Differences in Takaful and Conventional Insurance - Takaful is the Islamic term used to denote Islamic insurance. Takaful is based on the principle that the pool of donations is created and is used to support each other. This is the principle of Tabarru. To fully understand Takaful one can see principles of waqf, Kafalah, Tabarru, etc. (Usmani, 2007).
Why Islamic Sharia Prohibits Conventional Insurance? Conventional insurance include Riba, Maisir, and Gharar which are against Islamic Sharia. Riba is used in Arabic language which means excess or addition in something. In Islam loan without interest is allowed and if interest is charged then it is Haram and against Sharia however service charges are allowed (Mahmood, 1991). It is narrated by Hazrat Jabir (R.A),”The Holy Prophet (SAW) cursed the devourer of usury, its payer, its scribe and its two witnesses and they were equal (in sin)” (Karim).
Gharar is uncertainty in a contract in which one party is in benefit and loss is beard by other party. Gharar may be in case of any insurance contract in which there is no idea about payment as promised or there is no idea about how much amount should be paid at the time of its payment. Maisir in insurance is in which policy holders invest small amount premium with hope to gain large profit and some time due to losses they lose their premium invested and claims may be higher than contributions. Maisir refers to obtaining or acquiring something without any effort. This is done in gambling (Mohammad, 1988).
In Holy Quran Allah has clearly declared Maisir (gambling) unlawful and there is no relaxation in it (Quran, 627 A.D). About 200 scholars participated in a conference in Makkah and concluded that insurance practiced in conventional insurance companies is against Sharia (First international conference on Islamic economics, 1976). In this conference it was also concluded that Islamic insurance system is different from conventional insurance system and is according to Sharia. Council of Islamic Ideology of Pakistan in 1983 rejected all the models of commercial insurance.
Differences in Takaful and Conventional Insurance
Takaful operate in such a way that the participants contribute their money and formulate a pool of money. This money is then invested to earn Halal profit in sharia compliant investments. The amount of profit earned is then added in money pool and is then distributed among the participants after satisfying any claim as a renewal discount. The takaful operator only receives Wakala fee.
Islamic insurance companies invest in a number of Sharia compliant products. Governments of the countries in which Muslims are in majority have introduced a legal framework which helps in introduction of new Sharia compliant products. Mudaraba certificates are the instruments which are evolved from such legal framework. While a conventional insurance company invests in interest based instruments like treasury bills, certificates of deposits, interest bearing bonds etc. The following table shows differences in Takaful and Conventional Insurance
The present form of conventional insurance is Haraam and Takaful is according to Islamic Sharia is fully permissible because conventional insurance has elements of interest, gharar and gambling and takaful has not such type of elements as explained above (Islamic conference in jeddah , 1985). Insurance includes pure risk and speculative risk. In pure risk loss may occur or not while in speculative risk there may be loss, profit or no loss. Takaful applies the indemnification principle and compensate the loss of Takaful client. Takaful is only related with pure risk and not with speculative risk.
The goal of insurance is to maximize profit in favor of shareholders because they are stock companies and ignore client while in contrast takaful goal is well-being and self sustaining operation without earning high profit. In Takaful surplus is shared between shareholders and policy holder and also surplus is owned by participants and is reduced by performance fee for operators before dividing in to participant (Wakala model).
Takaful helps people to accumulate their saving for goodness of whole community. An opportunity is provided by takaful scheme to people to practice Islamic way. The Holy Prophet (PBUH) saying is “whosever removes the hardship from believer, Allah will remove hardship from him one of the hardship of the Day of Judgment” (Sahih Muslim ). Insurance is vice versa. Al tabarue is account in takaful which involves donations and it also involves al Mudarabah principles. While in conventional insurance general insurance and life
insurance accounts are involved. In Takaful profit is divided between different participants in specific ratios on the basis of Al-Mudarabah principles. While in conventional insurance profit is not shared between members in a specific ratio and in some year bonus is provided and some time not.
Takaful fund is managed by operator but ownership is of participants. They have a complete right of contribution and benefits. In conventional insurance the policy holder purchase policy and there exist seller –purchaser relationship. Takaful company performs trustee and operator functions. In conventional insurance there exist one to one relationship between policy holder and company. Different elements like Riba, Gharar and Gambling are not involved in takaful and it is according to Islamic Sharia. Riba and Gharar are involved in conventional insurance system and do not fulfill sharia requirements and therefore it is not allowed (Haberbeck, 1987). Sharia Council determines where to invest funds so that interest factor may not involve while in conventional insurance funds are invested without guideline of Sharia Council usually in interest based businesses. Takaful operates on mutual assistance principle. Conventional insurance operate on business principle.
In insurance contract there is clause that insurer can forfeit the premium amount that is paid by the policy holders under certain circumstances. Islam does not allow the forfeiture of premium, wholly or partly, as the amount of premium is consider as loan by insured to insurer. In takaful there is no forfeiture of contributions and it is distributed among the participant in form of surplus (Mahmood D. N., 1991). Rules are made according to Holy Quran and Hadith in takaful system. In conventional insurance system rules are made according to human mind and thinking. All participants contribute fixed amount in Takaful .In conventional insurance amount of paid premium vary from one policy holder to others. In takaful the participant can receive all the benefit on the maturity of contract but if he died before maturity then amount is paid to the claimant without investigation and without letter of administration. The claimant is entitled to receive same benefits as it is to be paid to the participant on maturity and there is no deduction (Mahmood D. N., 1991). In conventional insurance if the policy holder is died then amount is not paid to the claimant without proper investigation of causes of death.
In Islamic insurance the agent (wakil) gets the salary for his services while in conventional insurance agent gets specific percentage from the amount paid by policy taker. In Islamic insurance agent is considered as employee of the takaful operator and only gets salaries for his services. In conventional life insurance the persons (not necessarily the heirs) can have the insurable interest of the policy holder whereas in Islamic life insurance the insurable interest is vested according to wasiyah principle (Billah, 1997).
Differences in Takaful and Conventional Insurance
We can conclude that there are a number of significant differences between Takaful and conventional insurance companies. Takaful companies not only follow the principles of Sharia, but also have distinctive features compared to conventional companies. A comparison between Takaful and conventional insurance companies can be seen below:
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Takaful Companies
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Conventional Insurance Companies
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Takaful is based on mutual cooperation.
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Conventional insurance is based solely on commercial factors.
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Takaful is free from interest (Riba), gambling, (Maysir),
and uncertainty (Gharar).
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Conventional insurance includes elements of interest, gambling, and
uncertainty.
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There is a full segregation
between the Participants Takaful
Fund account and the shareholders' accounts.
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Premium paid by the Policyholder
is considered as income to the company, belonging to the shareholders.
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All or part of the contribution
paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing
protection against potential risks.
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The premium is paid to conventional insurance companies and
is owned by them in exchange for bearing all expected risks.
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Takaful companies are subject to the governing law as well as a
Shari’a Supervisory Board.
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Conventional companies are only subject to the governing laws.
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Any surplus in the Takaful Fund is shared among
Participants only, and the investment profits are distributed among
Participants and shareholders on the basis of Mudaraba or Wakala models.
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All surpluses and profits belong
to the shareholders only.
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In case of the deficit of a
Participants’ Takaful Fund,
the Takaful operator (Wakeel)
provides free interest loan (Qard Hasan) to the Participants.
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In case of deficit, the conventional insurance company
covers the risks.
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Takaful companies have re-insurance with Re-Takaful companies or with conventional re-insurance companies
that adhere to certain conditions of Sharia.
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Conventional insurance companies do not necessarily have re-insurance
with re-insurance companies that abide by Shari’a principles.
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The Plan Owners’ and shareholders’
capital is invested in investment funds that are Shari’a compliant.
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The capital of the premium is
invested in funds and investment channels that are not necessarily Sharia
compliant.
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To maintain his Homo-Islamicus behaviors a Muslim may adapt his practices to and comply with Sharia . Tawakal concept best deals with takaful because firm belief in the God is compulsory but taking due care is also necessary. Takaful and conventional insurance models are different because of their permissibility in Islam. Conventional mode is based on Riba which is prohibited in Islam.