Chapter 5

Legal Issues in Takaful

Madzlan Mohamad Hussain


It is interesting to note that takaful (Islamic insurance) historically has been a well-established practice in the pre-Islamic era among Arab tribes and continued to expand especially among Muslim merchants in shipping and trading throughout the glorious period of Islamic civilisation.1 This is unlike the practice of “banking,” which is relatively unknown within Islamic civilization—forcing Islamic economists, product engineers, and other proponents of modern Islamic banking to grapple with various Shari'ah-compliant financial contracts which can be used to meet the banking needs of Muslims, and thus, basically developing the entire sector from scratch. Ironically, the development of takaful as a segment within the Islamic financial services industry itself has been much slower than the building up of the banking and capital market sectors. In addition to the general prohibition against receiving or paying riba (usury), as well as elements of gharar (dubious ambiguity) and maisir (excessive speculation replicating gambling), takaful also places considerable emphasis on the spirit of ta'awun (solidarity and mutual assistance) as well as tabarru' (donation or contribution). It is not by coincidence that takaful entities during the glorious period of Islamic civilization were set up as mutuals rather than proprietorship businesses.

Hence, while other types of Shari'ah-compliant financial contracts may have ...

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