The word Takaful is derived from the Arabic verb "kafala" which simply means to take care of one's need. Therefore, the pact between at least two parties agreeing to jointly guarantee one another in the event of a loss, as a consequent of being afflicted by a calamity defines the term "Takaful". Likewise, the joint-guarantee as embedded in the concept of Takaful can be translated into practical operation in the form of business or commercial transaction within the "t'ijari" or private sector as one of the Islamic financial players in a market economy.
Mudharabah is defined as the commercial profit sharing contract beween the provider or providers and the entrepreneur for a business venture.
Tabarru' is an Arabic word that means donation or gifts, where the Participant shall agree to relinquish as donation all or certain portion of his contribution thus enabling him to fulfil his obligation of mutual help and joint guarantee.
Wakalah means agency in English. Under the structure, an agency relationship is agreed between two parties to conduct a certain business undertaking. Based on this premise, the model describes an agency agreement between the operators, acting as the agent or "wakil" to the participant as the principal to manage the participation of the latter in a variety of takaful products provided by the operator.
Tracing back to the philosophy and concepts of brotherhood and mutual assistance (ta'awun) and shared responsibility among members in providing financial aid and assistance to those who had incurred misfortunes, mishaps or faced difficulties, now has emerged a concept of Takaful, based on the contract of Tabarru' (donation), Mudarabah (profit sharing) and other supporting underlying contracts such as Wakalah, Ujr, Kafalah.
Tabarru' (donation) is a contract where a participant agrees to donate a pre-determined percentage of his contribution (to a Takaful fund) to provide assistance of joint guarantee and mutual help should another participant suffer a loss. This concept eliminates the element of gharar from the Takaful contract.