Mutual insurance systems such as takaful have existed in the Islamic world for centuries.

Conventional insurance relies on interest-based investments – which are forbidden in Islam – and is entirely rooted in un-Islamic, speculative investments. The insurance provider gambles on receiving more income from the premiums, the payments it receives, than it has to pay out.

Takaful does not aim to make a profit – its purpose is to ease the risk faced by contributors.

It is a co-operative system of reimbursement or repayment in case of loss. People and companies make small contributions into a mutual pool of funds, from which they are compensated.

The principles of takaful are:

  • members cooperate for their common good
  • member contributions are considered donations or gifts (hibah) to the fund (pool)
  • every member pays their contribution to help those who need assistance
  • losses are divided and liabilities spread according to the community pooling system
  • it does not gain advantage at the cost of others.

There are a number of models – and several variations – for implementing takaful according to Islamic social financial principles:

  • an endowment fund (waqf) uses irredeemable donations to compensate members of the takaful fund for their loss
  • in a commercial model, a fund is created with members’ voluntary contributions and compensates them in case of loss. An agency manages the fund and charges an up-front administrative fee paid from the contributions.

Growing demand for Islamic insurance over recent years, particularly in the Gulf Cooperation Countries and other areas of the Middle East, has seen a proliferation of new companies offering Islamic insurance products in these markets.

The majority of these firms are solely takaful operators, but conventional insurance companies have also created Islamic social finance compliant funds.