Takaful rests on strict separation between the participants' fund, financed by donations, and the operator's shareholders' fund, remunerated through wakala or mudaraba, under the oversight of a sharia committee and in line with IFSB and AAOIFI standards.
A contract of donation replaces a contract of exchange
According to State Life's takaful FAQ in Pakistan, conventional insurance is a contract of exchange, or mu'awadat, tainted by excessive gharar that renders it fasid. Takaful rests on a tabarru' contract, where uncertainty stays within tolerable limits.
Risk fund and investment fund
IFSB-14 separates the Participants' Risk Fund, which pools underwriting risk, from the Participants' Investment Fund, reserved for family savings contracts. The operator's shareholders' fund remains distinct and does not benefit directly from underwriting results.
Wakala, a paid agency model
Under this arrangement, the operator acts as the participants' agent and charges a fee fixed in advance. According to State Life, the underwriting surplus then belongs entirely to participants, and the operator earns nothing from the fund's claims experience.
Mudaraba, sharing investment profits
The IFSB cites mudaraba alongside wakala: participants remain owners of the funds, while the operator contributes its management skills and receives a share of profits. Our page on mudaraba in takaful sets out the usual profit-sharing ratios.
Waqf, giving the fund a legal personality
In Pakistan, operators apply a hybrid model in which the fund is constituted as a waqf with its own legal personality. The operator is merely its wakil, and participants contract directly with the fund, as our page on the wakala-waqf model explains.
Calculating and sharing the surplus
According to State Life, the year-end surplus is shared among participants in proportion to their contributions, after deducting claims already received. In Malaysia, the operator may take no more than 50% of any surplus arising in the risk fund.
Qard to cover a deficit
When the risk fund runs a deficit, the operator injects an interest-free loan, repayable only from later surpluses. This mechanism spreads the burden over several financial years. Our page on qard hasan and solvency details its limits and conditions.
Bank Negara Malaysia's operational framework
In its draft framework published on 18 May 2018, Malaysia's central bank prohibits cross-subsidies between takaful funds: surpluses and deficits remain specific to each fund. Any revision of the tabarru' rate also requires the participants' consent.
Shariah Board and annual audit
The SECP's Takaful Rules 2005 require every Pakistani operator to have a sharia board of recognised scholars and an annual sharia audit. Our page on the sharia committee of a takaful insurer describes its role in approving products.
IFSB governance and solvency standards
On 23 November 2009, the IFSB jointly adopted IFSB-8 on governance of takaful undertakings, IFSB-9 on conduct of business and IFSB-10 on sharia governance. IFSB-11 deals with solvency, and IFSB-14, issued in December 2013, with risk management.
AAOIFI: from Shari'ah Standard 26 to FAS 43
Following a public hearing in Bahrain in March 2006, AAOIFI's Shari'ah Standard 26 was approved in Madinah in June 2006. FAS 43, applicable since 2025, is read together with FAS 42 and the SS 26 and SS 41 standards.
Retakaful governed by IFSB-18
The IFSB-18 guiding principles of April 2016 apply the rules of tabarru', ta'awun and the prohibition of riba to retakaful. The draft was discussed in Manama in January 2016 with Munich Re Retakaful, Hannover Re, BNM and the DFSA.
Analysing a takaful contract like a professional
- Identify in the general terms the legal model used: pure wakala, mudaraba, hybrid or wakala-waqf.
- Find the percentage fee charged by the operator and the share of investment profit it keeps.
- Check the surplus-sharing rule and any cap on what the operator may take.
- Look for the qard clause applying in case of deficit and its repayment conditions.
- Confirm that the risk fund and, where relevant, the investment fund are accounted for separately.
- Read the sharia board's annual report and the findings of the sharia audit.
Financial flows between the funds
| Flow | From | To |
|---|---|---|
| Tabarru' contribution | Participant | Participants' risk fund |
| Family plan savings | Participant | Participants' investment fund |
| Wakala fee | Participants' fund | Operator's shareholders' fund |
| Qard in case of deficit | Shareholders' fund | Risk fund, repayable from future surpluses |
| Surplus distribution | Risk fund | Participants, in proportion to contributions |
Reference documents to consult
- General terms specifying the management model
- Annual report of the sharia committee
- Separate accounts for the participants' fund
- Sharia-compliant investment policy
- Surplus distribution rules
- Schedule of the operator's fees and charges
Common misconceptions about how takaful works
- Believing the participants' fund belongs to the company, when the operator is only its paid manager.
- Treating qard as a permanent subsidy, when it is a loan repaid from the surpluses of subsequent years.
- Thinking every IFSB standard is legally binding everywhere, when they bind only the regulators that adopt them.
- Assuming the operator can change the tabarru' rate at will, which the Malaysian framework makes subject to participants' agreement.
Technical questions about takaful
What is the difference between wakala and wakala-waqf?
Under simple wakala, the operator manages on behalf of participants. Under the wakala-waqf model used in Pakistan, the fund becomes a waqf entity with its own legal personality, with which participants contract directly, while the operator remains its agent.
Why does the FAS 43 standard matter?
Applicable since 1 January 2025, it harmonises how takaful contracts are recognised and measured in the accounts, including retakaful held by the participants' fund, making operators that follow AAOIFI standards more comparable.
Are IFSB standards available in French?
Partly. On 20 April 2021, the IFSB published French versions of five standards, including IFSB-14 on risk management for takaful undertakings, which helps French-speaking regulators understand and adopt them.
Can an operator keep the entire surplus?
Under wakala, the surplus in principle goes back to participants. Under mudaraba, it may be shared with shareholders. In Malaysia, the operator's share is capped at 50% of the risk fund surplus.