Concept of Takaful
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3.0 LITERATURE REVIEW3.1 Concept of TakafulTakaful is an Islamic alternative to conventional insurance. The word “takaful” is derived from the Arabic verb “Kafala”, which means guarantee or responsibility (Billah, 2003). According to Muhammad Nejatullah Siddiqi (1985), there are three elements present in conventional insurance that do not conform to the requirements of the Shari’ah law which are interest (Riba), gambling (Maisir) and uncertainty (Gharar). Riba means a monetary advantage without counter-value or on the other words it can defined as making money on money. Takaful businesses are restricted not to involved or have a deal with the practice of riba. Then, Maisir is known as gambling which the insurance contract is equated with gambling where if the peril happened the insurer will lose. If the peril does not occur, then the insured will lose. Gharar has been defined as a contract where the results are not known or hidden, or one of the two possibilities where the frequent occurrence is the one that is more feared. Mudarabah is the earliest Takaful model in Malaysia (Macey, 2008; Laldin, 2008). Mudarabah is defined as a profit and loss sharing principle applied normally to a business or commercial contract between the party that provides the fund or capital and the party that manages the business. In term of takaful, it would mean the contract of profit sharing between the takaful participants and the operator from the profit, if any, of the takaful business. The entrepreneur or al-Mudharib who is entrusted with managing the takaful business and the participants as the provider of capital which is called sahib al-mal who is obligated to pay the takaful contributions as the capital or rabb al-mal. Besides that, in Wakalah concept, the relationship between takaful operator and participant is basically as agent and capital provider. The takaful operator acts as participant’s agent and will be paid fees for the services provided. The fees are charged as a fixed amount or percentage, or based on the agreed ratio from the investment profits (Engku Rabiah Adawiah, 2010). In order to eliminate the element of uncertainty in takaful contract, the concept of tabarru’ is incorporated. According to Abu Umar Faruq Ahmad (2015), Tabarru’ means to donate, to contribute and to give charity. Participant agree to relinquish as tabarru’ certain portion of his takaful installments or takaful contribution that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss. In takaful, anyone who participates in any of its products whether family takaful products or general takaful products will allocate certain or whole amount of his contribution into a fund. Islam provides the solution to insurance system implementation which is following the Shariah principle. Thus, the contract of Tabarru’ is introduced as it is practical and safer.
There was many research that showed a comparative study to differentiate between takaful and conventional insurance. They are illustrated in the table below. The differences that were discussed might help readers develop a better understanding of takaful. Engku Ali (2010), Zaatri (2010) and Razeeq (2011).Table 1: Comparison between Takaful and Conventional InsuranceCompared factorsTakafulConventional InsuranceContract relationshipCombination of tabarru’ contract (donation) and agency or profit sharing contract – mutual agreement Exchange contract between the insurer and insured person – sale and purchase RiskWithin the group. The group member agreed to help those who incur any loss and share the reminder if any.Transferred to one party Right and responsibilitiesParticipants make their ownership right of the amount of the donation to help protect one another against the impact of unpredicted risk Policyholders pay premiums to protect themselves or their interests Prohibited elementsFree from Usury (Riba), Uncertainty (Gharar), and Gambling (Maisir) but operate based on the principle of profit sharing contract (Mudharabah) Contains the Usury (Riba), Uncertainty (Gharar), and Gambling (Maisir) Benefits & LiabilityThe benefits will be specified and paid by the Takaful administrator from the Takaful funds upon any unexpected event.Depends on outcome of future events that is unknown at the time of signing the contract.PolicyFixed and definite term or period of maturity The term or period of a policy varies on the type of policy.3.2 Awareness of Takaful.Husin & Maisaroh (2008) has made a study to determine the extent of the Malay community participation in Takaful. Perception of the agent is being a measure to assess the level of public awareness of Takaful because the agent is an individual who is considered the most understand the needs and requirements of society in terms of their involvement in the Takaful. The results of the study demonstrate an understanding of the Malay community related to the Takaful is low where they think there is no difference between Takaful and conventional insurance because the awareness among Malay community about the importance of Takaful is still low.