Difference Between Takaful And Conventional Insurance

Basically, the basic idea of Takaful is similar to conventional insurance. Both are aims to provide protection to individuals or corporate bodies from occurrence of loss and hazards, which it is a mutual financial transaction to safeguard against unexpected risk. These two contracts have the common objective of reducing a financial burden arising from any disaster or accidental loss like fire, flood, or storm.
Takaful needs to be operated within Islamic principles which it must be Shariah compliance. Therefore, in conducting the business, all the transactions of Takaful must be free from the elements of riba, gharar, and maysir.
Even though Takaful and insurance have common objective of reducing a financial burden arising from any disaster
This refers to the interest factor present in the investment activities of conventional insurance companies. The policy loan in conventional life insurance is in fact a riba based transaction. Islam prohibits any investment activities that are interest based. Daud Bakar asserts that, Takaful differs from conventional insurance in the sense that the company is not the insurer insuring the participants. The persons participating in the scheme mutually insure one another and this is the very essence of the word Takaful in Arabic. The operational framework of conventional insurance is based on “risk assumption” but Takaful operate under mutual co-operation basis. It means that, Takaful is a scheme or a social program for the collection of funds for the aid of participants in contingent future. Furthermore, the conceptual difference between Takaful and conventional insurance is that the risk in Takaful is not exchanged by way of contribution payments made to operator, which means operator is not selling and participant is not buying any risk coverage. The operator in Takaful acts as fund manager. They will manage the fund contributes by the participants and therefore the operator is not undertaking risk. The risk is however, distributed among the participants who agreed to jointly assume the
The basic service offered by the conventional insurance to the community is the transfer of the indeterminate fortuitous economic losses associated with the stipulated risks in return for a pre-determined payment known as premium. Thus it has been said and recognized that through the mechanism of conventional insurance, the insured substitutes certainly for uncertainly
- In the case of conventional insurance the primary motivation is to earn profit from the insurance transactions for the shareholders
- The policy-holder in a conventional insurance company have no right to vote in the elections of the directors of the company or to see the annual accounts of the company - It is a co-operative institution based on the principles of contract for mutual co - operation (ta’awun).
- In Takaful which is based on the principle of mutuality member are insured and insurers themselves. All the losses are shared by the members themselves and as such to transfer of risk is