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CHAPTER 2: CONCEPTUAL FRAMEWORK OF TAKAFUL
This chapter defines Takaful, discusses its importance for economic development from a
theoretical perspective, and provides an overview of Takaful needs in OIC member countries.
The chapter provides, specifically, a brief definition of Takaful/Re-Takaful based on its nature,
i.e. economic and social aspects. It explains the role and importance of Takaful /Re-Takaful for
an economy, and the ways it affects and improves economic development. Further, it provides a
brief theoretical background along with historical trends on its role in economic development.
2.1. Concept and Role of Takaful and Re-Takaful
Although the term “Takaful” has a broader literal meaning, including mutual solidarity, help,
cooperation and collaboration, it has been referred to technically in the limited sense as
Shari'ah-compliant insurance. It has been the case since the establishment of the first Takaful
Company in Sudan in 1979.
With the emergence of Islamic banks in different parts of the world in the latter part of the 20 th
Century, it was noticed that there was the need for a risk management tool to support the Islamic
banks and contribute further in developing the Islamic finance industry. Therefore, Takaful
became an indispensable and complementary element of the Islamic financial system and a vital
key to its success and development. Since then numerous Takaful models have emerged and
Takaful companies were established to fulfil the needs of many Muslims who were hitherto self-
excluded from financial opportunities such as insurance. This provided a good opportunity for
them to conduct their lives in accordance with the tenets of their faith.
2.1.1. Definition of Takaful
Takaful refers to a mutual guarantee or assurance arrangement among a group of people facing
similar risks or the danger of incurring unforeseen losses, to individually contribute a certain
sum of money, which will be used to compensate any member of the group who incurs such
losses (Alhabshi et al., 2012). Legally, Takaful is defined as “an arrangement based on mutual
assistance under which Takaful participants agree to contribute to a common fund providing for
mutual financial benefits payable to the Takaful participants or their beneficiaries on the
occurrence of pre-agreed events” (BNM, 2013).
Takaful, or Islamic insurance, cooperative insurance, mutual insurance, participation insurance
as it is called in different jurisdictions is defined by the International Islamic Fiqh Academy
(IIFA) as follows: ”Cooperative insurance is the process in which a group of people, who face
certain risk(s), agree that each of them contribute a specific amount, based on cooperation, to a
non-profit fund that is to be used for compensating anyone of them for the harms he would
encounter when the risk in question materializes, as per signed contracts and adopted regulatory
legislations ” (OIC Fiqh Academy, 2016).