| The term “Takaful” is derived from the | | | | three sources. These rules define clearly what is |
| Arabic word “Kafaala” meaning | | | | “Halal” (permissible) and what is |
| guaranteeing. Takaful means “guaranteeing | | | | “Haram” (prohibited) in a financial |
| each other" and refers to the concept of | | | | transaction. The salient points of these rules are: |
| permissible Islamic insurance or “Halal” | | | | Shariah prohibits the following: |
| insurance. | | | | 'Riba' - interest/usury |
| Takaful is based on the principles of | | | | 'Maysir' or 'Qimar' - gambling/speculation |
| “Ta’awun” (mutual cooperation) and | | | | 'Gharar' - uncertainty |
| “Tabaru’a” (Donation) whereby a | | | | Exploitation |
| group of people (Takaful participants or | | | | Unfairness |
| policyholders) agree between themselves to share | | | | Undertaking Haram activities (alcohol, pork, |
| the risk of a potential loss to any of them by | | | | pornography etc) |
| making a donation, of all or part of their | | | | |
| contribution, which is used to compensate the loss | | | | Shariah requires: |
| suffered by any participant of the Takaful | | | | Risk sharing |
| scheme. | | | | Reward sharing |
| Unlike conventional insurance in which risk is | | | | Fairness |
| shifted from the policyholder to the insurance | | | | Transparency |
| company, Takaful is a structure in which risk is | | | | Sanctity of contracts |
| shared between all the policyholders. | | | | Islamic finance places strong emphasis on the |
| The term Islamic finance refers to financial and | | | | economical, ethical, moral, social, and religious |
| commercial activities and transactions that | | | | dimensions, to enhance equality and fairness for |
| conform to “Shariah” (Islamic law). Whilst | | | | the good of society as a whole, whereas the |
| the terms Islamic finance, interest-free banking, | | | | conventional financial system focuses primarily on |
| Shariah finance, Shariah banking, Shariah insurance, | | | | the economic and financial aspects of transactions. |
| Islamic banking, and Islamic insurance are relatively | | | | There are many Shariah compliant modes of |
| new, the underlying principles of Islamic finance | | | | finance which are used to develop Halal financial |
| date back to the times of the Holy Prophet | | | | products. These include “Takaful” |
| Muhammad (PBUH). The trading practices of | | | | (insurance), “Musharaka” (partnership), |
| Muslims were based upon these principles until the | | | | “Mudaraba” (silent partnership), |
| days of the Ottoman Empire. | | | | “Murabaha” (special type of sale), |
| Islamic finance principles have been derived from | | | | “Ijara” (lease), “Wakala” (agency), |
| the Holy “Qur’an” (the Holy book of | | | | “Salam” (forward sale), |
| the Muslims), “Hadith” (the sayings of the | | | | “Istisna’a” (manufacturing or |
| Holy Prophet Muhammad, PBUH), “Sunnah” | | | | construction contract) and Qard (a loan - without |
| (the way the Holy Prophet Muhammad led His life) | | | | any benefits). |
| and centuries of scholarly interpretations of these | | | | |