Takaful is defined as a mutual arrangement between parties in which they agree to provide material assistance to one another or a group, in time of a misfortune. The agreement also stipulates that each party shall first agree on the form of contribution which will be utilized later on the basis of mutual benefit. The Takaful scheme fulfills the spirit of Islamic Jurisprudence (Syariah) which is the combination of the concept of co-operation, protection, and responsibility and they are implemented together. This will bring out the beauty of Islam which is more practical rather than conventional Insurance which is not allowable in Islam.

The idea to set up a takaful system stems from the Islamic community’s wish to conduct their affairs according to Islamic law. This in turn is a consequence of the efforts of the Islamic Mujaddids (reformists) in the nineteenth and twentieth centuries who propounded that Islam is not only restricted to a set roles and regulations concerning ibadah (worship) and munakahat (marriage), but a complete way of life (nizamul hayah) including the spheres of business transactions.

The concept of conventional insurance has not achieved full agreement from scholars whether it is permissible (halal) or prohibited (haram). Since conventional insurance as it is being practiced now did not exist during the Prophet’s time, ‘ijtihad’ is used to determine whether it is permissible or otherwise. Among scholars who ruled that conventional insurance is haram, there are disagreements as to the reasons why it is haram.

The scholars who are of the opinion that insurance is permissible said that insurance is a modem contract and there is no injunction (nass) regarding it. If there is no injunction, then it is allowed (mubah). They based their argument on the established legal maxim that "The original legal position on any matter is permissibility until there is evidence prohibiting it." This legal maxim is based on the Quran of which some of the related verses are as follows:-

We have subjugated to you all that is in the heavens and the earth (45:13)

These scholars further claimed that insurance is a contract that brings ‘maslahah’ (public interest) to the insured. Without insurance for example, one’s next of kin will suffer a huge burden after his death. The scholars further said that custom (uruf) establishes the practicality of Insurance.

The commercial conventional insurance contract is prohibited (haram) according to the Shariah because of the following reasons:

[a] Gharar
‘Gharar’ is taken from Arabic word which means uncertainty. According to scholars, ‘gharar’ is defined as a contract where the results are not known or hidden or one of the possibilities where the frequent occurrence is the one that is more feared. The conventional insurance contract is a contract of exchange whereby the insured pays the price (premium) and the insurer provides compensation. In a contract of exchange, the ‘gharar’ element that can nullify the validity of the sale is consent. The Quran says which means

"O who you believe, do not eat property amongst you in a false way, except through trade by mutual consent." (An-Nisa’:29)

However, the subject matter in a contract is required in determining consent because it is not logical to say that one gives consent to something that he does not know. There are four types of ‘gharar’ which are clarified by our scholars. These are:

i. Gharar in the outcome
When the contract is made, neither the insurer nor the insured knows the outcome of the contract. The insured does not clearly know whether he will get compensation or not as an exchange to the premium that he has paid. Similarly, the insurer does not know the outcome.
ii. Gharar in the existence
In the conventional insurance contract the insured does not know the existence (quantum) of the compensation since it depends on the outcome that may or may not happen.
iii. Gharar in the results of the exchange
When the contract is made, neither the insurer nor the insured knows the outcome of the exchange. The insured does not know whether they will receive the compensation in exchange for the premium that they pay. Similarly, the insurer does not know how much premium they will receive. Sometimes the insurer receives the premium only once or a few times, but has to indemnify an amount that is not commensurate with the premium.
iv. Gharar in the contract period
According to some scholars, when a contract is deferred, the period must be made known. If not the contract is considered void. The same situation arises in the conventional insurance contract whereby compensation is based on a time frame that is not known.

[b] Maisir
‘Maisir’ is also taken from Arabic word which means gambling. The conventional insurance contract is equated with gambling where if the peril (risk) occurs, the insurer will lose. On the other hand if the peril does not occur, the insured will lose. Furthermore some scholars argue that the source of the money that is being paid as compensation is not determined.

[c] Riba
‘Riba’ is taken from Arabic word which means interest. There are many verses that prohibit ‘riba’. What exactly constitutes ‘riba’ has always been a disagreement among scholars. Some scholars are of the opinion that interest whether on principal or late payment is ‘riba’. Other forms of ‘riba’ established by the sunnah of the Prophet is the exchange of ‘ribawi’ elements where there is a difference in time and/or quantity. The ‘ribawi’ elements mentioned by the Prophet are gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt. Rightly or wrongly, by making an analogy, money is similar to gold and silver where it is a medium of exchange. Therefore it is a ‘ribawi’ element and that in the contract of exchange between the insurer and the insured there is difference both in quantity and amount. Furthermore, these scholars argued that conventional insurance companies give out loans from the premiums received and charge interest and no doubt that this is ‘riba’.

The beauty of this system is that participants can obtain two forms of profit. Firstly, the monetary profits through this protection scheme and secondly, the “profit” in the spiritual sense whereby participants can exercise their religious and social responsibilities through the 'Tabarru’ method which would be handed to those who suffer losses and misfortune. The advantage of this system is that it is not only for the benefit of the Muslim but also for the prosperity of all participants, irrespective of their religious beliefs.

Al-Wakalah is the contract wherein the participant authorizes the operator to conduct the affairs of the fund on his/her behalf. Through this contract, Takaful Ikhlas will charge a management fee from the Ta’awuni Account Pool (TAP) for its duty.

PIA is a Fund for Family Takaful’s products which consist of protection and investment features but PRIA and GRIA Fund just for General Takaful’s product which consist of protection feature only.

The Ta’awuni pool comprises by three major funds:

a. Expenses Fund
Expenses Fund is a fund for payment for Management expenses, retakaful and technical reserves. Through al-wakalah concept which applied in Ta’awuni pool, Takaful Ikhlas will charge a management fee from this pool.

b. Risk Fund
Risk Fund is a fund for payment of claims.

c. Special Fund
Special Fund is a special pool to help the company not to be dependent on depends to the retakaful.

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(SUMBER - TAKAFUL IKHLAS SDN BHD )