Tabarru'

Tabarru' (Arabic for a gratuitous gift or donation) is a voluntary contribution made without expectation of an equivalent return. In Islamic finance the term is used mainly in takaful, the Sharia-compliant alternative to conventional insurance, where tabarru' is the portion of each participant's contribution that is donated to a common risk fund. Claims are paid from that fund to any participant who suffers a loss covered by the scheme.

The donation concept is what allows takaful to exist under Sharia. By treating the risk-pool payment as a gift among participants rather than the price of a promise to pay, scholars avoid the objections that most of them raise against conventional insurance.

Many Islamic jurists regard conventional insurance as a commercial exchange contract in which the policyholder pays a premium in return for an uncertain payout. That uncertainty is seen as excessive gharar, the possibility of gaining much or losing everything is compared to maysir (gambling), and investment of premiums in interest-bearing assets involves riba. In an exchange contract, gharar is a serious defect. In a gratuitous contract, such as a gift, Islamic law tolerates uncertainty far more readily, because the donor does not expect a return. Tabarru' therefore converts the risk-sharing payment from an exchange into a donation.

A participant's contribution to a takaful scheme is usually divided into parts:

• the tabarru' portion, donated to the participants' risk fund;
• a fee to the takaful operator, known as ujrah where the operator acts as agent under a wakalah model;
• in family (life) takaful, an investment portion credited to the participant's own account.

The risk fund belongs collectively to the participants. The operator manages it for a fee and may invest it in Sharia-compliant assets. Claims, retakaful costs and reserves are paid from the fund. If the fund has a surplus at the end of a period, it may be distributed to participants, retained as a reserve, or partly shared with the operator, depending on the model and the fund's rules. If the fund runs a deficit, the operator usually provides an interest-free loan, a qard, to be repaid from future surpluses.

Example

A car owner pays an annual takaful contribution of $1,000. The contract specifies that 25% is the operator's wakalah fee and 75% is tabarru'. The $750 goes into the motor risk fund alongside contributions from thousands of other participants. If the owner has an accident, the claim is paid from the fund. If the fund ends the year with a surplus after claims and reserves, the owner may receive a share of it, which conventional policyholders do not.

Scholars differ on how to characterize the donation. One view treats tabarru' as a conditional gift, made on the understanding that the donor will be helped if he or she suffers a loss. Another, associated with the waqf model used in Pakistan, treats the risk fund as a waqf, a charitable endowment, to which participants donate and from which they benefit as beneficiaries. Critics argue that once the donation is conditional on cover, it functions economically as a premium and the distinction is largely formal. Standards issued by AAOIFI and the IFSB require segregation of the participants' fund from the operator's own funds and clear disclosure of how surpluses and deficits are handled.

The term also applies to other gratuitous transactions, such as charitable contributions, which overlap with concepts like sadaqah, and to donation-based arrangements in some Islamic microfinance and cooperative schemes. In retakaful, takaful funds themselves contribute to a shared pool on a similar donation basis.