FAQ #20

A customer took a loan from conventional bank to purchase a house.  However, he decides to cover his house against fire and related perils with a Takaful company.  Is this possible?

Many countries like Malaysia, Indonesia, Brunei, Pakistan, and Middle Eastern countries practice dual financial system where conventional and Islamic finance runs in parallel.  Thus, a customer may choose to obtain financial assistance from a conventional or Islamic bank. 

Besides interest or profit rate, factors like ease of doing business, maximum amount offered, one-stop centre, and flexible approval process are few considerations that influence the customers to do business with a particular banking system.  Under certain circumstances, homeowner who opt to purchase his resident with the assistance from conventional loan may decide to cover his house against fire and related perils with a Takaful company. 

In this respect,  Shariah experts had no objection against the decision.  This is in line with the resolution by Shariah Advisory Council (SAC) of Bank Negara during their meeting in October 2005 which resolved that a Takaful company may offer a takaful coverage for a customer’s asset even though the asset is financed through conventional loan, provided that both are offered separately and not as a package.

SAC has considered that the takaful coverage contract which focus on the risk of the asset and the conventional loan contract which offer the financing are two separate and independent contracts.  As such takaful company is allowed to provide takaful coverage for a customer’s asset which is financed by a conventional loan since the takaful company is not directly involved in the conventional loan transaction concluded between the customer and the conventional financial institution.

Based on the same rationale, takaful company can also offer family takaful products like mortgage reducing term takaful  to homeowners who financed their assets through conventional loan.