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Takaful Insurance

Checklist Description

This checklist describes takaful, a form of mutual insurance that is fully compliant with shariah principles.

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Takaful, an Arabic word meaning “guaranteeing each other,” is a form of mutual insurance that is fully compliant with shariah principles. Takaful works on the basis of members cooperating with and protecting each other, but it can also be used by investors seeking returns while adhering to the principles of Islamic law. Members of the takaful scheme pool their individual contributions together to create a pot of money which is then available to cover any subsequent loss or damage claims. Any surplus, after the costs of running the scheme, is then distributed between the takaful operator and members or investors on pre-agreed terms.

Conventional commercial insurance contravenes shariah law on multiple grounds, chiefly the banning of gambling (al-maisir), the charging of interest (riba) and attempting to profit from uncertainty (al-gharar). However, takaful insurance is founded on the principle of shared responsibility and has been practiced in one form or another for well over 1,000 years. As a mutual-style concept, takaful does not function on conventional profit-making lines, instead typically working on the basis of mudharabah or wakalah, or sometimes even a combination of the two. However, conventions and acceptable practices for takaful may vary widely between different countries. Today, takaful is most developed in Malaysia following the country’s introduction of legislation in 1983.

Under mudharabah, the takaful operator collects regular installments from the takaful members. In keeping with the mudharabah principle, a contract between members specifies how any surplus gathered by the collector after any payouts is to be distributed. The contract can specify whether each member’s contributions are purely to cover potential liabilities, or alternatively to include some element of investment. To ensure full shariah compliance, under the tabarru (contribution) principle, any payout is determined only after all members suffering a defined loss have been compensated. Under the wakalah model, takaful operators collect a pre-arranged fee in advance, in addition to a share in the profits from the investment element of the scheme. However, the wakalah takaful operator does not benefit from the insurance underwriting.

Variations on the above models include the waqf methodology, which can specify that a percentage of any surplus is to be retained by the scheme to help protect against any future loss. Or a share of any surplus may be donated to community or charity projects each year.

In response to the surge in demand for shariah-compliant finances services over recent years, both in traditional Muslim countries and Western nations, a number of new providers have emerged, including specialist takaful-only providers as well as companies offering takaful alongside a range of conventional insurance services.

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  • Takaful is flexible in its range of applications, covering residences, places of business, cars, and inventory, as well as accident and life cover.

  • It provides a form of financial protection for Muslims unable to access conventional insurance.

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  • While shunning conventional insurance schemes, some Muslims believe that even takaful is unnecessary, as it is the duty of all to help compensate others’ losses.

  • Some Muslims may be uncomfortable with the scope for takaful to be used for investment purposes on the basis that investors are effectively speculating that low accident payouts will generate a surplus or profit.

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Action Checklist

  • Potential takaful operators should consider how their own resources could be put to work to ensure some kind of true competitive advantage in takaful provision.

  • Takaful operators are likely to benefit from regular contact with shariah experts to ensure that the schemes remain compliant with Islamic law.

  • Providers should seek to address the unique challenges of governance of takaful schemes with the establishment of a supervisory board.

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Dos and Don’ts


  • Be prepared for some operating differences between principle-based takaful theorists and those employed by takaful providers to operate the schemes and deal with the processing of individual claims.

  • Understand that distinctions will arise between takaful schemes in different countries according to local attitudes and conventions.


  • Don’t regard takaful as some kind of niche market; given the suspicion with which some consumers regard conventional financial services companies, takaful could be attractive as a mutual-based protection and/or investment scheme for many consumers.

  • Don’t think that the growth potential in takaful is limited to Middle Eastern or South-East Asian countries, as the scope for development in Europe and US markets is considerable.

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Further reading


  • Archer, Simon, Rifaat Ahmed, Abdel Karim, and Volker Nienhaus. Takaful Islamic Insurance: Concepts and Regulatory Issues. Singapore: Wiley, 2009.
  • Jaffer, Sohail. Islamic Insurance: Trends, Opportunities and the Future of Takaful. London: Euromoney, 2007.


  • Thanasegaran, Haemala. “Growth of Islamic insurance (takaful) in Malaysia: A model for the region?” Singapore Journal of Legal Studies (July 2008): 143–164.


  • Gosrani, Neil, Kevin Willis, and Ritesh Maheshwari. “Takaful insurance has long-term viability and benefits from expected growth, but stiff competition persists.” Standard & Poor’s, July 13, 2010. Online at: [PDF].
  • Katsipis, Vasilis, and Yvette Essen. “Takaful poised for growth, but greater focus is required.” AM Best, July 11, 2011. Online at: [PDF].


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