How takaful (Islamic insurance) works: tabarru', wakala and mudarabah models

Insurance is a system that provides financial protection when an unexpected loss occurs (illness, accident, property damage). Many Islamic scholars regard conventional commercial insurance as problematic because it contains elements of riba (interest), gharar (excessive uncertainty) and maysir (gambling-like trading of risk). Takaful is an alternative system built to address these objections, based on the principle of mutual assistance (ta'awun).

What takaful is

The word "takaful" derives from the Arabic root "kafala" (to guarantee, to look after one another). In takaful, participants contribute to a common fund; this contribution is not a purchase but is given as tabarru' — a donation made with the intention of mutual help. If one participant suffers a covered loss, they are compensated from the common fund. Risk is thus not "sold" to an insurer but shared among the participants.

Difference from conventional insurance

The core difference lies in how money flows. In conventional insurance the company assumes the risk and keeps the underwriting profit. In takaful the fund remains the property of the participants: any surplus left after claims and expenses at year-end is — depending on the model — returned to participants or distributed in their favor. In addition, the takaful fund is invested only in Shariah-compliant assets (no interest, no prohibited industries).

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The operator and the main models

The entity that manages the fund is the takaful operator. It works on the basis of one of the following models: the Wakala (agency) model — the operator acts as an agent on behalf of participants for a pre-agreed management fee and has no claim on the underwriting surplus; the Mudarabah model — the operator invests the fund's assets and takes an agreed share of the investment profit; the Hybrid model — combines wakala (management fee) and mudarabah (share of investment profit). Some systems also use a Waqf (endowment) model.

History worldwide

The first modern takaful company was the Islamic Insurance Company of Sudan, established in 1979 by Faisal Islamic Bank. The same year, the first takaful operator in Dubai (UAE), later known as SALAMA, was founded. In Malaysia the Takaful Act was enacted in 1984, and in November of that year the country's first operator, Syarikat Takaful Malaysia Berhad, was incorporated. Industry standards are set by bodies such as AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and the IFSB (Islamic Financial Services Board).

Its size today

According to estimates, the global takaful industry's gross contributions stood at around USD 35 billion as of 2024; the largest markets are Saudi Arabia, Malaysia and the UAE. Takaful operations exist in more than 40 countries.

The situation in Uzbekistan

The first operator in the Uzbek market working on Shariah mutual principles was Uzaro Yordam, which began operating in 2017; a second operator, APEX Takaful, started in 2021. On 6 December 2024 in Tashkent, the UN Development Programme (UNDP) and the National Agency of Perspective Projects presented a baseline analytical report on the takaful system. The legal framework for Islamic finance, including takaful, is being developed step by step.

Conclusion

Takaful is an insurance model based not on buying risk but on the mutual assistance of participants. It seeks to be free of riba, gharar and maysir and leaves any surplus in the fund in favor of participants. When choosing a takaful product it is important to check which model it uses, how contributions are allocated, and whether it has a Shariah supervisory board.