Insurance products in Malaysia are chiefly divided into two types — takaful and conventional. One of the main reasons insurers are required to offer two variations of insurance products is because the large majority of Malaysia’s population are Muslims who prefer financial products that comply with Islamic principles.
Malaysia is one of the pioneers in Islamic finance and the Takaful Act was enacted as early as 1984. Telling a takaful and conventional insurance apart can be difficult for a lot of people, especially non-Muslims. Hence, we have laid out the differences between the two types to help strengthen your understanding. Read on to find out what they are.
Features of takaful
Takaful is a Sharia-compliant insurance product that operates on the basis of Islamic principles. Here are some of the key features of a takaful policy.
Mutual risk-sharing – promotes the concept of mutual cooperation and risk-sharing among participants instead of transfer of risk.
No claim bonus – receive a cash rebate from their takaful company (of at least 10%) if no claims are made during the period of their policy.
Shariah-compliant – adheres to Shariah law and is free from Riba’ (interest), Maysir (gambling) and Gharar (uncertainty).
Takaful vs Conventional Insurance
Takaful car insurance and conventional insurance policies have a lot of differences from one another although they may offer similar coverage options. The differences between the two can be seen in the table below:
| Takaful | Conventional Insurance |
| Based on mutual cooperation | Based on commercial factors |
| Subject to Shariah laws and government laws | Subject to government laws only |
| Free from Riba’ (interest), Gharar (uncertainty) and Maysir (gambling) | May contain elements of interest, uncertainty and gambling |
| Risks are shared and distributed among takaful participants | Risks are transferred from the individual to the conventional insurance provider |
| Takaful plan holder and shareholder’s capital can only be invested in Shariah-compliant investment funds | Capital of the premium for conventional insurance is invested in funds that are not necessarily Shariah-compliant |
Despite the differences, both takaful and conventional car insurance offer the same protection for mishaps. For both policies, the policyholder must have a legitimate financial interest in the risk which means that they must suffer a financial loss when the insured event (accident, theft, etc.) occurs.
Which is better?
There’s no one-size-fits-all answer to whether takaful or conventional insurance is better because it really depends on the needs, values, and financial goals of a person. However, some studies have shown that Takaful has significant impacts on economic growth through savings, investment, and income.
Takaful products are ideal if you are a Muslim and prefer purchasing a product that adheres to Sharia principles. Since mutual cooperation is the underlying concept of takaful, a pooled fund provides mutual financial aid for everyone. It is also beneficial to consider a motor takaful policy because of the risk-sharing element in it as opposed to a conventional policy.
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