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In The Name of Allah, The Beneficent, The Merciful

All Praise is due to Allah and may Peace and Salutations be upon the last and final messenger Muhammad Sallallahu Alaihi Wa Sallam.

Over the past few years, a general awareness seems to have been created with regards to the impermissibility of dealing in interest, and therefore dealing with conventional banks. Many people seem to have understood why most of the dealings of conventional Banks are prohibited from a Sharia point of view. People have understood that their transactions are by and large interest based and are thus not acceptable. People have also understood that the transactions of an Islamic Banks are asset backed, and not interest based which is the key factor that makes the profits that they earn acceptable in terms of the Sharia. However, the question as to why conventional insurance is impermissible and as to what the basis for the permissibility of Takaful is, is a question that is still not clear to many. The present short article aims at briefly addressing this question.

It is my hope and prayer that Allah accepts this insignificant effort and makes it a means for people to carry out all their transactions in a manner that will please our Creator, Allah.

At the outset, it should be clearly understood that Islam does not condemn the basic concept of insurance which is to protect oneself from potential loss or in other words to manage one risk (risk management). Infact, Islam has promoted assisting one another in cases of loss. This is a concept has been endorsed by the Sharia at the highest of levels. The Holy Quran promotes mutual assistance and protection of one another. Similarly The Holy Prophet Sallallahu Alaihi Wasallam has endorsed the paying of blood money by the “Aaqila”, a third party, to the family of the injured which serves as a form of compensation for them. There are also other traditions of the Holy Prophet Sallallahu Alaihi Wa Sallam that indicate towards the acceptance of the concept of risk management. One such example is the incident in which Rasulullah Sallallahu Alaihi Wa Sallam restricted Hazrat Sa’ad ibn Abi Waqqas (R.A.) to giving only one third of his wealth to charity saying that leaving your heirs in a wealthy condition is better than leaving them poor and thus compelling them to stretch their hands out before others. This Hadith clearly depicts that the Sharia condones the concept of risk management. Sharia scholars also use this particular Hadith as a hadith that supports the concept of risk management in the case of life insurance. Another tradition that supports the concept of risk management is the Hadith that has been reported in Bukhari which explains that Rasulullah Sallallahu Alaihi Wa Sallam gave his wives the provisions of the entire year to come.

Hence, the concept of protecting oneself from potential loss and the concept of risk management is one that is well within the framework of the Sharia. However, it is the method in which this concept is implemented that would either make the system permissible or impermissible.

Why conventional insurance is not Sharia Compliant

Conventional insurance has certain features that are not consistent with some of the essential values of an Islamic financial contract. Ulama (Shariah Scholars) have highlighted three of these features as being the main reasons for conventional insurance being unacceptable from a Sharia point of view.


Custom or usage have been developed with legal effect since the early primitive era until today. Customs which have been unanimously accepted by the society and became enforceable as unwritten laws. In the primitive society of Babylon, for example, people used to protect against any risk by their own family or tribe. Subsequently, when they migrated from rural to urban life, those people then faced lack of co-operation and protection as a result, eventually they required insurance for material protection. The Babylonian then introduced a kind of commercial contract known as Bottomary, 1 which has been acknowledged as had been being the foundation of today’s insurance practices.

 Table of Comparison

Principles of Contract Affecting Insurance and Takaful



It originated from the ancient Arab tribal custom.

It originated in the ancient Babylon Society in 4000-3000 B.C.

It was developed through Doctrine of al-’aqilah.(العاقلة)

It was first developed through the contract of Bottomry.

The doctrine of al-’aqilah could only be practised by way of mutual understanding or agreement between the tribes.

The Bottomry could only be practised by way of a mutual agreement.

The doctrine of al-’aq began its practices on the basis of mutual contributions.

The Bottomry began its practices with the Usury based transaction.

Sources of law are basically based on the Divine sanctions.

Sources of the law are basically based on human thoughts and cultures.

There is a universalism as far as the chief sources of law are concerned.

In the sources of law there is no universalism in nature.

If there is a conflict between the chief sources and analogical sources or ijtihad, the chief sources will always prevail.

If there is a conflict between the common law and the principles of equity, the equity will prevail.

If there is a conflict between the custom (العرف)and chief sources of law, the chief sources will prevail.

If there is a conflict between the custom and other sources of law, the custom will prevail.


The contract is a bilateral in nature which binds both contracting parties on the basis of Surah al-Madiha: 1.

The contract is a unilateral which binds the insurer only.

It is a co-operative institution based on the principles of contract and also mutual co-operation (التعاون).

It is a business institutions operated based on the principles of contract.

It opposes the riba while proposes an alternative doctrine called al-mudarabah(المضاربة) (profit and loss sharing) financing technique.

It involves the element of riba(الربا) (interest) in its transaction.

Practices of Contract Affecting TAKAFUL AND Insurance - Compared

Formalities in Takaful Contract

The basic formalities in a commercial contract(العقد) (al-‘aqad) is that, there must be a subject matter( المعقود عليه ) (al-ma’qud ’alaih) upon which the intended parties called al-Muta’aqidayn (المعقود عليه)(contracting parties) mutually agree2 by an offer (الإيجاب)(ijab) and an acceptance (القبول)(qabul) for an exchange of a valuable consideration(العوض المتقوَم) (al-‘Iwad al-Mutaqawwim) upon which parties are bound to perform the contract according to the terms and condition(الشروط) (shurut) agreed upon. The Majalle provides that, the basic formalities required in a contract are that, two parties undertake upon themselves to do something upon an offer (Ijab) and an acceptance (qabul).3 Dr. Hussain Hamid Hassan opines that, as regard to the formalities of a contract under Islamic law, there is a legal relationship created by a promise of one of the contracting parties (offeror) with the promise of the other (offeree) as the result of which follow consequences in respect of the subject matter of the bargain.4

 A takaful policy is a kind of financial transaction which is formed based on the general principles of contract. Since a takaful is a kind of contract, the formalities for the formation of a valid policy are based on the formalities required in other form of commercial contracts. The formalities before the conclusion of a policy required by the takaful companies of the contemporary world are based on general principles of contract (al-‘aqd). Under Islamic Law to form a takaful policy, there must be a subject matter at risk, upon which (subject matter) two parties (operator and participant) mutually agree by a proposal (ijab) and an acceptance (qabul)5 in which both parties undertake to share the responsibility to provide a reasonable material security against unexpected but defined risk on the subject matter. In other words, the formalities in a takaful policy are the proposal (ijab), acceptance (qabul), issuance of a cover note (a temporary document for a policy provided by the operator to the participant) and payment of takaful contribution(المساهمة) (al-musamahah) which are further analysed as follows:

 Proposal (الإيجاب)(Ijab)

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