The Foundations of Islamic Banking

The Foundations of Islamic Banking

Theory, Practice and Education

Edited by Mohamed Ariff and Munawar Iqbal

After barely half a century of experience, Islamic banking has become established as a niche industry across the world, offering new and sophisticated financial products designed to be compliant with Islamic legal principles and common law. This comprehensive book explores the theory, principles and practices underpinning this rapidly expanding sector of banking.

Chapter 10: Takaful Insurance: Concept, History and Development Challenges

Syed Othman Alhabshi and Shaikh Hamzah Razak

Subjects: economics and finance, financial economics and regulation, islamic economics and finance

Extract

Syed Othman Alhabshi and Shaikh Hamzah Razak 1.0 INTRODUCTION Takaful is derived from its Arabic root word ‘kafala’ which literally means ‘to guarantee’. In terms of usage and implication, the term kafala certainly denotes the agreement by one party to indemnify another for any liability that has been pre-agreed upon. Conventional insurance companies operate on the basis of a guarantee to the policy holders that they would undertake to compensate them against any loss incurred as per their contract. In this sense there is no material difference between the practices of a conventional insurance to those of the takaful operators (we mean Islamic insurance companies). Both are dealing with indemnifying their customers and paying out compensation for the losses incurred by the customers. What then are the real differences between conventional insurance and takaful that have led to the separate, dramatic development of the latter industry the world over in the last four decades? Are these differences based on the concept and principles or simply operational? Unlike Islamic banking that basically meanders away from the usury or riba in order to make the products and operations Shari’ah-compliant, takaful can easily avoid riba by investing in non-riba-based instruments that have been developed by the Islamic banks and the Islamic capital and money markets. What else are the main differences between conventional insurance and takaful? In order to fully appreciate what takaful entails and how it operates that it becomes Shari’ah-compliant, we need to fully understand the underlying principles that have been...

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