What is the Meaning of Takaful?

In the past few days, I have been going through the products and services of Takaful Insurance of Africa. As a person who loves finding the meaning in words, I decided to dig deeper and find out the true meaning of the term Takaful.

I found out that Takaful is an Arabic word that is translated to mean ‘solidarity’ or ‘mutual guarantee.’ The term means a co-operative system of reimbursement or repayment in case of loss, organized as an Islamic or sharia-compliant alternative to conventional insurance, which Takaful proponents believe it contains forbidden riba (usury) and gharar (excessive uncertainty.)

When people come together to make a contribution towards something or in preparation for something like a hazard, we call it takaful. Under takaful, individual people or companies concerned about hazards come together to make regular contributions or donations to be reimbursed or repaid to members in the event of loss and managed on their behalf by a takaful operator.

Like other Islamic products, Takaful has its roots in Islamic known as Muamalat, meaning commercial and civil acts or dealings branch of Islamic law.

Some scholars define Takaful as a type of Islamic insurance, where members contribute money into a pool 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.

All parties (policyholders) in a takaful arrangement agree to guarantee each other and make contributions to a mutual fund, or pool, instead of paying premiums. The pool of collected contributions creates the takaful fund. The amount of contribution that each participant makes is based on the type of coverage they require and their personal circumstances. As in conventional insurance, a takaful contract specifies the nature of the risk and time period of coverage.

The takaful fund is managed and administered on behalf of the participants by a takaful operator, who charges an agreed-upon fee to cover costs. Much like a conventional insurance company, costs include sales and marketing, underwriting, and claims management.

Any claims made by participants are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund, not the takaful operator. Those funds may be distributed to the participants in the form of cash dividends or distributions or via a reduction in future contributions.