The term Takaful originates from Arabic verb ‘’Kafalah’’ which means ‘’to help one another’’ or ‘’mutual guarantee’’. Thus the word Takaful refers technically to shared responsibility, shared guarantee, collective assurance and mutual undertakings by a group. Takaful bears many similarities to co-operative or mutual insurance, but differs on the model of operation and on the rules governing investments and profit sharing.Takaful (or Islamic insurance) embraces the concepts of mutual protection and shared responsibility, which was seen in the practice of paying blood money (Aaqilah) under the Arab tribal custom.

Though the concept of Takaful has been in existence for decades in other parts of the world, Takaful Insurance of Africa (TIA) is the first licensed Takaful operator in the East and Central African region.TIA is pioneering this alternative concept of insurance in the region.

Takaful products are competitively priced, and are relatively cheaper than conventional products, given the additional value offered Takaful products, which cannot be matched by conventional insurance products.For example, when you consider only the factor of the ownership of the risk fund surplus at the end of the accounting period, it is easy to see how conventional insurance products are ultimately less competitive than Takaful products.

Takaful works on the basis of an agreement made by the Participants of the Takaful scheme. Each Member agrees that he or she is one of the insured by buying a policy, as well as one of the insurers. Each pays a premium to the scheme, which is both used to compensate claims, and also invested in approved instruments.
A Takaful company cannot, for example, invest in activities that deal in interest, alcohol, gambling or uncertainty. The profits made from the permitted investments are divided among the participants in the scheme.
There are two main models of Takaful that can be adopted, the Wakala Model and the Mudarabah Model. The Wakala Model works on the concept that the Takaful Operator is paid an agency fee, which is deducted from the participant’s contribution.

The Mudarabah Model is where the Takaful Operator is entitled to a fixed percentage of any investment profits or surplus made during year of operation. In this model, management or operating expenses cannot be charged to the risk fund. Expenses are borne entirely by the Takaful Operator from the shareholder fund.

Surplus refers to the excess of premiums over claims, plus investments return. Surplus sharing refers to act of distributing the excess made during the past accounting period among the participants of the risk fund or pool.

Profit sharing under Takaful Shirkah model is shared between the risk fund (the pool) and the takaful company based on Al-Mudharabah contract (profit sharing). The operating expenses of the company are paid from the total income of the profit, where the management and other expenses are paid from the share of the profit of the Takaful Company.If the there will be any loss, this is written off against the general reserve of the company. If the general reserve is insufficient, the loss is met by the shareholders general reserve, or from capital in the form of interest-free loan (Qard AL-Hassan) that will be recovered from future surpluses.

While the conventional insurance contract is one of transferring of risk from the insured to the insurer for a premium, that is, one of risk trading, the Takaful contract is based on the Islamic principle Tabaru, that is, a contract of self-insurance, or self-guaranteeing among Members of a group

Uncertainty can never be eliminated.It remains in the Takaful contract as well. However, since the Takaful contract comes under contract of Tabarru (donation), the uncertainty (gharar) is considered to be within tolerable limits under Shariah. Conventional Insurance being a contract of risk exchange contains “excessive gharar” and therefore becomes illegal.

The fundamental principle of insurance is not forbidden in Islam, rather it is encouraged. However, today most conventional insurance companies define insurance as, “the transfer of risk” from the insured to the insurance company. Consumers then pay the insurance company (the “premium”) for assuming the risk on their behalf. Such assumption of Total Risk Transfer in the contract introduces elements of interest, uncertainty and features of gambling that render the contract un-lawful.

The act of taking measures against possible dangers or consequences does not go against the teachings of Islam. As described in the Qur’an, Prophet Yusuf (Alaihis Salaam) ‘filled the grain silos from the surplus of seven years of good harvest as a protection to ensure the availability of continuous food during the seven lean years. However, Takaful differs from conventionally understood insurance cover.

First, in a conventional insurance scheme, the insured person sells his risk at a price to another party, thus introducing an element of “gharar” (uncertainty) in the contract. Under Shariah, a contract of uncertainty exists when the two parties do not know the nature of the counter-value that they are trading. A house may burn down, costing the insurer a large sum of money, or it may not burn down in which case the insured person has paid a premium and received nothing in return.
Second, conventional Insurers invest in ventures that involve interest or some form of activity, which goes against Shariah principles. Third, conventional insurance is not mutually beneficial, as certain individuals (shareholders, for example) benefit at the expense of others. In other words, commercial insurance companies exist to serve the interest of shareholders first, not policyholders.

Finally, the guiding principle behind commercial insurance is that it is based largely on commercial factors. Takaful, on the other hand, is guided by the principles of improved welfare for all, which aims to establish a social order based on universal brotherhood.