INSURANCE is a risk-transferring arrangement between two parties one party agrees, in exchange for a fee or premium, to indemnify the other against a specified loss.

It is a device by which individuals and organisations shift the burden of a potential hazard to others. Many Muslim scholars are against conventional insurance as they see elements of maisir, gharar and riba in it. According to them, Islamic law allows insurance when it is undertaken in the form of takaful, which is an arrangement based on the principles of cooperation, shared responsibility and reciprocal indemnification. It is not a transaction in which one party buys protection from the other.

Takaful is an agreement by a group of people to shield each other from a specified potential loss or damage through the setting up of a defined pool of money. Any member of the group who suffers such a loss is compensated in the form of monetary help from the common fund. Also, money from the common fund can be invested in shariah-approved avenues. This is one of the main differences between takaful and conventional insurance. This way income can be generated resulting in the growth of the fund.

It must be mentioned that takaful, as it is based on the notions of mutual help and social solidarity, is originally seen as a non-profit activity. However, there is no harm in undertaking it as a commercial venture. There are different models of takaful in vogue. These include tabarru- based takaful, mudaraba-based takaful and wakala-based takaful.

Similarly, there is a wide range of takaful products available for individuals and organisations. For example, personal takaful, group takaful, motor takaful, fire takaful, workmen`s compensation takaful, public liability takaful, etc.

Just like there is reinsurance in the world of conventional insurance, there is re-takaful in the world of takaful. It involves another arrange

ment between a takaful operator and a larger operator where the former is financially incapable of compensating for all possible losses out of his/her own resources.

The modern takaful industry started in Sudan in 1979 with the establishment of The Islamic Insurance Company. It was followed by Saudi Arabia where The Islamic-Arab Insurance Company was set up in the same year. Today, there are takaful operators in more than twenty countries.

In 2002, the global takaful market was estimated at $2.1 billion of premiums. It is estimated to increase to premiums of $12.5 billion by 2015. In fact, despite the global financial turmoil, the Middle Eastern insurance market is expanding. In 2006, as reported by Swiss Re, the market generated $6.9 billion in premium income. And, according to Standard & Poor`s, the United Arab Emirates and Saudi Arabia are showing the fastest growth, i.e., 20-25 per cent per annum.

The amazing growth in takaful has convinced some of the big conventional insurance and reinsurance providers - AIG, Allianz, Swiss Re, Munich Re, Hannover Re, etc - to start takaful and re-takaful operations. There are over $1,000 billion worth of infrastructure projects planned in the Gulf over the next decade. Majority of these projects will be seeking shariah-compliant funding. This also means a huge need for Shariah-compliant insurance and reinsurance.

Also, there is a potential for takaful in countries and regions having Muslim minorities. For instance, there are about 20 million Muslims in Europe. Offering takaful to them would be a substantial market in itself. However, it must be mentioned that it would be wrong to consider takaful operations as a mature industry just yet. It is still evolving.

For instance, there is no uniform set of rules governing the various procedures, products and structures. Consequently, there is often a conflict regarding different practices. The most obvious example is the difference between Malaysia and the GCC. The Malaysian scholars give a more liberal interpretation to Islamic provisions which is not favoured by scholars in the Gulf. Also, there is a shortage of professionals equally qualified in conventional insurance and in shariah.

To summarise, while the Quran and the Sunnah enjoin the believers to accept any misfortune that befalls them as the will of God, Islam also strongly instructs Muslims to take all possible measures to keep themselves safe from unfortunate events. Takaful reduces the risk of loss suffered in adverse circumstances.

The writer is a graduate of Harvard Law School, specialising in Islamic finance. syed_asad@post.harvard.edu