The Basics

What is Takaful?

Takaful comes from the Arabic root-word 'kafala', which means guarantee.   Takaful is not only a tool to mitigate loss, give financial protection, and give halal profits. It is an ideology which promotes:

  • Solidarity and joint guarantee
  • Self reliance and self sustainability for community well being
  • Assistance to those that need it
  • Community pooling system

How does the Takaful system work?

The Takaful system is based on the principles of fairness, and is committed to serving one another sincerely and truly so that all parties benefit. What is unique about this concept is that the underwriting profit is shared among all participants who have a positive contribution during the year.

How do I pay for a Takaful Scheme?

To initiate a Takaful scheme, you have to pay by cross check. Installments for your scheme may be made monthly, quarterly, semi-annually, annually or in one lump sum in order to match your financial resources after making necessary adjustments.

What are the common terminologies used in the Takaful?

Terminology changes:    
Life Insurance/ Life Assurance - Family Takaful
Policy - Certificate / Scheme
Premium - Contribution
Life Assured / Insured - Person Covered
Assured - Participant
Policyholder - Certificate Owner
Sum Assured - Sum Covered
Insurance Charge/Fee - Contribution
Payor - Contributor
Life Proposed - Person Proposed
Premium-Redirection - Contribution-Redirection
Policy Document - Participant’s Membership Document (PMD)
First Premium Receipt - First Contribution Receipt
Premium Notice - Contribution Notice

What are the key elements of Takaful?

A Takaful system of risk protection consists of the following elements:

  • Sharia compliance in Takaful operations and investments
  • Financial and Risk sharing under the principle of Shariah
  • Contributions are in the form of Tabarru', or donations for mutual assistance to the needy members of the group
  • Application of ethics and full disclosure

Who are the parties in a Takaful Contract?

 A contract is made between two parties but a Takaful scheme involves:

  • The Takaful Operator: Providing the service to the community.
  • The participant: Who wishes to have cover against risk of suffering a financial loss resulting from fire, accidents, burglary, death, etc.?
  • Waqf: An endowment which is setup and collects all the contributions which come from the participants.

What is the future of Takaful?

It is envisaged that Takaful premiums could increase to around USD 7.4 billion in 15 years, a growth of around 20 per cent. Insurance penetration in Muslim countries is amongst the lowest in the world. This is due to the strong extended family system and the interpretation of religious doctrine that has been widely misunderstood in the context of the financial protection. Given there are almost one billion Muslims in the world, the potential market for Takaful in Muslim and  non-Muslim countries is yet to be tapped.

Insurance vs. Takaful

What is Insurance?

It is a way of providing compensation for one who has suffered loss resulting from an unforeseen accident.  In other words, a method of financial protection.

How does Takaful differ from conventional life insurance?

The key differences between Takaful and Conventional Insurance are:

  • Risk Sharing Vs. Risk Transfer
  • Wakeel vs. Guarantor
  • Ameen vs. Owner
  • Different type of Contract

See the enclosed table 1 for a comparison.

Comparison of Takaful with Conventional Insurance

Issue Conventional Insurance Takaful
Org. Principle Profit for shareholders Mutual for participants
Basis Risk Transfer Co-operative risk sharing
Laws Secular/Regulations Shariah  & Prudential regulations
Ownership Shareholders Participants
Mgmt status Company Management Operator
Form of Contract Contract of Sale Cooperative, Wakala or Mudarbah with Tabar’ru (contributions)
Investments Interest based Sharia compliant, Riba-free
Surplus Shareholders’ account Participants’ account


Shariah Queries

Is all insurance Prohibited (Haram) in Islam?

Insurance, as a tool for risk mitigation, is not prohibited in terms of the benefit that it provides.  Islam does not prohibit individuals from taking measures to cover their financial risk, in fact it encourages it.  This is shown in the hadith of the Prophet (SAW) in which he told a companion to tie his camel and then put his trust in Allah.  The impermissibility of conventional insurance is based on the way that it is executed.

Is Risk Protection against Taawakkul total dependence upon Allah?

No human actions change the Will of Allah for our destiny. Whether a person has insurance/Takaful or not has no effect on future events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah:

In a Hadith narrated by Anas bin Malik when an Arab Bedouin asked Prophet Muhammed (PBUH),Shall I leave my camel untied and seek Allah’s protection on it, or should I tie it? The Holy Prophet replied, Tie your camel and then depend upon Allah.” [as quoted by Sunan At Tarmizi]

Is all Insurance a form of Gambling or Wagering, which is forbidden in Islam?

Risk or uncertainty can be divided into: Pure Risk and Speculative Risk. Pure Risk involves the possibility of Loss or No Loss. For example, damage to property due to fire. Pure Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risk involves the possibility of Loss, No Loss or Gain. For example, venturing into a new business, or gambling on horse race. Speculative Risks that include a potential Gain or Profit cannot be insured.

Takaful schemes use the principle of indemnification to compensate for the loss that occurs to a Takaful Participant. Takaful insures only Pure Risks and the claims only pay in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum.


Trust in Pak-Qatar

How can we trust and put confidence in Pak-Qatar Takaful with our hard-earned savings? Since these policies are long-term in nature (running up to 20 years) who will compensate us if the company (God forbid) runs out of business? Is there any kind of assurance against this risk?

  1. 1. Please note that Pak-Qatar Takaful is registered and supervised by the Securities and Exchange Commission of Pakistan (SECP). We receive our license from SECP only after fulfilling all the stringent requirements under the Insurance Ordinance of 2000 (link). A copy of this license certificate is available here for your record (link).
  2. 2. Both SECP and the Appointed Actuary (who is not an employee of Pak-Qatar Takaful) constantly oversees the operations of our company. Takaful and insurance companies world-over are all specially monitored by regulators for solvency and our company is no different. Insurance Ordinance of 2000 has a dedicated section (Part V) on such solvency requirements. These measures ensure that a company does not position itself in a situation to run away without fulfilling its obligations.
  3. 3. There is also another requirement by the SECP in statutory deposit with State Bank of Pakistan. This deposit for Shari’ah compliant companies is in the form of investment in government Sukuk. The value of this Sukuk is equal to Rs. 10 million or 10% of the company’s paid-up capital which in our case amounts to more than Rs. 50 million respectively.
  4. 4. Pak-Qatar Family Takaful has been assigned an initial Insurer Financial Strength (IFS) rating of ‘A’ (having Stable Outlook) JCR-VIS Credit Rating Co. Ltd. The rating incorporates strong financial support from Qatar based financial institutions having sound credentials and further takes into consideration the company’s institutional capacity and the technical competence to meet the participant and contract obligations.
  5. 5. Further, it is important to know that Pak-Qatar Takaful has already heavily invested in the expansion of branch networks and the procurement of state-of-the-art technology in business system from Malaysia and SAP ERP which is approximately US$ 1.4 million in worth. This is a sizeable investment for any new company from a financial sector in Pakistan. The strength of our workforce is increasing day by day.
  6. 6. Further testimony to our financial strength, management expertise, and long-term commitment to our customers, is in the impressive corporate clientele list. We are presently providing Takaful coverage to several companies which include all the major Islamic Banks, multinationals, pharmaceuticals, universities, and so on.
Glossary on Islamic Finance

1 (A)

It refers to deposits in trust. A person can hold a property in trust for another, sometimes by express contract and sometimes by implication of a contract. Amanah entails absence of liability for loss except in breach of duty. Current Accounts are regarded as Amanah (trust).
If the bank gets authority to use Current Accounts funds in his business, Amanah transforms into a loan. As every loan has to be repaid, banks are liable to repay full amount of the Current Accounts.

Down payment; a non-refundable deposit paid by a buyer retaining a right to confirm or cancel the sale.

Al-Aariyah (Gratuitous loan of non-fungible objects)
Al-Aariyah  means loan of a particular piece of property, the substance of which is not consumed by its use, without anything taken in exchange, In other words, it is the gift of usufruct of a property or commodity that is not consumed on use. It is different from Qard that is the loan of fungible objects which are consumed on use and in which the similar and not the same commodity has to be returned. It is also a virtuous act like Qard. The borrowed commodity is treated as liability of the borrower who is bound to return it to its owner.

AAOIFI: Auditing and Accounting Organization for Islamic Financial Institutions.

2 (B)

Bai' Muajjal : Literally it means a credit sale.
Technically, a financing technique adopted by Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the seller earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. He has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Bai' Salam:
Salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. According to normal rules of the Shariah, no sale can be affected unless the goods are in existence at the time of the bargain, but Salam sale forms an exception given by the Holy Prophet (SAW) himself to the general rule provided the goods are defined and the date of delivery is fixed. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver or currencies because these are regarded as monetary values exchange of which is covered under rules of Bai al Sarf, i.e. mutual exchange is hand to hand without delay. Barring this, Bai′Salam covers almost everything which is capable of being definitely described as to quantity, quality and workmanship.

Bai' bil Wafa :
Sale with a right in the seller, having the effect of a condition, to repurchase (redeem) the property by refunding the purchase price. According to majority of Fuqaha it is not permissible.

3 (D)

1) Contract of guarantee, security or collateral; (2) Responsibility of entrepreneur/manager of a business; one of two basic relationships toward property, entailing bearing the risk of its loss; compare

Amanah. Dayn or Debt
A Dayn comes into existence as a result of any other contract or credit transaction. It is incurred either by way of rent or sale or purchase or in any other way which leaves it as a debt to another.
Duyun (debts) ought to be returned without any profit since they are advanced to help the needy and meet their demands and, therefore, the lender should not impose on the borrower more than what he had given on credit.

4 (F)

Falah :
Falah means to thrive, to become happy or to have luck and success. Technically it implies success both in this world and in the Akhirah (Hereafter). The Falah presumes belief in one God, the apostlehood of Prophet Muhammad (Peace be upon him), Akhirah and conformity to the Shariah in behaviour.

Fiqh : Islamic law.
The science of the Shariah. It is an important source of Islamic economics.

Decisions made based on the guidelines in the Quran and Hadith. These decrees are problems or matters that are vaguely stated in the Shariah. There are rules regarding who can issue a fatwah. This is needed for insurance, as although commerce was common in the time of the Prophet (SAW), insurance per say was not, and thus there are few clear references to insurance in the Quran and Hadith.

5 (G)

Gharar :
It means any element of absolute or excessive uncertainty in any business or a contract about the subject of contract or its price, or mere speculative risk. It leads to undue loss to a party and unjustified enrichment of other, which is prohibited.

Al Ghunm bil Ghurm :
This provides the rationale and the principle of profit sharing in Shirkah arrangements. Earning profit is legitimized only by engaging in an economic venture, risk sharing and thereby contributing to the economy.

6 (H)

Hadith (see Sunnah)

Halal : Anything permitted by the Shariah.

Haram : Anything prohibited by the Shariah.
Hawalah :
Literally, it means transfer; legally, it is an agreement by which a debtor is freed from a debt by another becoming responsible for it, or the transfer of a claim of a debt by shifting the responsibility from one person to another – contract of assignment of debt. It also refers to the document by which the transfer takes place.

Hibah : Hibah means Gift.

7 (I)

Ijab : Offer, in a contract; see also qabul.

Ijarah :
Letting on lease. Sale of a definite usufruct of any asset in exchange of definite reward. It refers to a contract of land leased at a fixed rent payable in cash and also to a mode of financing adopted by Islamic banks. It is an arrangement under which the Islamic banks lease equipments, buildings or other facilities to a client, against an agreed rental.

Ijarah-wal-Iqtina‘ :
A mode of financing, by way of Hire-purchase, adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, building or other facilities for the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rental as well as the purchase price are fixed in such a manner that the bank gets back its principal sum alongwith with some profit, which is usually determined in advance.

Ijtihad :
 It refers to an endeavor of a qualified jurist to derive or formulate a rule of law to determine the true ruling of the divine law in a matter on which the revelation is not explicit or certain, on the basis of Nass or evidence found in the Holy Qur’an and the Sunnah. Express injunctions have no room for Ijtihad. Implied injunctions can be interpreted in different ways by way of inference from the accepted principles of the Shariah.

‘Illah :
It is the attribute of an event that entails a particular Divine ruling in all cases possessing that attribute. ‘Illah is the basis for applying analogy for determining permissibility or otherwise of any act or transaction.

Ijma‘ :
Consensus of all or majority of the leading qualified jurists on a certain Shariah matter in a certain age.

Inah ( A kind of Bai) :
Double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result of a loan with interest.

‘Inan (A type of Shrikah) :
It is a form of partnership in which each partner contributes capital and has a right to work for the business, not necessarily equally.
Istihsan :
It is a doctrine of Islamic law that allows exception to strict legal reasoning, or guiding choice among possible legal outcomes, when considerations of human welfare so demand.

Israf :
It refers to immoderateness, exaggeration and waste and covers spending on lawful objects but exceeding moderation in quantity or quality; spending on superfluous objects while necessities are unmet; spending on objects which are incompatible with the economic standard of the majority of the population. See also Tabzir

Istisna’a :
It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. A manufacturer or builder agrees to produce or build a well described good or building at a given price on a given date in the future. Price can be paid in installments, step by step as agreed between the parties. Istisna’a can be used for providing the facility of financing the manufacture or construction of houses, plants, projects, and building of bridges, roads and highways.

8 (J)

Jahl or Jahala :
Ignorance, lack of knowledge; indefiniteness in a contract, sometime leading to Gharar.

Juaalah or Ji’alah :
Literally, Joalah constitutes wages, pay, stipend or reward. Legally, it is a contract for performing a given task against a prescribed fee in a given period. A similar contract is ‘Ujrah’ in which any work is done against stipulated wage or fee.

9 (K)

Kali bil-Kali :
The term Kali refers to something delayed; appears in a maxim forbidding the sale of al-Kali bil-Kali i.e. the exchange of a delayed counter value for another delayed counter value.

Al- Kafalah (Suretyship) :
Literally, Kafalah means responsibility, amenability or suretyship, Legally in Kafalah a third party become surety for the payment of debt. It is a pledge given to a creditor that the debtor will pay the debt, fine etc. Suretyship in Islamic law is the creation of an additional liability with regard to the claim, not to the debt or the assumption only of a liability and not of the debt.

Kharaj bi-al-Daman :
Gain accompanies liability for loss; a Hadith forming a legal maxim and a basic principle – see also Al- Ghunm bil Ghurm.

Khiyar :
Option or a power to annul or cancel a contract.

Khiyar al-Majlis :
Option of the contracting session; the power to annul a contract possessed by both contracting parties as long as they do not separate.
Khiyar al-Shart :
A right, stipulated by one or both of the parties to a contract, to cancel the contract for any reason for a fixed period of time.

10 (M)

Mal-e-Mutaqawam :
Things the use of which is lawful under the Shariah; or wealth that has a commercial value. Legal tenders of modern age that carry monetary value are included in Mal-e-Mutaqawam. It is possible that certain wealth has no commercial value for Muslims (non Mutaqawam) but is valuable for non-Muslims. Examples are wine and pork.

Maisir :
An ancient Arabian game of chance played with arrows without heads and feathering, for stakes of slaughtered and quartered camels. It came to be identified with all types of hazard and gambling. Mithli (Fungible goods) : Goods that can be returned in kind, i.e. gold for gold, silver for silver, US $ for US $, wheat for wheat, etc.

Mubah :
Object that is lawful (i.e. something which is permissible to use or trade in).

Mudarabah :
A form of partnership where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits accrued are shared between the two parties on a pre-agreed basis, while loss is borne by the provider(s) of the capital.

The operator in a mudharaba transaction, i.e. the banker or insurer.

Murabaha :
Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and the profit. This has been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is stipulated in advance.

Musawamah :
Musawamah is a general kind of sale in which price of the commodity to be traded is bargained between seller and the purchaser without any reference to the price paid or cost incurred by the former.

Musharakah :
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by everypartner strictly in proportion to respective capital contributions.

11 (N)

Pay more either in term of money or exchange of goods when taking a loan due to the condition of the loan. The excess payment is Riba.

12 (Q)

Qabul :
 Acceptance, in a contract; see also Ijab. Qard (Loan of fungible objects) : The literal meaning of Qard is ‘to cut’. It is so called because the property is really cut off when it is given to the borrower. Legally, Qard means to give anything having value in the ownership of the other by way of virtue so that the latter could avail of the same for his benefit with the condition that same or similar amount of that thing would be paid back on demand or at the settled time. It is that loan which a person gives to another as a help, charity or advance for a certain time. The repayment of loan is obligatory. The Holy Prophet is reported to have said “…..Every loan must be paid……”. But if a debtor is in difficulty, the creditor is expected to extend time or even to voluntarily remit the whole or a part of the principal. Qard is, in fact, a particular kind of Salaf. Loans under Islamic law can be classified into Salaf and Qard, the former being loan for fixed time and the latter payable on demand. (see Salaf)

Qimar :
Qimar means gambling. Technically, it is an arrangement in which possession of a property is contingent upon the happening of an uncertain event. By implication it applies to a situation in which there is a loss for one party and a gain for the other without specifying which party will lose and which will gain.

Qiyas :
Literally it means measure, example, comparison oranalogy. Technically, it means a derivation of the law on the analogy of an existing law if the basis (‘illah) of the two is the same. It is one of the sources of Islamic law.

Qard Al-Hassan Loan:
An interest free loan. This is used when there is a deficit in the insurance fund of a takaful company.

13 (R)

Riba :
An excess or increase. Technically, it means an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense (‘iwad) in return to the other party; every increase which is without an ‘iwad or equal counter-value.

Riba Al-Fadl :
Riba Al-Fadl (excess) is the quality premium in exchange of low quality with better quality goods e.g. dates for dates, wheat for wheat, etc. – an excess in the exchange of Ribawi goods within a single genus. The Concept of Riba Al-Fadl refers to sale transactions while Riba Al-Nasiah refers to loan transactions.

Riba Al-Nasiah :
Riba Al-Nasiah or riba of delay is due to exchange not being immediate with or without excess in one of the counter values. It is an increment on principal of a loan or debt payable. It refers to the practice of lending money for any length of time on theunderstanding that the borrower would return to the lender at the end of the period the amount originally lent together with an increase on it, in consideration of the lender having granted him time to pay. Interest, in all modern banking transactions, falls under purview of Riba Al-Nasiah. As money in present banking system is exchanged for money with excess and delay, it falls, under the definition of riba. A general accord reached among scholar about its prohibition.

Ribawi :
Goods subject to Fiqh rules on Riba in sales, variously defined by the schools of Islamic Law: items sold by weight and by measure, foods, etc.

Al- Rahn :
Pledge, Collateral; legally, Rahn means to pledge or lodge a real or corporeal property of material value, in accordance with the law, as security, for a debt or pecuniary obligation so as to make it possible for the creditor to recover the debt or some portion of the goods or property. In the pre-Islamic contracts, Rahn implied a type of earnest money which
was lodged as a guarantee and material evidence or proof of a contract, especially when there was no scribe available to put it into writing. The institution of earnest money was not accepted in Islamic law and the common Islamic doctrine recognized Rahn only as a security for the payment of a debt.

14 (S)

Salaf or Loan / Debt :
The word Salaf literally means a loan which draws forth no profit for the creditor. In wider sense, it includes loans for specified periods, i.e. short, intermediate and long-term loans. Salaf is another name of Salam as well wherein price of the commodity is paid in advance while the commodity or the counter value is supplied in future; thus the contract creates a liability for the seller. Amount given as Salaf cannot be called back, unlike Qard, before it is due. (see Qard)

Al-Sarf :
Basically, in pre-Islamic times it was exchange of gold for gold, silver for silver and gold for silver or vice versa. In Islamic law such exchange is regarded as ‘sale of price for price’ (Bai al Thaman bil Thaman), and each price is consideration of the other. It also means sale of monetary value for monetary value – currency exchange.

Shariah :
The term Shariah refers to divine guidance as given by the Holy Qur’an and the Sunnah of the Prophet Muhammad (PBUH) and embodies all aspects of the Islamic faith, including beliefs and practice.

Shirkah :
A contract between two or more persons who launch a business or financial enterprise to make profits. In the conventional books of Fiqh, the partnership business has been discussed under the option of Shirkah that, broadly, may include both Musharakah and Mudarabah.

Sunnah :
Custom, habit or way of life. Technically, it refers to the utterances of the Prophet Muhammad (PBUH) other than the Holy Quran known as Hadith, or his personal acts, or sayings of others, tacitly approved by the Prophet.

Shariah Law:
Islamic laws written in the Quran or narrated in Hadith, concerning what is permitted or not permitted for a Muslim.

15 (T)

Tabarru’ :
It is a donation/gift the purpose of which is nit commercial but is seeking the pleasure of Allah. Any benefit that is given by a person to other without getting anything in exchange is called Tabarru’. Gracious repayment of debt, absolutely at lender’s own discretion and without any prior condition or inducement for reward, is also covered under Tabarru’. Repaying a loan in excess of principal and without a pre-condition is commendable and compatible with the Sunnah of the Holy Prophet (peacebe upon him). But, it is matter of individual discretion and cannot be adopted as a system because this would mean that loan would necessarily yield a profit. If such reward takes the form of a system, it would be considered Riba.

Tabzir :
Spending wastefully on objects which have been explicitly prohibited by the Shariah irrespective of the quantum of expenditure. See also Israf.

Ujrah : See Jua′alah.

16 (W)

Wakalah :
A contract of agency in which one person appoints someone else to perform a certain task on his behalf, usually against a certain fee.

Wakaf: Religious endowmen

17 (Z)

Alms, obligations charity that provide for a certain group of people stated in Shariah and for the development of Islamic Community.