What is takaful?
Takaful is a form of Islamic insurance based on mutual help. The word comes from an Arabic root meaning to guarantee or look after one another. Participants pay contributions into a shared fund. When one participant suffers a covered loss, the fund pays the claim.
In conventional insurance, a company sells a policy, takes the premium as its own money and carries the risk. In takaful, the fund belongs to the participants. The operator manages the fund for a fee or a profit share and does not own the risk pool.
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Why scholars objected to conventional insurance
Many contemporary scholars say commercial insurance has problems under Islamic law. These problems are linked to the principles explained in Islamic finance principles:
- Gharar: excessive uncertainty in a contract. The buyer pays a premium but does not know whether they will receive anything. See gharar and maysir.
- Maysir: gambling. One side gains and the other loses depending on an uncertain event.
- Riba: interest. Conventional insurers often invest premiums in interest-bearing assets. See riba explained.
Takaful tries to remove these problems. Contributions are treated as donations (tabarru) to a common pool rather than as payment for a promise. The fund is invested only in Shariah-compliant assets.
How the takaful model works
Main operating models
| Model | How the operator is paid |
|---|---|
| Wakala | A fixed fee for managing the fund, as an agent |
| Mudaraba | A share of investment profit, as a manager |
| Hybrid | A wakala fee for underwriting plus a mudaraba share on investments |
| Waqf-wakala | The fund is set up as a waqf (endowment), and the operator is paid a wakala fee |
Surplus and deficit
If claims are lower than contributions, the fund has a surplus. Depending on the policy terms, it may be shared among participants, kept in reserve or given to charity. If the fund runs short, the operator usually gives an interest-free loan (qard) to the fund instead of paying claims from its own capital.
Family and general takaful
- Family takaful covers life-related risks and often includes a savings or investment part.
- General takaful covers property, vehicles, health, travel and similar risks.
Takaful operators also buy retakaful, which is the Islamic version of reinsurance.
Takaful vs insurance
| Point | Conventional insurance | Takaful |
|---|---|---|
| Contract type | Sale of cover | Donation to a mutual fund |
| Who carries the risk | The insurance company | The participants together |
| Investments | Can include interest-bearing assets | Shariah-compliant assets only |
| Surplus | Kept by the company | Belongs to the fund or participants |
| Oversight | Company management and regulator | Also a Shariah board |
For a similar comparison in banking, see Islamic vs conventional banking.
What fatwas and standards say
AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions) has issued a Shariah standard on Islamic insurance. It accepts cooperative insurance based on donation and agency, and does not accept commercial insurance in its conventional form.
The OIC International Islamic Fiqh Academy issued a resolution saying commercial insurance with a fixed premium is not permitted, and that cooperative insurance is the acceptable alternative.
In Pakistan, the takaful sector widely uses the waqf-wakala model, which was developed with input from local scholars, including Mufti Muhammad Taqi Usmani. Some conventional insurers run separate takaful "windows".
You can read the full texts on the official AAOIFI and Fiqh Academy websites, and on the Shariah board pages of each takaful operator.
Differing views
- Majority view: conventional insurance is not permitted, and takaful is the acceptable alternative.
- Permissive minority: some scholars, such as Mustafa al-Zarqa, held that conventional insurance can be permitted because it serves a real need and is not gambling.
- Critics of practice: some scholars and researchers argue that many takaful products look very similar to conventional insurance, for example in fees, pricing and investments. They say the difference is sometimes more in form than in substance.
We do not give a ruling. Readers with a specific question should ask a qualified scholar they trust.
Choosing takaful in Pakistan
- Check that the operator or window is licensed. Confirm this with the regulator, and see law and regulators.
- Read the policy terms on the wakala fee, surplus sharing and exclusions.
- See who sits on the Shariah board and read its published opinions.
- Compare family takaful savings products with other options in saving, investing, loans and payments, tax, Islamic banking.
Takaful covers defined risks. It does not protect against losses from investing or trading. Leveraged forex and CFD trading can lose money fast, and no insurance product covers those losses.
Frequent questions
What is takaful in simple words?
It is a mutual fund where participants donate contributions to help one another when a covered loss happens. An operator manages the fund.
Is takaful the same as Islamic insurance?
Yes. "Islamic insurance" is the common English name for takaful.
Is takaful halal?
Most contemporary scholars and standard-setters accept properly structured takaful. Some critics question how certain products work in practice. Ask a qualified scholar about your own case.
What happens to the surplus?
It depends on the policy terms. It may be shared with participants, kept in reserve or given to charity.
Is zakat due on family takaful savings?
This depends on the product and the scholarly view you follow. See zakat on investments.