Diversification of Islamic Financial Insturments
35
The concept of Takaful in its essence is very similar to that of mutual insurance, with the
exception that it complies with Islamic law. Essentially, an operational Takaful model has to be
free of not just Riba, but the elements of Gharar (excessive or avoidable uncertainty) and
Maysir (gambling). The basis of Takaful is mutual solidarity with risk sharing – specific funds
are established with a selected group of Takaful participants agreeing to jointly support each
other from any losses arising from specified risks. The schemes or funds are then managed on
their behalf by a Takaful operator, who usually earns income on the basis of Mudarabah (profit
and loss sharing) or Wakala (agency). Hence in one word, the two key characteristics of any
Takaful operation are Shariah compliance and Risk sharing.11 A diversified Islamic financial
industry with a well-developed Takaful sector also contributes to increasing the overall
stability of the financial system.
The ‘optimal structure’ of a Takaful model is still a disputed matter. In the international
landscape, multiple models are used, mostly based on Tabarru (donation), Wakala, Mudarabah
and Waqf. As the table below demonstrates, though sometimes the Takaful operation is on a
pure Mudarabah or a pure Wakala basis, in many jurisdictions today including Sudan, Bahrain,
Malaysia and Pakistan, hybrid models are used, such as Wakala – Waqf, Mudarabah – Wakala
and Wakala-Mudarabah-Waqf. The choice of the operational model depends on factors such as
 Regulations in a given jurisdiction
 Whether its Family Takaful or General Takaful
 Requirement from Shariah advisor
 Compliant securities.
Table 12. Differences in Takaful Models Used
Properties Mudarabah Pure Wakala Mixed Wakala-Waqf
Creation of
fund:
The participants
(Takaful clients)’
contributions
participants’
contributions
participants’
contributions
There is an initial
donation to create
Waqf
Fees: None Up-front fees as
agreed
Up-front as agreed Up-front as agreed
Underwriting
losses:
Qard-a-hasan from
Takaful operator
Qard-a-hasan from
Takaful operator
Qard-a-hasan from
Takaful operator
Waqf to solicit
funds
Investment
profits:
None None As per the agreed
profit-sharing ratio
As per agreed
profit-sharing ratio
Investment
losses:
Borne by participants By participants Borne by Takaful
operator
by Takaful
operator
Operational
expenses:
Borne by Takaful
operator (with some
exceptions)
by Takaful
operator
by Takaful
operator
by Takaful
operator
Liquidation Proceeds accrue to
participants only
Proceeds accrue to
participants only
Proceeds accrue to
participants only
Proceeds accrue to
participants only
Present in
Jurisdictions:
Malaysia, Saudi Arabia
and some GCC
members
United Kingdom Bahrain, Malaysia
and Sudan
Pakistan & South
Africa
Source: IRTI Global Report on Islamic Finance, 2016
11 IRTI The Global Report on Islamic Finance 2016, Chapter 5 Takaful