Article: Takaful vs Islamic Insurance


Takaful vs Islamic Insurance

Islamic Insurance

The Accounting and Auditing Organization for Islamic Financial Institutions, in Shari’ah Standard No. 26 on insurance, adopted the term “Islamic insurance” for insurance which complies with the provisions of Shari’ah. Professor Dr. Hussein Hamed Hassan addressed this when he stated that “The writers of Islamic insurance have become accustomed to calling insurance with provisions consistent with Islamic law as Cooperative, Reciprocal and Takaful Insurance

Terms of Islamic Insurance

this designation means that the most important principles which can be uniquely ascribed to Islamic insurance is mutual cooperation and solidarity.” In the West, cooperative or reciprocal insurance models abound, however, they are not necessarily Islamic because while there are similarities, they differ to some degree from the formula of Islamic insurance. We, therefore, prefer to call insurance consistent with the provisions of Islamic law as “Islamic insurance” and then mention the different types that fall under this type of insurance. Cooperation and solidarity are paramount foundations of Islamic insurance, however, they are not the only ones, moreover, cooperation in the view of Islamic law has specificities, under shari’ah requirements which state that insurance is not Islamic unless certain controls and conditions are specifically present. In any case, the word Islamic can be added to the terms “cooperative” or “solidarity” insurance to express this meaning, but this would not necessarily make it Islamic insurance. Insurance on things is subject to the rule of compensation for the actual damage that befalls the participants within the limits of the amount of insurance and the premium is determined accordingly, however, in ensuring persons this rule does not apply.



The term Takaful is considered relatively newer; it became popular after the Takaful symposium held in Khartoum in 1995. Some contemporary scholars believe that Takaful insurance is similar in meaning to both ”cooperative insurance” and ”Islamic insurance”. On this matter, Prof. Dr. Abdul Sattar Abu Ghuddah stated that “The ruling on obtaining an insurance policy differs between the insurance being Islamic (cooperative) and based on the mutual donation between policyholders (takaful) and the merging of the two attributes of the insured and the insurer in them, so that insurance is Islamic.” He also stated that “Islamic insurance or takaful is different in its basis and its adaptation from conventional insurance” and that “Islamic insurance or Takaful is a donation by the trustee himself ” Prof. Dr. Abdul Hamid Al-Baali further observed that “ The cooperative insurance system is based in its essence on the donation contract”, Prof. Ali Al-Qarah Daghi, in his research, titled “ The Applied Aspect of Islamic Insurance (Takaful),” stated that “Islamic insurance is based on the principle of cooperation and donation, without a doubt, the cooperative insurance that we mentioned, is part of it, and cooperative insurance can be considered Islamic if it is devoid of usury and any other Islamic offenses. ”


The Preferred Term

The two terms used to describe Islamic insurance remain relevant because they have been used in the industry in different jurisdictions, however, the term Takaful has increasingly become an important connotation and terminology used in Islamic finance to indicate Islamic insurance. Takaful has become the popular term in the industry used to distinguish Islamic insurance from conventional insurance which is similar to the case of bonds where the market started by using the term Islamic bonds to connote the Islamic context, but later “Sukuk” became the popular term as the unique terminology distinguishing it from the conventional bond. Despite the permissibility to use the term ”Islamic insurance” as used by AAOIFI, it remains preferable and better to use the term “Takaful” in the market, as the preferred terminology used to describe Islamic Insurance, a distinguishing term that makes Takaful, different and unique in form and substance.

Author: Assoc. Prof. Dr. Ahcene Lahsasna