Takaful - The Mudharabah Model (profit-sharing)

The Mudharabah Model (profit-sharing)

According to this principle the al-Mudharib (takaful operator) accepts payment of the takaful installments or takaful contributions (premiums, known as ra's-ul-mal) from investors or providers of capital or funds (takaful participants), acting as sahib-ul-mal. The contract specifies how the profits (or surplus) from the operations of the takaful is to be shared in accordance with the principle of al-mudharabah – between the participants (as providers of capital) and the takaful operator. The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30 and so forth, as mutually agreed between the contracting parties.

In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru ("to donate, contribute, or give away") is incorporated. Relating to this concept, a participant agrees to relinquish (as tabarru) a certain proportion of his takaful installments (or contributions) that he agrees or undertakes to pay, should any of his fellow participants suffer a defined loss. This agreement enables him to fulfill his obligation of mutual help and joint guarantee.

In essence, tabarru enables participants to perform their deeds in assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit (or surplus) that may emerge from the operations of a takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care, whilst striving prudently to ensure the funds are sufficiently protected against over-exposure. Therefore, the provision of insurance coverage in conformity with Shariah is based on the Islamic principles of al-takaful and al-mudharabah.

Al-mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of a takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.