Comparative Analysis Between Conventional Insurance And Takaful Finance Essay

The conventional insurance is an agreement whereby the insured wages premium to the insurance company to derive fiscal compensation in return for a specified loss occur. It is a hazard transportation mechanism that the insured and insurer exchange their uncertainness of fiscal loss for the certainty of the premium. It appeared due to the beginning of homo ‘s societal demand as human ever will make anything to gain their safety. Since security is chiefly a societal demand before being a fiscal one, insurance is launched in the construct of aiming net income from procuring operations.

Anyhow, Islamic rules see insurance as non profitable and concerted 1. Besides, it should non include forbidden effects in Islamic Shari’ah such as vigorish, fraudulence, ignorance and gaming. For those grounds, Takaful insurance has been introduced. Takaful is an Muslim insurance construct which is grounded in Islamic banking, detecting the regulations and ordinances of Islamic jurisprudence. The rules of Takaful include that policyholders cooperate among themselves for their common good, every policy holder pays his subscription to assist those that need aid, losingss are divide and liabilities spread harmonizing to the community pooling system, uncertainness is eliminated in regard of subscription and compensation and Takaful does non derive advantage at the cost of others.

Since conventional insurance and Takaful present for different rules, our group is traveling to analyze, comparison and discourse the differences between them in the facets of nature, contract, premium, elements, investings, fillip, ordinances and histories.


The full operation of Takaful is based on the construct of group sharing, which is a simple community pattern of coming together to assist one another. It aims at advancing brotherhood, solidarity and common cooperation. In other words, it encourages us to take attention of other people, to guarantee the fiscal stableness of our family and to guarantee that there is duty and bond with the society as a whole ( Syed Moheeb Syed Kamarulzaman, 2010 ) . Harmonizing to Dr. Mohd. Ma’sum Billah, the nature of Takaful can be illustrated by a state of affairs where anybody in the society who has the legal capacity may lend a amount of money to common co-operative fund to guarantee material security for one against a defined-risk likely encountered by another ‘s life or belongings. The parties who involved in Takaful normally are participant, operator, insured, and beneficiary. Participants are those who contribute to the common fund while insured are those who among the participants face the hazard and are assisted by the fund. Those who really benefit from the fund are known as the donees while the pecuniary part made by the participants to the fund is known as common part. A registered or licensed organic structure or corporation who known every bit Takaful operator is responsible to pull off the fund harmonizing to Shari’ah rules and besides to supply a sensible fiscal security for those who truly merit it against the loss or harm suffered by them ensuing from a defined-risk. The common part made by the participants is put into two financess ; one of them is investing fund harmonizing to the rules of al-Mudharabah ( net income and loss sharing ) while the other is treated as charity harmonizing to the rules of al-Tabarru ( contribution ) . The common part does non belong to the Takaful operator who merely responsible to pull off the fund ; it belongs to all of the participants in the strategy who portion the hazard.

We came out with an illustration to visualize the nature of Takaful in a simple manner:

Meanwhile, in conventional insurance, the values of brotherhood, solidarity and common cooperation are absent. The conventional insurance is merely strictly a common commercial dealing that carried out against unexpected hazard that involved lives, belongings or concern venture. It is a trade good that offered by the insurance company to supply protection against several uncertainnesss while the hazards are spread over a figure of clients of the insurance company. The parties involved in conventional insurance are insurance company and insured. Insurer is normally referred to insurance companies while insured is referred to policyholder. The conventional insurance Acts of the Apostless as a hazard transportation mechanism whereby hazard is transferred from the insured to the insurance company in consideration of ‘insurance premium ‘ paid by the insured ( Muhammad Asghar Shahzad, n.d. ) . After the procedure of hazard transferring, the premiums that paid to the insurance companies will be belonged to the insurance companies and can be used by them to pay unfortunate and maintain the balance.


Takaful Contracts

Since the nature of hazards are unsure ( or Gharar ) and Islam prohibits gross revenues or dealing that contain Gharar, accordingly Takaful contracts can non be gross revenues contracts. Given that Gharar or uncertainness is prohibited within Takaful contracts, therefore Gharar in monetary value, method, footings of contract, and anything that is deemed to be unsure or delusory can non be involved in the Takaful contract.

To do the construct of insurance applicable under Shari’ah jurisprudence, the diction of the contract is changed, so that it is non a contract of exchange ( i.e. : buy-sale contract ) , but a contract of contribution. ( Syed Moheeb Syed Kamarulzaman, 2010 ) . In the proposal signifier, the policyholder declares that “ I donate into this pool and name a Takaful operator as the pull offing agent to manage the financess harmonizing to the best patterns ” . By doing parts as conditional contributions, the component of uncertainness is brought down to acceptable degrees under Shariah for a good cause i.e. to decrease the loss suffered by any one of the participants.

It is important that Datuk Syed Moheeb Syed Kamarulzaman, president of the Malaysian Takaful Association uses the phrase “ fall ining a Takaful strategy ” , alternatively of “ purchasing Takaful ” . As he said, “ We do non sell Takaful, but we invite people to take part in the strategy or the fund. “ This is to emphasize on the issue that Takaful contracts can ne’er be gross revenues contracts.

In add-on, to avoid or extinguish the forbidden elements from Takaful contracts, the alternate contracts like Mudharabah Contract ( Net income and Loss Sharing ) , Musarakah Contract ( Joint-Venture ) , Wakalah Contract ( Contract of Agency ) can be used.

Conventional Insurance Contract

Conventional insurance is a buy-sale contract, in which policies are sold and policyholders are the buyer. Uncertainty is an built-in portion of the contract since none of the insurance company or insured will cognize how much they will hold to pay or have until the terminal of contract. The sum of uncertainnesss in insurance companies is significant since the sum of uncertainnesss does non depend on the action of both undertaking parties. Although the underwriting procedure can find the chance of how much the insurance company will pay or have from each underwritten contract, the uncertainness that remained with each insured party is still significant.


In conventional insurance, premiums paid by the policyholder are assorted. Premiums paid depend on a specified hazard for a specified clip. For illustration, a adult male age 25 will pay less premiums compare to a adult male age 45 as a adult male age 45 will hold higher hazard in unwellness. The premiums paid by the policyholders depend on the age of policyholder foremost take out his policy. The higher hazard policyholder face, the higher premiums that he has to pay. Risk degree and the premium charged to the policyholder have positive relationship.

In Takaful, fixed minimal premium is imposed on all of the participants. All of the participants of all ages will hold to pay the same sum of premium. Takaful neglects age and hazard of their participants, every bit long as peoples want to take part in Takaful plan, they will merely necessitate to donate the same sum as the other present participants donate in the plan.


Our following point is about the component of conventional insurance and Takaful itself. Takaful patterns are free from the elements of Riba ( involvement ) , Gharar ( uncertainness ) , Maisir ( chancing ) and other unislamic elements. It involved the elements of al-Mudhrabah, al-Tabarru ‘ and other Shari’ah that justified the elements. Here, we focus on two elements which are Tabarru ‘ and Mudharabah. Tabarru ‘ is an Arabic noun that means “ contribution, gift, or part ” . Each participant that needs protection from Takaful must be present with a sincere purpose to donate in order to assist other participants if they are faced with troubles. In precise words, all participants agree to assist one and each other. The accent on this issue can be observed from a fatwa by Dr. Yusuf Al-Qardhawi that insisted Islamic insurance may be in status that each participant contributes into a fund used to back up one another.

Mudharabah means profit-sharing. Under this theoretical account, the Takaful operator asks for no returns from pull offing the Takaful concern. It seeks returns from the concern of puting the policyholder financess in an in agreement ratio. Technically, the policyholders pay premium that is credited to a policyholders ‘ fund, while the stockholders of the Takaful operator company contribute to a stockholders ‘ fund which is different from the policyholders ‘ fund. The Takaful operator, as a mudarib, invests the policyholders ‘ fund to the Shari’ah compliant instruments. Then, net incomes generated from the investing are shared between the policyholder and Takaful operator in an in agreement ratio.

On the contrary, the elements of conventional insurance is involved in Gharar ( uncertainness ) , Maisir ( chancing ) , and Riba ( involvement ) which may non be justified by the Shari’ah rule. Gharar means “ Uncertainty ” . The definition of uncertainness in the muamalah dealing is that when a affair is to be concealed by one party where it can raise a sense of inequality every bit good as dictatorship to another party. In fact, Maisir and Gharar are closely related. When a dealing consists the component of Gharar there would be the being of chancing component. ( Why ) Maisir can be illustrated in a status when the participant contributes a little sum of premium in a hope to derive back a big amount. The last component is Riba which exists in the policy loan concern offered to the participant in a life insurance merchandise. This is because most of the insurance financess are invested in fiscal instruments such as bonds every bit good as stocks which contain the component of Riba.


By and large, there are two chief aims for the activities of fund investing. First, it is about increasing and spread outing the wealth and assets of both certification holders and stockholders through the accretion of net incomes and capital grasp. Undoubtedly, spread outing the wealth is consistent with Islamic duty that it will make a balanced socio economic growing.

Second, it is to deduce net incomes from all the investings made. In fact, net income maximization is ever the chief aim of any investing activity and it is non against Shari’ah. Besides, under the rule of Mudharabah, certification holders and stockholders have the right to portion those net incomes.

The differentiation between Takaful and conventional insurance is rather obvious in the facet of investing. Takaful merely invests in the concern which is compliant with Shari’ah which means that the companies deal in involvement, intoxicant, chancing or uncertainness are non allowed to put. This is exercised through statutory Acts of the Apostless and it usually requires the puting up of a Shari’ah commission within the Takaful company. The commission is accountable to the Shari’ah conformity of all investings.

Besides, unlike the conventional insurance whereby the investing can be made in any strategy or undertaking that may non be supported by the Shari’ah subject, Takaful operators have to find the investing fund ‘s plus size in order to take an appropriate type of instruments for investing such as Islamic private debt securities ( Sukuk ) , Islamic funding installations, authorities Islamic issue and Islamic unit trusts.

For conventional insurance, they invest their financess in interest-based avenues and without any respect for the construct of Halal-o-Haram. For illustration, insurance financess invested in fiscal instruments such as bonds and stocks which contain the component of Riba ( involvements ) . The Riba component from the net income of the investing fund will be used for the payment of claims to the policyholders.


In certain insurance, insurance companies may offer fillip or net income in general footings merely particularly with net income policies. In conventional insurance, there is no exact specification with respect to the profit-sharing in contract. Insurance companies may or may non giving fillip to policyholders. Besides depending on policies, companies besides consider return on investing that they have made in order for them to give fillip. Bonus rate for policyholders will be varied from twelvemonth to twelvemonth up to the discretion of the Board of Directors of the insurance company.

Different from insurance, Takaful gives bonus as agreed between Takaful operator and participants ( policyholder ) . Takaful operator will portion the net incomes from investings with participants harmonizing to the ratio agreed between the operator and participants. Bonus sharing in Takaful is based on rules of al-Mudharabah, the ratio of fillip sharing could be 5:5 or 6:4 or 7:3 as agreed between the catching parties.

In drumhead, for conventional insurance, fillip will merely be given when insurance company make good net income and the fillip rate is under discretion of Board of Director ; while Takaful will portion bonus on the net income made from investing based on the ratio agreed.


Following, we differentiate between Conventional and Takaful in the facet of ordinances. Regulations impacting Takaful is based on the divinely revealed jurisprudence that dictates the manner of life for world, called Shari’ah. The authorization of the Shari’ah is chiefly drawn from the Qur’an and Sunna. The Qur’an is the sanctum book which Muslims believe incorporating God ‘s word as straight revealed to the Prophet Muhammad. The Sunna refers to the spoken advice, Acts of the Apostless and silent blessings of the Prophet Muhammad. When there is a new state of affairs arisen which requires an reading of the jurisprudence, qualified Shari’ah bookmans engage in ijtihad, which is a method of legal logical thinking by analogy from the beginnings of the jurisprudence to research possible solutions to the job.

A Takaful operator has an duty to guarantee that all facets of the insurance operations are compliant with Shari’ah regulations and rules. One of the facets that give a immense impact is on how and where they invest the money because their investings must be following with Shari’ah. Takaful houses can non put in conventional involvement paying bonds, or in certain types of equity. Because of that, Takaful industry in Malaysia was shown by Takaful Act 1984 in November 1984 every bit good as Shari’ah Standard AAOIFI 2008 as their counsel in regard of what stated in Qur’an and Sunna.

On the other manus, conventional insurance jurisprudence is based on the human idea and civilization. The illustration of the conventional insurance jurisprudence is rules ( ICPs ) which provide a globally accepted model for the ordinance and supervising of the insurance sector. They provide the footing for measuring insurance statute law, and supervisory systems and processs, and are used for that intent by the IMF and the World Bank. Some of the ICPs are general rules which are universally applicable and appear to necessitate no version to use to Takaful. One of the rules is ICPs 18 ( Risk Assessment and Management ) which province the supervisory authorization requires insurance companies to acknowledge the scope of hazards that they face and to entree and pull off them efficaciously.


No affair in Takaful or conventional insurance, they have to account the grosss of payment and premium as the normal company will make. In trading or fabrication companies, payments that received from clients will be accounted as gross for services rendered and goods provided. In conventional insurance, insurance company will account the insurance premium received from clients in general insurance history and life insurance history of fund. In general insurance, all premiums are paid into an insurance company ‘s general history. Therefore, purchasers are subjected to credit-risk exposure to the insurance company, which is low but non zero.[ 1 ]This is the same for life insurance.

For Takaful, the grosss of Takaful part are put into two histories. One of the histories is known as al-Tabarru ( contribution ) , which means to assist or to take attention of one ‘s demands, while another history is treated in line with the rule of al-Mudharabah ( net income and sharing ) . Takaful is operated based on shared duty, brotherhood, solidarity and common cooperation or aid, which provides common fiscal security and aid to safeguard participants against a defined hazard. This is the chief ground why Takaful does non account premium in general insurance history.

The differences in insurance and Takaful is insurance company will handle its premium received like normal trading company will make while Takaful will handle the Takaful part as contribution which is non to commercialize it.


Overall, our study covered the debut to conventional insurance and Takaful, the difference between the both in the facets of nature, contract, premium, elements, investings, fillip, ordinances and histories.

We learned that conventional insurance is no uncertainty a good manner to minimise fiscal losingss when catastrophes happen but Takaful is besides decidedly a good option for conventional insurance where the system is perfectly based on justness, equal distribution of the net incomes and required far less premium than the conventional insurance policies. Anyhow, it is imperative that public consciousness be enhanced and allow more Moslems and non-Muslims come to understand the existent benefits of Takaful.


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