Takaful for beginners

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What is Takaful?

Takaful is a type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takaful-branded insurance is based on Sharia, Islamic religious law, and explains how it is the responsibility of individuals to cooperate and protect each other.

On What principle does Takaful work?

Takaful works on the principle of Tabarru and Ta’awun. The Arabic word Tabarru is used to refer to a donation or a gift and the word Ta’awun is used to refer to mutual assistance. In Takaful, the participants make donations and assist mutually to tackle the risk of loss due to certain events.

Is Takaful a recent development?

No in fact the concept of Takaful originates from the Arabs customary practices. These practices were recognised and allowed by prophet Muhammad peace be upon him and thus the practice continued.

What is the Mechanism of Takaful?

Takaful participants make contribution as donations into an insurance fund. The resources of this fund are used to compensate any participant encounters injury or loss and portion of the fund is invested in a Sharia compliant profitable business. The insurance fund is managed either by a selected group of participants a company against a specific fee.

Relationship between participant and fund manager

The relationship between participants and the fund manager depends upon the takaful model adopted. Every takaful model is based one of the Islamic structures.

What makes Takaful different from conventional insurance?

Takaful is free from the elements of uncertainty (Gharar), Gambling (Maysir) and Interest (Riba). The surplus in the Takaful fund belongs to the policyholders and is not treated as the profit to the fund.

What are the different models adopted in Takaful?

The commonly adopted models are the Mudaraba, WakalaWaqf and Hybrid model. In the Mudaraba model, the Mudaraba structure of Islamic finance is used and the Fund Manager invests the surplus of the pooled money on the Mudaraba basis and the same with the other models. The Hybrid Model is where two different structures of Islamic finance, e.g. the Mudaraba and Wakala are used in a single model then it is referred to as a hybrid model.

Differences in Takaful models

  • In the Mudaraba model, the fund manager is entitled to a share in surplus but not entitled to a salary or any fee.
  • In the Wakala model, the fund manager is entitled to a specific fee but not the share of the surplus.
  • In the Waqf model, the fund manager is entitled to a salary.
  • In a Hybrid model, the fund manager is entitled to a share in net realization as well as a fee for his or her services to manage the contributions and claims.
 A Fund Manager entitlements in different models:
    Salary Share in Surplus Specific Fee Share in Net Realisation
Mudaraba X YES X X
Wakala X X YES X
Waqf YES X X X
Hybrid X X YES YES

A Working Example of Takaful

Let’s suppose there are ten participants who are contributing $10 each into a fun, making a total contribution of $100. The Fund Operator is appointed to manage this fund of $100 for a period of one year. From this $100; –  $70 dollars are distributed to the claims account and – $30 dollars to the investment account In the claims account, we have $70 which is used to pay for the losses claimed by the participants, in these twelve months if there were two claims made and the fund operators paid $30. From the remaining $40 in the claims pool the fund operator deducts operation expenses including the fee of the fund manager, who is working as an agent and distributes the rest to the participants at the end of 12 months. The $30 dollars in the investment account will be invested in Sharia permissible businesses. If there is any profit after the one year from the investments then the fund operator will distribute the profit amongst the participants after deducting the operating expenses.

The fee for the Fund Operator

Based on the Takaful structure an agreed fee would be paid to the fund operator in a WAKALA structure a fee is paid and in a MUDARABA structure the fund manager share from the realised profit on an agreed ratio. The other important point is that the remaining amounts in the investment account and claims account are distributed to the participant at the end based on the WAKALA and the MUDARABA models. But in the case of Waqf model, it would be retained as a reserve and not distributed.

Takaful Categories

Before you apply for Takaful you should know the products. There are two categories one as a General Takaful and the other is Family Takaful. General Takaful provides protection on a short-term basis normally covering a period of one year. This includes the following claims:

  • fire accidents
  • car accidents
  • marine accidents
  • airplane accidents
  • liability and breach of trust

Family Takaful includes insurance against the risk of disability and death. Family Takaful offers a combination of protection and long term savings usually covering a period of more than one year.  It provides financial benefits if the insured is inflicted by a tragedy.


Riba is a concept in Islamic banking that refers to charged interest. It is forbidden under Sharia, Islamic religious law, because it is thought to be exploitive. Depending on the interpretation, riba may only refer to excessive interest; however to others, the whole concept of interest is riba, and thus is unlawful.

Sharia is an Islamic religious law that governs not only religious rituals, but aspects of day-to-day life in Islam. Sharia, literally translated, means “the way.”

There is extreme variation in how Sharia is interpreted and implemented among and within Muslim societies today. This is especially prevalent for its financial laws.
Also known as “Shariah” or “Shari’a”.

The act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law. Usury first became common in England under King Henry VIII, and originally pertained to charging any amount of interest on loaned funds. Over time it evolved to only mean charging excess interest, but in some religions and parts of the world charging any interest is considered illegal.

A shareholder is any person, company or other institution that owns at least one share of a company’s stock. Because shareholders are a company’s owners, they reap the benefits of the company’s successes in the form of increased stock valuation. If the company does poorly, however, shareholders can lose money if the price of its stock declines.