Takaful is another term used in Islamic finance, which means Islamic insurance and is based on the principle of mutual assistance. In Takaful, members will contribute funds into a collective monetary pool for mutual protection and guarantee against any type of damage or loss. This is a shared responsibility of risk in the event of a loss to any of the members, who contribute to the pool of funds. Takaful insurance is based on the Shariah law and combines the responsibility of individuals, who mutually protect each other.
Takaful Islamic insurance was initiated as a substitute to conventional insurance companies, which contradict Islamic principles and are banned in Shariah law. Takaful is observed as mutual insurance, where members contribute to a collective fund pool, where the ultimate purpose is not for earning profits, but for collectively sharing the risk burden of the contributing Islamic community, in the event of any unforeseen circumstance.