It is a Muslim’s belief that any misfortune that befalls him, that results in the loss of life or belongings, is by the will of the Almighty Allah. At the same time, we are also taught to take positive steps to avoid or reduce the possibility of these misfortunes as indicated by the hadith:

“The Prophet (s.a.w.) told a Bedouin who left his camel untied to the will of Allah: Tie your camel first, then put your trust in Allah”

(Narrated by at-Tirmizi and Ibn Majah)

Nowadays, insurance is seen as a means of action undertaken to reduce the risk of loss due to misfortunes. An alternative form of cover a Muslim can avail himself against the consequences of catastrophe and disaster is by participating in Takaful schemes. It is a scheme based on solidarity, shared responsibility and brotherhood among members. Participants of this scheme all agree to mutually help each other by contributing financially on the basis of tabarru’ (donation).

Insurance as a concept does not contradict the practices and requirements of Syari’ah. In essence, insurance is synonymous to a system of mutual help. It is the pooling of resources to help the needy, a scheme which is similar to the principles of compensation and shared responsibility among the community, as practised between the Muhajirin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. However, Muslim Jurists are of the opinion that the operation of the conventional insurance, in its presence form, does not conform to the rules and requirements of Syari’ah as it embodies the following three elements:

(i) Gharar

The unknown or uncertain factors in operation of a contract in life insurance contracts.

(ii) Maisir

Gambling arises as the consequence of the presence of Gharar, particularly in the case of life insurance.

(iii) Riba

Interest and other related practices that do not conform to the Syari’ah in the investment activities.

Birth of Takaful in Malaysia

The foundation for the development of Takaful or Islamic insurance was set by the wish of Muslim to realign more to Islamic practices in the economic activities coupled with the strong support from the Government for Islamic financial services. In the same manner as conventional banking requires the services of insurance, Islamic banking also needs the services of insurance. It is befitting that the insurance services for Islamic banking must be based on a system acceptable to Islam. A special body, “Task Force on the Study of Establishing Islamic Insurance Company in Malaysia”, was formed in 1982 to study the possibility of establishing Islamic insurance to complement the services of Islamic banking.

Following the recommendation of the task force, the Malaysian Parliament enacted the Takaful Act in 1984. In November 1984, the first Takaful operator, Syarikat Takaful Malaysia Sdn Bhd (STMB), was incorporated with a paid-up capital of USD2.6 million. Bank Islam Malaysia Berhad held the majority stake in STMB while the other shareholders Islamic Religious Councils and Baitulmals of certain states in Malaysia. The paid-up capital of STMB was increased to USD14.5 million via bonus and rights issue, followed by public floatation of its shares on the main board of the Kuala Lumpur Stock Exchange in July 1996. In 1994, MNI Takaful Sdn Berhad (which changed its name to Takaful Nasional Sdn Berhad on 19 November 1998) was established, a subsidiary of a conventional insurer licensed in the country. To support the re-takaful needs of Takaful operators in the region, a full-fledged re-takaful company, ASEAN Retakaful International (L) Ltd (ARIL) was incorporated in Malaysia’s offshore financial centre in Labuan in May 1997. Currently, shareholders of ARIL are Takaful operators in Malaysia, Brunei and Singapore.

Takaful Concept

In Malaysia, the provision of insurance cover as a form of business in conformity with Syari’ah is based on the following Islamic principles:

(i) Al-Takaful

The pact among a group of people called participants, reciprocally guaranteeing each other against loss or damage that may befall any one of them.

(ii) Al-Mudharabah

The commercial profit sharing contract between the provider(s) of funds (participants) for a business venture and the entrepreneur who actually conducts the business.

(iii) Tabarru’

The agreement by a participant to relinquish as tabarru’ (donation), a certain proportion of the Takaful contribution that he agrees or undertakes to pay, thus, enabling him to fulfil his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

Thus, the operation of Takaful may be envisaged as a profit sharing business venture between Takaful operator and the individual members of a group of participants who wish to reciprocally guarantee each other against certain loss or damage endured by any one of them. The operation of Takaful is confined within the Tijari (commercial) sector or popularly known as the private sector. The traditional aspects of the commercial activity of Takaful must be subject to Islamic contractual laws to ensure its compliance with Syari’ah. Within this fundamental framework contract of tijari, Takaful is therefore based on the Islamic principle of Al-Mudharabah.

The tabarru’ concept is incorporated in Takaful contract to eliminate the uncertainty element. A participant shall agree to relinquish as tabarru‘, certain proportion of his Takaful contributions that he agrees or undertakes to pay. Consequently, enables him to fulfil his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss. The sharing of profit or surplus that may emerge from the operations of takaful, is made only after the obligation of the assisting the fellow participants is fulfilled. It is imperative for a Takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure.

Reprinted from Bank Negara Malaysia