The rating agency said its approach to analyzing the financial strength of a Takaful company is essentially the same as with a conventional mutual insurance company, but with some key differences.

"Conventional insurance has been deemed to be in conflict with Shariah (Islamic law) for two key reasons," said Timour Boudkeev, a Moody's vice-president/senior credit officer and author of the report. "Firstly, traditional insurance is thought to have a large element of 'gharar,' a term that denotes uncertainty, ambiguity or deception."

He explained that as the payoff from an insurance policy is dependent on occurrence of uncertain events in the future, the amount of compensation has no predictable relationship with the insurance premium. This disqualifies conventional insurance as an acceptable financial product under Islamic law.

The second reason, he said, relates to traditional insurers' investment strategies. "As 'riba' (interest) is forbidden under Shariah, conventional bonds and other sources of funding are not viewed as Islamically acceptable," the analyst explained.

"The main concept that differentiates Takaful from conventional insurance is that of co-operation, or solidarity," he said. "Somewhat similar to a mutual insurer, the purpose of the company is not to generate profits but to share risk between members, thus making it more manageable for each of them."

An important point, he added, is that consideration for the insurance service is classified as a "donation," rather than a "premium." This may have implications for the structure of certain long-term life insurance products," Mr. Boudkeev said.

Moody's said that in analyzing a Takaful company, the distinction between a "premium" and a "donation" is more cultural than economic.

The Takaful arrangement is similar to that of a conventional mutual insurance company, Moody's said.

The rating agency's report also discusses a number of additional considerations relating to corporate governance--asset allocation, structural features, capitalization strategies and the regulatory environment--that need to be taken into account when rating a Takaful company.