Turaths & Todays: Takaful Guest Class

(Class #8, Summary of the class)

Takaful (تكافل)

What Are You Most Curious to Learn About Takaful?

Q&A

1. How is the participant’s risk assessed? How is the element of gharar (uncertainty) removed from this?
2. How do you obtain approval from the Monetary Authority of Singapore (MAS) regulators?
3. What happens if claims exceed funds collected? Are the claimable amounts pre-determined? What happens if investments underperform or overperform, especially considering the current international economic climate?
4. Why is this considered the first Takaful product in Singapore in decades? I thought NTUC Income had a Takaful Individual Life Plan (ILP) product years ago. How is it different this time?

Experience Developing and Reintroducing Takaful in Singapore

Why Do We Need Insurance?

Insurance is a risk management tool. It can be broadly categorised into three types:

• Health insurance
• General insurance
• Life insurance

Each serves different purposes. 

Life Insurance

Life insurance serves specific purposes such as:

• Protection for your dependents
• Savings and investment
• Regular income during retirement

Examples include term insurance and whole life insurance. Life insurance is a long-term commitment and should not be product-pushed without proper analysis.

If the customer needs pure protection, the recommendation will depend on their circumstances and budget, including takaful options.

General Insurance

General insurance covers you and your assets, such as:

• Car insurance
• Travel insurance
• Home insurance
• Maid insurance
• Work injury compensation insurance

Health Insurance

Health insurance can be part of either life insurance or general insurance, depending on the specific risk covered (e.g., hospitalisation cash benefits are often under general insurance). Most health insurance products involve long-term commitments.

Life Insurance Industry Performance & Sustainability

Three key factors affect life insurance sustainability:

1. Insurance risk
2. Expense risk
3. Investment risk

Over the years, Investment-Linked Plans (ILPs) have been growing steadily.

Family Takaful

In Takaful, life insurance is referred to as Family Takaful. The question arises:

• Which product should pilot first?
• Is there sufficient demand for Family Takaful?

General Takaful

For general Takaful, considerations include:

• Which general Takaful product should be piloted first?
• Is the cost sustainable?
• Setup costs, Shariah-compliant investments, and market size all matter.
• Higher claims lead to higher insurance costs.

Market Considerations

Many Malay Muslim families hesitate to buy insurance because they consider it haram. Although we don’t have many takaful products here, as mentioned by Ustadz Amin, insurance in a state of necessity (darurah) is considered acceptable.

First Takaful Product in Decades – Etiqa

• There was takaful before, for example, Keppel Takaful, which later became HSBC Takaful. HSBC withdrew after rationalising its global operations 12 years ago, including in Malaysia.
• Etiqa has now launched Shariah-compliant Investment Linked Plans (ILP) sub-funds.

Approval Process for Takaful (Etiqa)

The approval process involves:

• Group Steering Committee
• Management Team
• Shariah Department and Shariah Committee
• Product Development Committee
• Management Risk Committee
• Board Risk Management Committee

MAS Approval Process

• AA (Actuarial Audit) Certification and filing to MAS
• MAS review and queries
• Replies from management, Shariah department, and AA to MAS
• MAS approval prior to launch
• Shariah committee approves changes based on MAS feedback before launch

Operational Considerations

• Establish end-to-end Shariah-compliant processes involving all stakeholders
• Compliance with outsourcing guidelines

Pricing & Claims Management

• Pricing for Takaful products is similar to that of conventional insurance, as it is based on mortality risk.
• If claims exceed available funds, the operator (e.g., Etiqa) initially funds the claims for the segment.
• Over time, as funds grow, they can cover larger claims independently.

What is Takaful?

Takaful originates from the Arabic word Kafalah, meaning “guaranteeing each other.” Takaful is an Islamic insurance concept that is rooted in the principles of cooperation (ta’awun) and shared responsibility. It is a system in which participants agree to support one another financially in case of loss or damage.

According to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Takaful is a process where a group of individuals agree to guarantee each other against certain risks jointly.

Takaful is not merely an insurance mechanism—it is a risk management tool in Islam. It reflects the teachings of Prophet Muhammad ﷺ, who advised:

روى أنس بن مالك رضي الله عنه:

أن رجلًا قال: يا رسولَ اللهِ، أَعقِلُها وأتوكَّلُ، أو أُطلقُها وأتوكَّلُ؟ قال: “اِعْقِلْهَا وَتَوَكَّلْ” رواه أنس بن ملك

“Tie your camel and trust in Allah” (Narrated by Anas bin Malik).^[1]

As Muslims, we must continually draw wisdom from the Qur’an. For example, in Surah Al-An’am, Allah mentions the prohibition of consuming certain types of food, including swine. This teaches us that a person should live with just enough to survive, not to promote laziness or complacency, but to strive for halaland ethical means of living continuously.

This principle also applies in areas such as insurance — we should always seek halal solutions in managing our financial risks.

What are the Differences Between Takaful and Conventional Insurance?

1. Mutual Cooperation and Joint Guarantee: Participants agree to support each other. The system is built on solidarity, not profit.
2. Ownership of Contributions: Once contributions are collected, ownership remains with the participants. The funds do not belong to the operator.
3. Appointment of Takaful Operator: A Takaful operator is appointed to manage and invest the funds on behalf of the participants. In return, the operator receives a management fee.
4. Shariah-Certified Contracts and Operations: All contracts and operations must be approved and certified by a Shariah board to ensure full compliance with Islamic law. Certification alone is not enough—it must be implemented in practice.
5. Shariah-Compliant Investments: All investments must be free from riba (interest), gharar (excessive uncertainty), and any non-halal (forbidden) activities.

What Are the Underlying Shariah Principles in Takaful?

• Tabarru’ – Voluntary contribution or donation among participants to cover each other’s risks.
• Ta’awun – Mutual assistance and cooperation.
• Wakalah – A contractual agreement in which the operator is appointed as an agent to manage and invest the funds on behalf of the participants.

Takaful Operational Models

Takaful is based on the spirit of cooperation, shared responsibility, and ethical risk management. The system operates on several key models that define the relationship between participants and the Takaful operator.

1. Tabarru’ (Donation Principle)

Participants agree to the concept of voluntary donation (tabarru’) by contributing to a shared pool of funds. This fund is used to provide mutual support and financial assistance to any participant who suffers a defined loss.

This embodies the spirit of ta’awun (cooperation) and is one of the core foundations of Takaful.

2. Wakalah Model (Agency)

In the Wakalah model, participants appoint the Takaful operator as an agent (wakil) to manage and invest their contributions on their behalf.

• The Takaful operator receives a pre-agreed fee (wakalah fee) for their services.
• The operator does not own the funds, but only manages them.

This model ensures transparency and professionalism while maintaining participants’ ownership of the fund.

3. Mudharabah Model (Profit-Sharing)

In the Mudharabah model, participants entrust the Takaful operator, acting as a mudarib (entrepreneur), to invest their contributions.

• Profits from the investment are shared between the participants and the operator based on a pre-agreed ratio.
• The Takaful operator does not receive a fixed fee; instead, it earns income from a share of the investment profit.

This model is ideal where profit-sharing is suitable and mutually beneficial.

How beautiful Shariah is—guiding every aspect of life with clarity and balance. In Islamic finance, we always return to the Qur’an and Hadith as the foundation. Key contracts in Takaful, such as Tabarru’ and Wakalah,are not only rooted in classical Islamic jurisprudence but also reflected in divine guidance.

Tabarru’ (Voluntary Donation)

Tabarru’ is a voluntary contribution or donation made without expecting any return. In Takaful, participants donate a portion of their contribution to help fellow participants in need. This embodies the Islamic values of solidarity and mutual assistance.

Qur’anic Basis:

يَا أَيُّهَا الَّذِينَ آمَنُوا أَنْفِقُوا مِمَّا رَزَقْنَاكُمْ مِنْ قَبْلِ أَنْ يَأْتِيَ يَوْمٌ لَا بَيْعٌ فِيهِ وَلَا خُلَّةٌ وَلَا شَفَاعَةٌ ۗ وَالْكَافِرُونَ هُمُ الظَّالِمُونَ

“O you who have believed, spend from what We have provided for you before there comes a Day in which there is no exchange, no friendship, and no intercession…”^[2]

While the term “tabarru'” does not appear explicitly in the Qur’an, the concept of donating sincerely for the sake of Allah is strongly encouraged.

Prophetic Hadith:

إِذَا مَاتَ الإِنْسَانُ انْقَطَعَ عَنْهُ عَمَلُهُ إِلاَّ مِنْ ثَلاَثٍ: صَدَقَةٌ جَارِيَةٌ، أَوْ عِلْمٌ يُنْتَفَعُ بِهِ، أَوْ وَلَدٌ صَالِحٌ يَدْعُو لَهُ

“When a human being dies, all of his deeds are terminated except for three: a continuing charity, beneficial knowledge, or a righteous child who prays for him.”^[3] 

Wakalah (Agency)

Definition:
According to Dr. Wahbah al-Zuhayli, Wakalah is:

“The delegation of one’s affairs to another who will act on one’s behalf.”

As defined by AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions):

“Wakalah is the act of one party authorising another to act on its behalf in matters that may be delegated.”

In Takaful, participants appoint the Takaful operator as their agent to manage and invest the funds in a Shariah-compliant manner, and the operator is paid a fee (wakalah fee) for this role.

Qur’anic Reference:

فَٱبْعَثُوٓا۟ أَحَدَكُم بِوَرِقِكُمْ هَـٰذِهِۦٓ إِلَى ٱلْمَدِينَةِ فَلْيَنظُرْ أَيُّهَآ أَزْكَىٰ طَعَامًۭا فَلْيَأْتِكُم بِرِزْقٍۢ مِّنْهُ

“…So send one of you with this silver coin of yours to the city, and let him look for which is the best food and bring you provision from it…”^[4]

This verse demonstrates the concept of delegation, where someone is entrusted to act on behalf of others.

Prophetic Hadith:

The Prophet ﷺ appointed Umar ibn Al-Khattab to collect zakat on his behalf:

أنَّ النَّبِيَّ صلى الله عليه وسلَّم بَعَثَ عُمَرَ عَلَى الصَّدَقَةِ

“Indeed, the Prophet (peace be upon him) appointed Umar to oversee the charity.”^[5]

This demonstrates the permissibility of appointing someone to undertake financial responsibilities, such as collecting or managing funds.

Mudharabah

Mudharabah is a partnership for profit-sharing where capital is provided by one party while another party provides labour or skill.

According to AAOIFI, it is a partnership in which one party provides the capital (rabbul maal) and the other party provides the labour (mudharib).

Evidence from Qur’an and Hadith:

يَا أَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا أَمْوَالَكُم بَيْنَكُم بِالْبَاطِلِ إِلَّا أَن تَكُونَ تِجَارَةً عَن تَرَاضٍ

مِّنكُمْ ۚ وَلَا تَقْتُلُوا أَنفُسَكُمْ ۚ إِنَّ اللَّهَ كَانَ بِكُمْ رَحِيمًا
“O you who have believed, do not consume one another’s wealth unjustly but only [in lawful] business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful.”^[6]

ثَلاثٌ فِيهِنَّ بَرَكَةٌ: الْمُبَايَعَةُ الْمُؤَجَّلَةُ، وَالْمُضَارَبَةُ، وَخَلْطُ الشَّعِيرِ بِالْقَمْحِ
“There are three things which have blessings: deferred payment sale, mudharabah, and mixing barley with wheat.”^[7]

Muqaradah is another term for mudharabah, a partnership where capital and labour are combined to undertake a joint venture with profit sharing.

Hibah or Gift (هبة)

Hibah is a contract by which a person transfers ownership of a property to another party during their lifetime without any consideration.

According to AAOIFI, ownership is transferred upon taking possession.

• Qur’anic evidence:

لَيْسَ الْبِرَّ أَن تُوَلُّوا وُجُوهَكُمْ قِبَلَ الْمَشْرِقِ وَالْمَغْرِبِ وَلَكِنَّ الْبِرَّ مَنْ آمَنَ بِاللَّهِ… وَآتَى الْمَالَ عَلَىٰ حُبِّهِ ذَوِي الْقُرْبَىٰ وَالْيَتَامَىٰ وَالْمَسَاكِينَ وَابْنَ السَّبِيلِ…
“Righteousness is not that you turn your faces toward the east or the west, but [true] righteousness is in one who believes in Allah… and gives wealth, in spite of love for it, to relatives, orphans, the needy, the traveller…”^[8]

Hadith about exchanging gifts to increase love:

تَهَادَوْا تَحَابُّوا
“Exchange gifts, you will love one another.” (Narrated by Al-Bukhari and Muslim).^[9]

Application of Takaful Based on Different Contracts

1. Tabarru’ (Donation Contract)

Definition and Application:

Tabarru’ refers to a voluntary donation for cooperation and solidarity among participants in a Takaful scheme.

Scholarly Support:

Shaykh Yusuf Al-Qaradhawi stated:

“Insurance against hazard can be modified in a manner which brings it closer to the Islamic principle via Tabarru’, with a condition of compensation.”

Key Point:

This concept eliminates the elements of conventional insurance (gharar, maisir, riba) that are generally prohibited under Shariah.

Mechanism:

• An explicit declaration must be made that the participant is entering into a contract of cooperation.
• The participant agrees to donate a portion of their contribution (Tabarru’) to help other participants in need.
• Contributions are based on a risk assessment — higher risk may result in a higher contribution, ensuring fairness.
• The Takaful fund will be used to provide compensation to eligible participants or their beneficiaries.

2. Wakalah (Agency Contract)

Definition and Application:

Wakalah is the appointment of the Takaful operator as an agent to manage and administer the Takaful fund on behalf of the participants.

Mechanism:

• The Takaful operator is appointed as a manager (wakil) to handle contributions and investments.
• The operator is remunerated through a pre-agreed management fee.
• This fee must cover all administrative and operational costs (excluding claims and claim-handling expenses).
• Performance-based incentives (Jualah) may be given to the operator based on investment results or operational performance.

3. Mudharabah (Profit-Sharing Contract)

Defintion and Application:

Mudharabah is a profit-sharing arrangement where the Takaful operator invests the contributions and profits are shared according to a pre-agreed ratio.

Implementation Note:

In practice, a pure Mudharabah model has proven difficult due to regulatory and Shariah concerns. Therefore, a hybrid model (Wakalah-Mudharabah) is often preferred by practitioners.

Mechanism:

1. The Takaful operator is appointed to manage the underwriting and day-to-day operations (Wakalah role).
2. The operator also acts as an investment manager (Mudharib) to invest the Takaful fund.
3. Profits from investments are shared between participants and the operator based on a mutually agreed ratio.

4. Hibah (Gift Contract)

Definition and Application

Hibah in Takaful refers to the voluntary giving of Takaful benefits to nominated beneficiaries. This is aligned with Islamic inheritance and gift principles.

Forms of Hibah:

• Conditional Hibah: Takaful benefits are gifted to beneficiaries upon the participant’s death or maturity of the plan.
• Nomination-Based Hibah (Contemporary Practice): Participants nominate beneficiaries as part of estate planning.

Mechanism:

• The participant makes a nomination under the Takaful plan, designating the benefit as a gift (hibah) or for charitable purposes (waqf).
• The participant has the discretion to nominate anyone, including family members or institutions.
• Often used in legacy planning and Islamic wealth distribution.

Key differences between Conventional insurance and Takaful

Aspect	Conventional Insurance	Takaful
Contractual Agreement	Based on a commercial contract of sale and purchase. Involves elements prohibited in Shariah such as Riba (interest), Gharar (uncertainty), and Maysir (gambling).	Based on Shariah-compliant contractssuch as Tabarru’ (donation), Wakalah (agency), and Mudharabah (profit-sharing), eliminating prohibited elements.
Ownership of Contributions	Risk is transferred to the insurer. The insurer owns the premiums paid.	Based on risk sharing. Contributions belong to the Takaful fund collectively, not the operator.
Investments	Funds may be invested in non-Shariah-compliant instruments (e.g., interest-based securities, conventional bonds).	Investments are strictly in Shariah-compliant instruments, following ethical and Islamic finance guidelines.
Regulatory/Shariah Approval	Regulated under the conventional insurance legal framework. No requirement for Shariah oversight.	Requires both regulatory approval and Shariah Advisory Boardapproval. Subject to annual Shariah compliance reviews.
Surplus Sharing	No surplus sharing (except in Participating Plans). Any excess surplus belongs to the insurer.	Surplus may be sharedwith participants or retained in the fund, subject to the Takaful model and Shariah approval.

Conventional Insurance Process

1. The customer pays a premium
2. Premium goes into the insurance fund
3. Insurer invests the fund, often in interest-based (riba) instruments
4. If a claim occurs, the customer receives benefits/payment
5. If no claim, customer receives nothing (premium is lost)

Problematic Areas in Conventional Insurance

Issue	Brief Explanation
Riba (Interest)	Premiums collected and invested in interest-based accounts; involves exchange of money later with possible gain or loss, including riba fadl elements.
Maysir (Gambling)	Customer “bets” on risk to get a claim; speculative with uncertain gain or loss.
Gharar (Uncertainty)	Insurance benefits are uncertain and may be zero if no claim occurs, leading to ambiguity and potential manipulation.
Non-Shariah Investments	Insurers invest funds in prohibited assets like interest-based instruments and haram commodities.

Takaful Process

1. The customer pays contribution to the Islamic bank account
2. Shariah-compliant contracts are established (e.g., Tabarru’, Wakalah)
3. The administrator manages the Takaful fund
4. Customer’s contributions go into Shariah-compliant investment funds
5. Customer and Administrator contribute to Tabarru’ Pool Fund
6. Fees for the Administrator and other expenses are deducted
7. Claims paid from the Tabarru’ Pool Fund based on the mutual assistance principle

Key Points

• All contracts are Shariah-compliant
• Investments are strictly in Shariah-compliant assets
• No riba, maysir, or gharar issues due to the structure and contracts

Question:

Is it possible for everyone to fully understand the risks?

Because risks involve future events which are unknown and uncertain, we purchase Takaful to help or protect ourselves against potential future events. So, does this mean it involves gharar? And can it be quantified?

Answer:

Both conventional insurance and Takaful have similarities in risk assessment. There is available data and mathematical formulas used to quantify and calculate many types of risks.

In Takaful, the contract is based on tabarru’ (donation), meaning the intention from the start is to give or contribute for mutual help. Because of this intention, the gharar (uncertainty) is considered tolerable and acceptable within Shariah principles.

Question:

Why is gharar (uncertainty) not tolerable in conventional insurance, but bearable or tolerable in Takaful?

Answer:

• Conventional insurance involves buying protection by paying a premium. The customer purchases a contract with the expectation of receiving a specific benefit in the event of a loss. Because this is essentially a sale contract with uncertain outcomes (you pay now for a potential future payout), it contains gharar and elements of gambling (maysir), which are not permissible in Shariah. The uncertainty here is not tolerated because the transaction is considered a commercial sale with speculative elements.
• Takaful, on the other hand, is based on contribution (tabarru’) or donation. Participants contribute to a common pool with the intention of mutual help and shared responsibility for risks. The key difference lies in the intention (niat) and the nature of the contract: it is not a sale or purchase, but a cooperative agreement to assist one another. Because the uncertainty is shared collectively and the purpose is charitable, gharar is considered tolerable and acceptable under Islamic law.

Analogy: Akad Nikah (Marriage Contract)

• The marriage process looks the same outwardly—couple, children, family—but in Islam, the validity of the marriage depends on a proper akad (contract).
• A child born from a legitimate Islamic marriage is recognised according to Shariah. Without the correct akad, the status is not recognised in Islamic law.
• Similarly, Takaful’s legitimacy and permissibility come from the Shariah-compliant contract and intention, which distinguishes it from conventional insurance.

Common Misconceptions about Takaful:

• Is Takaful only for Muslims?

No. Takaful is open to everyone regardless of religion. All customers can enjoy the benefits and coverage under a Takaful plan. Additionally, Takaful emphasises values-based investing aligned with Shariah principles, which can appeal to anyone interested in ethical and responsible investing.

• Are Takaful plans costly?

Not necessarily. Takaful plans are competitive in pricing. Costs depend on the provider and the coverage options chosen, just like conventional insurance.

Question:

When both conventional insurance and Takaful are available, how should someone decide which to choose?

Answer:

Ultimately, the decision comes down to the individual’s purpose, values, and needs. Every participant or customer must reflect on why they are seeking protection and whether the product aligns with their personal beliefs and financial principles.

For a Muslim, this includes considering whether the financial product is compliant with Shariah. Takaful is not just about protection—it’s also about upholding values such as mutual assistance, ethical investment, and trustworthiness in financial dealings.

Why This Matters?

قالَ رَسُولُ اللَّهِ ﷺ:

لَا تَزُولُ قَدَمَا ابْنِ آدَمَ يَوْمَ القِيَامَةِ حَتَّى يُسْأَلَ عَنْ خَمْسٍ عَنْ عُمْرِهِ فِيمَا أَفْنَاهُ، وَعَنْ شَبَابِهِ فِيمَا أَبْلَاهُ، وَعَنْ مَالِهِ مِنْ أَيْنَ اكْتَسَبَهُ، وَفِيمَا أَنْفَقَهُ، وَمَاذَا عَمِلَ فِيمَا عَلِمَ. رواه الترمذي

“The son of Adam will not pass away from Allah until he is asked about five things: how he lived his life, and how he utilised his youth, with what means did he earn his wealth, how did he spend his wealth, and what did he do with his knowledge.” (narrated by al-Tirmidhi).^[10]

This hadith reminds us that we will be accountable for how we earn and spend our wealth, as well as for what we do with the knowledge we possess.

So, when choosing between conventional insurance and Takaful, we are not just making a financial decision—we are making a moral and spiritual decision that reflects our responsibility as stewards of the resources Allah has entrusted to us.

 

[1] Imam Abu ‘Isa Muhammad ibn ‘Isa At-Tirmidhi, Sifat Al-Qiyamah Ar-Raqa’iq wa’l-Wara’, 2517

[2] Al-Qur’an, Surah Al-Baqarah (2:254).

[3] Abul Husain Muslim ibn al-Hajjaj al-Qushayri an-Naysaburi, Sahih Muslim, 1631.

[4] Al-Qur’an, Surah Al-Kahf (18:19).

[5] Muhammad ibn Ismail ibn Ibrahim ibn al-Mughirah al-Ja’fi al-Bukhari, Sahih Bukhari, 1395.

[6] Al-Qur’an, Surah An-Nisa’ (4:29).

[7] Ibn Abi Shaybah, Al-Musannaf, kitab Al-Buyu’.

[8] Al-Qur’an, Surah Al-Baqarah (2:177).

[9] Imam Al-Bukhari, Al-Adab Al-Mufrod, no. 594.

[10] Al-Imam An-Nawawi, Riyadhu Ash-Shalihin, no. 2416.

https://islamicfinance.sg/summary-class-7/