Takaful operates based on principles derived from Islamic Shariah, and these principles guide the business operations of takaful companies. The key Shariah principles that influence the structure and conduct of takaful business include:
- Mudarabah (Profit and Loss Sharing): Mudarabah is a partnership arrangement where one party provides the capital (rab al-mal) while the other party manages the business (mudarib). In the context of takaful, participants (policyholders) contribute to a common pool (rab al-mal), and the takaful operator acts as the mudarib, managing the pool. Profits generated from the takaful operations are shared between the participants and the takaful operator based on pre-agreed ratios.
- Wakalah (Agency): Takaful operators are compensated for their services through a wakalah fee. In this arrangement, the takaful operator acts as an agent (wakil) on behalf of the participants. The wakalah fee covers the administrative and operational expenses of managing the takaful fund.
- Tabarru’ (Donation): Takaful contributions made by participants are considered as donations (tabarru’). These contributions go into a common fund, and participants agree to mutually help each other in times of need. In the event of a covered loss or claim, funds from the common pool are utilized to compensate the affected participant.
- Takaful Participants’ Fund (TPF): The common fund created by participants’ contributions is segregated into two main funds – the Participants’ Investment Fund (PIF) and the Participants’ Risk Fund (PRF). The PIF is used for investment purposes, and the profits earned are shared with the participants. The PRF is utilized to cover claims and related expenses.
- Shariah Compliance: Takaful operations must strictly adhere to Shariah principles. Shariah boards or committees comprising Islamic scholars are established to ensure that the takaful company’s activities and investments comply with Islamic law. These boards review and approve takaful products, investment strategies, and other operational aspects to ensure Shariah compliance.
- Avoidance of Riba (Usury) and Gharar (Excessive Uncertainty): Takaful contracts avoid elements of usury (riba) and excessive uncertainty (gharar), in line with Shariah principles. This means that takaful agreements are designed to be transparent, fair, and free from elements that are deemed unethical or speculative.
- Mutual Cooperation and Social Responsibility: Takaful emphasizes the concept of mutual cooperation and shared responsibility among participants. The aim is to foster a sense of community and social solidarity, with participants helping each other in times of need.
By adhering to these Shariah principles, takaful companies aim to provide insurance solutions that align with Islamic ethics and values, offering Muslims a way to protect themselves and their assets in a manner consistent with their religious beliefs. The involvement of Shariah scholars ensures ongoing compliance and ethical conduct in the takaful business.