When looking at the global landscape, you can’t help noticing a rising star on the horizon. While economies have seen downturns and the screws on financial organization revenues are tightening like never before, there is one element of the insurance sector that is not only seeing significant growth but also represents potential reminiscent of the California Gold Rush.

In North America, having insurance is part of everyday life. Buy a car, get an auto insurance policy. Buy a home, get a homeowners policy. But for those who practice the Muslim faith, insurance is not so simple—they must find insurance that fits within an Islamic framework. In other words, it must comply with Shari’ah, the body of Islamic religious law. It is unlawful for Muslims to participate in conventional insurance due to several key components: interest which includes speculation and possible usury, and uncertainty, which is akin to gambling and includes unacceptable risks.

Takaful, the Islamic alternative for insurance coverage, eliminates each of these concerns since it is based on the concept of mutual indemnification. The basic elements of takaful insurance include mutual guarantee, fund ownership, lack of uncertainty, and Shari’ah-compliant management and investment—participants are essentially both insurer and insured.

Similar to cooperative insurance, members (Muslim or otherwise) contribute to a pool of funds which are used to indemnify participants who suffer a loss. At the end of the year, shortfalls are covered with interest free loans by the company and paid back by policyholder donations, or premiums. When there are surplus funds, they are distributed back to policyholders.

Not a New Concept
While largely an unfamiliar term in much of the U.S. and Canadian markets, takaful is not a new concept. In Takaful Islamic Insurance: Concepts and Regulatory Issues, the author notes that the first modern takaful insurance came about in 1979 as a Sudanese Shari’ah scholar attempted to solve a juristic problem, “How may the Shari’ah prohibition of trading in insurance (and in indemnities and guarantees more generally) be overcome?” In answer to the question, the world’s first takaful company was created by the Faisal Islamic Bank of Sudan, followed that year by the Arab Islamic Insurance Company in Dubai. In 1984 the Malaysian Takaful Act went into effect, and Takaful Malaysia was established.

Since then, takaful has seen much of its growth in countries with high Muslim populations including Saudi Arabia, Bahrain, Pakistan and Indonesia. Though currently underpenetrated, few disagree as to the potential market share that exists, even in countries with a lower percentage of Muslim citizens such as the United States.