You must be agreed, human instinct keeps us alert from unforeseen events. And, it’s natural; you want to protect your loved ones and valuable possession from a series of bad episodes. When you think about protection, the first thing that clicks is commonly known as ‘Insurance’. Again, you might not be satisfied with their giving out of interest-based return. As you know; a fixed or guaranteed profit is not allowed in Islamic and strictly should not be practiced.
Then, what is the best alternative? Takaful; it is around for decades and is widely used in the Middle East and Asia region. This blog will highlight factors that promote the Islamic way of insurance, how do takaful work and different models used. So, let’s get down to finding more.
Why do you need Islamic Insurance?
The idea behind this model is to guarantee protection to one another in the time of need or risk. The funds are contributed by the members as per policy terms, the aims to assist the affected, in case of damage. To sum up, this catalyst will string the following factors:
- It builds co-operation and promotes brotherhood to help each other when needed the most.
- Shares responsibility: Naturally, when you do this, you will feel pain one is going through and want to share burden with them.
- Contribution to the society welfare: The wealth will not remain in the hands of few people, through charity and mutual consideration will benefit the whole community.
What are the parties involved and Pool of funds – The process flow?
Mainly, two parties are involved: one is the policyholder and the other is the fund manager, Important to mention pool of funds. This part will discuss the principles behind these three basic elements in detail:
Policyholder: The one who pays for the subscription through its funds. After getting the policy, the investor will act as a joint investor who also enjoys the ownership interest in the underline assets-where funds are invested.
Fund Manager: The responsibility of the Takaful Company is to invest funds in those assets which are allowed in Islam, avoiding activities like trading in alcohol, casino business and buying or selling of stock shares and bonds.
Common Pool: This is where the investor’s contribution is managed; all the claims and the administrative costs like salaries and marketing expenses are paid from this pool. When there is surplus, it is distributed through a cash dividend. The loss is also shared among the members, not always a guaranteed profit which results in fixed interest.
How does Takaful cut down Interest and limit Gharar and Maysir?In conventional insurance, the insured person pays premium and always expects a guaranteed profit and never exposed to any loss. Most of the dealing is based on speculation, own interests and minimum attention to ethical values.
Ghara or uncertainty: You must be familiar with this fact that every transaction involves some elements of Ghara; whether there will be some damage or not in the future. Islamic scholars do admit some element of uncertainty but that should not lead to fraud or cheating.
Gambling: Also called Al-Maysir. It is certain that when there is speculation in some transactions, gambling will also be present. Conventional Insurance is also known as a ‘Zero-Sum Game’. In case of no claim, the insurance company will get all the profit. Conversely, the insurer has to pay extra if damage is more than the claim. In both cases, the parties can take advantages that will lead to selfishness and individual benefits.
Mudarabha and Wakal- Most commonly used models in Pakistan
Under Mudarbha model the insurance company will act as Al-Mudharib and participant will be nominated as Sahib-Ul-Mall. The contribution amount will be managed against the claims and in the investment account. After making necessary deductions like claims, salaries and marketing expenses. The remaining surplus will be shared among the members and the takaful operator. The rate of profit can be pre-determined like 50:50 or 60:40.
To eliminate gharar, members will agree to donate a portion of their installments to one who needs this amount. In other words, this will make a ‘Win-Win Situation’ for everyone involved.
In Wakala, the Takaful manager will act as an agent to manage the funds. Against agency service, a fixed fee will be charged that will be approved by the Sharia committee. Importantly, that fee will not be subject to any profit or loss that may result under this arrangement.
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Currently, there are five main takaful operators in Pakistan and many others who are operating through their windows. According to a report by the State bank of Pakistan, Pak-Qatar has the largest network that is operating with 100 branches in 90 different cities of Pakistan.
Mawazana.com will help you to pick the right takaful product whether you want Takaful operator for family or general insurance. On our panel, we have got all the leading takaful providers working across Pakistan and other regions. The following are our Takaful partners:
- UIC Window Takaful
- Pak Qatar General Takaful
- Jubilee General Takaful
- Pak Qatar Family Takaful
“موازنہ کریں اپنے لیے، اپنوں کے لیے”