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Tuesday, 20 May 2008

Takaful: Promoting social solidarity through Islamic insurance

"Promoting social solidarity through insurance"

Dr Mahbub Alam

Uncertainty is the only certainty in the world. In our everyday life, we are prone face accidents, which may lead to disability, even death and also loss or damage of properties. An accident is a mishap. It has been defined severally as an unplanned, undesigned, unexpected, un-devised, undesirable, unintended and or unfortunate occurrence.

Insurance is one of the most significant and scientific methods of handling risks. In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the effects of their misfortune. It lets your protect yourself against everyday risks to you health, home and financial situation. In modern society, almost every type of risk could actually be mitigated. An insurance company is always prepared to take the risk for us. It is up to us to make the choice of which risks to mitigate in our daily lives.

But the Islamic scholars have objection to the concept of conventional insurance. In their view, the elements of Gharar (Uncertainty), Maisir (Gambling) and Riba (Usury) are involved in insurance contracts, which make it un-Islamic. Therefore, as an alternative of conventional insurance the Islamic scholars have developed a new concept of insurance that complies with Islamic principles on basics and rules drawn from the Holy Quran and Sunnah., called Takaful insurance. As mentioned in the Qur'an: "And help one another in righteousness and piety and do not help one another in evil deeds and enmity" (AI Maidah verse 2)

Takaful, the Islamic alternative to insurance is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a promise among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively. The Takaful contract so agreed usually involves the concepts of Mudarabah, Tabarru' (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.

The concept of Takaful is not new in Islamic commercial law. The contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was laid down in the system of 'Aaqilah' (Mutual Help), which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet (PBUH). In case of any natural calamity, everybody used to contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.

The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to the business or property. The policyholders pay subscription to assist and indemnify each other and share the profits earned from business conducted by the Company with the subscribed funds. Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru' is incorporated in the contract. How much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements. Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators. To describe from another angle, a Takaful contract may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment. The protection part of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally. In the savings part, individual rights remain intact under Mudarabah principle and the contributions along with profit (net of expenses) are paid to the policyholders at the end of policy term or before, if required by him.

The dissimilarity between the conventional insurance and Takaful business is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreements. Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.

Takaful "co-operative or Islamic insurance" has steadily been growing as a legal financial tool to serve the peoples in Islamic countries as well as non-Muslim countries. Besides operating in Muslim countries, there are more than 108 Takaful (Islamic Insurance) companies operating successfully in the non-Muslim countries such as USA, England, Sri Lanka, Singapore and Japan,

Bangladesh as a Muslim country has a very ample opportunity to flourish Takaful (Islamic Insurance) within a short span of time. But imprudently yet there is no policy framework undertaken by the proper authority of the government machinery. Though 85% of its population is Muslim they live their life based on Islamic valves which lies the enormous feasibility of Takaful. However, the government can take prompt initiative to formulate a new criteria about the rules and regulations of shariah-based insurance business in Bangladesh. To implement the 'Takaful' concept in the society, it will not only a praiseworthy task of the government, it will also uphold our Islamic values and heritage beyond the boundaries.

(The New Nation)

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