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Takaful and the Principles of Shariah-compliant Financial Services

Author: Firoj Khan

The term “Takaful” is derived from the Arabic word “Kafaala” meaning guaranteeing. Takaful means “guaranteeing each other" and refers to the concept of permissible Islamic insurance or “Halal” insurance.

Takaful is based on the principles of “Ta’awun” (mutual cooperation) and “Tabaru’a” (Donation) whereby a group of people (Takaful participants or policyholders) agree between themselves to share the risk of a potential loss to any of them by making a donation, of all or part of their contribution, which is used to compensate the loss suffered by any participant of the Takaful scheme.

Unlike conventional insurance in which risk is shifted from the policyholder to the insurance company, Takaful is a structure in which risk is shared between all the policyholders.

The term Islamic finance refers to financial and commercial activities and transactions that conform to “Shariah” (Islamic law). Whilst the terms Islamic finance, interest-free banking, Shariah finance, Shariah banking, Shariah insurance, Islamic banking, and Islamic insurance are relatively new, the underlying principles of Islamic finance date back to the times of the Holy Prophet Muhammad (PBUH). The trading practices of Muslims were based upon these principles until the days of the Ottoman Empire.

Islamic finance principles have been derived from the Holy “Qur’an” (the Holy book of the Muslims), “Hadith” (the sayings of the Holy Prophet Muhammad, PBUH), “Sunnah” (the way the Holy Prophet Muhammad led His life) and centuries of scholarly interpretations of these three sources. These rules define clearly what is “Halal” (permissible) and what is “Haram” (prohibited) in a financial transaction. The salient points of these rules are:


Shariah prohibits the following:

  • 'Riba' - interest/usury
  • 'Maysir' or 'Qimar' - gambling/speculation
  • 'Gharar' - uncertainty
  • Exploitation
  • Unfairness
  • Undertaking Haram activities (alcohol, pork, pornography etc)

  • Shariah requires:
  • Risk sharing
  • Reward sharing
  • Fairness
  • Transparency
  • Sanctity of contracts


    Islamic finance places strong emphasis on the economical, ethical, moral, social, and religious dimensions, to enhance equality and fairness for the good of society as a whole, whereas the conventional financial system focuses primarily on the economic and financial aspects of transactions.

    There are many Shariah compliant modes of finance which are used to develop Halal financial products. These include “Takaful” (insurance), “Musharaka” (partnership), “Mudaraba” (silent partnership), “Murabaha” (special type of sale), “Ijara” (lease), “Wakala” (agency), “Salam” (forward sale), “Istisna’a” (manufacturing or construction contract) and Qard (a loan - without any benefits).

     

    About the Author:

    Salaam Insurance is the UK’s first dedicated Islamic Insurance Company that provides Takaful car insurance based on the Shariah principle of Takaful.

    Article Source: ArticlesBase.com - Takaful and the Principles of Shariah-compliant Financial Services

     

     

     

     

     

     

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