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3.1.1. The Contractual Relationship among the Participants
The first scenario is the Takaful relationship, which is established between the participants
themselves, based on cooperation and solidarity, whereby they contribute their money to
provide the financial assistance to any of them, who suffers a loss covered under their Takaful
policy. Under this relationship, the participants agree to insure each other against loss on a
reciprocal basis. The contract of tabarru’ is used as the underlying contract to govern the
relationship among the participants. Under this contract, every participant agrees to renounce
a certain amount of the contribution that he or she pays to a Takaful fund, as a donation, in order
to provide the mutual indemnity to any fellow participant who suffers from a defined loss. By
way of donation, the issue of gharar which exists in commercial insurance from the exchange of
an uncertain amount of loss for a fixed amount of premium could be avoided because the
compensation or Takaful benefit received by the participant in the event of a loss is not a reward
( ʻiwad) for his contribution; instead, it is a donation provided by the other participants to ease
his or her burden. Though the amount of compensation is uncertain at the time of the contract
because it depends on the actual loss, this uncertainty does not affect the contract of Takaful
because gharar is tolerated in donation-based contracts.
However, it should be noted that the contract of tabarru’ in Takaful is not a pure donation
contract like sadaqah or hibah (gift). It could be considered as a conditional donation because,
in the contract of Takaful, every participant donates to the Takaful fund so that it could be used
to help fellow participants on the condition that he will be indemnified by the fund (or by other
participants) if he suffers the loss covered under the Takaful policy. This type of tabarru’ is quite
similar to the concept of nihd, which was approved by the Prophet Muhammad (PBUH).
3.1.2. The Contractual Relationship between the Participants and the TO
The other scenario within the Takaful contractual arrangement is the relationship between the
participants collectively and the TO. It should be noted that this relationship is not established
to provide Takaful coverage, but it is for the management and investment of the Takaful fund.
The TO is appointed by the participants to manage and invest the Takaful fund for them. In
general, the TO is responsible:
a) to manage the Takaful scheme, which mainly involves the underwriting process to
determine the amount of Takaful contributions and sum covered, to process claims and
pay the Takaful benefits to the participants. These tasks are known as management of
underwriting activities.
b) to manage the investment portfolio of the Takaful fund in line with Shari'ah principles.
Contrary to the first relationship, the latter relationship is usually formed on a commercial basis
because the TO is a commercial company. Hence, TO may charge fees for its services and/or
shares some of the investment profits depending on the type of contracts that governs the
relationship between the company and the participants. Several types of contracts could be used