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On the contrary, it is to be noted that Takaful does not contain unlawful conditions. It is based
on such lawful contracts as tabarru', mudarabah (trust partnership contract) and wakalah
(agency contract). However, all terms and conditions in the contracts must be Shari'ah-
compliant or, otherwise, Takaful contract is not valid.
In a nutshell, the above misconceptions arose as a result of the lack of understanding about the
genuine concept of Takaful which is an arrangement of mutual assistance aiming to assist
orphans, widows, other dependents as well as the policyholder himself against unexpected
future loss, damage or peril.
2.1.2. Significance of Insurance and Takaful
Risk is the probability of two outcomes, and the ultimate outcome is usually unknown. Others
see risk as the probability of loss in an event. Risk is an integral part of life as every human
endeavour, particularly in business activities, entail risk. It is typically attributed to uncertain
events in the future such as accidents, death, thefts, fire, diseases, and disasters, among others,
that may result in losses, damage and financial difficulties. From time immemorial, people
continue to develop measures and tools to manage risks. In modern times, such tools are
primarily in the form of insurance, which has become indispensable for individuals and
businesses to mitigate and manage risks that otherwise could result in losses and adversely
affect people’s lives and their wealth.
The insurance industry today has become an essential component of business and financial eco-
system. The insurance business is largely operated by non-banking institutions. Nevertheless,
both the banking and non-banking financial institutions have to conform to the insurance
regulatory requirements and guidelines to provide their services. Individuals, businesses and
governments have been increasingly using insurance services to manage risks against
unforeseeable incidents and losses to life and wealth.
The rapid development of Islamic finance has necessitated the need for Shari'ah-compliant
alternative to conventional. This alternative, which is based on Shari'ah principles may also be
referred to as “Islamic insurance”. Takaful operates in line with Shari'ah principles and, at the
same time, offers the benefits and services equivalent to its conventional counterpart. Therefore,
Takaful has evolved in response to the ever-increasing yearning of faith-based financial
consumers for an insurance system fulfils their religious beliefs and provides the desired risk
coverage for individuals and IFIs. The Islamic banking, capital market and insurance have
complemented one another in the Shari'ah-compliant eco-system. The Takaful industry now
includes small, medium and large firms. The industry has rapidly developed in such a short
period globally in both Muslim and non-Muslim countries. This growth has far-reaching positive
implications for individuals and businesses patronising Takaful and abandoning conventional
insurance for reasons related to both business and belief. Beyond the religious principles
underpinning it, the Takaful theoretical model is fundamentally based on mutual benefits and
cooperation.