Takaful vs. Conventional Insurance 141
- debt based (eg. bonds), as this violates theribaprinciple;
- have a guaranteed or minimum return on the investment, as this violates
the risk/reward sharing principle; or
- based onharampractices (eg. casinosand gambling companies).
With the recent growing interest in Islamic finance, there are, however,
innovative Shari’a-compliantinvestments, such as:
- Commodity murabaha – the Islamic equivalent of money market
instruments that are based on theunderlying value of commodities; and
- Sukuks– the Islamic equivalent of conventional bonds that are asset
based rather than debt based.
The investment decisions are, however, the same for takaful and
conventional assets, and involve consideration of the same questions. For
example, which investments will enable the business to match the cash
flows to the liability cash flows of the insurance/takafulbusiness? What are
the local regulatory restrictions?
The income from the investment of the policyholders fund is returned to
the policyholders fund after the deduction of any “mudarabafee". If the
takaful structure includes a mudaraba fee, this is returned to the
shareholders’ fund.
Conclusion
Takafulis not a new concept – it has been around for centuries.Takaful
business allows policyholders to enjoy the benefits of a mutual structure
within a shareholder wrapper.Takafulbusiness also has an explicit ethical
structure which can be marketed to both Muslims and non-Muslims.
Although both conventional andtakafulbusinesses generate profits for the
shareholders, intakafulbusiness the expenses paid to the shareholders are
explicitly transparent – in conventional insurance they are not necessarily
so.
The following table summarizes the main differences between both
systems.
