The following Banking & Finance practice note Produced in partnership with Dr Hiba Allam, PhD in Islamic Insurance Law provides comprehensive and up to date legal information covering:
Takaful is the provision of risk-cover conducted in line with the principles of Islamic law (Shari’ah). It offers a unique and important alternative to conventional insurance for meeting the insurance needs of many Muslims throughout the world. For a number of reasons relating, inter alia, to the prohibition under Shari’ah of undue interest (riba) and uncertainty (gharar), conventional insurance has been declared by some Muslim scholars as haram, ie not permissible for Muslims. For further information on these prohibited elements, see Practice Note: Key principles of Islamic finance.
As a consequence, until the advent of takaful, a number of Muslims worldwide were left without the possibility of effectively covering against risk. That being said, takaful is not reserved exclusively to Muslims and takaful products may be purchased by all, irrespective of belief or religion.
The core principle underlying the takaful concept is very similar to that of co-operative and mutual insurance. Participants in a takaful scheme must voluntarily and collectively share a defined risk through mutual assistance and donation.
The two categories of takaful are:
'general takaful’—Shari’ah compliant alternative to non-life insurance, and
‘family takaful’—effectively the Shari’ah compliant alternative to life insurance
General takaful and family takaful share similar required elements and structures, however, the concept of Participants’ Investment Fund is absent in general takaful.
Takaful consists of the following:
participants (ie policyholders)
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