In recent decades Islamic finance principles have become more mainstream. Two key components in Islamic finance are Islamic banking and Islamic insurance which is also known as takaful.
Takaful is a form of Islamic insurance, but it is different from conventional and western insurance policies. Geared towards a Muslim customer base, takaful involves a pooling system whereby members each pay money into a pool fund and effectively guarantee each other against losses and damages.
Essentially, takaful is a system within Islam of mutual insurance. It is based on the following principles
- mutual assistance
- solidarity
- co-operation
That means takaful does not include any form of interest (riba), or unjust enrichment (gharar). Members who pool their funds are protected by each other by pooling their respective contributions. These contributions are then used to provide financial cover for those within the group who face a claim or a loss. The system of collection and distribution is an ethical and Sharia compliant experience for the participants.
This article will examine how takaful works, and the main Islamic principles relating to this form of insurance.
PRINCIPLES OF TAKAFUL
As mentioned above the three main principles relating to takaful are mutual assistance, solidarity, and co-operation that offer protection from losses.
These principles mirror the core Islamic finance principles that centre on ethical funding and social responsibility.
- Mutual assistance: this principle is based on reciprocal help. Participants or members of the takaful fund help each other out, and in doing so they share the risks and rewards of the scheme.
- Solidarity: the takaful system is based on principles relating to social solidarity. This reflects the ethical stance within Islamic finance which focuses on the benefit to society rather than the individual. The social solidarity aspect of takaful fosters and enhances the sense of community among the participants. What this means in reality for customers is that their financial needs are met, whilst they are also helping others.
- Co-operation: As it is based on the principle of mutual support, it is clear that co-operation is key for takaful schemes to succeed. Each member must agree to co-operate with the others for the greater good of the scheme.
Takaful involves the following components:
- Pooling of contributions - participants all contribute to the fund which is managed by a takaful manager
- Providing insurance coverage - the fund offers participants insurance coverage for specified risks
- Processing claims - the takaful operator manages the claims
- Costs - the cost of administering the takaful system is covered by the contributions made
- Profit sharing - as there are no middlemen (as is the case in traditional insurance products), the profits are shared. This means that if a claim is made the takaful operator uses the funds already in the pool to settle the claim
In many countries across the globe, there is regulation of takaful schemes. Especially in countries that have adopted Sharia law. In Muslim countries takaful sometimes forms part of government services and policies.
How takaful is regulated depends on the country and region you operate within. Typically, a takaful scheme will be governed by the insurance rules and regulations of that region.
The type of protection on offer includes insurance industry regulations, business regulations, tax laws, and consumer protection laws. You should always check the status of any takaful scheme before joining it.
BENEFITS OF TAKAFUL INSURANCE
There are many different advantages of taking part in takaful insurance. The main benefit to Muslims is that they can benefit from an insurance scheme that is Sharia compliant.
Some of the other key benefits of takaful include the following:
- Flexibility: takaful insurance can be tailored to meet the specific needs of an individual or business.
- Ethical Investment: As takaful operates in compliance with Islam and Sharia rules, it means that is it an ethical and attractive option for those who want to invest in a socially responsible way.
- Mitigated Risk: Pooling contributions via takaful insurance reduced risk for all involved and also generates revenue to deal with insurance claims. Overall, takaful offers an ethical strategy when wanting to secure an insurance policy.
- Financial Protection: of course, one of the main benefits of takaful is the financial protection those within the pool are offered. This means policyholders have protection against unexpected events via the insurance policy and their business. product and asset collection can be covered.
Takaful has increased in popularity in the United Kingdom with the increase in consumers and investors looking for ethical and alternative insurance options to protect assets and manage risk. Globally, there is also a demand for takaful projects, including in Kenya, the Middle East, South East Asia, and the wider African region.
In the UK, takaful insurance products are available and offer protection for a variety of risks such as life insurance, motor insurance, and health insurance. In fact, the UK takaful insurance industry has seen significant growth in the last decade.
TAKAFUL INSURANCE
Those businesses and brokers offering takaful insurance usually work together with traditional insurance companies to create bespoke insurance coverage for their clients. Conventional insurance and investment products are based on underwriting risk. In contrast, takaful is based on co-operation and the pooling of funds.
Takaful insurance that is offered by brokers and businesses is subject to the same regulation as other insurance products. In the UK, takaful insurance is regulated by the Financial Conduct Authority (FCA).
Anyone looking for takaful insurance in the UK should ensure they approach reputable brokers and those who understand the concept of Islamic finance and Sharia law.
When doing research you can visit the website or online platform of the company offering the takaful insurance so you can assess how the company prices and offers the takaful product and find all the information you need.
Takaful is a great financial planning option for those people who want insurance cover that is Sharia compliant and aligns with ethical values.