Understanding Takaful from the Islamic perspective

Express Tribune

03-06-2025

Photo: Renowned Shariah scholars from the Islamic finance industry discuss the principles and benefits of Takaful, an Islamic insurance model based on the principles of mutual cooperation, solidarity and brotherhood.
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Shariah perspectives on Takaful
Renowned Shariah scholars from the Islamic finance industry discuss the principles and benefits of Takaful, an Islamic insurance model based on the principles of mutual cooperation, solidarity and brotherhood.
Karachi (Faisal Arshad)
In the second episode of the Tribune Podcast on Takaful, host Adeel Azhar engaged in a comprehensive discussion with Mufti Irshad Ahmad Aijaz, Chairman, Shariah Advisory Committee, State Bank of Pakistan, and Mufti Muhammad Ibrahim Essa, Shariah Advisor, EFU Hemayah Takaful.
The conversation centered around Shariah perspectives on Islamic insurance, identifying the fundamental differences between conventional insurance and Takaful.
Takaful Versus Conventional Insurance
Mufti Irshad said that people are often skeptical about the appropriateness of Takaful from a Shariah perspective, arguing that any form of insurance negates the concept of Tawakkul. However, he maintains that Takaful operates on the principle of mutual protection, which is encouraged as a principle in Islam.
In the case of Takaful, he says, a collective pool of funds is established by the participants to provide protection against losses to individuals against unforeseen events. In contrast to conventional insurance, Takaful does not involve selling risk; the fund remains intact even if there are no claims.
Conventional insurance follows a commercial model where the insurer keeps any unclaimed funds as profit, whereas Takaful operates on a cooperative model where participants share in any surplus. This approach ensures that the system is free from betting, where the service provider claims entitlement to the fund even if no loss is incurred.
Surplus distribution in Takaful
The key difference between conventional insurance and Takaful is about the treatment of the fund in the event that the pool of funds exceeds the payment made on account of compensation, as explained by Mufti Ibrahim. In Takaful:
The contribution made by each participant in a Takaful plan is divided into three parts:
Investment – allocated for savings or investment purposes. Wakala Fee – a fixed fee paid to the Takaful operator for managing the funds. Tabarru (Donation) – a portion voluntarily donated to the Participant Takaful Fund (PTF), used to provide financial support to participants in need.
At the end of the financial period, if there is any surplus remaining in the PTF (after claims and expenses), it is handled in two ways:
A portion may be distributed among eligible participants as a surplus sharing, based on predefined criteria.
The remaining surplus is retained in the fund to ensure future stability and sustainability of the Takaful pool.
This approach is based on a Hadith of the Holy Prophet Muhammad PBUH, which presents the concept of mutual protection and distribution of surplus among participants.
Almost Rs. 800 million of surplus has been distributed amongst EFU Hemayah Takaful participants over the past years, in accordance with Shariah principles.
How Takaful operators make money
Mufti Ibrahim addressed the question of how Takaful operators make money when they distribute the leftover pool of premiums among contributors.
He cited Mufti Irshad's explanation that Takaful operators are considered as managers of the fund. To perform the arduous task of management, they are entitled to a management fee, known as the Wakala fee. This fee is similar to the salary drawn by employees of Awqaf and is approved by the Shariah advisor.
The Takaful operator's role is to manage the pool, collect funds, make investments, and process claims, all while ensuring Shariah compliance.
The Wakala fee is a key component of the Takaful system, as it allows the operator to cover its costs and management expenditures. However, the fee must be reasonable and approved by the Shariah advisor to ensure that it is in line with Shariah principles.
Islamic reference for Takaful
Host Adeel Azhar asked about the Islamic reference for Takaful, and Mufti Irshad explained that while there may not be a direct reference to modern-day Takaful in Islamic history, the concept of mutual protection and harmony among a group of people facing similar challenges is encouraged in Islam.
He referenced a historical example praised by Prophet Muhammad (PBUH), where a tribe (Asharijin) collectively pooled dates to survive a famine, highlighting Islam's encouragement of mutual support. By working together and pooling resources, individuals can protect each other against risks and challenges.
Investment approaches in Takaful
Mufti Ibrahim also noted the differences in investment approaches between Takaful and conventional insurance. In Takaful, investments must be Shariah-compliant, including the collection and parking of funds.
Complying with the Shariah guidelines EFU Hemayah Takaful ensures that participants' contribution is invested in Islamic banks and other Islamic investment avenues, ensuring that the system remains true to its Islamic roots.
Growth of the Takaful industry
Mufti Irshad discussed the growth of the Takaful industry, noting that while it is regulated by SECP, the State Bank of Pakistan is also working to increase financial penetration among the general public. Ulemas are playing a crucial role in promoting Shariah-compliant options and convincing people to avoid fraudulent investment schemes. He urged the need for financial literacy so that people may benefit from legitimate and Shariah-compliant financial services.
Mufti Ibrahim added that, like Islamic banking, Takaful services are also growing. The companies are now opting for conversion to Shariah-compliant business models rather than maintaining parallel windows of both Islamic and conventional banking or insurance.
He acknowledged that all stakeholders and regulators, as well as Ulema, are playing a role in this regard, with Ulemas providing inputs in product development, investment rules, and Shariah audit.
With the growing demand for Islamic financial services, Takaful is poised to play a significant role in the financial landscape of Pakistan, helping individuals and businesses protect themselves against risks while adhering to Islamic principles.
With scholars, regulators, and companies working together, the industry is well-positioned to redefine financial protection in Pakistan.