Status of Takaful
Glossary of Financial Terms
Why No to Conventional Insurance
In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The concept of insurance where resources are pooled to help the needy does not necessarily contradict Islamic principles.
Three important differences distinguish conventional insurance from Takaful:
- Conventional insurance involves the elements of excessive uncertainty (gharar) in the contract of insurance;
- Gambling (maysir) as the consequences of the presence of excessive uncertainty that rely on future outcomes
- Interest (riba) in the investment activities of the conventional insurance companies;
- Conventional insurance companies are motivated by the desire for profit for the shareholders;
- Conventional system of insurance can be subject to exploitation. For example, it is possible to charge high premium (especially in monopolistic situations) with the full benefit of such over-pricing going to the company.
The key difference between Takaful and conventional insurance rests in the way the risk is assessed and handled, as well as how the Takaful fund is managed. Further differences are also present in the relationship between the operator (under conventional insurance using the term: insurer) and the participants (under conventional it is the insured or the assured). Takaful business is also different from the conventional insurance in which the policyholders, rather than the shareholders, solely benefit from the profits generated from the Takaful and Investment assets.
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