Islam and Insurance
ISLAM AND INSURANCE
As the essence of insurance could be seen in the system of mutual help in relation to the custom of blood money under the Arab tribal custom, Muslim jurists generally accepted that the concept of insurance does not contradict with the Shariah. In fact, the principle of compensation and group responsibility was accepted by Islam and the Holy Prophet (PBUH). Muslim jurists acknowledged that the basis of shared responsibility in the system of `aqila’, as practiced between Muslims of Mecca (muhajirin) and Medina (ansar) laid the foundation of mutual insurance.
As a complete religion, the teaching of Islam encompasses the essence of peace, economic well-being and development of the Muslim at the individual, family social, state and `ummah’ levels.
To illustrate the importance of this relationship in a life of a Muslim, Islam calls for the protection of certain basic rights, viz.: –
* The right to protect the Religion.
* The right to protect the life.
* The right to protect dignity/honour.
* The right to protect the property.
* The right to protect the mind.
It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance.
In view of the above as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists this concept of insurance is acceptable in Islam because,
* the participants would cooperate among themselves for their common good;
* every participant would pay his contribution in order to assist those of them who need assistance;
* it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;
* the element of uncertainty will be eliminated insofar as contribution and compensation are concerned;
* it does not aim at deriving advantage at the cost of other individuals.
The generally accepted view of the Muslim Jurists is that the operation of the conventional insurance as an exchange transaction under a buy and sell agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements :-
There is the element of al-Gharar (unknown or uncertain factors in the operation of a contract) in both the life and general insurance policies. This arises due to the uncertainty of the subject matter of the contract or `ma’qud’alaih’ of which one of the basic rules of contract in Islam is that the ma’qud’alaih must be clear. In such a contract the insured or the policyholder agrees to pay a certain sum of premium and in turn the insurance company guarantees to pay a certain sum of compensation (sum insured) in the event of a catastrophe or disaster. But the insured or the policyholder is not informed, for example, of how the amount of the compensation that the company will pay him is to be derived nor is he certain of the amount.
In addition, any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is also classified as Gharar. This is prevalent in both the life and general insurance policies. In the former, for example the loss of premium suffered by the policyholder if he would have to cancel his policy before the policy acquires the forfeiture status. Similarly the “double-standard” condition of charging customary short period in general insurance if the policyholder is responsible for the termination of the policy whilst a proportional refund of premium is applicable if the insurance company terminates the cover.
According to a Fatwa issued by the Islamic Fiqh Council in Jeddah, all forms of contemporary insurance is unacceptable in terms of Islamic Shariah Law. The reasons for this are as follows:
1. Gharar (uncertainty)
The contract of insurance is based on a buy-sell agreement and therefore it has to meet the requirements of a buy-sell contract as required by Shariah. One of these conditions is that that contract matter must be certain to both parties, i.e. both the buyer and seller must be certain as the amount of the transaction and the timing of the transaction. Unfortunately, insurance by it’s very nature is uncertain. One cannot tell when a claim is going to happen or how much the claimed amount will be. Therefore, because of the element of Gharar (uncertainty) the current contract of insurance does not conform to a buy-sell agreement as required by Shariah and therefore is not acceptable.
2. Maisir (Gambling)
Due to the Gharar of the insurance contract, there is an element of gambling. This does not mean that insurance is gambling but rather because of the uncertainty in the contract, one party may be unjustly enriched and therefore the element of Maisir
3. Riba (Interest)
Insurance companies generally ensure that their investment income is maximized at the lowest possible risk. Given the volatility of the equity markets, most insurance premiums are deposited in interest bearing investments.
In light of the above reasons, Muslim scholars worldwide searched for an alternative as the need for insurance increased.
In 1985, The Islamic Fiqh Council, Jeddah approved the system of Takafol as a viable alternative to Insurance
Takaful or Takafol can be described as “a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose.”
Takafol is a noun stemming from the Arabic verb “Kafal” meaning to take care of one’s needs. Takafol means mutual help among the group i.e. each member of the group pools efforts to support the needy within the group. This is exactly like mutual insurance as was practised in the early days of insurance and even today by certain groups.
Although Takafol does appear to be similar to conventional insurance, this is only in terms of the concept of the common pool where the fortunate many help the unfortunate few. However, there are a number of fundamental differences between the two.
Central to the concept of Takafol is the payment of contributions on the basis of tabarru’ (contribution or donation). This intention of paying the contribution as a donation by the participant changes the entire contract in that the contract is no longer a buy-sell agreement but rather a contract of participation/donation. In terms of Shariah, this changes the contract requirements and thus the Takafol contract becomes a viable alternative.
A further difference is the investment income of a Takafol operator is done in accordance with Shariah.
The concept of Takafol had already existed during the time of the Prophet where the Muslims contributed to a fund called Al-Kanz under the system of aqila. The contribution was for the purpose of helping members of their own community who were liable to pay diyat (blood-money).
* The important aspects of the Takafol operation have been summarised by as follows:
* the company is not the one assuming the risk.
* the company is acting as trustee to manage the operation of the Takafol business.
* all contributions paid by the Participants will be accumulated in the Takafol Waqf Fund.
* all payment of the Takafol benefits (i.e. claims) will be paid by the Takafol Waqf Fund. At the same time, money credited to the said fund can be invested in areas approved by the Shariah.
* should a surplus be declared on the Takafol Waqf Fund, the participants will share this surplus.
The concept of Takafol is meant to foster Islamic brotherhood among the Participants who have agreed to bear each other’s burden.
Do you have any other questions regarding Takafol? Please do not hesitate to contact us.