Insurance vs Takaful

Apr 29, 2010 by admin

Part 1:

Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. The distinction between the conventional insurance and Takaful business is more visible with respect to investment of funds.  While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-Haram, Takaful companies undertake only Shariah (Halal) compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreement.  Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.