1. What is Takaful ?
The word Takaful is derived from "Kafalah" (it means to guarantee and to be responsible for someone). Takaful is a Sharia-compliant system of mutual protection, insurance, in which the participants donate part or all of their contributions to a common fund. These may be used to pay claims for damages suffered by some of the participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions.
The Islamic Financial Services Board (known as IFSB) defines Takaful as "the Islamic counterpart of conventional insurance, and exists in both Family (or Life) and General forms. Takaful is derived from an Arabic word that means joint guarantee, whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified risks. In a Takaful arrangement the participants contribute a sum of money as a Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings"
2. What are the key features and core principles of Takaful?
The major key features of Takaful:
Takaful should be based on socially responsible joint risk sharing, on financial transparency and on Sharia-compliant policies and investments.
IFSB’s core principles of Takaful:
- Tabaru: Takaful participants commit to give donations.
- Tawun: Takaful participants commit to mutually assist each other.
Prohibition of Maysir.
3. What is the difference between Takaful and conventional insurance?
- In conventional insurance, the insured pays premiums (regular installments) to the insurer (an insurance company) in exchange for an insurance cover in case an event occurs (based on probability). The insurance company is a profit making entity investing in all types of markets and stocks.
- In Takaful, participants mutually insure each other by giving Sharia-compliant investments. The pool of funds is owned by the participants and can be used to indemnify any participant who faced a bad event. The profits from the investments are shared between participants based on pre-agreed ratios (depending on the Takaful model agreed upon).
4. What are the main Takaful models?
All the four main Takaful models insure a mutual guarantee for the participants.
- Mudaraba model: It is based on a Mudaraba contract. Participants make donations that are pooled to the Takaful fund. The operator (Mudarib) uses the first part of the fund, called the Participant’s Risk Fund (PRF), to settle claims, reserves and Sharia-compliant investments that would allow to pay for the operating expenses and to distribute dividends to participants. In this model, participants are fund contributors, the operator is a manager, and the profits are shared between participants and the operator.
- Wakala model: It is based on a Wakala contract. Participants make donations that are pooled to the Takaful fund. The Takaful operator (is a Sharia-compliant investments and distributes investment surpluses to participants. In this model, participants are fund owners, the operator is just an agent who gets a fee, and profits are shared between participants depending on their contributions.
- Hybrid model / Mixed model (Mudaraba-Wakala): It is based both on Mudaraba and Wakala contracts since Mudaraba is used for investments and Wakala is used for the underwriting. Participants make donations that are pooled to the Takaful fund. Takaful fund is invested in Mudaraba activities and split into the Participant’s Risk Fund (PRF) and the Participant’s Investment Fund (PIF). Some investment profits from the PRF are retained and some others are distributed to participants. Investment profits from the PIF are shared between the operator and the participants.
- Ultra-hybrid model (Waqf-Mudaraba-Wakala): It is based on Waqf, Mudaraba, and Wakala contracts. The difference with the Hybrid model is that participants contribute to the Takaful fund in the form of Waqf and pay a fee to an operator that will invest the Waqf fund in Sharia-compliant Investments.
5. What are the major Takaful products?
- General Takaful: can cover health, assets, material loss, employee compensation, employer liabilities, fire…etc.
- Family Takaful: the Sharia-compliant form of life insurance.
- Takaful Course: Click here to learn more about Takaful undertaking types, Takaful undertaking structures, Takaful underwriting of surplus and technical provisions, and about English]
- AAOIFI (2020) Exposure Draft – Financial Accounting Standard – Presentation and Disclosures in the Financial Statements of Takaful Institutions [English]
- IFSB-25 (December 2020) "Disclosures to Promote Transparency and Market Discipline for Takaful/English] [Arabic]
- IFSB- 20 (December 2018) "Key Elements in the Supervisory Review Process of Takaful/Retakaful Undertakings" [English] [Arabic] [French].
- IFSB-18 (April 2016) "Guiding Principles for English] [Arabic] [French] [Russian]
- IFSB (November 2015) "Issues in Regulation and Supervision of Microtakaful (Islamic Microinsurance) [English]
- IFSB-15 (December 2013) "Revised Capital Adequacy Standard for Institutions Offering Islamic Financial Services" [English] [Arabic] [French].
- IFSB- 14 (December 2013) "Standard On Risk Management for Takaful (Islamic Insurance) Undertakings" [English] [Arabic] [French].
- IFSB-11(December 2010) "Standard on Solvency Requirements for Takaful (Islamic Insurance) Undertakings" [English] [Arabic].
- IFSB-8 (December 2009) "Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings" [English] [Arabic].
- GN-5 (March 2011) "Guidance Note on the Recognition of Ratings by external Credit Assessment Institutions (ECAIS) on Takaful and English] [Arabic].
8. Takaful Database
- Takaful Database [English]
- Takaful insurance in Algeria, was put in place by the 2020 Finance Law. In article 103 "authorizing companies to carry out insurance activities in the Takaful form", was consolidated in 2021 , by Executive Decree No. 21-81 of February 23, 2021. [French]
Country: Brunei Darussalam
- Takaful Regulations (2008) [English]
- Takaful Order (2008) [English]
- List of Takaful Companies [English]
- Licensing Framework for Digital Insurers and Takaful Operators (2022) [English]
- Takaful Operational Framework (2019) [English]
- Risk-Based Capital Framework for Takaful Operators (2018) [English]
- Trade Credit Insurance and
Trade Credit Takaful (2018) [English]
- Financial Reporting for Takaful Operators (2018) [English]
- Internal Capital Adequacy Assessment Process for Takaful Operators (2016) [English]
- Guidelines on Takaful Operational Framework (2013) [English]
- Guidelines on Valuation Basis for Liabilities of Family Takaful Business (2011) [English]
- Guidelines on Valuation Basis for Liabilities of General Takaful Business (2011) [English]
- Guidelines on Investment Management for Takaful Operators (2009) [English]
- Internet Takaful (2004) [English]
- List of Takaful and English]
- Regulation For Life Insurance And Family Takaful Insurance Businesses On Prevention Of Money Laundering And Financing Of Terrorism (2015) [English] [Dhivehi]
- Takaful insurance is governed by Law No. 17-99 on the insurance code, as amended and supplemented by Law No. 59-13 and 87-18.(2016) [French]
- Takaful Terms and Conditions [Arabic]
- Takaful Insurance Law Executive Regulation (2019) [Arabic]
- Investment of the Assets of Insurance and Takaful Insurance Companies Regulation (2020) [Arabic]
- Law n° 2014-47 amending and supplementing the insurance code (2014) [French]
Country: United Arab Emirates
- Insurance Authority (2014) " Financial Regulations for Takaful Insurance Companies" [English]