The Islamic insurance system, known as Takaful, is a type of insurance that operates according to the rules of Islamic finance (muamalat) instead of the usual practices of Western banking, based on debt, credit, and interest.
Islamic finance refers to financial services based on certain interpretations of the Koran and of Muslim law. In all cases, the objective is the same as those of Western financial consumers. However, it is based on Shariah concepts regarding proper financial transactions. Shariah Islamic law has acquired a reputation in the West mostly for its particular approaches to women and family law. However, the same body of law also prescribes “proper” financial activity. Briefly, Islamic law prohibits the charging of riba, or excess profit not based in provision of any additional service or value.
This led, in part, to severe restrictions on the charging of interest. The medieval Muslim world was not alone in its restrictions on interest. Much of the Christian world also barred “usury,” while the Old Testament of the Bible also denounces the charging of interest. Modern Islamic banking finds ways around this concept. For instance, whereas a Western bank would process a mortgage by lending a homeowner money to buy her or his house and then expect it to be paid back with interest, an Islamic bank might buy the house outright and then sell it back to the homeowner via installment, with the total price ending up somewhat higher than the original purchase price.
The Shariah Islamic equivalent to insurance is takaful, or shared responsibility. Instead of being policy holders, people participating in a Takaful Islamic insurance system are partners. Together, they pool their money in a fund which pays out to members whenever they are in need. This is a cooperative rather than corporate insurance system: when there is a surplus after the money is collected and paid out, it is distributed back to the insurance holders through profit sharing. Some money can be held by the company and invested to yield further revenue. However, normally this must occur in accordance with the broader rules of Islamic finance, meaning it can only be invested with businesses that themselves meet Shariah requirements. This can be understood as similar in function (though not in values) to what is better known as ethical investing.
Currently, there are a growing number of Takaful insurance companies operating around the world, in several dozen countries. Most of their operations are, of course, concentrated in the Muslim world: the Middle East, southern Asia, Malyasia, and some countries in Africa, like Sudan.