RELIGION AND
HUMAN CAPITAL DEVELOPMENT
Essays in honour of ?rof. fast Anioia Quadri
Edited
Y. O. Imam 
R. W. Omotoye  
P. O. Abioje 
A. I. Ali-Agan
UNIVERSITY OF IBADAN LIBRARY
Published by 
Department of Religions 
University of Ilorin, Ilorin
First Published 2017
© Y.O . Imam, R. W. Omotoye, P. O. Abioje and A. I. Ali-Agan
ISBN 978-978-53135-3-6
All rights reserved. No part of this publication may be reproduced 
either by stored or in retrieval system or transmitted in any form or by 
any means electronic or mechanical without the written permission of 
the publishers/editors who are the copyright owners.
Printed by BWright Integrated Publishers Ltd 
© 0805 236 8340, 0813 485 5956
UNIVERSITY OF IBADAN LIBRARY
Contents
Dedication V
Acknowledgement vi
Foreword viii
Editors and Contributors X
Introduction xiii
SECTION ONE: AFRICAN TRADITIONAL RELIGION
Chapter 1: Traditional Religious Festivals and Modernity 
in Mobaland, Ekiti State, Nigeria 3
-  LereAdeyemi
Chapter 2: Iba: The Sine-qua-non in the Yoruba Indigenous 
Healthcare Practices 20
-  Oladele Caleb Orimodgunje
Chapter 3: African Traditional Religion, Christianity, 
Magic and Health in Yorubaland 29
-  Pius Oyeniran Abioje
SECTION TWO: ARABIC
Chapter 4: Prepositional Reference in Cohesiveness of 
Textual Discourse: A Practical Study of 
Farewell Sermon 45
-  A. A. Abdussalam and M. A. Abdulraheem
Chapter 5: Arabic Syntactical Compendia in Nigeria: 
An Analytical Study of Selected Works 56
-  Kazeem Ibrahim
SECTION THREE: CHRISTIAN STUDIES
Chapter 6: The Contributions of Christianity to the 
Development of Western Education in 
Yorubaland, South-Western, Nigeria (1854-2015) 69
-  Rotimi Williams Omotoye
XIV
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Chapter 7: Come Let Us Reason Together: An Exegetical
Study of Isaiah 1:18-20 in the Context of Security 
Challenges in Nigeria 85
-  C.O. Ogunkunle
Chapter 8: Nehemiah’s Approach to Security Challenges
in Judah: Lessons for Nigerian Leaders 102
-  Jegede, O. Paul, Isaac J. Julius, and 
Adewusi Rahila
Chapter 9: An Exegetical Study Of John 9:6-7 in the Light
of ‘Syncretism’ in the Celestial Church of 
Christ (CCC) 116
-  J. Afolabi Ampitan
Chapter 10: The Christian Theological Basis for Poverty 
Alleviation 142
-  A. A. Olubitan
Chapter 11: Relevance of the “Eyco cipi” Sayings of Jesus
in John’s Gospel to the Contemporary Church 
in Nigeria 155
-  M. O. Oyetade
SECTION FOUR: GENDER STUDIES
Chapter 12: Equality of Genders is Progress For All 175
-  Oyeronke Olademo
SECTION FIVE: ISLAMIC STUDIES
Chapter 13: Religious Freedom for National Development
in a Pluralistic Age: The Nigerian Example 193
-  Rafiu Ibrahim Adebayo and 
Is-haq Olanrewaju Oloyede
Chapter 14: Utilizing Islamic Principles as a Paradigm in 
Combating Diseases for Sustainable 
Development in Nigeria 221
-  H. A. Abdulsalam
Chapter 15: Az-Zuhayli’s Conception of Ad-darurah as Contained
xv
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in His Commentary on Qur’an 2:173 and the 
Nigerian Experience 230
-  AbdulWahab Danladi Shittu
Chapter 16: Women and Scholarship: Brief Account of Key
Women Scholars of the Sokoto Caliphate in Nigeria 244
-  Sa ’adiya Omar
Chapter 17: Translating the Untranslatable: A Reflection
on Y.A. Quadri’s Al-Kur 'anu Alaponle 259
-  Abu-Bakr Imam Ali-Agan
Chapter 18: The Legacy of Shaykh Taju’l Adab in the
Development of Arabic and Islamic Learning 
in Yorubaland 280
-  Yusuf Adebola Bamigboye
Chapter 19: The Place of Spirituality in Islamic Economic
Paradigm 295
-  Khalid Ishola Bello
Chapter 20: An Appraisal of Sufi Tafslr (Interpretation of
the Qur’an) in Ilorin, Nigeria 309
-  Abdur-Razzaq Mustapha Balogurt Solagberu
Chapter 21: Implications of Ethno-Religious Conflicts and
Inter-Group Relations in Nigeria on National 
Development: A Panacea from Islam 332
“ cAbdus-Samfi Imam Arikewuyo
Chapter 22: Readings and Mis-Readings of the Divine Mind:
A Review of Yasir Anjola Quadri’s All in the
Name o f God 352
-  AbdulGafar Olawale Fahm and 
Mubarak Oladosu
Chapter 23: Understanding Insurance From Islamic Perspective 365
-  Muritala Kewuyemi Kareem
XVI
UNIVERSITY OF IBADAN LIBRARY
CHAPTER TWENTY-THREE
Understanding Insurance From 
Islamic Perspective
Muritala Kewuyemi Kareem
Abstract
Without insurance, the business world may not be sustainable 
since all businesses have their inherent risks and therefore, 
may not have capacity to accommodate them particularly in 
this ever changing global economy. Managing the risks then 
becomes imperative. It is against this backdrop that this paper 
examines how insurance and takaful (Islamic Insurance) can 
protect the public, insurance policy holders and consumers; 
and thus build a strong national takaful industry to foster 
economic development. From the historical perspective, the 
paper reviews the operation of insurance right from the pre- 
Islamic period. The main purpose of this paper is to address 
the compatibility and non-compatibility of insurance in 
relation to Islam through a comparison of insurance and 
takaful. By comparing the two, it is possible to evaluate the 
benefits of takaful over conventional insurance. From the 
theoretical analysis employed, we found that the concept of 
insurance does not contradict the dictates of Islam. However, 
some of the means and methods that are currently being used 
in the conventional insurance are not Shari'ah compliant. 
From the analysis of theoretical aspect, a Shari'ah compliant 
Takaful must be devoid of riba (interest), gharar (uncertainty) 
and cooperation in sins. The paper also shows that despite the 
long history of insurance, the attempt to introduce takaful in 
Nigeria has not gained enough ground for only a few 
conventional insurance companies such as African Alliance 
Insurance, Niger Insurance Pic and Cornerstone Insurance Pic 
have added takaful to their operations. No full-fledged takaful 
company is in existence. With Guidelines 2013, issued by the 
National Insurance Commision, many insurance companies
365
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366 Religion and Human Capital Developm ent
should be established to serve as backbones for emerging the 
Islamic finance in Nigeria.
Keywords: Insurance, Takaful, Cooperation, Islam, Ta ‘awwun.
Introduction
Insurance is as old as the human society. In natural economics, 
insurance is seen in the form of people helping one another or each 
other. For example, if  a person’s house is burnt or destroyed by 
rain, members o f the community help the person by building 
another one or repairing the old if  it is repairable. If such a thing 
should happen to the helper next time, the helped person would 
assist those who assisted him. This type o f insurance is still in 
operation in some parts o f Nigeria particularly in the researcher’s 
town. However, insurance in the modem sense was practised by 
Chinese and Babylonian traders in the 3rd and 2nd centuries B.C. 
respectively. A merchant paid his lender additional sum to cancel 
the loan if  the shipment was stolen. The additional sum is 
insurance. Health and life insurance was established by the Greeks 
and Romans in 600 A.D to cater for the families upon the death o f 
members. New forms o f insurance started emerging later. An 
example is building insurance, which was established by Nicholas 
Barboon in England after the first fire outbreak that burnt to ashes 
13,200 houses in 1666.1 What then is insurance? Insurance is an 
arrangement by which a company gives customers financial 
protection against loss or harm such as theft or illness in return for 
payment premium.2 This definition refers to a promise of 
reimbursing or indemnifying a person for loss that occurs under the 
terms o f agreement in exchange for premium or consideration 
received. A company that is selling insurance is an insurer while 
the person or the company that is buying the insurance is an 
insured.3 In relation to Islam, insurance is unique in the sense that 
it is a mutual cooperation between two or more parties with the 
aim o f providing a financial security for any member o f the group 
that suffers financial loss. It is also a shield against an unexpected 
risk. It must be mentioned that the way insurance is operated in the
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Understanding Insurance From Islamic Perspective 367
conventional economy is not Shari'ah compliant. Its operation 
need to be modified for it to be in line with the dictates o f Islam. 
To put it simply, Islamic insurance is a cooperative risk sharing 
that is operated in line with the dictates o f Islam as contained in the 
Qur’an and the Sunnah. Therefore, it is based on cooperation, 
solidarity and brotherhood.
From this vantage, the first section gives the historical 
overview o f the concept and practice o f insurance. How insurance 
can be re-organised in line with the dictates o f Islam is the point o f 
the discussion in the second section. Section three clarifies some 
basic terms related to insurance. This is followed by division o f 
takaful and its operation. The last parts present the differences 
between insurance and takaful, and then conclusion and a few 
recommendations.
Historical Overview of the Concept and Practice of Insurance
Before the time o f the Prophet (S.A.W.), insurance had been 
practised. During the pre-Islamic period (Jahiliyyah period), if  a 
member o f a tribe was killed either mistakenly or negligently by a 
member o f another tribe, the relative o f the killer would pay the 
family o f the deceased person an amount o f blood money as a 
compensation. The family o f the killer was referred to as “Aqila or 
aSaba (paternal relatives o f the killer).4 Every member o f the later 
family would contribute money for the purpose o f compensating 
the heirs o f the killed for loss o f life o f their member.5 This is a 
form of financial protection or insurance for the heir o f the killed 
and it is called Al-Aqila form of insurance.
However, with the introduction o f Islamic practices as a way of 
life, the Prophet o f Islam (S.A.W.) directed the paternal relatives o f 
one woman from Huzayl family who killed another woman 
mistakenly to pay blood money called diyah (ransom) to the heirs 
o f the killed. This is another form of financial protection or 
insurance to take care o f the heirs after the loss o f their member. 
Diyah (ransom) is another form o f insurance, which Prophet 
Muhammad practised.7 This was paid by paternal relatives o f the 
victim to rescue the life o f the prisoner o f war by an enemy so that 
he can be freed by the enemy.8 The two principles were applied to
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368 Religion and Hum an Capita l Developm ent
some families such as BanuNajjar and BanuHarith in Madinah. 
After the Prophet’s demise, his companions also upheld the 
doctrink o f insurance. For instance, Umar, the second caliph 
instructed his governors to open a Diwan of Mujjahideen. Those 
people whose names were in the diwan would contribute the blood 
money to a pool that the compensation would be paid to the heirs 
o f a killed person if  one o f them should kill another person either 
mistakenly or negligently.
IbnAbidin, a Hanafi Lawyer, was the first Islamic scholar to 
give the meaning, concept and legal entity o f insurance contract 
based on Divine principles if  it is free from element o f riba 
(interest) during the 19th century;9 his discussion gave an impetus 
to the issue o f insurance, which was later accepted by many 
Muslims. Mohammad Abdul, a reformer also contributed to the 
development o f Islamic form o f insurance in the twentieth century 
by considering it legal for Muslims. Many Islamic insurance 
companies have been emerging since that time. However, that 
were formalized in the twentieth century started in 1979 in Sudan 
and Saudi Arabia. Many countries have joined the trail by 
establishing windows o f Islamic insurance companies or full- 
fledged insurance companies.
In Nigeria, the history o f conventional insurance can be traced 
to the European merchants when they faced the risks of 
transporting their cash crops to Europe. Royal Exchange 
Assurance Agency introduced by African and East Trade 
companies was the first to be established in Nigeria. Non- 
indigenous insurance dominated the industry in Nigeria. After the 
set up o f the Insurance Company Act o f 1961, a large number of 
insurance companies were indigenously owned. At a time, the 
number o f insurance companies was 110 (1990) but later reduced 
as a result o f financial system reforms o f 2004. Among all these 
companies, none is a full-fledged Islamic insurance company. It 
was in 2003, that African Alliance Insurance Company introduced 
Takaful into its operations. Later, Niger Insurance Pic and 
Cornerstone Insurance Pic added takaful to their operations.10
The business o f insurance in the conventional setting can be 
broadly classified into Life and General Insurance. General
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Understanding Insurance From Islamic Perspective 369
Insurance business is also referred to as Non-Life Insurance 
Business. It provides protection against losses, which may result 
from occurrence o f specified events within specified periods. The 
risks normally insured against include accidents, property damage, 
fire, flood, work-related injury, disability, business interruption, 
etc. In this type o f insurance, the insured pays an amount called 
premium to the insurer in consideration for indemnity against 
specified losses that the insurer has assumed to make good.11 It is 
difficult, if  not impossible, to cover all the known types o f general 
insurance. Some of them are auto insurance, home insurance and 
disability insurance. Life Assurance is the benefits that are paid to 
the policy holder when he attains a specified age, or when an event 
occurs. It may also be paid to the policy holder’s family after his 
death.
Takaful (Islamic insurance)
A number o f Muslim jurists believe that insurance is un-Islamic as 
it involves uncertainty (gharar) as regards the payment of 
insurance amount.12 This is because the seller does not know what 
he has sold and the buyer does not know what he has bought. 
Getting the amount o f compensation is not sure because it is based 
on the occurrence o f an unknown event. If one takes car insurance, 
he pays premium regularly. If the car does not involve in any 
accident, all the premiums are forfeited. The insurer does not pay 
back or refund the money. However, if  there is an accident, the 
insurer may pay more than the premium or less than the premium 
paid. This shows that the business is a business o f uncertainty 
{gharar). The time o f payment is based on the occurrence o f an 
unknown event.
For some people, insurance takers buy peace o f mind. This is 
because if  something happens to them they are compensated and 
restored to their original level. If  nothing happens, they are 
happier. However, this view is not correct.This is because it is not 
peace o f mind that the buyer o f the policy buys. He buys the 
amount o f insurance. It is only Allah that can provide tranquility. 
Insurance is likened by some people to gambling, wagering 
contract, etc. In life insurance, it is not possible to know the
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370 Religion and Human Capital Developm ent
number o f installments to pay before one dies. In fact, some 
insurance companies invest the premiums collected in interest 
bearing securities. Therefore, insurance is condemned by many 
Islamic jurists. However, there is the need to help one another in 
case anyone incurs loss in his business. There is also the need to 
lessen the seriousness o f the consequences o f the death o f a bread 
winner in a family. That brings about the issue o f family takaful. 
Insurance and takaful differ in their operations from each other. 
This will be taken care o f subsequently.
Takaful and Ta‘awwun (Mutual Guarantee and Mutual 
Cooperation)
Qiyamuhu binafsih is one o f the attributes o f Allah mentioned in 
Ad-DurusulAwaliyyah. It means Allah is self-sufficient. He does 
not rely on anybody. He relies on Himself. The implication o f this 
is that it is only Allah that is self-sufficient. He does not need 
anybody but everybody needs Him. This brought the idea o f 
co-operation among the creatures: ants, human beings, animals, 
etc. The Quran also emphasises the issue o f co-operation when it 
says: “And help you one another in al-birr and at-taqwa ... (virtue 
and righteousness) (Q.5:2)”. There are many ways by which co­
operation can be done. Some o f them are through trade, takaful 
(Islamic insurance), charity, donation, etc. In fact, Ibn Khaldun 
refers to trade itself as a form o f cooperation. He said, “Man 
cannot survive as an individual in isolation, by his very nature, he 
needs cooperation to get what he requires. This cooperation 
inevitably involves first quid proquo {mu ’awwadah), then sharing 
and other forms”.13
The equivalent o f the western notion o f insurance is takaful 
(Islamic insurance) because it is in line with the sharl'ah. Takaful 
or Mutual guarantee is an agreement among a group o f people 
called participants to collectively intervene; should any o f them 
suffer a catastrophe or disaster, he would receive certain sum of 
money to meet his loss or damage.14 The word takaful is derived 
from the Arabic root kafala, which means to guarantee.15 Takaful is 
a verbal noun of a five-letter verb which is derived from a three- 
letter verb, kafala. The additions to the three letters are ta ’ and alif.
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Understanding Insurance From Islamic Perspective 371
These additions change the meaning from guarantee to mutual 
protection and joint guarantee. The implication is that the 
participants contribute to a common purse with the aim o f using 
the funds to assist any member who suffers loss or peril.
The Quran (Q.5:2) and sayings o f the Prophet such as: “Verily, 
it is better for you to leave your offspring wealthy than to leave 
them poor asking others for help ...”16; “Whosoever removes a 
worldly hardship from a believer, Allah will remove from him one 
o f the hardships o f the hereafter...17 and “Tie the camel first, then, 
put your trust to the will o f Allah”18 point to the permissibility o f 
takaful. They imply a strategy to mitigate or reduce loss or risk. 
The participants must fear Allah and be ready to assist others 
willingly through tabarru ’ (charity). They should be conscious o f 
the well-being o f the people in their community as opposed to 
profit maximization (i.e. profit maximization should not be the sole 
aim o f doing business). This is because if  there is a problem or a 
catastrophe in a place, in one way or the other, others will be 
affected if  the situation is not put under proper control through 
takaful. Whenever a takaful is to be put in place, mutuality and 
cooperation, payments made with the intention o f tabarru1, 
avoidance o f gharar, maisir and riba, constitution o f takaful fund 
and SharVah Supervisory Board, joint guarantee and investing the 
funds in a Shari‘ah compliant products must be very seriously 
taken into consideration. Otherwise, all the affairs o f a takaful, 
which do not consider the above-mentioned elements, will render 
such a takaful business null and void.
Re-organisation of Insurance in Line with the SharVah
In insurance, there are two main parties. They are Dhamin {takaful 
operator) and M ua’mmanAlayh {takaful participant). Dhamin is 
one who indemnifies a participant o f takaful against unexpected 
losses. The operator receives contributions from the participants. 
Takaful operator is made to register under the act o f  insurance but 
its business must be SharVah compliant. Individuals, companies or 
societies should be allowed to carry out a takaful operation. They 
must have contractual capacity as in the commercial contracts 
called ‘uqud. Such contracting capacity entails puberty, sound
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372 Religion and Hum an Capita l Developm ent
mind, etc. Junun (insanity or mental derangement), Atah (partial 
insanity), nisyan (forgetfulness), safah (prodigality, weakness o f 
intellect) taflis (bankruptcy) are some o f those things that can 
render capacity o f contracting parties null and void. The operator 
o f takaful must be a Muslim. This is because Muslims are enjoined 
to seek help o f believers rather than non-believers particularly in 
the ordinary every day’s affairs o f business. The Qur’an says:
Let not the believers take for friends or helpers unbelievers 
rather than believers, if any does that, in nothing will there be 
help from Allah except by way of precaution, that you may 
guard yourselves from them (Q 3:28). Yea, to those who take 
for friends unbelievers rather than believers. Is it honour they 
seek among them? Nay all honour is with Allah (Q 4 :139). O 
you who believe! Take not for friends’ unbelievers rather than 
believers. Do you wish to offer Allah an open proof against 
yourselves? (Q 4:144)
The above-mentioned injunctions are to give Muslims mutual 
co-operation because they share the same faith. In addition, being 
an operator, he will have dominating power over the entire policy, 
i.e. articles o f association that will guide the operations o f the 
business. Therefore, he will be able to organize the business in a 
S h a n ‘ah way. A non-Muslim operator may not believe in the 
Quran guidelines for the running o f takaful and thus he may depart 
from the SharVah principles. The objective o f Shan ah may be 
defeated, If  a non-Muslim can follow totally the teachings o f Islam 
on insurance, he may be allowed to operate takaful. However, a 
non-Muslim may be a policy holder as he is not in charge o f 
decision-making. He is only benefiting from takaful business. He 
must be helped if  he seeks assistance. Takaful can be registered 
under any law provided all its activities are to be SharVah 
compliant in principles and objectives. Takaful operation must be 
registered before it starts its business. There should be rules and 
regulations that will guide its operations. The operators will not be 
able to deceive or mismanage the funds as they are being 
monitored right from the beginning. The Prophet forbade najash 
(dishonesty) in trade. There must be a SharVah Supervisory
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Understanding Insurance From Islamic Perspective 373
Council to advise an operator on the operations o f his takdful 
business so as to conform to SharVah principles.
An operator may be stopped or a potential one may not be 
given license to operate if  it is sure that his aims are not in line 
with the Shari‘ah. If  he fails to start business within a stipulated 
time (to be decided by the National Insurance Commission- 
NAICOM) after he has been given license, the license may be 
withdrawn. Its license may also be withdrawn if  the operator is 
doing one or more o f the following: if  he is carrying on his 
business in a way that is against SharVah and detrimental to the 
interest o f his participants; if  it is unable to meet its obligations as 
at when due; If  he has provided false or inaccurate information, or 
has concealed material facts in its application for registration; if  the 
operator is going or has gone against the Shari‘ah or the insurance 
Act relevant to the takaful given by NAICOM, Central Bank of 
Nigeria (CBN) and other regulatory authorities; i f  the operator has 
failed to maintain a surplus o f assets over liabilities; if  the operator 
refuses to make good any deficiency when there is an impairment 
in its takdful fund, etc. An Islamic insurance operator may be given 
licence if  it has adequate assets that are required for the operation 
o f takdful.
Mua‘amman Alayh (Takdful Shareholders or Takdful 
Participant)
Takdful participants have to make regular contributions by way of 
premium so as to indemnify them when their subject-matter suffers 
a loss or impairments in order to restore them to their original 
form. Going by Q.5 verse 2, Takdful is for everybody irrespective 
o f age, relation, sex, religion, etc. However, an operator must be 
cautious when he is accepting a responsibility. He needs to verify 
each applicant in order to make sure that he is not a thief, a 
crooked person, etc. In fact, all the rules o f contracting capacity 
explained must be taken into consideration when a participant is to 
be considered.
Whatever contributions received by the operator from the 
participant are invested in SharVah compliant products such as 
mudarabah, musharakah, ijarah, etc. Participants in takdful are
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374 Religion and Hum an Capita l Developm ent
made to enter into contract o f donation called tabarru and contract 
o f mudarabah, or musharakah or ijarah, etc.
Divisions of Takaful
In the conventional setting, insurance is categorised into two main 
divisions: general insurance and life insurance. However, in an 
Islamic environment, takaful is divided into general takaful and 
family takaful. Family takaful replaces life insurance. Family 
takaful is a takaful that provides financial assistance to the 
participants and/or their family or relative in case o f their death, 
misfortunes, disability, etc. The purpose o f this class o f  takaful is 
to lessen the negative consequences in the event o f  death or 
misfortune upon the bread winner o f a family. It is used to cater for 
hospital bill o f a participant or his heirs; to cover funeral expenses 
o f a participant and his immediate family members; to finance the 
education o f participants’ children; to perform religious duties such 
as Hajj, Umrah, etc. Takaful participants are required to pay 
regular installmental payments for a defined number o f years. The 
contributions are divided into two. One is credited to the 
participants’ investment account and the other part is credited to 
the participants’ risk account. The other portion o f the 
contributions is credited to participants’ Risk Account. The 
contributions in the latter account are considered as tabarru ‘ which 
are used to mitigate the losses or damages suffered by the 
participants. It involves a longer term relationship between the 
participants and the Takaful operator. General takaful is a contract 
o f joint venture, which is based on a short-term basis say, a year. 
Participants provide mutual compensation in case o f a specified 
loss. This Takaful is taken to protect individuals, corporate bodies, 
groups (e.g. mosques), etc. that are participants against loss or 
disaster on their assets. There can be different forms o f general 
takaful such as motor takaful, fire takaful, burglary takaful, money 
takaful and a host o f others.
The Operations of Takaful
If  Takaful is operated as a commercial venture, it will involve a
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Understanding Insurance From Islamic Perspective 375
number o f people. Some expenses will, therefore, be incurred. 
When the give and take involve large number o f people, some 
coordination would be necessary. Such coordination has to be paid 
for. The coordinators may receive their salaries from a mutual 
insurance or a commercial insurance.Efficiency, transparency, etc. 
should guide the two forms o f insurance. There are many ways by 
which takaful can be organised. Some o f them are tabarm  ‘mode of 
takaful, mudarabah mode, wakalah mode, wakalah-waqf mode, 
etc. The operations o f these models are hereby discussed.
Tabarru TVIode of Takaful
As the name indicates, it is a donation from participants to the 
Takaful fund without expecting any returns. Those who conceive 
the idea o f floating this fund have it at the back of their mind to 
assist the less fortunate members o f their community and to 
mitigate the loss incurred by their members. Besides the 
promoters, others who join them as the policy holders cannot 
expect any returns from the use o f the funds. Both the promoters 
and the participants contribute to the purse, which is used to extend 
financial assistance to any member based on the defined losses. If 
the funds are not sufficient to cover the losses incurred by the 
members, they may give interest-free loan called qardhasan. The 
participants manage this fund if  they are not many. This model is 
only good for a small number o f people. In a situation where there 
are many participants, there is need for proper organisation and 
coordination. The coordinators have to abandon some other things 
for coordinating the Takaful. Therefore, the coordination has to be 
paid for if  it is to be effective, efficient and result-oriented. This 
brings about the issues o f other three models, which are organised 
in a large scale, and in a commercial way.
Mudarabah Mode of Takaful
There are two funds under this mode. Policy holders fund and 
shareholders’ fund. The former is invested by the takaful operator 
in SharVah compliant products. The operator assumes the position 
o f al-mudarib (an entrepreneur) and the takaful participants as
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376 Religion and Human Capital Developm ent
Rabbul-mal (capital provider). Based on the operation o f 
mudarabah, there will be a pre-agreed ratio o f sharing profit or 
loss. Based on the stated ratio, when the profit is made from the 
investment, it has to be shared accordingly. No one has right to 
change unilaterally the agreed sharing ratio as stated in the Takaful 
contract. It must be mentioned that the operator does not take any 
return as a manager o f Takaful business. However, for investing 
the Takaful funds under mudarabah agreement, he assumes the 
role o f a mudarib. Therefore, he is entitled to share in the profits 
generated from the investments. But if  there is a loss, it is the 
policy holders that bear the loss. The operator only loses his labour 
provided he is not negligent in the conduct o f Takaful business or 
does not go ultra vire. As it was said at the beginning, the two 
funds are combined together by the Takaful operator and he invests 
them. Whatever profits generated from the investments shall be 
shared between the two funds on a pro-rata basis.
However, all the expenses related to the investment (the 
general and administrative expenses) are charged to policy holders’ 
fund for determining the actual profits made. If  a member incurs a 
loss, he is assisted from the policy holders’ fund which has 
increased as a result o f added share o f profits. Whatever remains o f 
the policy holders’ fund is shared among them based on a pro-rata 
basis.
Wakalah Mode of Takaful
Takaful operator acts as an agent under wakalah mode. He is called 
the wa/dl, i.e. the agent o f the policy holders. The relationship is, 
therefore, a principal-agent one. Takaful operator is in a fiduciary 
capacity on behalf o f the participants in performing underwriting 
and managing the takaful funds, which are funded by and belong to 
the participants under the concept o f mutuality. All the rules o f 
wakalah apply here. The wa/dl invests the premiums paid by the 
policy holders in SharT'ah compliant products. He deducts all the 
expenses related to the investment from the policy holders’ funds 
because he is acting on their behalf. Whatever profits made from 
the investments are added to the policy holder’s funds. From the 
funds, the beneficiaries o f takaful funds are paid if  they incur
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Understanding Insurance From Islamic Perspective 377
losses and they make valid claims. Whatever remains o f the profits 
is paid to the policy holders. If  loss is incurred, they make up for 
the loss. The waldl is only entitled to a fee or remuneration. He is 
not to share in the profit. It is possible for a wakil to receive his 
remuneration based on performance to serve as an additional 
incentive for him.
Wakalah-Waqf Mode of Takaful
Literally, Waqf means to tie down and it also means endowment, 
etc. Endowment refers to money or property donated for the 
purpose o f education, religious philanthropy, science, etc. 
Property, money or any other asset can be used as waqf. Under this 
model, the operator establishes a benevolent fund. All shareholders 
who are interested in this fund contribute to it. The participants 
who seek takaful protection also donate into the fund. All the 
shareholders lose their ownership rights on the waqf. The Takaful 
operator administers the funds by investing the combined funds in 
Shari‘ah compliant products. Profits earned will be deposited into 
the waqf funds. There will be contingency reserve funds and 
technical reserves to cushion the effect o f potential losses that may 
arise from the investment. It is from the funds that the participants 
would be compensated for their losses based on the defined bases 
for financial assistance. If there is a surplus, it is shared between 
the members and the operators based on the agreed ratio as 
contained in the takaful contract. Another point is that since the 
shareholders have lost their ownership rights, profits earned would 
be ploughed back into the fund. Operational expenses incurred for 
running the activities o f the wakdlah-waqf model o f Takaful will 
be charged to the fund. It is clear from our explanations o f the 
modes that there are clear-cut differences between insurance and 
takaful. The table below gives a summary o f the major differences 
between the two.
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378 Religion and Hum an Capita l Developm ent
Table 1: The Differences between Insurance and Takaful
In su ran ce T akafu l
State and man-made law guide the The Qur’an and Hadith are some 
operation of insurance. of the sources of laws and 
regulation guiding Takaful.
It is based on man-made will. Islamic law of inheritance, Q.41 
guides the distribution of 
the family Takaful funds.
Premiums are paid. Contributions are collected from 
the participants in the form of 
tabarru'.
Premium are invested in any Investments in goods like alcohol 
product whether the goods or the and pork and services such as 
services are Islamic or non- media pornography and 
Islamic. prostitution must be avoided.
It is only the insurer that decides The takaful contract specifies how 
where and how to invest and where the contributions 
premiums. should be invested.
Premiums are invested in interest Premium should not be invested in 
bearing securities. interest bearing securities like 
treasury bill (Q.2:275).
The shareholders own the business Participants and operators own the 
of insurance. takaful.
Its motive is profit maximization It focuses on mutual help, 
for its shareholders. community welfare, solidarity and 
protection. It may not be a profit 
organization.
Profits are distributed based on the The takaful contract determines 
discretion of the board of how and when profit will be 
Directors. shared.
The insured man may choose The participant is only entitled to 
original cost or replacement cost. compensation only for repair or 
replacement.
Reserves and surplus if any belong Reserves and surplus may be 
to the shareholders if the insurance given to participants or donated to 
company is dissolved. a charity home if takaful is 
dissolved.
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Understanding Insurance From Islamic Perspective 379
Only company income tax is paid". Conventional tax and zakat are 
paid annually by takaful.
Only one contract is involved, i.e. A number of contracts are 
it is commutative. involved in takaful, i.e. it is non- 
commutative.
Insurance is the owner of the Takaful is not the owner of the 
premium. premium.
Only one relation is present in There are more than one relation 
insurance. at different stages in takaful.
Accounting is based on only one Accounting is based on many 
contract. contracts.
An insurer and an insured are Takaful involves at least three 
involved. parties: company, policy holder, 
and operator.
Surplus is for the insurance. No Surplus is given back to the 
surplus is given to the policy participants.
holders totally or partially.
Pool of insurance company is not Pool of takaful company is a 
a legal entity. separate legal entity.
Source: The Author 
Merits of Islamic Insurance
Takaful makes it possible to import goods from a far place because 
businessmen know that if  they should incur loss, it will be 
mitigated through it. Therefore, it makes available goods and 
services that can improve people’s standard o f living. Businesses 
are also set up in a crime-prone area, because o f the availability o f 
takaful to make up for the loss incurred by participants. Therefore, 
such areas will not be deprived of infrastructural facilities such as 
electricity and pipe-borne water and services o f professionals such 
as physicians, lawyers and accountants. This is because people will 
not be afraid o f establishing industries that will produce beneficial 
goods and firms that render valuable services for the good of 
mankind.
In insurance, the policy holder expects to get back an amount 
greater than what he invested. The excess is riba. If  policy holders 
agree to share profit made from investing their money in S h a n ‘ah
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380 Religion and Human Capital Developm ent
compliant products, then their investments are permissible and 
lawful. Islam supports cooperative insurance. A participant that 
incurs loss is assisted from a fund that is jointly funded by a group 
o f people with common interest to guarantee or protect each other 
from a certain defined misfortune by a way o f donation. The 
participant is given all his paid contributions together with his 
share o f profits realized from the investment if  loss does not occur. 
Takaful also follows the principle o f cooperation as contained in 
the earlier cited Quranic verse. It also brings equity to all parties 
involved as explained in the paper particularly under Mudarabah 
mode. Widows and orphans are provided for through takaful and 
inheritance. Takaful also involves risk sharing instead of 
transferring risks to another person
Conclusion
Insurance is not alien to Islam. As such, it is allowed with some 
restrictions and modifications. Contributions from takaful should 
not contain interest (riba) and should also not be invested in 
interest based investments such as conventional treasury bills, 
interest based loans, etc. We realized that takaful is quite different 
from insurance in the sense that it involves tabarru and other 
modes o f its operation such as Mudarabah. The issue o f gharar 
which appears in the conventional insurance does not apply to 
takaful. With Guidelines 2013, issued by National Insurance 
Commision, many insurance companies should be established to 
serve as backbones for emerging Islamic finance in Nigeria. 
Awareness should be created by NAICOM through organized 
lectures, workshops, training programmes, etc. Higher institutions 
should also include takaful as one o f the courses to be taught in 
their institutions. Introduction o f new products in line with the 
dictates o f Islam should be embarked upon by the operators.
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