OF TAKAFUL

Takaful (تكافل) is an Islamic insurance concept that is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. Takaful is basically a system of Islamic insurance based on the principle of Ta'awun (mutual assistance) and Tabarru (voluntary contribution), where the risk is shared collectively by the group. It is operated on the basis of shared responsibility, brotherhood, solidarity, and mutual cooperation or assistance, which provides for mutual financial security and assistance to safeguard participants against a defined risk.

The word Takaful is derived from the Arabic verb Kafala, which means to guarantee, to help, to take care of one's needs. This concept has been practiced in various forms for over 1,400 years. Muslim jurists acknowledge that the basis of shared responsibility in the system of Aqila, as practiced between Muslims of Mecca and Medina, laid the foundation of mutual insurance. It is based on the concept of social solidarity, cooperation, and mutual indemnification of losses among members. It is a pact among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively.

The Takaful contract so agreed usually involves the concepts of Mudarabah, Tabarru’ (to donate for the benefit of others), and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.

3. ISLAMIC REFERENCES TO TAKAFUL

These fundamentals are based on the sayings of the Islamic Prophet Muhammad (PBUH). Based on the Hadith and Quranic verses mentioned below, Islamic scholars have decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some examples are:

• Basis of Co-operation
  "Help one another in al-Birr and in al-Taqwa (virtue, righteousness, and piety): but do not help one another in sin and transgression."
  (Surah Al-Ma'idah, Verse 2)

"Allah will always help His servant for as long as he helps others."
(Narrated by Imam Ahmad bin 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."
  (Narrated by Imam al-Bukhari and Imam Muslim)

"One true Muslim (Mu’min) and another true Muslim (Mu’min) are just like a building, whereby every part in it strengthens the other part."
(Narrated by Imam al-Bukhari and Imam Muslim)

• Basis of Mutual Protection
  "By my life, which is in Allah’s Power, nobody will enter Paradise if he does not protect his neighbor who is in distress."
  (Narrated by Imam Ahmad bin Hanbal)

The basic fundamentals underlying the Takaful concept are very similar to cooperative and mutual principles, to the extent that the cooperative and mutual model is one that is accepted under Islamic Law.

 

4. PRINCIPLES OF TAKAFUL

The principles of Takaful are as follows:

• Policyholders cooperate among themselves for their common good.
• Every policyholder pays his subscription to help those that need assistance.
• Losses are divided and liabilities spread according to the community pooling system.
• Uncertainty is eliminated in respect of subscription and compensation.
• It does not derive advantage at the cost of others.

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."

Commercial insurance is not allowed for Muslims as agreed upon by most contemporary scholars because it contains the following elements:

• Al-Gharar (Uncertainty)
• Al-Maisir (Gambling)
• Riba (Interest)

Conventional Insurance Incompatibility with Islamic Principles

Conventional Insurance Issue	Incompatibility with Takaful
The insured does not know what the compensation amount will be.	This introduces Al-Gharar (uncertainty).
An insurance product might offer a replacement or compensation greater than the loss.	The insured could gain unfairly, making it a form of Al-Maisir (gambling).
Life insurance contracts are not structured to cover a specific obligation.	This is considered betting on life expectancy, conflicting with Islamic ethics.
Insurance funds are usually invested in interest-bearing financial instruments (e.g., bonds).	This directly involves Riba (interest), which is prohibited in Islam.
The insurer keeps the premium and investment profits regardless of claims.	Risk is traded and not shared, making it an unfair system.
The insured has no share in investment profits.	This contradicts the Takaful principle of mutual benefit.

Illustration of Al-Gharar, Al-Maisir, and Riba

Before we proceed further, we need to understand these three concepts in detail:

 

5. Al-Gharar (Uncertainty)

The Arabic root for Gharar means deception—but in practice, the term is used quite widely. Gharar encompasses uncertainty, risk, hazard, and deceit.

The origin of Gharar can be divided into two categories, namely:

• Tadlis (cheating in business).
• Ghabn (to deceive).

All businesses involve some level of risk; therefore, unlike Riba, Gharar is a relative concept when it comes to uncertainty, risk, and hazard—with a certain level of uncertainty being tolerated. However, when it comes to deceit or fraud, Gharar is an absolute concept.

 

4.2 Al-Maisir (Gambling)

Maisir means a game of haphazard in all matters—particularly a game of chance by means of divinatory arrows.

Maisir exists in various forms. Some examples include:

• Seeking omens or fortune by divinatory arrows.
• Backgammon, chess, lottery, etc.

Gambling is categorized into two types:

1. A game of chance played purely for sports or entertainment (fun).
2. A game of chance that involves gambling.

Gambling refers to all dealings in which people are required to make a bet, and every dealing that involves some aspect of gambling is Maisir.

4.3 Riba (Interest)

In conventional literature, interest is seen as the time value of money. However, in Islam, money is regarded simply as a medium of exchange—with no intrinsic value in itself. Therefore, it is impermissible to lend money and earn a guaranteed rate of interest on the money.

The Arabic word Riba literally means "an addition to" or "excess" over the original price of the good or service.

MODELS OF TAKAFUL

There are two models and several variations on how Takaful can be implemented.

5.1 Mudharabah Model

Under the pure Mudharabah model, the Takaful operator and the participant share direct investment income only, and the participant is entitled to a hundred percent share of the surplus.

However, under the modified Mudharabah model, the investment income is ploughed back into the Takaful fund, and the Takaful company shares the surplus with the participant.

By this principle, the entrepreneur or Al-Mudharib (Takaful operator) accepts payment of the Takaful installments or Takaful contributions (premium), termed as Ra’s-ul-Mal, from investors or providers of capital or fund (Takaful participants) acting as Sahib-ul-Mal.

The contract specifies how the profit (surplus) from the operations of Takaful, managed by the Takaful operator, is to be shared in accordance with the principle of Al-Mudharabah, between:

• The participants (as the providers of capital).
• The Takaful operator (as the entrepreneur).

The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30, etc., as mutually agreed between the contracting parties.

To eliminate uncertainty (Gharar) in the Takaful contract, the concept of Tabarru (to donate, to contribute, to give away) is incorporated. In relation to this concept, a participant agrees to relinquish a certain proportion of his Takaful installments or Takaful contributions to support fellow participants in case of a defined loss. This agreement enables him to fulfill his obligation of mutual help and joint guarantee.

In essence, Tabarru allows participants to assist fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of Takaful is made only after the obligation of assisting fellow participants has been fulfilled.

It is imperative for a Takaful operator to:
✔ Maintain adequate assets for the defined funds under its care.
✔ Ensure financial protection by prudently managing funds against over-exposure.

Thus, the provision of insurance cover as a business in conformity with Shariah is based on the Islamic principles of Al-Takaful and Al-Mudharabah.

• Al-Takaful is a pact among a group of people (participants), reciprocally guaranteeing each other.
• Al-Mudharabah is a commercial profit-sharing contract between the provider(s) of funds for a business venture and the entrepreneur who actually conducts the business.

The operation of Takaful may therefore be envisaged as a profit-sharing business venture between the Takaful operator and the individual members of a group of participants, who wish to mutually guarantee each other against specific losses or damages.

5.2 Wakalah Model

In the Wakalah Model, the surplus from policyholders' fund investments—net of the management fee or expenses—goes to the policyholders. The shareholders charge a Wakalah fee from contributions, which covers most of the business expenses.

The fee rate is fixed annually in advance in consultation with the Shariah committee of the company. To provide an incentive for good governance, the management fee is linked to performance levels.

Illustration of Wakalah Model

Policyholders	Shareholders (Operators)
Share all underwriting risk	Receive a fixed Wakalah fee for covering expenses.
Receive underwriting surplus after deducting investment & operating expenses.	Fee is expressed as a percentage of premium and Takaful fund under management.
Policyholder deficits are funded interest-free by the operator until repaid from profits.	Required to fund policyholder deficits without charging interest.

5.3 Wakalah Waqf Model

An extension of the Wakalah Model is the Wakalah Waqf Model, in which the risk-related component of the Takaful contributions is pooled into a separately formed Waqf Pool.

The overall Takaful contract is administered by the Takaful operator as a Wakeel (agent) under the Wakalah arrangement. However, the investment portion of the Waqf Pool is administered by the Takaful operator as a Mudarib (investment manager) under a Mudarabah agreement.

6. TAKAFUL COMPANIES

The growth in demand for Islamic insurance over recent years has seen a proliferation of new companies offering Islamic insurance products in these markets.

According to the current applicable laws in Pakistan, Takaful Companies (Takaful Operators) are financial institutions incorporated as Limited Companies registered with the SECP and licensed by the Insurance Division of SECP. They are granted permission to conduct General and Family Takaful (Islamic insurance) business in Pakistan for Non-life and Life insurance, respectively.

The first Takaful Company to operate in Pakistan was Pak-Kuwait Takaful Company Limited, which began its Takaful operations in 2005. Currently, there are five Takaful operators, comprising three General Takaful and two Family Takaful Companies, namely:

General Takaful Companies

1. Pak-Kuwait Takaful Company Limited
2. Pak-Qatar General Takaful Limited
3. Takaful Pakistan Limited

Family Takaful Companies

1. Pak-Qatar Family Takaful Limited
2. Dawood Family Takaful Limited

 

7. BENEFITS OF TAKAFUL

Takaful intends to provide a five-in-one advantage, categorically spelled out as follows:

7.1 Insurance Coverage/Protection Benefits

Takaful plans provide cover in the form of mutual financial aid through the payment of Takaful benefits to the policyholder or heir(s).

The benefits can be divided into two categories:

1. Family Takaful Plan (similar to Conventional Life Insurance).
2. General Takaful Plan (similar to General Insurance).

Family Takaful offers a maturity plan for 10, 15, 20, 25, 30, 35, or 40 years. Supplementary contracts such as:
✔ Hospitalization coverage
✔ Accident and permanent total disability benefits
may be incorporated into the plan.

Other supplementary contracts, such as the Family Rider, may also be attached to the Family Takaful Plan, including:
✔ Takaful Mortgage Plans
✔ Takaful Plans for Education
✔ Group Takaful Plan

Types of General Takaful Schemes

Takaful companies provide a variety of General Takaful schemes for both individuals and the corporate sector, categorized as follows:

a) Fire Takaful Scheme

• Basic fire
• House owners
• Householders
• Industrial all risks

b) Motor Takaful Scheme

• Motor car
• Motorcycle

c) Accident/Miscellaneous Takaful Scheme

• Personal accident / Group personal accident
• Personal accident for pilgrims
• All risk
• Workmen's compensation
• Public liability
• Money equipment all risks
• Employers' liability
• Plate glass
• Fidelity Takaful, etc.

d) Marine Takaful Scheme

• Cargo

e) Engineering Takaful Scheme

• Machinery breakdown
• Erection of all risks
• Boiler and pressure vessel
• Contractors all risk
• Bond

·        7.2 Mobilization of Savings

·        The birth of Takaful companies is complementary to the establishment of Islamic banks. It adds to the diversity of Islamic finance by providing more alternatives for Muslims to save their money in a safe and systematic manner.

·        With the existence of Takaful, a Takaful company can mobilize savings in a secure and profitable manner. As such, Takaful encourages the custom of regular savings for a fixed period with the objective of creating a retirement or long-term contingency fund.

·        In summary, a Takaful company plays the role of both a savings institution and a custodian of money deposited under its custody, serving the future interests of the Muslim community.

·        7.3 Islamically Approved (Halal) Investment Opportunity

·        In relation to the savings function, a Takaful company mobilizes the savings of contributors into Islamic-approved investment avenues such as Shariah-compliant stocks and shares.

·        In other words, by joining a Takaful plan, the policyholder gains an added benefit—a golden opportunity to invest money in accordance with Islamic principles.

·        7.4 Participation in the Economy in a Collective Way

·        Takaful encourages both Muslims and non-Muslims to participate in the economy in a collective and systematic manner.

·        As previously mentioned, Takaful is based on a group of people pooling their resources in the spirit of mutual benefit and shared responsibility.

·        If social cooperation allows individuals to help and protect one another for a good cause, then the same principle should apply in the economic sphere.

·        Each policyholder contributes money in advance, anticipating that it will be used for a beneficial purpose—assisting those in need.

·        In addition, Takaful not only helps others collectively but also benefits the contributor personally. If one suffers misfortune, it is a great relief to have others share the burden.

·        Ultimately, Takaful serves this dual purpose—financial security, rather than just emotional consolation.

·        7.5 Opportunity to Perform Good Deeds and Charitable Works

·        By joining Takaful, one is indirectly involved in charity and welfare.

·        In today’s challenging world, whether by force or voluntarily, people are too busy with never-ending mundane pursuits for survival and convenience. As a result, there is practically no time to be physically involved in charitable and social welfare activities, even though the natural instinct to do so exists in one’s intention.

·        By participating in a Takaful Scheme, that noble intention can be realized, as part of the contributed money (premium) is donated to a special fund. This fund is used to provide financial assistance to other fellow participants (or their dependents) who suffer loss or misfortune.

·        Thus, this portion of the money does not belong to the policyholder. Upon entering into the Takaful contract, he/she has already agreed to donate this amount to the special fund.

·        Therefore, there is no issue or objection if the policyholder does not receive that portion of money when:
✔ The Takaful policy expires.
✔ The policyholder survives beyond the policy term.
✔ The policyholder does not suffer any loss from the defined risk in the policy.

·        Furthermore, those who wish to make a claim from this special fund must do so in a bona fide (good faith) manner, without any ulterior motives for unjust self-enrichment.

·        Since the fund is exclusively designated for those who genuinely suffer from misfortune, Takaful participants should be mindful of this concept. This principle is based on the idea that:

·        “The fortunate many assist the unfortunate few.”

·        With this awareness and consciousness, there should be no unreasonable claims made by participants seeking compensation from the Takaful operator.

·        As a result:
✔ Fewer claims are made to Takaful operators.
✔ This allows more surplus to be distributed to both policyholders and the company at the end of the year, based on the pre-agreed profit-sharing ratio.

·        8. FREQUENTLY ASKED QUESTIONS

·        8.1 Is Risk Protection (Insurance) Against Tawakkul (Total Dependence Upon Allah (SWT))?

·        No. Human actions do not change the Will of Allah (SWT) for our destiny.

·        Whether a person has insurance/Takaful or not has no effect on future events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah (SWT).

·        In a Hadith narrated by Anas bin Malik, one day Prophet Muhammad (PBUH) noticed a Bedouin leaving his camel without tying it. He (PBUH) asked the Bedouin:

·        "Why don't you tie down your camel?"

·        The Bedouin answered:

·        "I put my trust in Allah (SWT)."

·        The Prophet (PBUH) then said:

·        "Tie your camel first, then put your trust in Allah (SWT)."

·        (As quoted in Sunan At-Tirmidhi, 1981.)

8.2 Is All Risk Protection (Insurance) Haraam (Prohibited)?

The Fiqh Council of the World Muslim League (1398H / 1978AD) and the Fiqh Council of the Organization of Islamic Conference (OIC) (1405H / 1985AD) in Jeddah resolved that conventional insurance, as presently practiced, is Haraam.

However, cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles.

Thus, conventional insurance is considered prohibited for Muslims because it contains the elements of:

• Riba (interest)
• Al-Maisir (gambling)
• Al-Gharar (uncertainty)

By contrast, Takaful provides risk protection in accordance with Shariah, based on the principles of:
✔ Ta’awun (mutual assistance)
✔ Brotherhood
✔ Piety
✔ Ethical operations

8.3 What is Takaful?

Takaful comes from the Arabic root-word "Kafala" (كفالة), which means to guarantee, to help, and to take care of each other’s needs.

Takaful refers to mutual protection and joint guarantee.

Operationally, Takaful refers to participants mutually contributing to the same fund with the purpose of providing mutual indemnity in the case of peril or loss.

8.4 How is Uncertainty (Gharar) Eliminated from the Takaful Contract?

Uncertainty can never be completely eliminated; it remains present in the Takaful contract as well.

However, since the Takaful contract falls under Tabarru’at (voluntary contributions), the uncertainty (Gharar) is considered to be within tolerable limits under Shariah.

In contrast, insurance is a contract of exchange (Mu’awadat), which contains "excessive Gharar" and is therefore classified as Fasid (defective or voidable) under Islamic law.

8.5 All Insurance is a Form of Gambling or Wagering, Which is Forbidden in Islam.

Risk or uncertainty can be divided into two categories:

1. Pure Risk – Involves the possibility of loss or no loss.
• Example: Damage to property due to fire.
• Pure Risks are covered by insurance risk protection and Takaful.
2. Speculative Risk – Involves the possibility of loss, no loss, or gain.
• Example: Starting a new business or gambling on a horse race.
• Speculative Risks that include a potential gain or profit cannot be insured.

Takaful schemes use the principle of indemnification to compensate for losses suffered by Takaful Participants.

✔ Takaful insures only Pure Risks.
✔ Claims are payable only in the event of a loss to cover repairs, damage, replacement of property, or an agreed fixed amount.

8.6 Does a Takaful Company Seek to Maximize Profits and Take Benefits Away from Policyholders?

Takaful operators are mutual or cooperative entities.

The goal of Takaful is to promote community well-being and self-sustaining operations, rather than focusing on high profits.

Under different Takaful models, profits or surplus are distributed as follows:

• Takaful Mudarabah Model – Surplus (or profits) is shared fairly and equitably between:
  ✔ Shareholders
  ✔ Policyholders (Participants)
• Takaful Wakalah Model – Surplus is returned entirely to the Participants.

·        8.7 Do I Need Insurance/Takaful?

·        A Takaful scheme gives us an opportunity to practice the virtues of Islam, including self-purification.

·        Surah Al-Ma’idah (V.2) states:
"Help one another in furthering virtue and Taqwa (God-consciousness), and do not help one another in evil and transgression."

·        In a Hadith narrated by Ahmad and Abu Daud, the Prophet (PBUH) said:
"Whosoever fulfills the intentions (needs) of his brother, Allah will fulfill his intentions. And Allah always helps those who help their brothers in need."

·        The first Constitution in Medina (622 CE), arranged by Prophet Muhammad (PBUH), contained three aspects directly related to risk protection:
✔ Social insurance for the Jews, Ansar, and Christians.
✔ Article 3 concerning wergild (blood money).
✔ Provision for Fidyah (ransom) and 'Aqila'.

·        We should follow his (PBUH) example to meet our needs and social obligations.

·        8.8 Do Takaful Contributions Entail a Higher Rate Than Conventional Insurance Premiums?

·        No. Takaful companies are as competitive as their conventional insurance counterparts.

·        Opting for Takaful will not make you pay higher costs than conventional insurance.

·        8.9 Can Takaful Cover the Theft of My Car?

·        Yes. Takaful companies offer the same variety of products as conventional insurance companies, including:
✔ Fire Takaful
✔ Marine Takaful
✔ Motor Takaful

·        Additionally, most Takaful operators have the expertise and experience to provide tailor-made solutions for their clients.

·        The only exceptions are risks that do not conform to Shariah, such as:
❌ Breweries
❌ Casinos

·        8.10 How Will I Get a Claim From a Takaful Company?

·        All procedures, including claims processing, are the same as in conventional insurance companies.

·        The difference lies in the nature of the contract, not in the procedures.

·        8.11 How is it Ensured That All Activities of Takaful Companies Are Shariah-Compliant?

·        All Takaful companies are governed by the SECP's Takaful Rules, 2005, which require Takaful operators to constitute a Shariah Board comprising reputable Shariah scholars.

·        Moreover, all Takaful companies must undergo a Shariah audit, in addition to the customary accounting audit, in each accounting period.

·        8.12 Is Takaful Transacted in Other Countries?

·        Takaful is a new phenomenon in Pakistan.

·        The first Takaful company was established in 1979—The Islamic Insurance Company of Sudan.

·        Currently, there are more than 100 Takaful Companies operating in over 20 countries.

·        8.13 How Many Takaful Models Are There?

·        In Islam, there is room for diversity within certain prescribed parameters.

·        Over the centuries, several Takaful Models have evolved, all of which are approved by Islamic scholars.

·        While they all share the same fundamental goal of cooperative risk sharing, these models differ slightly in legal structure and organizational operations.

·        Takaful Models are usually described by the Islamic contracts used, namely:

·        ✔ Hibbah or 100% Tabarru’ (Sudan).
✔ Al-Mudarabah (Bahrain/Malaysia).
✔ Al-Wakalah (Saudi Arabia).
✔ Wakala/Waqf (Pakistan).

·        8.14 What Takaful Model is Followed in Pakistan?

·        According to the SECP's Takaful Rules, 2005, in Pakistan, a Takaful product must be based on the principle of Wakalah, Mudarabah, or both.

·        Therefore, Takaful companies in Pakistan follow a refined hybrid model known as the “Wakala-Waqf” model.

·        ✔ It is a Wakala model in which the fund is made a separate legal entity by virtue of it being a Waqf.
✔ The relationship between the participants and the operator is directly with the Waqf fund.
✔ The operator acts as the Wakeel (agent) of the fund.
✔ Participants pay contributions to the Waqf fund as Tabarru’ (donation/contribution).

·        8.15 How is Takaful Companies' Investment Income Riba-Free?

·        Unlike insurance companies, whose investment income may contain Riba (interest), Takaful companies invest funds in:

·        ✔ Property
✔ Islamic Banks
✔ Shariah-compliant Stocks
✔ Other Shariah-approved securities such as Sukuk bonds

·        8.16 Is Takaful Just a Change of Label?

·        Although the end result is the same—both insurance and Takaful aim to provide compensation against possible losses—the crucial difference lies in the way each system operates.

·        The notion "ends justify means" does not hold in Islam, where both the ends and the means must be permissible and ethical.

·        For example, a chicken can either be:
✔ Slaughtered according to Islamic principles (making it Halal).
❌ Killed using an electric shock (rendering it Haraam).

·        Both methods achieve the same end—a dead chicken—but only the first method makes the meat Halal for consumption, while the latter renders it Haraam.

·        Similarly, Takaful and conventional insurance may serve the same purpose, but the method of operation determines whether it is permissible (Halal) or forbidden (Haraam) under Islamic law.

8.17 What is Meant by Surplus Sharing?

The Takaful Operator acts only as the Wakeel of the Waqf Fund.

If, at the end of the year, there is a surplus in the Fund (i.e., after adding all its income and deducting all outgoings), such surplus will be distributed among the participants proportionately, after taking into account any claim benefits already availed.

8.18 Is There a Single Participant Takaful Fund (PTF) or Separate PTFs for Each Class of Business?

A General Takaful operator may create:
✔ A single PTF (Participant Takaful Fund).
✔ Separate PTFs for different classes of business.

(Section 8(5) of the SECP’s Takaful Rules, 2005).

The surplus is thus calculated according to the practice adopted.

9. GLOSSARY OF TAKAFUL TERMS

The language of Takaful can be quite complex and confusing.

Below are some commonly used insurance terms and their meanings.

This information is for educational purposes only and should not be relied upon to form professional opinions on coverage issues.

A

✔ Assurance

• Insurance in a conventional insurance policy.
• It refers to the “sharing” of risk that comes with mutual solidarity and guarantee, as opposed to the “transfer” of risk that conventional insurance provides.

✔ Average Clause

• Stipulates that a Takaful fund is only liable for such a proportion of the loss as the sum covered bears to the total value at risk.

C

✔ Claims

• Notification to a Takaful operator that payment of an amount is due under the terms of the certificate.

✔ Claims Ratio

• The ratio of net claims incurred to earned contributions.

✔ Contribution

• Equivalent to Premium in a conventional insurance policy.
• It is the payment of an amount by a Participant to the Takaful Protection Pool, whether directly or through intermediaries, for the purpose of mutual protection and assistance.

D

✔ Designated Charities

• If there is a surplus in the Takaful Protection Pool after all expenses have been deducted, then that Net Surplus will be donated to a designated charity or charities.
• Currently, these charities include:
1. United Nations International Children's Emergency Fund (UNICEF)
2. International Federation of the Red Cross and Red Crescent Societies (IFRC)
• The designated charities may be changed from time to time at the discretion of the Wakeel’s Oversight Committee, provided such change is approved by the Shariah Supervisory Board.

E

✔ Earned Contribution

• Net contributions less provision for reserves for unearned contribution (RUC) at the year-end, plus the RUC at the beginning of the year.

✔ Excess of Loss Treaty

• A type of Re-Takaful treaty in which the Re-Takaful operator pays all or a specified percentage of a loss arising from a particular occurrence or event (frequently of a catastrophic nature), in excess of a fixed amount and up to a stipulated limit.

✔ Excess

• Equivalent to Deductible in a conventional insurance policy.
• It is the first amount that a participant has to pay on their own account towards each claim.

✔ Event of Loss

• An event that gives rise to a loss, as defined in the policy.
• Loss refers to a loss suffered by a Participant that qualifies for compensation under the terms and conditions of the policy.

F

✔ Facultative Treaty

• A Re-Takaful contract under which a ceding Takaful operator has the option to cede, and the Re-Takaful operator has the option to accept or decline individual risks.

G

✔ General Takaful

• Protection provided to a participant against losses arising from perils such as:
  ✔ Accidents
  ✔ Fire
  ✔ Flood
  ✔ Liability
  ✔ Burglary

✔ Gharar

• Arabic for uncertainty.
• One of three fundamental prohibitions in Islamic finance (the other two being Riba and Maisir).
• Gharar involves an unacceptable level of uncertainty or contingency in a contract.
• The prohibition of Gharar is often used as the basis for criticizing conventional financial practices such as:
  ❌ Short selling
  ❌ Speculation
  ❌ Derivatives

✔ Gross Direct Contributions

• Contributions based on the original gross rate charged to clients in respect of direct Takaful business, without any deduction for commission or brokerage.

✔ Group Family Takaful

• A Family Takaful plan (usually without medical examination) for a group of people under a master certificate.
• Typically issued to:
  ✔ Employers (for the benefit of employees).
  ✔ Associations (for their members).

I

✔ Indemnity

• Restoration to the claimant for a loss by payment, repair, or replacement.

✔ Individual Family Takaful

• A contract that provides Takaful benefits payable to an individual in the event of:
  ✔ Death / Total Permanent Disability (TPD)
  ✔ Periodic income upon retirement

✔ Investment-Linked Takaful

• A contract where the certificate benefits at any time vary according to the value of the underlying assets at that time.

✔ Islamic Finance

• Financial services that meet the requirements of Shariah (Islamic Law).
• Although designed to meet the religious requirements of Muslim consumers, Islamic banking is not restricted to Muslims.
• Both the financial services provider and the consumer can be Muslim or non-Muslim.
• Also known as:
  ✔ Islamic banking
  ✔ Islamic financial services

I

✔ Ijarah

• An Islamic lease agreement.
• Instead of lending money and earning interest, Ijarah allows a financial institution to earn profits by charging rentals on the asset leased to the consumer.
• Ijarah wa Iqtinah extends the concept of Ijarah to a lease and purchase agreement.

M

✔ Maisir

• Arabic for gambling.
• One of three fundamental prohibitions in Islamic finance (the other two being Riba and Gharar).
• The prohibition on Maisir is often used as grounds for criticism of conventional financial practices, such as:
  ❌ Speculation
  ❌ Conventional insurance
  ❌ Derivatives

✔ Medical and Health Takaful

• A contract that provides specified medical treatment benefits, such as:
  ✔ Cost of hospitalization
  ✔ Surgical fees
  ✔ Physician consultation fees
• Protects against the risk of being diagnosed with certain illnesses or injuries arising from an accident.

✔ Mortality Table

• A statistical table showing the death rate at each age.
• Usually expressed as the number of deaths per thousand.

✔ Mudarabah

• A Mudarabah is an investment partnership, where:
  ✔ The investor (Rab-ul-Mal) provides capital to another party/entrepreneur.
  ✔ The entrepreneur (Mudarib) undertakes the business/investment activity.
  ✔ Profits are shared on a pre-agreed ratio.
  ✔ Loss of investment is borne only by the investor (Rab-ul-Mal).
  ✔ The Mudarib loses its share of the expected income in case of loss.

✔ Mudarib

• Entrepreneur (the party managing the investment in a Mudarabah contract).

✔ Murabaha

• A purchase and resale transaction.
• Instead of lending money, the capital provider purchases the desired commodity from a third party and then resells it at a predetermined higher price to the commodity user.
• By paying this higher price in installments, the commodity user effectively obtains credit without paying interest.

✔ Musharaka

• A Musharaka is a partnership financing structure, where:
  ✔ Profits are shared as per an agreed ratio.
  ✔ Losses are shared in proportion to each partner’s capital investment.
  ✔ All partners contribute funds and have the right, but not the obligation, to exercise executive powers in the project.
  ✔ Similar to a conventional partnership structure or holding voting stock in a limited company.
• This equity financing arrangement is widely regarded as the purest form of Islamic financing.

N

✔ Net Claims Incurred

• Net claims paid, less provisions for outstanding claims at the beginning of the year, plus provisions for outstanding claims at the end of the year.

✔ Net Contributions

• Gross contributions, less all Re-Takaful contributions payable.

✔ Net Investment Income

• Returns on investments, less rates and taxes.

✔ Net Surplus

• The net difference in the Takaful fund after subtracting all expenses and management fees for the cost of administration.

O

✔ Operating Protocol

• A document that outlines the terms and conditions under which the operator (Wakeel) and participant of the Takaful Policy agree to follow the guidelines and principles set forth between the two parties.
• This document also specifies the relationship between all participants, operators, and administrators.
• Ensures that all transactions take place in accordance with Shari’ah law.
• Dictates that all investments must be Shari’ah-compliant.

P

✔ Participant

• Equivalent to the Named Insured (Muwakkil) in a conventional insurance policy.
• The participant is the contributing party to the Takaful policy, who is covered through the mutual protection and solidarity of the Takaful policy.

✔ Participants' Account

• An account to credit a portion of contributions from the participant for the purpose of investment/savings.

✔ Participants' Special Account

• An account to credit a portion of contributions from the participant for the purpose of Tabarru’ (donation).

✔ Period of Takaful or Policy Period

• The length of time for which Takaful protection will be effective.

✔ Proportional Treaty

• A contract under which a Takaful operator and a Re-Takaful operator participate proportionately in the contributions and losses on every risk that comes within the scope of the contract.

Q

✔ Qard

• Loan

✔ Qard Hasan

• An interest-free loan from the Wakeel to the Takaful Protection Pool to cover any shortfalls in the fund.

R

✔ Rabbul Mal

• Capital provider

✔ Ra’sul Mal

• Takaful Contribution

✔ Retention Ratio

• The ratio of net contributions to gross direct and Re-Takaful accepted contributions, less Re-Takaful within Malaysia.

✔ Riba

• Interest generated in a conventional loan.
• The legal notion extends beyond just interest.
• In simple terms, Riba covers any return on money over money—whether the interest is:
  ✔ Fixed or floating
  ✔ Simple or compounded
  ✔ At any rate
• Riba is strictly prohibited in Islam.
• Investments made within a Takaful policy always avoid Riba in their financial transactions.

✔ Rider

• An attachment to a certificate that modifies its conditions by expanding benefits.

S

✔ Shari’ah

• Islamic law as revealed in the Qur’an and through the example of Prophet Muhammad (PBUH).
• A Shari’ah-compliant product meets the requirements of Islamic law.
• A Shari’ah board is a committee of Islamic scholars that guides and supervises an Islamic financial institution in the development of Shari’ah-compliant products.

✔ Shari’ah Advisor or Scholar

• An independent professional, usually a classically trained Islamic legal scholar, who advises a financial institution on the compliance of its products and services with Shari’ah (Islamic law).
• Some financial institutions consult individual Shari’ah advisors, while others establish a Shari’ah board or committee.

✔ Shari’ah Compliant

• An act or activity that complies with the requirements of Shari’ah (Islamic law).
• Often used in the Islamic banking industry as a synonym for Islamic, for example:
  ✔ Shari’ah-compliant financing
  ✔ Shari’ah-compliant investment

✔ Sum Covered

• Equivalent to the limit of liability in a conventional insurance policy.
• The amount shown in the schedule, representing the maximum amount that the Risk Fund will pay for any one claim.
• The Sum Covered must be high enough to cover the cost of rebuilding a building in case of an incident that completely destroys it.

✔ Sukuk

• The Arabic term for a financial certificate, often referred to as the Islamic equivalent of a bond.
• Since fixed-income, interest-bearing bonds are not permissible in Islam, Sukuk are Shari’ah-compliant securities that:
  ✔ Do not involve the charging or paying of interest.
  ✔ Represent undivided ownership in tangible assets, usufruct, services, or specific investment projects.

✔ Surplus at Valuation Date

• The excess of the Takaful fund carried forward over the actuarial liabilities of a Takaful fund in family Takaful business.

 

T

✔ Tabarru’

• Equivalent to Premium in a conventional insurance policy.
• An Arabic word meaning donation, gift, or contribution.
• In a Takaful contract, this is the amount contributed for the purpose of participating in a Takaful scheme.

✔ Tijari

• Commercial business.

✔ Takaful

• Islamic insurance, structured as a charitable collective pool of funds based on the idea of mutual assistance.
• Takaful protection policies are designed to avoid elements of conventional insurance (i.e., interest, uncertainty, and gambling) that are problematic for Muslims.
• Takaful literally means mutual protection through co-operative risk sharing.
• Takaful insurance avoids the prohibited elements of conventional insurance in accordance with the laws of Shari’ah.

✔ Takaful Policy

• Equivalent to Policy in a conventional insurance contract.
• The agreement entered into between the operator and the participant(s) for the purpose of Takaful insurance.

✔ Takaful Protection Pool

• The total sum of contributions received by the Wakeel from the Participants, together with investment returns generated thereon (if any).
• This fund has been established voluntarily for the purpose of mutual protection and assistance of the Participants.

✔ Ta’min

• Insurance.

✔ Total Loss

• A loss of sufficient size, where nothing of value remains.

U

✔ Underwriting Profit/Loss

• Earned contribution income, less net claims incurred, commissions, and management expenses.

✔ Unearned Contribution Reserves

• Contributions already received for risks that are still unexpired at the end of the accounting period.

W

✔ Wakeel or Operator

• The insurance company that underwrites, administers, and manages the Takaful program on behalf of the participants.
• In the Zayan Takaful Homeowners Program, the Wakeel is Lexington Insurance Company, one of the leading Property & Casualty insurers in the United States.

✔ Wali

• Guardian.

✔ Wakalah

• Agent-principal relationship, where a person nominates another to act on his behalf.

✔ Wakil

• Agent.

✔ Wasi

• Executor.