Takaful

Takaful and Conventional Insurance: Differences and Conflicts in IFRS application

Takaful and Conventional Insurance: Differences and Conflicts in IFRS application

Introduction

Modern trade and business rests on many foundations. The significance of insurance as the basis of modern business practice can hardly be exaggerated as it dilutes the risks involved in the business operations. As Muslims enter the competitive trade arena, the conventional insurance practices potentially threaten the shariah compliance. Thus an alternate system called 'Takaful' came to forefront as a consensus Muslims' insurance counterpart. However, the current IFRS standards do not account for many of the issues in recording the Takaful operations.

Takaful Insurance

The principles of insurance came under the scanner of the Muslim scholars in the 19th century. This was when a Hanafi Jurist Syed Ibn Abdin (1784-1836 A.D.) was contacted by some Muslim merchants to seek advice on the principles of the Marine insurance (Farooq et al 54-55). He was to decide whether the principles of marine insurance followed the rules of Shariah. He concluded “I see that it is not permitted to any merchant to get indemnity for his damaged property against the payment of a certain sum of money known as insurance premium; because this is a commitment for what should not be committed to.” (Shahzad, n.d.). This was the start of the Muslim revolt against the conventional practices of insurance. This continued for many years even after the death of Hanafi. In 1976, a conference was held in Mecca between the Islamic Economists and Jurists. They concluded:

“The conference sees that the commercial insurance which is practised by the commercial insurance companies in this era does not conform to the shariah principle of cooperation and solidarity because it does not fulfill the shariah conditions which would make it valid and acceptable”. (Shahzad, n.d.)

The conference paved the way for the development of an insurance that would operate on the principles of Shariah. The new system would be free of Riba (interest bearing instruments). Some of the economists from the conference accepted the principles of conventional insurance with slight modifications to suit the rules of Shariah. Others refused it completely. The major reasons for the objections of the conventional insurance are Gharar (Uncertainty); Mainsir (Gambling); and Riba (Usury).

There was, thus, a need on part of Muslims to develop an alternate insurance system that would comply with the principles of Shariah. Muslims jurists and economists built a consensus in this regard and developed what is called Takaful, or Islamic insurance. Takaful principles are based on “aquila” (then practised by the Mecca and Medina merchants), reflecting the system of cooperative insurance that took care of the losses of anyone in the group. This system also entailed in it the element of Tabarru, a donation or gift implying the idea that “Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims.

According to Shahzad, the objective of Takaful is to pay a defined loss from a ...