Tafakul: The Islamic Insurance

Tafakul: The Islamic Insurance is the Islamic alternative to conventional insurance which is based on the idea of social solidarity, cooperation and joint indemnification of losses of the members. It is an agreement 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 main purpose of takaful under the Islamic system, is to bring equity to all parties involved, and the objective of the contract is to help the policy holder through bad times. Profit earnings is not the main goal, while sharing any profits generated incidentally is acceptable.

The origin of Islamic insurance started before the era of the Holy Prophet Muhammad (S.A.W) which is based on “Aqilah” mutual co-operation. Later such insurance transaction was steadily practiced and was even made mandatory in some cases during the period of the second Caliph, Saydina Omar (R. A .A). During the period of 14th to 17th century a Sufi Order of the Kazeeruniyya was very active especially in port cities in Malabar and in China. This order served as a kind of marine travel insurance company.

In 19th century, a Hanafi lawyer Ibn Abidin (1784 -1836) was the first Islamic scholar who came up with the meaning, concept and legal entity of insurance contract. He was also the first person, who repeated the word insurance in the context of a legal constitution, and not in a customary practice (Klingmuller, 1969). In 1906, Muhammad Baqit Mufti of Egypt approved the idea of insurance which was explained by Ibn Abidin.

In the period of twentieth century, a well-known Islamic jurist, Muhammad Abduh issued two ‘fatwas’ mentioning that an insurance transaction is like the transaction of ‘al-mudaraba’ financing technique, while the other was that a transaction which is similar to endowment or life insurance are legal.

To consider insurance as Islamic mode of risk sharing efforts were made in late 1970s. The first Islamic insurance company, known simply as the Islamic Insurance Co. Ltd, was established in Sudan in 1979. This company was able to distribute profits to its shareholders at the rate of 5% in 1979, 8% in 1980 and 10% in 1981.

Following the success of the insurance company in Sudan, other Islamic insurance (takaful) companies were established in Islamic and in non-Islamic countries. In Pakistan first Islamic insurance company was established in 2004 and now there are three Islamic insurance companies working.

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