One of the exceptional benefits of Shariah-compliant investment is that it is based on the community of its participants. Simply put, the losses of the few are compensated by the contributions of many. However, some people might wonder what this type of insurance is, and to answer that, we’ve gathered the most essential details that you need to know about Shariah-compliant insurance policies.
What is Islamic Finance?
Islamic finance refers to the acceptable financial methods in Islam that do not include an interest rate and do not allow investing in any harmful activities such as lottery or gambling. One of those methods of Islamic financing is called “Takaful”. The most astonishing attribute of Shariah-compliant finance is that it is remarkably transparent. All fees, deductions, and commissions are explicitly clarified to all participating parties. Shariah funds are also kept in an account that is separate from the insurer’s capital funds account, which guarantees to clients that their donations will not be used to collect any interest fees by giving debts to the general public.
What is Islamic Takaful?
Takaful is a Shariah-compliant insurance alternative based on permissible Islamic financial methods. Takaful insurance options include life Takaful, medical Takaful, and other products. Takaful also refers to the joint interest principle of Islamic insurance, which indicates that both the insured and the insurer would assume risks in investments simultaneously.
Takaful coverage is also available to anyone, whether they are Muslim or not.
What is the Difference Between Shariah Compliant Insurance and Regular Insurance?
As mentioned before, Shariah rules are placed to ensure that such insurance policies do not become unlawful and do not support illegal activities or profits. There are two main Shariah-compliant insurance factors, and they are:
The Intent is to Help Rather than Gain.
Individuals or companies choose to enter a fund that helps the less fortunate; however, a regular insurance company becomes the risk-taker because it is deemed the sole financial security provider for an individual.
Returns are Dispersed and Distributed.
In Shariah-compliant insurance, the overflow of cash will be distributed between all participants. In other words, the profits will be distributed between shareholders and individuals. However, in a regular insurance company, only shareholders would receive those profits.
What Are Some Great Qualities of Shariah-Compliant Finance?
Ever since the 2008 financial crisis, many western institutions have started to look for alternatives to the economic model of the west. The need to look for an alternative has risen more significantly, especially during the recent COVID-19 global recession.
The Islamic focus on equity’s sharing of risks and profits between shareholders and participants has become increasingly relevant today as market participants tend to avoid market volatility by choosing an investment option that is much more secure.
In addition, Shariah-compliant insurance prohibits and avoids investing in socially detrimental activities such as gambling, which might lead to truncating heavy debts.
Should You Venture into a Shariah-Compliant Investment?
Takaful programs are meant to keep everyone in a safe spot financially. It means that you will have your money placed in safe hands; even if global financial markets start to suffer from volatility, your profits would not critically decline. You will still be able to get profits and keep your investments flowing.