Takaful refers to Islamic insurance where the participant is committed to making a contribution as a donation to the Takaful fund. This will be considered as an agreement between the participants to mutually cooperate in the event of any risk or loss, arising from death, permanent disability, loss, damage, or other such misfortunes.
It is based on the principle of cooperation and the separation between the funds of shareholders and the funds of policyholders (Takaful contributions).
The contributions collected from the participants (policyholders) are considered donations. It forms the Takaful fund from which the claims are paid.
At the end of each financial year, any cash surplus (if any) in the Takaful Fund, after deduction of the expenses, may be distributed to the participants (policyholders) in the form of cash dividends, or it may be returned to the Takaful Fund.
The model of Wakala (agency) is being used to issue the Takaful policy and manage it. While the model of Mudaraba (Joint Venture) is being used to manage the investments.
The framework of Takaful avoids elements of Riba (interest or usury) and Gharar (unknown or ambiguous factor in the contract) which are against Shari’a rules and principles.
In case of a deficit in the Takaful Fund, then the Shareholders may give Qard Hasan (interest-free loan) to the Takaful Fund to cover the deficit.
