3 steps...
1. Takaful works on the basis of an agreement made by the participants of the insurance scheme.
2. Each agrees that he or she is one of the insured as well as one of the insurers.
3. Each pays a premium to the scheme which is then invested by the scheme in an Islamically acceptable way.
A takaful company cannot for example invest in companies that deal in interest, alcohol, gambling or uncertainty. The profits made from the permitted investments are divided among the participants in the scheme. However, the participants also agree to give up a portion of their contributions in the event that a policyholder suffers financial loss or a catastrophe befalls him.
There are two models of takaful that can be adopted:
The Wakala model works on the concept that the operator of the company is paid a fee, which is deducted from the participant's contribution.
The Mudarabah model is where the operator is entitled to a fixed percentage of any investment profits or surplus. In this model, management or operating expenses cannot be charged to the takaful fund. Expenses are borne entirely by the operator from the shareholder fund.
Profit sharing under takaful is simple as any surpluses at the end of the period is shared between the participant and the takaful company. The operating expenses of the company are paid from the total income of the takaful, whereas management and other expenses are paid from the share of the profit of the takaful company. If the takaful company makes a 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 an interest-free loan that will be recovered from future surpluses.
