Between Islamic Takāful Insurance and Mutual Insurance

Mohyedine Hajjar

DOI: 10.55780/Jo25013 15 Oct, 2025

Introduction 

Takāful^[1] is presented as a mutual, Sharīʿa-compliant alternative to commercial insurance, legitimized by mid-20th-century scholarly deliberations that endorsed mutual insurance, permissible. The first takāful company, founded in Sudan in 1979^[2], introduced a hybrid structure combining mutualist principles with joint-stock frameworks: unlike traditional mutual insurers, where members are both insured and co-owners, takāful companies separate management and risk-sharing, with companies acting as external administrators. Meanwhile, this model has been formally regulated in many Muslim countries.

Despite this innovative hybridization, the question persists: can takāful companies genuinely be considered mutual insurers? This article critically assesses their structural and ethical alignment with mutualist principles. While national laws may differ in certain aspects, the underlying philosophy of both takāful and mutual insurance remains consistent: policyholders and shareholders qualities are combined or separated, affecting the entity’s legal characteristics (legal form, purpose, etc.). Although the analysis could be conducted without reference to any national application of mutual insurance, the French mutual model is used here as a key reference point, given its formative influence on takāful’s emergence.

1- Legal form:

In mutual insurance, legal form expresses mutuality: policyholders are co-owners. French law establishes multiple mutual legal forms, but two are considered the main mutual entities: Sociétés mutuelles d’assurance (covering all risks) and Mutuelles d’assurance (limited to personal risks). Takāful firms, however, use a hybrid model, blending mutual principles with joint-stock companies. Still, the principle of policyholder-led management remains in the core of takāful philosophy. AAOIFI Standard No. 26 outlines two governance models for takāful:

“The fund is managed either by a group of selected subscribers or by a joint-stock company which manages the insurance operations and invests the fund’s assets, subject to specific fees.”

Thus, Islamic insurance may operate under two legal forms: mutual companies or joint-stock companies. The latter is now prevalent in Arab and Muslim countries, while the former remains theoretical.

2- Corporate purpose

In mutual companies, policyholders had two qualities: insured and members. The purpose of the mutual company is to cover its members’ risk. The company is liable for any risk coverage claim.

The takāful company operate through a fund segregation model: policyholders contribute to a shared risk pool, while the company oversees operations and investments for a fee or share of profits^[3]. This arrangement led to a distinct legal configuration composed of three internal funds, ensuring the separation of policyholder assets from company equity^[4]. The company’s purpose became the management of the Insurance operation. So, the company is, in theory, not liable for any claim of insurance, the risk coverage claims should be on the insurance fund. Despite functioning as a manager, takāful company is legally treated as an insurer, raising the question: how can the takāful company could be considered a mutual insurance company if it is liable for the insurance claims despite the presumed segregation of funds?

3- Company’s Economic Purpose:

In the French mutual model, the Sociétés d’Assurance Mutuelles and the Mutuelles d’Assurances are non-profit organizations. This is due to the essence of mutuality philosophy: nobody profits from the insurance operation.

However, takāful companies operate commercially, earning income through insurance management fees[5] and through the investment management of part of the takāful assets ^[6]. This scheme introduces a profit-driven party (the company), external to the insurance operation, that gains profit indirectly from the insurance, contradicting mutuality’s non-profit ethics. In-depth analysis is needed to assess takāful revenues: Are insurance management fees aligned with the actual costs of mutual insurers, or are they inflated? Do investment returns match typical asset management profits, or exceed them? Another study should compare the policyholder’s total insurance cost across takāful, mutual, and commercial models for similar risks and coverage. These inquiries will help determine whether takāful genuinely applies mutuality principles or merely uses them as a legal framework to legitimize what is, in effect, a profit-driven commercial insurance model. We must ask whether commercial insurers’ profits are simply being rebranded in the takāful companies as management fees. If so, this would suggest that takāful may, from an economic standpoint, hypothetically amount to a disguised form of commercial insurance.

4- Member Status:

In Mutual insurance companies, policyholders are both insured and members (co-owners). They actively manage the company through its governance bodies like the General Assembly and Board. In takāful, policyholders hold no ownership in the company, shareholders, external to the insurance operation, control management^[7]. This situation allows takāful companies to potentially exploit the operation by inflating management fees and profit shares from asset investments without serious policyholder oversight.

5- Company’s capital:

Mutual Companies require no share capital, relying solely on members’ contributions. However, to demonstrate financial resilience when seeking regulatory approval, they must have an “establishment fund”, composed of the membership fees paid by each member. For Sociétés Mutuelles d’Assurance, this fund must amount to €240,000 if they do not cover life insurance, personal liability, motor insurance, investment management, or credit insurance, and €400,000 if they cover all such risks. For Mutuelles d’Assurance, the required fund is €228,600 when covering health and personal insurance, and €381,100 when life insurance is included.

Takāful firms, by contrast, must be capitalized by founders under general corporate law which mandates minimum capital for joint-stock companies, with special regard to the insurance-specific regulatory requirements^[8].

6- Founding Origins:

French mutual entities are formed exclusively by policyholders. Sociétés Mutuelles d’Assurance require a minimum of 500 members, while Mutuelles d’Assurance can be established  without a legally defined minimum number of participants. This high membership threshold is crucial for raising the necessary “establishment fund” through broad participation, thereby ensuring the operation’s mutual character. By contrast, takāful companies are founded by profit-seeking shareholders and operate under the legal framework of joint-stock companies, while also adhering to specific insurance laws and regulatory requirements. Their establishment typically requires only the minimum number of board members, usually between 3 and 12, depending on the jurisdiction. From a regulatory standpoint, approval of any new insurer, regardless of the model, is largely contingent upon the founders’ qualifications.

7- Surplus Distribution:

Mutual companies typically allocate surpluses to reserves^[9] rather than to members,^[10] unless explicitly stated otherwise in the company’s Articles, thereby maintaining low costs and preventing outsider profit.

In takāful, surplus belongs solely to policyholders; the company cannot claim it. AAOIFI allows various uses: reserves, premium reductions, charity, or distribution to policyholders (5/5); in case of dissolution, it must go to charity (5/6). In practice, the surplus’s fate remains unclear due to multiple possible uses and multiple market practices. A key concern is whether surpluses are genuinely significant or merely nominal, especially as elevated management fees may absorb most of them.

Conclusion

This article has sought to highlight the main differences between takāful Islamic insurance and mutual insurance. The following table outlines the key distinctions identified and discussed.

To date, takāful companies are the main insurance entities in the Arab-Muslim world claiming adherence to the principle of mutuality. However, this claim remains conceptually and legally unclear. In reality, they are not genuinely mutual insurers but adapted joint-stock companies, enabled by specific legislation.

We therefore criticize the regulatory approach towards Islamic insurance. Rather than codifying a hybrid model distant from true mutuality, a more effective strategy would be to incorporate conventional mutual structures into Arab Muslim countries legal systems. However, such a shift appears unlikely in the near term. Mutuality – as a philosophy of solidarity with its own legal form – remains poorly understood in these societies, while its presence in some Western societies stems from specific historical economic and social circumstances. Moreover, the dominance of profit-driven philosophies in modern societies impedes the development of authentic mutual models.

As long as the conventional sector ignores mutual insurance, its Islamic counterpart cannot flourish. If takāful continues enriching shareholders at policyholders’ expense, it risks diverging from the foundational spirit of mutuality. The current takāful structures thus reveal the ongoing challenge of embedding genuine mutual principles within Arab-Muslim contexts. Nevertheless, the gradual opening of Arab-Muslim legal systems to Western mutualist models offers hope for eventually aligning takāful insurance with Mutual insurance ethical roots.

^[1] All transliterations follow the ALA-LC Arabic Romanization Standard.

^[2] Al-Siddīq Al-Amīn al-Ḍarīr: “Insurance: Assessment of Theoretical and Practical Experience”, paper presented at the 3^rd Conference on Islamic Economics, Mecca, 2005, p.22.

^[3] AAOIFI Standard n°26, art.4.2.

^[4] Al-Qari: “The Excess of Insurance”, Paper presented at the Mutual Insurance Forum, Islamic World Organization for Economy and Finance, Riyadh, 20-22/01/2009, p.7.

^[5] AAOIFI Standard n°26, art.10.1.

^[6] AAOIFI Standard n°26, art.10.7.

^[7] AAOIFI Standard n°26, art.3.

^[8] AAOIFI Standard n°26, art.3.1.

^[9] J. Bigot : Traité de droit des assurances, T.1, Paris: LGDJ, 2011, p.252.

^[10] In case of dissolution, any excess of net assets over liabilities is allocated, by general assembly decision, either to other mutual insurance companies or to public-interest associations.