Its answer is very simple. It means Islamic insurance. Are you aware what is insurance. It is actually a financial coverage of your risk of losses in future. It may relate to life, property, health or business. In crude words insurance is a deal between insurer and its client to compensate a fixed percentage of any loss occurs to client during a specified period of time. To implement this deal client pays a fixed amount of money every month to insurer. But this involves usury because here a fixed percentage is promised regardless of how much insurer earns with monthly deposits of the clients. This is not allowed in Islam and it is Haram.
Takaful is Islamic alternative of insurance
Does it mean Muslims have just to believe in their fate and don’t make any arrangement to cover the risk of losses of any type in future? No, this is not the case. Muslims have a best alternate of it that is not only free from the curse of interest but it is more logical and does not keep you in the dark. This is called Islamic insurance and in technical terms it means Takaful.
How Takaful works?
Under the agreement of Takaful an Islamic insurer makes agreement with a group of clients separately for the coverage of the risk of their losses in future. He collects the money from them and invests in Halal business purely on profit and loss basis. With his expertise in investment he puts the collected money in those businesses where there are least chances of any loss. Secondly he spreads the money into several Halal businesses. This is called portfolio investment where the famous investment quote “don’t put all your eggs in one basket” is followed. In this way if some losses are occurred in one business they are compensated by huge profit in any other investment in other business.
How Takaful offsets losses
Under the agreement of Takaful if a client suffers losses he just submit his claims to Islamic insurer who already earned a sizeable amount with the monthly premium submitted by the group of clients separately. So a small chunk from the earned money he paid to the losing clients as compensation. In this entire deal there is no involvement of interest either the promise of compensation is in fixed term – it is a portion of the total amount earned by the Islamic insurer – or in onward investment into Halal business by him that is also done purely on profit and loss basis.