Nibrasul Huda Ibrahim Hosen

September 02, 2021

Islamic Insurance

An Islamic insurance is known as Takaful a concept that is grounded in Islamic muamalat (Banking transactions), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years. It originates from Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". In principle, the Takaful system is based on mutual co-operation, and is based on the concept of Ta'awun, or mutual assistance.. Ta'awun forms the basis of many Islamic practices. The teaching of Islam in regard to the equality and brotherhood of believers, and their responsibilities toward one another and all humanity led to several forms of mutual assistance both in social and economic.

There are several examples in pre-Islamic history whereby families, tribes or related members throughout the Arabia peninsula pooled their resources as a mean to help the needy on a voluntary and gratuitous basis. There practices were validated by Prophet Muhammad (Peace Be Upon Him) and incorporated into the institutions of the early Islamic State in Arabia around 650 C.E. for example:

1. Merchants of Mecca formed funds to assist victims of natural disasters or hazards of trade journeys.

2.Surety called daman khatr al-tariq was placed on traders against losses suffered during a journey due to hazards on trade routes.

3.Assistance was provided to captives and the families of murder victims through a grouping known as a'qila.

The Majority viewpoint by contemporary Islamic scholars is that Takaful (cooperative insurance) is fully consistent with Shariah principles. This perspective is upheld by numerous meetings and resolutions:

· Council of Saudi Ulama (1397 Ah/1977 CE) resolution

· Fiqh Council of Muslim World League (1398/1978) resolution

· Fiqh council of Organization of Islamic Conference (1405/1985)

· Islamic Fiqh Week Conference, Damascus 1961

· Second Conference of Muslim Scholars, Cairo 1965

· Symposium on Islamic Jurisprudence, Libya 1972

· First International Conference on Islamic Economics, Mekkah February 1976

· The Islamic Conference, Mekkah, October 1976

· The esteemed shariah advisory Board of Bank Al-jazira confirms also its viewpoint and whole heartedly endorsed the Family and Group Takaful Programs now offered by Bank Al-jazira .{Refer to Fatwa dated April 2001}.

Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of “bear ye one another’s burden.” Commercial insurance is strictly not allowed for Muslim as agreed upon by most contemporary scholars because it contains the following elements: a). Riba (interest) b). Al-Gharar (Uncertainty) and c). Al-Maisir (Gambling) c).

Riba

The Holy Quran and the Sunnah prohibit riba. It is normal in insurance contracts, in the life insurance; the beneficiary gets far more than he paid as premiums. In case he dies after paying only a few premiums, or even after paying all the premiums, he receives interest and dividends in addition to the total premium he has paid. In case of general insurance too, the amount paid to the beneficiary on the happening of the event insured is far more than the premium amounts paid. Generally the money collected through premiums is invested by the insurance company in interest-bearing deposits, un-Islamic business or dealings. This clearly attracts the prohibition against riba and further alienates Muslims from insurance.

The prohibition of riba is accepted by all the Muslim jurists and it is an absolute prohibition which covers simple and compound interest and productive as well as non-productive loans. In the words of the Holy Quran:

“Allah permits trading and forbids riba” (Al-Baqarah 2: 275].

Even in case of productive loans, guaranteed return on capital is unjust, viewed against the uncertainties surrounding entrepreneurial profits[i]. Sometimes it is suggested that the prohibition of riba does not extend to non-Muslim countries, but this is not correct. No matter what may be the position under international law, a Muslim remains within the jurisdiction of Allah irrespective of the place of residence.

Gharar

Gharar literally means risk. In the context of business-contracts it means uncertainty and consequent insufficient knowledge of the details of the contract. This is why gharar is mentioned along with jahl mufdi ila niza (ignorance likely to cause disputes). There are various Prophetic Traditions prohibiting al-gharar. Islamic jurists therefore insist on a very clear statement of every possible detail affecting each party to a contract. There is gharar in insurance as both the parties do not know their respective rights and liabilities till the occurrence of the insured event.

There is difference in juristic opinion on the tolerable level of gharar. A distinction is drawn between gharar yasir (minor Uncertainty) and gharar Fahish (excessive uncertainty). Contemporary Muslim thinkers assert that what the Sunnah
prohibits is gharar fahish which is not present in the contract of Insurance. “To the best of our knowledge, Sunnah does not forbid those transactions that fulfill genuine needs and are indispensable for certain desirable ends but which cannot always be altogether freed from indeterminacy or hazard. In view of their usefulness uncertainties in them are to be tolerated. It is also an accepted principle of usul al-fiqh (Islamic jurisprudence) that “necessity” (darura) renders prohibited things permissible. Maslaha (public interest) may also provide justification for ignoring the minor uncertainties. The importance of insurance and its indispensability in the modern life, and the absence of a possible alternative, brings it very near to darura (necessity). However, every possible avenue to eliminate riba and to reduce the level of uncertainty and ignorance in an insurance contract must be explored before allowing it under the category of gharar yasir (minor uncertainty). Risks can be divided into three categories: business risks, b. pure risks, and c. optional risks. Optional risks are undertaken in gambling and games of chance and are prohibited in Shariah. Business risk and pure risk involve risks of the type which are inherent in everyday life. Insurance aims at covering business risk and pure risk.

Maisir

The Holy Quran verse 11:219 ‘prohibits maisir. They ask you (O Muhammad) concerning alcoholic drink and gambling. As Allah says: “In them is a great sin and (some) benefit for men, but the sin of them is greater than their benefit. “And they ask you what ought to spend. “That which is beyond your needs”. “Thus Allah makes clear to you His signs in order that you what may give thought to it “. Insurance is sometimes equated with gambling, maisir or gamble, which is prohibited.

By this principle, the entrepreneur or al-Mudharib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra’s-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the takaful operator is to be shared, in accordance with the principle of al-Mudharabah, between the participants as the providers of capital and the takaful operator as the entrepreneur. The sharing of such profit may be in a ratio 5:5, 6:4, 7:3, etc. as mutually agreed between the contracting parties. In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru (to donate, to contribute, to give away) is incorporated. In relation to this a participant shall agree to relinquish as tabarru, certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

In essence, tabarru would enable the participants to perform their deeds in sincerely assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure. Therefore, the provision of insurance cover as a form of business in conformity with Shariah is based on the Islamic principles of al-Takaful and al-Mudharabah.

Al-Takaful is the agreement among a group of people, called participants, equally guaranteeing each other; while Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of takaful may thus be visualized as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to jointly guarantee each other.

Wakalah is a contract whereby one party acts on behalf of another for a fee. In the context of takaful, the takaful operator manages the Takaful Fund on behalf of the participant for a fixed fee called a ‘wakalah fee’. Contributions paid by the Takaful participants under the wakalah principle will be utilized for two main causes, which is creating a defined fund to undertake the joint-guarantee payment in the event of a misfortune to the participant; and providing income to the operator for the purpose of financing its operating expenses. The participant as a party to the wakalah contract must be agreed that the Takaful operator may take a portion of the contribution as reward for services provided, such as the wakalah fee and the performance fee (if any), the fee scale must also be transparent and agreed to at the time of participation.