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The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines
Takaful as “a process of agreement among a group of persons to handle the injuries resulting from
specific risks to which all of them are vulnerable” (AAOIFI, 2017). In a similar but semantically
different dicta, the Islamic Financial Services Board (IFSB) defines Takaful as "a mutual
guarantee in return for the commitment to donate an amount in the form of a specified
contribution to the participants’ risk fund, whereby a group of participants agree among
themselves to support one another jointly for the losses arising from specified risks” (IFSB, 2018
January). Therefore, Takaful, regardless of how it is interpreted in other languages, is a Shari'ah-
compliant mutual assurance contractual structure, where participants contribute their
resources to mitigate against future risks based on agreed terms.
Misconceptions on Takaful
Even though the practice of Takaful insurance is widely approved by the majority of
contemporary Muslim scholars, there is still some confusion, debates and disputes about its
permissibility and Shari'ah compatibility
The misconceptions and relevant clarification on each of them are summarised as follows:
1. It is claimed that Takaful contains an element of usury (riba) as it involves an
exchange of money for money with an additional amount. However, Takaful does
not involve riba as it is practised based on the principle of tabarru’ in which the
participants pay contributions as a donation for their mutual benefits. When a member
suffers loss, the compensation paid to him is not riba because it is not a consideration of
his Takaful contribution; but it is a donation from other participants.
2. It is claimed that Takaful also contains an element of uncertainty (gharar). It is
argued that the subject matter in the Takaful contract is the compensation to be
paid on the occurrence of insured events such as death, accident or injury which
is presumed to occur in the future that is uncertain; hence, this kind of transaction
is prohibited by the Shari'ah. However, this perception is wrong since Takaful is a
tabarru’ (donation) contract in which uncertainty of the subject matter is tolerated. In
contrast, in the contract of insurance, which is a sale-based transaction, the subject
matter must be specified for such a transaction to be valid.
3. It is claimed that Takaful is also said to involve an element of maysir (gambling), as
the policyholder pays a certain amount of contributions in the hope of better
returns. It is argued that maysir comes into existence when the sum paid out by the
Takaful company exceeds what the policyholder had already paid in terms of
Takaful contributions in the event where the policyholder dies during the earlier
period of the contract. It could also be because the Takaful benefit is paid together
with bonuses and dividends. However, the above contention is incorrect because the
payment to the policyholder (in the case of early death or early termination) is from the
collective contributions provided by other policyholders based on the concept of