Takaful insurance: concept, history, development and future challenges

Abstract

Mutual help and guarantee have been the ordinary practice of tribal Arab custom even before the advent of Islam in Arabia. A similar but refined concept was reinforced by the Quran to be adopted by Muslims which was widely applied in the daily lives thereafter. When the Muslims extended their trade by sea to the Far East, the concept of mutual assistance became more prominent and organized to protect their ships, merchandise and even lives from all sorts of dangers and mishaps. The practice by these merchants to put aside a sum of money into a fund before setting sail to the Far East for trade to compensate for loss incurred by any of them became the most prominent practice that led to the birth of what is today known as marine insurance. To circumvent some of the Shari'ah non-compliant practices of mainstream insurance is the introduction of the concept of donating part of the participants' contribution which forms the special fund to compensate losses. From then on, the takaful operators started to emerge, first in Sudan and later in other parts of the Muslim world. Several models have been formulated, namely the Mudharabah, Modified Mudharabah, Wakala and Wakala-Waqf The success of the takaful companies around the world has also been strongly influenced by the recent upsurge in the petroleum price that has led to the unprecedented increase in sovereign and private wealth. The recent emergence of re-takaful companies adds up further to the rapid growth in takaful operators and funds. Despite the success stories, there are a number of serious challenges facing takaful and retakaful operators which are worth noting.