Shariah-Compliant Insurance Products: ‘Takaful’

22 March 2006
Article by Benjamin Macfarlane

"Takaful" is an Arabic word meaning "guaranteeing each other" or "joint guarantee". The fundamentals underlying the concept of Takaful are very similar to cooperative and mutual principles, as the cooperative and mutual model is one that is accepted under Islamic Law.

Takaful is a form of co-operative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another’s burden." The concept of takaful or Islamic insurance, where resources are pooled to help the needy does not contradict Shariah1.

The concept is in accordance with the principles of compensation and shared responsibilities among the community. It is not a new concept, and has been practiced by the Muhajrin (emigrants) of Mecca and the Ansar (supporters or followers) of Medina following the hijra2 of the Prophet Muhammad over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah. The elements of uncertainty or gambling in the contract of insurance and interest on the investment activities of conventional insurance companies contravene the rules of Shariah.

Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to disasters. The European Council for Fatwa and Research has stated:

"Commercial insurance is originally haram3 as agreed upon by most contemporary scholars. It is well known that in most non-Islamic countries there are cooperative and mutual insurance companies. There is no harm from the Shariah point of view to participate in these services."4

The basic principles of takaful insurance are as follows:

1.       Policyholders cooperate among themselves for their common good.

2.       Every policyholder pays his subscription to help those that need assistance.

3.       Losses are divided and liabilities spread according to the community pooling system.

4.       Uncertainty is eliminated in respect of subscription and compensation.

5.       No one member of the scheme derives advantage at the cost of others.

Reinsurance of insurance business on Islamic principles is known as takaful and has been an area of much debate. The problem has been one of lack of enough retakaful companies in the market. This has left the takaful companies with a predicament of having to reinsure on conventional basis. However, this is contrary to the customer’s preference of seeking cover on Islamic principles. The Shariah scholars have allowed relaxation of the rules to takaful operators to reinsure on conventional basis so long as there was no retakaful alternative available. Therefore, takaful companies actively promote co-insurance. A number of large conventional reinsurance companies from Muslim countries take on retrocession.

Growth and Development of Takaful

Muslims around the world have for generations grown up with the mind set that insurance is forbidden because it contravenes some of the Islamic doctrines. Conventional life insurance was declared unacceptable in 1903 by some prominent scholars in the Arab countries. In 1974, the National Religious Council issued a legal opinion that conventional life insurance is not permissible because it contains elements of (1) risk and uncertainty; (2) gambling and (3) interest.

In 1985, the Grand Counsel of Islamic scholars in Saudi Arabia called the Majma al-Fiqh approved takaful system as the alternative form of insurance written in compliance with Islamic Shariah. The takaful system is a concept of protection for the good of society. This system was approved as a system of co-operation and mutual help by the Grand Counsel.

However, the exact method and operation was left to Islamic scholars and insurance practitioners to resolve develop and implement. Takaful industry is still in its formative stage and there are many areas unresolved. The key issues that need to be resolved are the global standardization of takaful terminology, the development of an acceptable form of life insurance especially for countries in the Arab regions and a common consensus for a system to determine profits distributable to participants and shareholders.

The first Takaful company was the Islamic Insurance Company of Sudan that was established in 1979.

There have recently been new Takaful companies established in Sri Lanka and Tunisia. There are several takaful companies under formation in the Middle East. Takaful companies are also being contemplated in Pakistan, Australia and Lebanon. There are some signs of interest shown in Takaful in South Africa, Nigeria and some other former states of the Soviet Union.

A broad estimate of the total amount of risk underwritten by the Takaful industry in 2000 is approximately US$550m for both life and non-life business, of which around $193m relates to risk in the Asia Pacific region. Malaysia is one of the largest markets of Takaful outside the Arab region. It writes about 72% of the non-Arab Takaful business. A geographical spread of Takaful business is as follows5:

Estimated Figures


% of Total




Other Asia Pacific



Europe, USA



Arab Countries







Reinsurance of takaful business on Islamic principles has been an area of much debate. Reinsurance on Islamic principles is known as retakaful. The problem has been one of lack of retakaful companies in the market. This has left the takaful companies with a problem of having to reinsure on conventional basis, contrary to the customer’s preference of seeking cover on Islamic principles. The Sharia scholars have allowed dispensation to takaful operators to reinsure on conventional basis so long as there was no retakaful alternative available. Therefore, takaful companies actively promote co-insurance. A number of large conventional reinsurance companies from Muslim countries take on retrocession. However, there is still a lack of capacity within the Takaful industry worldwide. A certain proportion of risk is placed with international reinsurance companies that operate on conventional basis. The retrocession from Takaful companies ranges from some 10% in the Far East where Takaful companies have relatively smaller commercial risks (so far), to the Middle East where up to 80% of risk is reinsured on conventional basis.

Takaful in the UK

The global Islamic finance market has grown to over US$200 billion. London is one of the main wholesale transacting centers outside the Middle East for this market. The irony is that there are very few Islamic financial products available to the Muslims in the UK. However, the community of between 1.5 to 2.0 million Muslims and some 350,000 households is a sizeable market and is unlikely to be ignored for long. There have been recent developments that suggest that this lack of Shariah-complaint financial products for the resident UK Muslim community may be about to change dramatically. A small Takaful operation looking after the insurance type needs of Muslims has been in operation for some years.

Indications have emerged from the UK regulators that they do not have any objections in principle to Shariah complaint financial products. As a result of this major players like HSBC and some building societies are considering entering the market with a range of products. They have teamed up with Muslim institutions to try and address the regulatory issues that have so far discouraged the launch of Islamic housing finance and other products. A working party, comprising of the Muslim Council of Britain ("MCB") and Union of Muslim Organisations ("UMO") has been formed with the approval of the Governor of the Bank of England.

The market in the UK can grow significantly with a range of takaful insurances and compliant bank/mortgage products. Each relies on the other for real growth. The great thing about these special products and services in the UK and elsewhere is that they are ethically based and therefore appeal to non-Muslims as well.

In the UK, Datamonitor has forecast that gross advances on Islamic mortgages will grow from GBP 164 million in 2004 to almost GBP 1.5 billion by 2009. In the past twelve months alone a number of UK financial services providers, such as Lloyds TSB, HSBC and Lloyd’s of London, have launched Shariah-compliant products.

The Financial Services Authority ("FSA") and Takaful

The Financial Services and Markets Act ("FSMA") 2000 which came into force in December 2001 governs the regulatory regime in the UK. FSMA provides that carrying on a regulated activity, or purporting to do so, in respect of a specified investment by way of business in the UK requires authorisation by the FSA, unless the person carrying on such activity is exempt. Effecting or carrying out contracts of insurance is included in regulatory activities.

Takaful does not involve the payment of a premium but the payment of a "donation". However, none of the essential elements of an insurance contract are inconsistent with the Shariah principles governing Takaful.

It is a criminal offence to carry on a regulated activity in the UK without being authorised by the FSA. Also, any agreement entered into by a person in contravention of the requirements to be authorised will be unenforceable against the other party, who will be able to recover any money or other property paid or transferred by him under the relevant agreement.

In order to become authorised by the FSA there are certain "threshold conditions" that need to be satisfied by the applicant. An applicant also needs to satisfy the FSA’s risk assessment process that involves an assessment of the risk posed by an applicant against a number of probability and impact factors. A number of specific threshold conditions are:

1.       There must be sufficient financial resources to meet claims as they fall due. In particular, there should be a solvency margin as determined and agreed with the FSA. The margin represents the excess of assets over liabilities and provides a "cushion" against any unexpected claims.

2.       There must be adequate resources.

3.       Adequate systems and controls need to be in place in order to ensure that risk is managed properly.

However, certain Takaful insurers may have some difficulty in technically meeting their solvency margin. This is because the FSA solvency rules are based on encouraging a spread of investments, but, given the present limited size of the Islamic investment market, there is not the same investment scope for a Takaful insurer as there is for a conventional insurer.

In order to satisfy the "adequate resources" threshold, there must be competent and prudent management, which will be responsible for managing various risks involved in the takaful operation. Those persons who occupy certain so-called "controlled functions" must be "fit and proper". In addition, there must be sufficient expertise, such as in respect of legal, accounting and underwriting matters.

There also needs to be in place an efficient and reliable IT system to process applications, handle claims and generally deal with administration.

The FSA in discharging its general functions must have regard to the desirability of facilitating innovation in connection with regulated activities, the international character of financial services and markets and the desirability of maintaining the competitive position of the UK. Therefore, it can be assumed that although the FSA may be relatively unfamiliar with Takaful as a product, it will welcome any application for authorisation to conduct Takaful business in the UK


Insurance, especially life insurance is an essential part of the social protection needed for any society and has its rightful place among Muslims too. However, years of misunderstanding and misconception have created mental blocks against insurance in the Muslim culture. It is believed that Takaful or co-operative insurance is the right way forward towards the breakdown and removal of such blocks. If the system of Takaful is projected correctly and understood properly it could lead to a manifold increase in take-up of insurance products in Islamic countries and amongst Muslims in other countries.


1. The code of law based on the Koran.

2. The Islamic calendar is based purely on lunar cycles. The Hijra begins with the migration (Hegira) of the Prophet Muhammad from Mecca to Medina in 622. The Hijra begins at July 16, 622. Islamic months begin at sunset on the day of visual sighting of the lunar crescent.

3. Something that is forbidden by Islam.




Indian Sunnis order Muslims to shun insurance

September 1, 2006

LUCKNOW, India --  A powerful Islamic seminary in India has issued a fatwa or decree against Muslims buying life insurance, a spokesman said Thursday.

The binding edict by the Sunni-run seminary of Deoband in northern Uttar Pradesh state was announced after some Muslims sought its permission before buying insurance.

"A true Muslim should never go for life insurance as this is against the tenets of Islam," seminary spokesman Maulana Shahid Rehan said.

"Life is given by Allah and to insure it or assure it is a crime in the eyes of Allah," Rehan said by telephone from Shaharanpur, 500 kilometers (300 miles) northwest of the state capital Lucknow.

The decree, issued earlier this month, has been greeted with ridicule from Shiites.

"For us, buying insurance is not illegal," announced Sajid Nomani, a prominent Shiite Muslim cleric from Lucknow.

Fatwas issued by the 100-year-old seminary in Shaharanpur are binding on Sunnis in India and a section of Muslims in Pakistan also honors them.

However, the autonomous All India Muslim Personal Law Board, which is headed by a Sunni cleric, spurned the decree.

"Insurance is legitimate as per Islamic laws governing the Shiite sect," said Maulana Kalbe Sadiq, vice-president of the board, an apex body that frames civil legislation for all India's 130 million Shiites and Sunnis.

Board President Mirza Athar, a Sunni, ridiculed the decree.

"In today's modern world Shiites do not believe in edicts and moreover such decrees are not binding on the Shiites."


 NOTE: Insurance is evidence of a society being civilized with citizens having personal responsibility.