Tax treatment

Differences between Conventional and 
Islamic Finance Transactions - Examples
(continued)

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9
Tax Treatment on
Islamic Finance 
in Malaysia
 
CONVENTIONAL 
SHARIAH-COMPLIANT
Conventional Insurance
Conventional insurance is associated with 
riba and major gharar, both of which are 
forbidden by Islamic principles, for instance:
• 
shareholders own the insurance 
company. The objective is to maximise 
profits.
Islamic insurance or Takaful
It is an arrangement by a group of people 
who have the desire to protect each 
other from defined risks and mishaps, by 
contributing to a pool of money out of their 
own resources.
The foundation of takaful is based on 
principle of Aqilah (persons of relationship) 
means the takaful operator will divide the 
contributions into tabarru (donation) and 
investment. Tabarru is for the purpose of 
meeting policyholder losses and mishaps.
Basically, it based on two main concepts:
• 
An insurance contract based on 
Mudarabah means that policy holders 
and the insurance operator share 
risk by agreeing to a profit-sharing 
arrangement;
• 
Insurance based Wakalah (agency) 
means that the policyholders appoint 
the insurance operator as an agent to 
operate the insurance scheme at a fee 
and does not share in the profits;
• 
Takaful products can also run on tabarru’ 
(donation) or non-profit basis or;
• 
A hybrid of profit- sharing and agency.