Takaful firms search for suitable long term assets

The Islamic insurance industry, or takaful, is struggling to find suitable long term investment opportunities, executives at the Reuters Islamic Banking and Finance Summit said.

The takaful – or sharia compliant – insurance industry has grown at double or three digit growth rates so far as the Gulf Arab region is underpenetrated with insurance products in general, and has also attracted business from conventional peers.

But issues like the absence of long term sukuk, or Islamic bonds, to compliment some of the products are hampering the process of asset deployment.

Speaking at the summit in Bahrain, Abdul Rahman Tolefat, chief executive, Allianz Takaful, said: “As an insurer, if I want to offer annuity products I need to have long term assets to match my liabilities which are still not available.”

Tolefat said the firm was in talks with a regional financial institution, urging them to issue a bond earmarked for the industry.

Islamic insurance works like mutual insurance, but there is a clear segregation of the assets owned by members and those owned by the insurer.

Unlike conventional insurance, investments made using the pool of funds have to adhere to sharia law and shun sectors such as alcohol and gambling.

Islamic insurers also keep away from investments in risky assets and prefer fixed income products for parking their funds.

Global takaful premiums total about $2 billion to $3 billion and are expected to reach more than $7 billion by 2015, industry figures show.

While medium term sukuk are available in the market, takaful firms in this space have to compete with big banks who absorb a major chunk of issues, leaving little for takaful firms.

Tolefat said: “The credit rating of corporates who issue sukuk is just not there. I prefer an issue which has an ‘A’ rating and above. Even if they provide low yields, we don’t mind.”

 source : INN

Decision-makers Seek New Growth Map for Islamic Insurance

944458_s_PRLog (Press Release) – Mar 01, 2009 – United Arab Emirates- Dubai: A record number of industry leaders have already confirmed their partnership with The 4th Annual World Takaful Conference (WTC 2009), testimony of the overall significance of the forum in shaping the future of the global Takaful industry.

The 4th Annual World Takaful Conference (WTC 2009), the world’s largest gathering of Islamic insurance leaders, builds on 4 years of successfully meeting industry needs. At this critical juncture in the international financial markets, WTC 2009 is bringing together more than 300 global industry leaders representing key international Takaful operators, insurance institutions, Re-Takaful and Re-Insurance players, Captive insurance firms, underwriters, major brokers, and leading legal and advisory firms to debate how business models will change in the Shari’ah-compliant insurance industry in the context of the global economic crisis.

The World Takaful Conference (WTC 2009) is again held in strategic partnership with DIFC (Dubai International Financial Centre). HSBC Amanah, SALAMA Islamic Arab Insurance, Noor Takaful, and Takaful Re have already confirmed their participation in the conference as platinum sponsors. With new record level participation being achieved, WTC 2009 has set the stage for its most important industry gathering since its inception 4 years ago. Other leading sponsors at WTC 2009 include: ACR Re Takaful, Allianz Takaful Co., MNRB Takaful, Abu Dhabi National Takaful Co, t’azur, Munich Re Retakaful, enaya AIG Takaful, Ernst & Young, A.M. Best, Norton Rose, Hannover Re, and GIC Re.

Speaking ahead of the conference Parvaiz Siddiq, Chief Executive Officer, Noor Takaful stated that:

“Shari’ah compliant insurance solutions are fast gaining wide-spread popularity and acceptance across diverse customer profile. Noor Takaful comes at a strategic time when we are positioned to harvest the manifold possibilities existing in the financial environment in the UAE, the GCC and the wider world. The phenomenal growth of the Takaful industry signals the need for a service-focused provider that will raise the bar on international best practices in this sector.”

Chakib Abouzaid, Chief Executive Officer , Takaful Re noted that “The fourth annual edition of the World Takaful Conference is a great opportunity for Takaful and insurance professionals to discuss the current status of the nascent Takaful industry, which has witnessed a tremendous development in the past few years. Should this momentum continue during the current crisis?

Islamic finance should be in principle less impacted by the current crisis, as it doesn’t allow non backed investments and speculation. As part of the Islamic Finance industry, Takaful should be less affected; however, as players within the global insurance industry, Takaful players must revisit their strategies, and come back to the basics.

The WTC 2009 should be a forum to discuss the achievements, with enough self criticism, and explore the ways to take advantage of the current situation to market the essence of Takaful i.e. the values of solidarity among the community, which are needed by all”.

The 4th Annual World Takaful Conference is the world’s largest gathering of Takaful industry leaders and will this year focus on renewing growth in a challenging global market.

UAE Islamic insurance sector growing rapidly

dubai1_s_The Islamic insurance (takaful) industry in the UAE and Qatar enjoy higher average premium per capita than the global average of $554.8 (Dh27.33), according to a report by Dubai Chamber.

Malaysia and Kuwait both have premium per capita below the world average by 47 per cent and 59 per cent respectively.

The UAE Islamic insurance industry is the second fastest growing market in the Gulf after Bahrain, the report said yesterday.

Capitalising on their robust economic growth, GCC takaful model market share is rapidly growing.

Bahrain takaful market grew 64 per cent during 2005-2006, while the UAE has an average growth rate of about 46.1 per cent.

Nevertheless the market size is still small when compared with the conventional insurance market.

The percentage of takaful premiums to total insurance premiums is still low yet increasing, ranging on average between 0.5 per cent in Bahrain and 1.8 per cent in Kuwait. The exception is, the Saudi Arabia which scores the highest average percentage share of about 17.9 per cent.

In the UAE, the estimated takaful premium share to total insurance premiums for 2006 is 1.5 per cent, second after Kuwait.

The UAE and the Muslim countries insurance penetration ratios (IPR) are very low. IPR is defined as the percentage of premiums to nominal GDP. Malaysia scores the highest insurance penetration ratio among the Muslim countries of about 4.9 per cent, followed by Lebanon with 3.9 per cent, Morocco 2.99 per cent and UAE 1.83 per cent.

IPR scores of the Muslim courtiers are below the world average penetration ratio of 7.5 per cent.

UAE takaful market is rapidly growing and becoming competitive as the number of takaful insurance providers is increasing, the report said. As of September, there are four UAE Islamic compliant insurance companies listed at Dubai Financial Market.

Source : emirates business news


Promoting social solidarity through insurance – islamic insurance theory

images35Dr Mahbub Alam

Uncertainty is the only certainty in the world. In our everyday life, we are prone face accidents, which may lead to disability, even death and also loss or damage of properties. An accident is a mishap. It has been defined severally as an unplanned, undesigned, unexpected, un-devised, undesirable, unintended and or unfortunate occurrence.

Insurance is one of the most significant and scientific methods of handling risks. In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the effects of their misfortune. It lets your protect yourself against everyday risks to you health, home and financial situation. In modern society, almost every type of risk could actually be mitigated. An insurance company is always prepared to take the risk for us. It is up to us to make the choice of which risks to mitigate in our daily lives.

But the Islamic scholars have objection to the concept of conventional insurance. In their view, the elements of Gharar (Uncertainty), Maisir (Gambling) and Riba (Usury) are involved in insurance contracts, which make it un-Islamic. Therefore, as an alternative of conventional insurance the Islamic scholars have developed a new concept of insurance that complies with Islamic principles on basics and rules drawn from the Holy Quran and Sunnah., called Takaful insurance. As mentioned in the Qur’an: “And help one another in righteousness and piety and do not help one another in evil deeds and enmity” (AI Maidah verse 2)

Takaful, the Islamic alternative to insurance is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a promise among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively. The Takaful contract so agreed usually involves the concepts of Mudarabah, Tabarru’ (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.

The concept of Takaful is not new in Islamic commercial law. The contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was laid down in the system of ‘Aaqilah’ (Mutual Help), which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet (PBUH). In case of any natural calamity, everybody used to contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.

The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to the business or property. The policyholders pay subscription to assist and indemnify each other and share the profits earned from business conducted by the Company with the subscribed funds. Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru’ is incorporated in the contract. How much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements. Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators. To describe from another angle, a Takaful contract may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment. The protection part of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally. In the savings part, individual rights remain intact under Mudarabah principle and the contributions along with profit (net of expenses) are paid to the policyholders at the end of policy term or before, if required by him.

The dissimilarity between the conventional insurance and Takaful business is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreements. Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.

Takaful “co-operative or Islamic insurance” has steadily been growing as a legal financial tool to serve the peoples in Islamic countries as well as non-Muslim countries. Besides operating in Muslim countries, there are more than 108 Takaful (Islamic Insurance) companies operating successfully in the non-Muslim countries such as USA, England, Sri Lanka, Singapore and Japan,

Bangladesh as a Muslim country has a very ample opportunity to flourish Takaful (Islamic Insurance) within a short span of time. But imprudently yet there is no policy framework undertaken by the proper authority of the government machinery. Though 85% of its population is Muslim they live their life based on Islamic valves which lies the enormous feasibility of Takaful. However, the government can take prompt initiative to formulate a new criteria about the rules and regulations of shariah-based insurance business in Bangladesh. To implement the ‘Takaful’ concept in the society, it will not only a praiseworthy task of the government, it will also uphold our Islamic values and heritage beyond the boundaries.

source ; the new nation

Islamic insurance out of reach of Indian Muslims


MuSaumya Roy and Gargi Banerjee

Mumbai: Sayeda Ansari wants to buy a life-insurance policy for her daughter. But she cannot do so unless her stock broker gives the nod. The daughter, the single-mother of a six-year-old boy, lives with Ansari. “Insurance will give her and her son some support,” says Ansari, a Mumbai-based sales tax officer.

But insurance, particularly life insurance, is prohibited by many Islamic scholars because insurance firms may invest the money in shares of firms that are in the business of alcohol, gambling or entertainment— this is not allowed by shariah or Islamic law. Besides, the insurance firm may also lend money and earn interest income, which is also not approved by shariah, a legal framework that regulates public and some private aspects of life based on Muslim principles of jurisprudence. Shariah deals with many aspects of day-to-day life including politics, economics, business and social issues.

Praying and worrying do not go together. If you believe in the power of prayer, you would not need insurance, says Zafar Sareshwala who runs Islamic brokerage Parsoli Corp.Shariah does not allow Muslims to buy insurance. Life insurance, in particular, is frowned upon because life is given or taken away by God and anyone taking out a policy is, in effect, hedging against God’s will. There are Islamic insurance products available—this market is valued at a few billion dollars—including policies for marine and airline insurance, but this phenomenon is restricted to countries such as Malaysia, Indonesia and those in West Asia. Although India is home to more than 150 million Muslims, insurance companies have largely stayed away from Islamic products here. Bajaj Allianz’s Star Select is currently the only Islamic, or ethical insurance product in India.

When Ansari approached Ashraf Mohamedy, who runs an Islamic stock brokerage calledIdafa Investments Pvt. Ltd, he advised her against getting her daughter insured because it is haram or forbidden in Islam. She is still waiting for an insurance product that will get Mohamedy’s nod. Ansari, now 56, hopes it will be soon.

There is no data indicating what percent of Muslims are insured but anecdotal evidence suggests it is less than the national average because of religious reasons.

The Rajinder Sachar Committee, a panel appointed by Prime Minister Manmohan Singh to prepare a report on the social, economic and educational status of the Muslim community, has found that since most Muslims are self-employed, their need to access bank credit is high. Despite this, “Muslims constitute about 12% of all account holders in banks,” according to the committee; this is well below the share of other minorities. And on average, the amount outstanding (an indicator of loans sanctioned) per account for Muslims is about half that for other minorities and only one-third of other communities. The committee presented its report in November 2006.

Rakesh Basant, one of the six members in the Sachar committee, says that the idea that Muslims are generally averse to participating in the formal financial system is a myth. The committee did establish that there is a need for savings accounts among Muslims but sometimes “Muslims themselves assume they will not qualify for credit, and do not approach banks,” Basant says. The committee did not touch upon the insurance sector. Muslim stockbrokers in India say that with the cost of health care rising, there is a growing need for insurance coverage among Muslims. The community’s informal safety net called zakat where wealthy Muslims are obliged to pay 2.5% of their wealth to underserved categories of the society when their annual wealth exceeds a minimum level, is increasingly proving inadequate.

After riot-related damages hit businesses run by Muslims, religious consensus in the community veered towards allowing general insurance. However, even as the cost of health care increases, health and life insurance products remain largely out of bounds.

Bajaj Allianz’s Star Select is currently the only Islamic, or ethical insurance product in India. When people of his community come to Mufti Abdul Qayoom, an Ahmedabad-based cleric, seeking his advise on insurance-related queries, he tells them to invest in a systematic investment plan (SIP) of a mutual fund. SIP is a method of investing a fixed sum, on a regular basis, in a mutual fund scheme. It is similar to regular saving schemes like a recurring deposit and it allows one to buy units on a given date each month.

Mohamed Irfan Dadani, an agent of Life Insurance Corp. of India (LIC) who operates in central Mumbai’s Muslim-dominated Mohamed Ali Road, says 90% of his 800 clients are Muslims but admits that at least 30% of them stay away from life insurance. Dadani and Mahesh Mangaonkar, another LIC agent in Mumbai’s Santa Cruz suburb, keep an assortment of religious opinions, articles and fatwas that say Muslims can buy insurance products and produce these when they meet prospective Muslim clients. The clients usually do not commit to buying any policy without taking religious opinion.

Even those who have bought policies are not particularly happy. “I took life insurance for myself and my family many years ago because I did not have the money to invest in property or gold then,” says Abdul Ral, a Mumbai-based timber trader. “Now I pay more than Rs1.20 lakh in insurance premiums a year. But I know this is haram and I will be thrashed by the powers above,” the 56-year-old said.

Haroon Efroze, a financial advisor with Metlife India Insurance Co. Pvt. Ltd, a private sector insurance firm, says that despite being a devout Muslim he sometimes feels the ire of his community members because he sells a forbidden product. He recalls having worked out a model portfolio for a high net worth Muslim individual who was ready to pay a premium of Rs1,000 daily to cover himself and his family, but backed out at the last moment, because his local cleric did not approve of the plan. Efroze, however, points out that instances of Muslims opting for unit linked insurance plans (Ulips) and general insurance products have been growing.

Zafar Sareshwala, who runs an Islamic brokerage called Parsoli Corp. Ltd, is in the process of creating an Islamic insurance product and he does advise clients to be insured. But personally, he and his family do not want life or health insurance. “Praying and worrying do not go together. If you believe in the power of prayer, you would not need insurance,” he says. “But when the choice is between getting insurance and staying sick because of the lack of insurance, I feel taking insurance is the lesser evil.”

source : livemint

Lending and Borrowing: An Overview

By A.L.M. Abdul Gafoor

Appropriate Technology Foundation

Groningen, The Netherlands

Lending and borrowing between humans has taken place since time immemorial.  People borrowed and returned implements, animals, foodstuff, etc from their friends, neighbors and relations.  They returned the same after use or in the case of foodstuff consumed and returned the equivalent when they came into possession of similar stuff.  When money came into being people borrowed that too and returned.  It was all on the basis of mutual help — the borrower today may be the lender tomorrow and vice versa.  As time progressed professional moneylenders appeared on the scene, and they demanded a “fee” for the use of their money.  This fee is now called interest, but till a few centuries ago it was called usury.  In Islam, interest or usury, which in Arabic is called riba, is prohibited.  Demanding, receiving, paying, witnessing, and anything connected with these activities are all equally prohibited.  There is no controversy over this.  Similar prohibitions exist also in the religious laws of Judaism and Christianity.  Although other religions may not have written laws explicitly prohibiting usury, their followers do eschew the practice of usury. 

1.1  Lending and borrowing: then and now

In earlier times, lending and borrowing was mainly between individuals, and what was meant by usury in these transactions was commonly known and understood.  In money matters, any amount over and above the lent sum was defined as usury or riba.  The ill consequences of usurious lending — the ruination of individuals and families — were witnessed at the local level and therefore the community held the practitioners in contempt.  But the need for capital and loans existed and, in the absence of alternative solutions, the usurious lenders became an indispensable component of the society.  They also exercised invisible power over their clients’ resources.  If the clients happened to be in authority, the power extended to other areas as well; the greater the client’s authority the extensive the power of the lender. 

Kings and nobles needed money to wage war or to live extravagantly.  Moneylenders were happy to oblige, not only for the profit it brought them but also for the privileges and concessions they could extract from their royal clients.  Mining concessions, special trading licenses, tax exemptions, lucrative contracts for public projects, land grants, and personal privileges such as royal titles and appointments to influential positions are just a few examples.  These dealings were carried out discretely and the public was generally ignorant of them.  But the citizens paid the price, one way or another.

The most important concession so extracted was the passing of the Usury Law.  This law introduced an innocuous term called interest and usury was defined as high rate of interest.  Usury was still prohibited, in deference to the Church, but “reasonable” interest was made permissible.  What is reasonable and what is high was to be determined by the parliament!  Now that interest is legal, kings may lose their thrones, soldiers may lose their lives, families may lose their livelihoods, but the country must pay its debts with interest.  Moneylenders extracted their pound of flesh. 

In recent times, presidents and ministers have replaced kings and nobles, and corporate and international financial institutions the individual moneylenders.  The same game, only new names and wider settings.  It is now global, the suffering is universal, and the statistics are in the public domain.  Yet, hardly anyone dares to point the finger at the real culprit — usury, whatever the legal name it may assume.  Neither are the real needs objectively looked at.  Consequently, no meaningful alternatives are offered.

1.2  Lender, borrower and the Church: different goals

Governments, businesses and individuals need money for various purposes.  The methods of catering for these needs must match the purpose for which the money was needed.  A mismatch can lead to disastrous consequences, but this requires much thought and effort.  Borrowing is an attractively easy solution, and this is what the moneylender would recommend for all situations, for it is the most profitable one from his point of view.  When the borrower is impatient or desperate and the only game in town is the moneylender, borrowing from him is the only option and the consequences are inevitable.  To avoid disasters, then, we have to first study the different purposes for which money is needed and then devise methods most appropriate to each purpose.  We have to provide more alternatives.  The moneylender has only one purpose and concern: his profits and benefits.  But the society has more and larger concerns, for it is its responsibility to cater for and protect all its members, individually and as a whole, those living now and those still to come.  In this connection, it is well to remember that all the basic rules, methods, procedures and laws relating to banking and finance were either formulated by the moneylenders themselves or they had a hand in their design and/or execution.

When the usury law was proposed, it was argued that the merchants needed financing, they made profit using the borrowed funds and, therefore, they had the ability to pay the financiers a portion of that profit.  Very reasonable.  The trouble was, once the law was passed, it was applied to all situations — whether the borrowed funds brought about a profit or not.  The Church had become too weak but still dogmatic, and the merchants and moneylenders too strong.  The Church could not grasp the new need, brought about by the increased trade in Europe, and failed to provide an appropriate solution.  Nor could it argue successfully to limit the application of the new law to trade financing only.  Neither did it demand that the law should not be applied to non-profit-creating loans intended for basic consumption needs.  It seems that the Church granted the moneylenders a blank cheque on a platter, by default — by its all‑or‑nothing insistence on a complete prohibition and by failing in this dogmatic stance.

1.3  Islamic approach: different consequences

In Islam, the situation was different.  First, from the beginning of the history of Islam in the seventh century, the (large-scale) merchants’ need for (additional) funds was fully recognized and provided for.  There were two ways in which a merchant could finance his trade.  One: two or more merchants could pool their funds together and conduct the business together and share the profit or loss according to their (financial) contribution.  This was called musharaka, similar to the present-day partnership company.  Two: a merchant could obtain his funds from one or more financiers and share the profit with his financiers in an agreed proportion.  But he has full freedom in the conduct of his business, and any genuine financial loss must be borne entirely by the financiers.  This was called mudaraba, similar to the present-day shareholder companies.

Consequently, while the riba-prohibition of Islam related to all lending and borrowing operations, it took special note of the financing needs of traders and businessmen as well as the investment and income generation needs of those who possessed extra funds.  It does not mean that riba is acceptable in these cases; it is prohibited here too.  But a different and equitable solution was already available in Arabia when the Qur’an was revealed; so it approved of it and went onto prohibit riba in all cases.  Therefore, the merchant-need-based and return-on-investment-based arguments of Europe were not relevant or valid in the case of Islam and Muslim lands.  It is necessary to recognise this fact.  That is, the all-embracing usury-prohibition law of the Church and the riba-prohibition law of Islam are not exactly equivalent, despite the similarity of appearances. 

Second, throughout the long history of Islam, Muslim caliphs, kings and nobles have, by and large, kept away from borrowing at interest.  Even though many of them had their share of shortcomings — in common with their counterparts elsewhere — their belief in after-life and the strong words used by the Holy Book against the dealers in riba kept them away from it.  The same applied to all would-be moneylenders as well.  This saved the Muslim masses and the society from many of the ills experienced by other societies, even though this blessing goes generally unrecognised and unappreciated.  Even under colonialism they have enjoyed this benefit.  However, it would be naïve to believe that there existed absolutely no riba-based lending and borrowing, but it certainly was personal, local, small, isolated, discrete and unorganised.

Only in the second half of the twentieth century, especially after many countries became independent, established their own governments, and had to run the affairs of the country on their own, that they began to experience the claws of interest through the banking system.  They needed the banking system because it provided the various services needed by the different sectors of modern society.  But the moneylenders had developed it for their own benefit, based on the all-embracing usury law.  It did not make the differentiation the Qur’an had made.  Muslims had slumbered through the formative years of the modern world, and failed to build on the head start they had and shape a business and banking model to suit modern needs.  Yet their desire to comply with the commandments of their Creator did not die.  Their leaders and intellectuals have awoken to the demands of their constituents, experiments with Islamic banking have begun, but there is still a long road to travel.

1.4  Lending with and without interest

Before we travel further, let us state clearly what we mean by interest and riba and then note the difference between lending/borrowing with and without interest, usury or riba.  Limiting ourselves to monetary dealings only,[1] any benefit demanded or received by a lender in addition to the sum he lent is termed riba.  This would, however, include both monetary and non-monetary benefits.  Interest, on the other hand, would legally limit itself to monetary benefits only.  It is useful not to forget this difference and its significance.

When a person lends without any benefits to himself, he is bound to assess the ability of the borrower to pay back the capital as well as to ensure that the capital is to be used for a purpose that he approves of.  It is also a condition of such borrowing that the lender and the borrower are known to each other or that a reliable mutual friend/relative/acquaintance has introduced them.  In such a situation, there is an unspoken moral/ethical responsibility (and a sense of shame and reluctance, otherwise) in asking, recommending or granting such a loan. 

All these restraints are absent when the lending is done at interest.  The lender assesses only the borrower’s ability to (or the means to) repay the capital and the interest.  A collateral is usually demanded, and by the very nature of interest — its dependence on time — the lender expects that he would eventually be able to acquire the collateral at a favourable price.  Both the interest and the possibility of acquiring property at very low cost drive the moneylender to readily accede to request for loans, as well as to encourage such requests.  Thus, when riba or interest enters the picture, the attitudes of both the lender and the borrower head in a direction directly opposed to the one prevalent in its absence.   This riba-induced change of attitude is remarkable, as are the opposing characteristics of the two attitudes.  One discourages debt, and the other encourages it.  One restrains expenditure on morally or ethically unacceptable items and purposes; the other places no such restrains.  One is open to social control, the other not.  One limits both the size of borrowing and its frequency; the other encourages increase in both.  One encourages short-term loans; the other thrives on long-term arrangements. 

The last two are very interesting.  For since more and larger loans would bring more profit to the lender he would try to acquire more funds.  This eventually led the moneylender to borrow from others at low rates of interest and use the same funds to lend at higher rates, as if it were his own.  The bank’s credit-creation technique was also developed for the same end.  Furthermore, long-term loans provide a stable and steady source of income to the moneylender.  This and the availability of increased funds led the banks to widen their reach and, in recent times, to enter previously untapped areas such as housing finance and student loans.

1.5  Need for money

Let us now examine the need for money in some detail.  To begin with, there are purposes that bring profit, and others that do not.  Within these two categories there are necessary, unnecessary and harmful purposes.  In the modern world one has to also make a difference between the needs of individuals, business organisations and governments.  Let us take them in turn.

1.5.1  Extravaganza and vanity

When the borrowing is for extravaganza or vanity, the borrowed fund produces no profit.  Therefore, if the borrower is unable to repay the loan and interest from his other income sources, the interest would keep on mounting and the moneylender would eventually confiscate the collateral.  All religions and sages throughout the ages have condemned extravaganza and vanity, and have advised against it.  The Qur’an has specifically prohibited spending in vanity.  Here the reference is to one’s spending from his own resources, and the onus is on the individual.  As such, if one engages in such spending using borrowed money, he is seeking his own doom.  Yet, by making the riba-prohibition applicable to both the lender and the borrower, Islam seeks to protect people against their own selves.  If there is no borrower there will be no lender; if there is no lender there will be no borrower.  This closes all doors to doom.  Thus there is no need to find any other solutions to the apparent need of the extravagant.

1.5.2  Housing and education loans

Housing and education are real needs, and therefore their financing deserves close attention.  Building or purchasing a house is obviously a capital acquisition.  So is education, though it does not seem that obvious.  Capital acquisition has always been done using one’s own savings or wealth.  It should continue to be so.  House-owning leads to individual and collective independence.  In turn they add to national wealth and well-being.  This fact is recognised by wise governments and they actively encourage private initiatives.  Free education has produced wonderful results in the twentieth century. 

However, the modern trend, especially in the developed world, is to have them financed by long-term bank loans.  But unlike the loans for commercial purposes these loans produce no immediate profit to the borrower.  Yet, to a moneylender a loan is a loan, and from his point of view these have some attractive advantages, including a secured regular return guaranteed for a long period.  In many developed countries the fiscal laws encourage borrowing and discourage saving/investment/capital acquisition by taxing the interest/dividend received from the latter and granting tax exemption to the interest paid on loans.  These laws enable the banks to price the products very attractively and encourage mortgages, but the subsequent experience of the borrower and the effect on the nation are different. 

For example, a house-owner who bought it on mortgage remains a debtor for practically the rest of his working life and ends up paying several times the original price.  On the other hand, if he fails to pay his instalments on time, he is kicked out as if he were only a tenant.  A student forced to take a loan for his education leaves college/university with a certificate and a millstone round his neck.  He may become a government administrator, business executive, politician or any other, but he is still a bonded man.  And a bonded person cannot think or act independently.  Anyone whose parents are too poor or unwilling to pay for his education, and himself refuses to be bonded, is denied higher education.  It is a national tragedy.  These characteristics of housing and education set them apart from other needs. Therefore these require special treatment.   

1.5.3  War

Wars, in general, bring only death and destruction to people and property — never any profit.  The winner and the loser are both losers in the end.  If a war is fought by borrowing money at interest, win or lose the country will have to pay the debt with interest, and borrow again to rebuild.  Whether the war was an offensive one or a defensive one, in the end, only the moneylenders celebrate — on both sides.  Consequently, in history as well as in the present time moneylenders have played an important behind-the-scenes role in both beginning and prolonging wars.  Only a total prohibition of riba on both the lenders and borrowers and its adherence at all levels, especially at the highest levels, could eliminate this factor in the war equation.  Since everyone is a loser in a war, it is in everybody’s interest to avoid any war; eliminating its financing by funds borrowed at interest will go a long way in this effort.  Therefore we need not seek any other solution to this contingency.

1.5.4  Government expenditure

Government expenditure consists of two types: capital and current.  The funds for both are expected to come from taxation.  So a government’s ability to acquire capital goods — to buy equipment and material and to build roads, bridges, schools, hospitals, communication infrastructure, etc — are dependent on, and limited by, the tax revenue.  However, the current expenditure, such as salaries of government officers, supplies and maintenance, has priority over capital expenditure.  Often, like in the case of an individual, little is left over from the tax revenue for capital expenditure.  Consequently, since all capital expenditure cannot be postponed indefinitely, there arises a budget deficit.  A budget deficit is financed by printing money, borrowing, or both.  Printing money leads to inflation, which is a tacit form of taxing the population.  Borrowing increases national debt and interest payment.  Credit creation by banks based on the new money (printed or borrowed) increases inflation even further. Government bonds

Government bonds is one of the instruments used for borrowing money.  Since capital expenditure on infrastructure does not produce any profit, borrowing at interest leads to additional current expenditure in the form of interest payments.  This in turn requires curtailment of other current expenditure or further borrowing.  Government bond is big business, it provides those who have money to spare with a great source of guaranteed return.  But the public debt it creates keeps mounting.  So does the interest on it.  And the inflation generated by money-printing and credit creation add onto the interest rate and lead to further increase of the public debt. 

Thus once a government begins to spend more than its tax income, or fails to tax sufficiently to cover its essential expenditures, it gets into a vicious cycle of borrowing to spend and spending to borrow.  To tax sufficiently the country must produce enough, and taxes are always unpopular.  Borrowing is the easy way out and the country finally ends up in the grip of the moneylenders — national and international — no matter which party or person runs the government.  The debt is open and legally binding but the grip — do this or return the loan, do that or no more loans — is unseen, undeclared and least understood, and hence more hideous.  It is a great mystery, though, that developed countries with very large national debts keep on prospering, while underdeveloped countries with much smaller debt burdens crumble under it.  However, this is no place to probe into that mystery.  Treasury bills

It is a time-honoured practice of any individual to spend on his needs from what he has earned.  If there is no more money left, he either curtails his spending or postpones it till he comes into sufficient funds.  If his income is fixed and regular, such as that of a salaried employee, and he finds himself short of money at the end of the month, he must curtail his expenditure.  Otherwise he will find himself at a worse position next month because his income is not going to increase next month, but the gap would have doubled.  If, instead, he borrows to bridge the gap he will have to borrow the next month and the following month too — an increasing amount every subsequent month.  Eventually he will have to borrow to eat, and pay the loan as soon as he receives the salary and then borrow again for the expenses of the next month.  Suppose he borrows at interest, then he will be bankrupt very soon on account of the interest payments, even though he continued to work and earn.  One could get out of this situation only by earning more or selling some property and paying off all the debts and begin to live within the income and spend only from already earned income.  Or by severely curtailing his expenditure, save and pay off the debts, and by living within one’s means from then on.   

In the case of government current expenditure too, somewhere along the line, they threw away the time-honoured practice of spending from realised earning (collected tax) and began to borrow and spend, expecting to repay when the tax revenue came in.  This committed them to an interest payment cycle.  An instrument called the Treasury Bill was developed for this purpose.  This, in effect, is a three-month loan, interest paid in advance.  The funds are used to pay the current expenditure for the next three months and the loan is paid from the taxes collected at the end of the quarter.  New treasury bills are issued every quarter, month or week.  The cycle goes on.  An elaborate set of financial tools and markets are built around this.  So elaborate that no one remembers when, how or why it started in the first place, or how it keeps perpetuating itself.  It is a given in Finance and Government, and theory and practice have canonised it.  Moneylenders (private individuals, banks, financial institutions, insurance companies, pension funds, etc) thrive on it, and a whole army of professionals service it.  But the general public pays for it, suffers the consequences, and is blissfully unaware of what is happening to it.  Enlightening the public further on this point is not within the purview of this essay.[2]

1.6  Islamic banking confusion

Islamic banking is rooted in the facts that riba is prohibited and trade is permitted, and the profit resulting from trade is permissible income.  By extension, it was argued that interest, which is equated to riba, must be replaced by profit.  To achieve this, lending transactions must be replaced by trading transactions.  This simple concept is religiously applied to all situations.  Where the difference was not clear, legal devices were adopted to dress it up as trade and profit.  One may cheat himself, but can you fool God?  He may be amused by our poor attempts, but does He approve of it?  Whatever God does or does not, others are laughing at us.  Sincerity is supposed to be the bedrock of our relationship with God.  If we are sincere in our efforts to obey His commands, He will certainly show us the right way. 

When the commands were issued 1400 years ago, they were directly understood in the context of the social and economic environment then prevailing, and their application was easily achieved.  Today, the environment has changed and that makes the application seem difficult.  But the solution is not through legal devices, but through our studying and understanding the new environment and sincerely seeking to apply the commands without any adulteration.  Trade and profit have their place, but it is not appropriate for all occasions.  We have to explore other options.  If our intention is sincere, He will certainly guide us to the right solution.

1.7  Solutions

By looking at the needs of society, we can identify three different kinds of needs — investment and finance, banking and loans, and charity — and they each need be handled using a different technique.  Moneylenders offered one solution for all three needs because it was to their advantage, but the society has to cater for larger concerns and therefore must offer more appropriate solutions.  The Qur’an points out these different needs and presents us with different techniques to suit each need.  It is for us to translate them into present-day “language” and set up appropriate institutions.  Outlines of such institutions are presented in another essay (see Meeting the Financial Needs of Muslims: A comprehensive scheme).  Other essays elsewhere expand on these outlines.

Properly dealing with lending and borrowing transactions requires an understanding of the meaning of modern bank interests in relation to usury and riba.  In an essay entitled, Interest, Usury, Riba, and the Operational Costs of a Bank, the history of interest, its relation to usury and riba, the origins of dogmas and theories that prohibit or justify its practice, and the meaning of interest in the modern setting of banking are explored.  It also presents a general model of interest in which several scenarios — from person-to-person lending to modern commercial bank lending — become sub-models.  This enables one to separate riba from the operational costs of a bank and thus to devise a riba-free system of commercial banking that is both viable and compatible with the conventional one.

Inflation has become a fact of life, it erodes the value of capital — depositors’ savings, banks’ loans, cash-in-hand.  It has also been offered as an excuse for charging and accepting interest.  But the main cause of modern-day inflation is not in the short-term supply-demand  pull-push tensions, but in the long-term effects of increased money supply.  The basic cause of this increase is the de-linking of the currency-gold relationship.  It occurred gradually over time, but the final blow was dealt in 1971 when the US dollar was de-linked from gold and the promise to redeem every dollar for 1/35th of an ounce of fine gold was withdrawn, reneging on the Bretton Woods Agreement of 1945.  US dollar was allowed to float (meaning more dollars were printed without the constraint of the 35 dollars per ounce of gold ratio), and the other currencies, which were all linked to gold through the dollar, also started their free-floats, each in its own pace.  Today, at 350 dollars an ounce, gold is ten times more costly.  It is said that the price of gold has gone up; but the reality is that the currency has depreciated that much.  Re-linking all currencies directly to gold, and strictly adhering to the agreed currency-gold ratio, is the proper solution to this problem.  But a global agreement on this is not going to occur anytime soon.  In the meantime savings, loans and cash-in-hand are going to lose their purchasing power.  To neutralise the effect of inflation (due to currency depreciation) on capital, without recourse to increasing the interest rate, a new mechanism is necessary.  Such a mechanism is presented in a book entitled, Commercial Banking in the presence of Inflation.  This mechanism is applicable in person-to-person lending-borrowing transactions as well.  It is straightforward and not difficult to implement.





1.       Emry, Pastor Sheldon, Billions for the Bankers – Debts for the People.  Free distribution booklet, undated.  Also available at: http://www.justiceplus.org/bankers.htm, and downloadable from: Billions.exe.

2.       Gafoor, A.L.M. Abdul, Commercial Banking in the presence of Inflation.  Groningen, the Netherlands: Apptec Publications, 1999.  Published in Malaysia by A.S. Noordeen, Kuala Lumpur.

3.       ……….., Interest, Usury, Riba, and the Operational Costs of a Bank.  Article available at the author’s websites: www.IslamicBanking.nl and http://users.bart.nl/~abdul/

4.       ……….., Meeting the Financial Needs of Muslims: A comprehensive scheme.  Article available at the author’s websites: www.IslamicBanking.nl and http://users.bart.nl/~abdul/

TAKAFUL: Objectives and Methodology

images10By : Atiquzzafar Khan




Insurance is the most important sector in present day modern economies after banking. In fact, banking and insurance go Hand-in-Hank and greatly complement and support each other’s operations. Almost all large scale business activities are bound to arrange insurance cover in one way or the other. Insurance business is an important contemporary issue which has attracted so many debates and discussions. Muslim scholars have been writing on this issue since the introduction of this business in the Muslim societies. In sixties and seventies the issue of insurance business came on the agenda of many conferences and seminars and consensus was emerged after long discussions that although the concept of insurance is not contradictory to Islamic principles but its present practice involves some elements such as interest, Gharar, Unlawful appropriation of others’ property etc. which are forbidden in Islam. Cooperative insurance has been suggested as an alternate to the present commercial insurance. Some scholars presented the concept of Takaful as an alternative scheme for running the insurance business in private sector. Involvement of Mudarabah and Tabarru’ (gift) in this scheme removes the objectionable elements from the business. On these lines many Islamic insurance (Takaful) companies were established in eighties and nineties in various Muslim countries and performing their business successfully.


The objective of this paper is to give an introduction of Islamic insurance (Takaful) business by mentioning its objectives, principles and operational mechanism. The arrangement of the paper is follows: The second section of the paper provides a brief introduction of contemporary insurance. Section three analysis the major points for and against commercial insurance to determine its Shariah position. Section four lists the basic Shari’ah principles of business in general and insurance business in particular and gives a brief introduction of Takaful scheme. The final section describes the operational mechanism of Takaful business in the light of Takaful experience of Malaysia.



Section 2.

Contemporary Insurance: Nature, History and Management


2.1. Introduction of Conventional Insurance and its Mechanism:


All human activities are subject to risk, which may lad to financial or physical losses to him. Insurance is a device to covers the loss arise due to occurrence of some undesired event. There are many possible ways of handing the risk. We can briefly mention some important ones as follows:

1. Risk Avoidance 4. Risk Transfer

2. Risk Retention 5. Risk Sharing

3. Risk Reduction

The last two methods provide the possibility of insurance business and naturally the third method is also used by insurance companies through instructing the policy holders to adopt suitable safety measures for reducing the risk.

Insurance is a complicated and intricate mechanism, and it is consequently difficult to define. However, in its simplest, it has two fundamental characteristics.

Transferring or shifting risk from one individual to a group.

Sharing losses by all members of the group on some equitable basis.


The term insurance, in its real sense, is community pooling to alleviate the burden of the individual, lest is should be ruinous to him. More precisely it can be defined as, “The simplest and most general conception of insurance is a provision made by a group of persona, each singly in danger of some loss, the incidence of which cannot be foreseen, that when such loss shall occur to any of them it shall be distributed over the whole group.”1

Insurance has a very long history. There is evidence of many practices resembling insurance in the ancient world. As early as 3000 B,C. Chinese merchants utilized the technique of sharing risk..2 The practices similar to insurance were in vogue in pre-Islamic Arab Society. 3 Some of the known practices were A’qila, Qasama Mawalat, and Willa’. The institutions were allowed to work in Islam due to there usefulness and some other institutions of the similar nature were established under Islamic state. Although these were insurance of sort, the modern insurance business did not begin until the commercial revolution in Europe. Marine insurance appears to have been started in Italy sometime during the thirteenth century. 4 Fire insurance in the modern era can be traced to Germany, where a fire association known as the Feuer Casse was organized in 1591. In 16666 the great fire of London broke out and an English Physician named Nicholas Barbon formed a stock company in 1680 with several associates called “The first life insurance policy was issued on June 18, 1536 by a group of underwriters in London.

Objectives of Insurance Business

The major objectives of insurance business, as gi en in the printed material of insurance, are the following:

Provision for the necessities of life of heirs as a result of sudden death of head of the family.

Security from economic loss in case of some accident such as fire, burglary etc.

Provision beforehand for the payment of any unforeseen financial liability or penalty.

Provision for inevitable needs of the future like after retirement, Provision beforehand for children’s education or marriages.

Increase in capital.

Provision against unforeseen business loss due to sudden fluctuations in money market, international market, or stock market etc.


Insurance business is broadly classified into two groups: Life insurance and General insurance. The latter has three main branches Marine, Fire, and Accident. The last mentioned type includes insurance of Motor Vehicles and Aero plane etc. Life insurance is also broadly classified as Whole Life policies and Endowment policies. Annuities come in the later group. Annuity in periodic payment to commence at a stated or contingent date and to be continued to be paid, to a designated persons(s), for a fixed period or for the life or lives of the person or persons entitled to receive payment


Classification of Insurance Business

Insurance Pricing:

The pricing of insurance policies is same as pricing policies for other commodities. In either case the seller must charge enough to cover all his costs and give some reasonable profit. But beyond this basic similarity there are some major differences. Two of them are particularly important: First, when an insurer sells a policy it has no way of knowing what its costs for that particular policy will be. It cannot just add up the cost of labor, rent, and so forth. Instead, the insurer must estimate the cost, basing its estimate upon what it has cost to provide similar policies in the past. The second difference is that the cost to the seller depends partly on who the buyer is. The insurer’s cost depends largely upon whether or not the policy buyer has losses and, it so, how many and how large they are. Of course, this is the reason that different people are charged different prices for policies providing the same kind and amounts of insurance. It is among the statutory requirements that the insurance rates must “discriminate fairly”, which means that proper distinctions should be made among various insured’s. Those who are alike should be charged the same rate; those who are different should be charged different rates.

There are three basic elements that premium must cover. The first component, the amount needed to pay policyholders’ losses, is the pure premium. The second part of the premium pays for the operating expenses of insurance company. These include the sales commission and other marketing costs, administrative costs, taxes, and the cost of handling claims. The third part of the premium is classed the margin, which includes an allowance for (a) contingencies, and (b) underwriting gain or profit.


Premiums, Rates, and Exposure Units:

As we know, insurance price is called premium; premiums are based on rates; and rates are prices per unit of exposure. As total price for any commodity is determined by multiplying the price per unit times the number of units of that commodity, the premium in case of insurance policy is the rates times the number of exposure units.

Pure Premium = rates * exposure units

Where exposure units

are the quantitative units used in insurance pricing. As gallons are the quantitative units in gasoline pricing, the quantitative units in automobile insurance are cars; the rates apply on a per car basis. In life insurance, for instance, the rates apply per $1,000 of insurance, and in workers’ compensation the rates apply per $100 of payroll.5

The final premium that the insured pays is called the gross premium or gross rate. For converting the pure premium into a gross rate requires addition of the loading, which is intended to cover the expenses of operation. The final gross rate is derived by dividing the pure premium by a permissible loss ratio, defined as t he percentage of the premium that will be available to pay losses after provision of expenses. It is equal to (1 – Expense ratio). Thus gross rate is defined as,

Gross Rate = Pure Premium /(1 – Expense ratio) 6




Section 3:

Arguments For and Against Insurance

Muslim scholars are writing on the issue of insurance and their opinion is sharply divided on the issue. Generally these views of the Muslim scholars could be classified into three groups:

Both the concept and the practice of insurance is contradictory to Islamic principles. According to them insurance involves Riba gambling and uncertainty, and is opposed to the concept of predestination (Taqdeer).This view is held by Dr. Hussain Hamid Hussan7 , Mufti Wali Hasan8 , Sheikh Abu Zahra9 and many other Shari’ah scholars.

Other group while appreciating the philosophy and rationale of insurance disapprove most of the forms of insurance contracts undertaken by commercial insurance companies. They see in them elements of risk, uncertainty, ignorance, usury which are inalienably associated with contemporary insurance. Among the prominent scholars of this group are Muft Muhammad Shafi10, Maulana Maudui11, Sheikh Ahmad Ibrahim12, Mustafa Zaid713, Sheikh Mohammad Bakheet14,, Issa Abduho15, Ahmad Fahmi16, Dr. Muslehuddin17, Dr. Mustafa Sayyad18 and many other distinguished scholars.

Third group of Muslim scholars maintains that insurance is permissible since it is based upon the principles of mutual assistance an reciprocal responsibility which Islam wants to promote among the Muslims. Further, the uncertainty involved in insurance is not of a sufficiently high degree to warrant its prohibition. This viewpoint is held by Mustafa Zarqa19, Sheikh Ali al Khafif20, Dr. Yousuf Musa21, Muhammad Ali Bahi22, Dr. Nijatullah Siddiqui23, Ahmad Taha Al-Sannusi24. Gharib Jamal25, and some other scholars.

In this section we ill briefly present the major arguments of both the proponents and the opponents of existing insurance in some detail and evaluate them in the light of Shari’ah


3.1. Arguments of opponents


Shari’ah scholars have raised many objections in contemporary insurance business. Some major objections are as follows:


3.1.1. Elements of Gharar (Uncertainty)


According to various Ahadith of the Prophet (SAW) any sale involving Gharar is prohibited whereas the insurance contract involves an element of Gharar of a high degree. The attribute of Gharar exists in insurance in four kinds.






Gharar in existence:

The existence of the amount of compensation is doubtful since it is paid only at the occurrence of the event which is uncertain.

Gharar of quantum:

The insured does not know at the time of the contract how much compensation he will get in case of any damage to his property.

Gharar with regard to time of payment:

It suggests that the time of payment of compensation in case of insurance is unknown and uncertain.


3.1.2. Element of Gambling

: In the contracts of insurance the insured loses his premium if the event does not happen, and in the other situation the company pays his several time more than what he has paid as premium. This clearly amounts to gambling as one party loses by more chance and the other gains undeservedly.


3.1.3. Element of Interest:

The opponents argue that the element interest is found in insurance in two ways. The first is that insurance companies invest the collected amounts in interest-oriented government securities and businesses for earning purposes. The second is the difference between what company receives from the policy holders and what it pays back as compensation as contractual objection comes under the definition of Riba.


3.1.4 Unlawful Appropriation of Other’s Properties


Islam enjoins upon believers not to devour other people’s properties wrongfully. 25 In most contracts of insurance the insured does not get anything from the company because the event never occurs during the period of contract. The premium money is thus wasted without any material benefit. All the money on account of premium goes to the company without any effect on its part..


3.2. Arguments of the Proponent


We also find scholars who consider contemporary insurance desirable from Islamic point of view and they don’t see any major problem into this business. There arguments are briefly stated below.

3.2.1 Principle of Mutual Assistance


Insurance encourages and promotes mutual assistance and reciprocal responsibility which are an indispensable part of the teachings and value system of Islam. 26

3.2.2. Non Resemblance with Gambling


The advocates of insurance deny the presence of gambling in insurance. They distinguish between the risk taken by the gambler and the risk in insurance which is a necessary part of living. The gambler takes up a risk voluntarily. The hope for gain is the only motivation of the taking of risk in his case. This risk contained in insurance, on the other hand, is indispensable and a useful social process conducive to productivity. 27 The objective of the insured person behind insurance is not to gain the amount of compensation. He does not intend the event to happen. His interest lies in the incident not taking place. He contracts only for peace of mind derived from the knowledge that whenever a catastrophe takes place, he will be indemnified. Gambling upsets the normal system based on work and reward and is inimical to equitable distribution of income and wealth, whereas insurance protects the disruption of the system by accidents and events beyond human control.28


3.2.3. Low degree of Gharar:


Insurance does not contain a high degree of Gharar. An insurance company can predict the chance of actual occurrence. The law of large number helps the company to calculate the number of likely happenings with some accuracy. This law points to the fact that some quantities which are uncertain and changing in individual cases, being different for each one, are certain and remain constant for a large group of similar persons. There, the element of Gharar is negligible in the contracts of insurance.


3.2.4. Analogy between Insuracne and the Institution of A’qila:


It is argued by the supporters of insurance that insurance resembles the institution of A’qila of early Islam. A’qila is an adult and sane male clan of an offender or convict from whom he receives help to pay blood money in culpable homicide.29


3.2.5. Insurance and Suretyship of Unknown Thing or Event:


It is allowed for a person in Shari’ah to be surety for an unknown and unspecified thing30. In insurance each policy holder becomes a surety for the other for an uncertain happening. The company also assumes the role of surety and compensates the loss incurred by a policy holder by way of being a surety.


3.3. Evaluation of the Argumetns:


If we examine the arguments of both the groups, we reach the conclusion that the insurance business as it is practiced today b the insurance companies, contains elements of uncertainty, deceit, usury and many other objectionable features. It contains Gharar of the highest degree. The elements of gambling and interest are also present in the contracts of insurance. The claim of the proponents that the element of uncertainty is negligible since the company has the ability to predict for event with some accuracy does not carry much weight. The event may be certain for the company but it remains quite uncertain for the policy holder. It is also a fact that a large amount of collected money by the company is invested in interest bearing assets. It does not resemble “Aqila of the early ages of Islam, since the purpose of the institution is to help and assist a person and share his burden by way of assistance, sympathy, benevolence, whereas the objective of insurance company is to earn profit. It is also not analogous to kafala contract because kafala is a contract of Tabarru’ and mutual assistance and not a contract to gain money.

As regards the concept and philosophy of insurance there seems to bean agreement of opinion among Muslim jurists, which emerged after many conferences and discussions at various forums, that the concept and objectives of insurance business in no way opposed to the injunctions and value system of Islam since it promotes mutual help, assistance, and cooperation. We can trace from the practice of the Prophet (SAW) and the companions (RAA) that all the needs mentioned in previous section under objectives of insurance, were recognized by Shari’ah.31 There is no doubt about the utility of the institution for society. The only thing required to be done is that the business of insurance should be brought in conformity with the tenets of Shari’ah. The elements of uncertainty, ignorance, gambling, and usury inherent in the business of insurance, need to be removed. The best method to run this business, as suggested by a large number of scholars, is to run this business on the basis of mutual suretyship and reciprocal responsibility. Islamic models of investment such as Musharaka and Mudharaba should be observed while investing the money collected by the company. Mutual insurance has been commonly suggested as a substitute for commercial insurance.32


Section 4: Islamic Guiding Principles4.1. General Principles governing Financial Contracts


Before discussing the Islamic model of insurance it will be quite appropriate to first mention the fundamental Islamic principles governing contracts in general. These principles are as follows:

1. The subject matter of the contract should not be unlawful in Islam.
2. The intended objectives of the contract should not be contradictory to the will of
the law- giver.

3. The contract should be free from the following elements,

i) Qimar (Gambling),

ii). Gharar (Aleatory),

Hi). Ghaban-al-Fahish (Grave Deception), and

iv). Ikrah (Coercion)

4.2. Principles Governing the Islamic Insurance Businessi). It should be based on Mutual Guarantee and Co-operation.

The objectives for which the institution of insurance initially started were very noble. The philosophy underlying insurance was that the consequences of an unhappy event will be shared by a large number of people and will not be left for a single individual to bear. It goes without saying that mutual guarantee and solidarity are integral parts of the value system of Islam.

The present state of this institution is that it does not contain any attribute of mutual co-operation, and guarantee. It is now a business through which a small group of capitalists attempts to attract the wealth of the society to use it for its own benefit and to shift the losses to others. Mufti Muhammad Shaft highlights this situation in the following words:

The prevalent insurance system cannot be described as a cooperative one. It is a misleading device to let the nation face the ill effects of interest-based insurance and speculation. If we analyze this system it will be established that insurance and speculation are in fact the supplements of the same interest- based business by means of which we try to feather our own nest without caring for the profit and loss of the entire nation. It is also used as a means of diverting one’s impending liabilities towards others through the cleaver use of the pharases of “national solidarity” and “cooperatives.^ Therefore, it is suggested that the Islamic insurance should be established on mutual or cooperative bases and preferably run by the government for keeping the spirit of solidarity and cooperation alive. Even if it is in the private sector, help should be provided from a common pool (a Trust fund), meant for this purpose and not for earning profits. The company can earn profits by investing the amount given in investment account

ii) Islamic Modes of Investment should be adopted.

At present many types of investments are being employed in the insurance business without any distinction between the lawful modes and forbidden ones. Most of them contain the element of Riba which is strictly prohibited in Islam. Some of these are founded on gambling and Gharar. Quite apparently all these three elements are unlawful according to Shari’ah. As such, any business or forms of investment which contains any one of these, will be unlawful in Islamic Shari’ah.

An Islamic insurance company is supposes to invest the funds in Islamically approved investments, such as stocks of companies, real estate, and participatory financing (Musharakah, Maudarabah).

Section 5: Islamic Alternative to insurance business:


Muslim Jurists have devoted much time and energy in their efforts to find an Islamic alternative to the existing insurance business. They have discussed the issue in a number of conferences. After extensive deliberations they have reached the conclusion that cooperative insurance provides the Islamic substitute for the prevalent unlawful insurance practices because profits are shared by the policy holders themselves. But this suggestion waslittle restrictive as it did not allowed the private sector to perform any role. Some Muslim scholars offered the scheme of Takaful, based on the elements of Tabarru1 and Mudharabah as the basis for a lawful insurance business35. The word Takaful1 means joint guarantee. The objective of Takaful is cooperation and mutual help among the members of a defined group. In a practical sense Takaful can be visualized as a method of joint guarantee among a group of members or participants against loss or damage that may inflict upon any of them. The members of the group agree to guarantee jointly that should any of them suffer a catastrophe or disaster, he would receive certain sum of money to meet the loss or damage. All members of the group pool together their efforts to support the needy 35.

Under Takaful scheme the participants deposit annually an agreed sum of money with the company. This contribution is divided into two parts. A larger portion goes into investment fund and remains the property of the contributor. The other part which is nearly 2 to 5 percent of the contribution goes into a Waqf fund and considered as Tabarru1 (Donation). The company invests the available funds in mudarabah ventures or some other approved modes. The profits, if any, are added into the investment and Waqf funds according to the previous ratios. The purpose of Takaful may be life insurance and it may also be risk insurance of property. If the insured person dies before the end of the covered time in case of life insurance or if an insured risk on the property materializes, then the company will pay back the amount deposited in investment account by the policy-holder along with profits earned during that period. The other component of compensation will come from the Waqf fund to satisfy the need or to make the compensation up to a certain level.

As company uses Islamically approved modes of investment and distribute profit among the policy holders, element of Riba is eliminated. The other objectionable element, Gharar is still there but as the company manages a separate Waqf fund from donationes of the policy holders, for providing support to the needy member(s) of the group, this Gharar will not invalidate the insurance contract. According to Malki Fuqaha Gharar in Uqood al Tabarru1 (Donation contracts) is acceptable and does not invalidate the contract. The other objectionable elements such as violation of Islamic law of inheritance, confiscating the previously deposited money after a non payment of contribution etc. can easily be corrected as they are not the integrated part of the contract. This is a brief introduction of Takaful scheme suggested as a substitute for commercial insurance. There are many Takaful companies operating in various Muslim countries. To have a better understanding of this scheme it would be appropriate to see the actual functioning of a Takaful company. For this purpose, the structure and functioning of Sharikat Takaful Malaysia is presented as follows.

5.1. Sharikat Takaful Malaysia Sendirian Berhad

In Malaysia the operation of Takaful is licensed and regulated by the Takaful Act 1984. Sharikat Takaful Malaysia Sendirian Berhad was incorporated on 29 November 1984, with an authorized capital of RM 100 million and a paid-up capital of RM 10 million. It officially commenced business operation on 1 August 1985. Sharikat Takaful Malaysia is a subsidiary of the Malaysian Islamic Bank, Bank Islam Malaysia Berhad with, 87.15% of its equity held by the Bank. Other shareholders are States Islamic Councils and Bait-ul-mals of various states in Malaysia. Types of Takaful Business

The commercial activity of Takaful is reflected in two basic types of business that it undertakes,

Family Takaful Business (Islamic life insurance)

General Takaful Business (Islamic general insurance)

The fundamental objective and basic working operation differ between these two types of business. Under the Family Takaful Business, Sharikat Takaful Malaysia provides various types of Family Takaful Plan, which generally, are long-term al-Mudharabah contracts. Basically, a Family Plan provides cover of mutual aid among its members or participants expressed in the form of financial benefits paid from a defined fund should any of its members be inflicted by a tragedy.

For the General Takaful Business, Sharikat Takaful Malaysia manages various types of General Takaful Scheme, such as Fire Takaful Scheme, Motor Takaful Scheme, Marine Takaful Scheme, and Engineering Takaful Scheme etc, usually on a short-term basis. These schemes provide protection in the form of mutual financial help to compensate its members or participants for any material loss, damage or destruction suffered out of any catastrophe, disaster or misfortune that falls on a member’s property or belongings.



Working of the Takaful BusinessTakaful Business is based on the concepts of Al-Mudarabah and Tabarru1. Involvement of these two Islamic forms of business eliminates the elements of Riba and Gharar from the insurance contract.The operational details of different Takaful Businesses are as follows:

Family TakafulAny individual between the ages of 18 to 55 years can participate in the Family Takaful business. Participants are required to pay Sharikat Takaful Malaysia regularly. The Takaful installments are then credited into a defined fund known as the Family Takaful Fund. Each Takaful instalment is divided and credited into two separate Accounts namely, the Participants’s Account (PA) and the Participants Special Account (PSA). A substantial proportion of the installments is credited into the PA solely for the purpose of savings and investment. The balance of the installments is credited into the PSA as tabarru1 for Sharikat Takaful Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before the maturity of the Family Takaful Plan. The amount accumulated in the PA is invested in various businesses according to Islamic financing techniques, and the resultant profits are divided betweer the Sharikat and the participants according to an agreed ratio, e.g., 30-70. The participants’ shares are calculated according to their individual shares in the PA, and credited into their respective accounts, the PA and the PSA.

In case of occurrence of some unfortunate event like death or disability, the
Sharikat makes payment to the policy holder or his heirs. The amount deposited in the
PA along with the profits plus some amount from the PSA according to a formula is paid
by the company. For example if the person die or suffer permanent and the total
disability (PTD) in the fifth year of participation, Takaful benefits will be paid in the
following manner:
i. From Participant’s Account RM 4,890.00

= RM 978 x 5 (i.e. installments paid by the Participant

in his Participants Account from the date of entry

up to the date of death or suffering of PTD) together

with profit, if any, which have been earned from

investment for during the same period, say RM 400.00

ii. From Participants Special Accounts RM 5,000.00

= RM 1000 x 5 yearly payment (i.e. outstanding

amount of Takaful installments that would have been

paid should the Participant survive).

Total Takaful Benefit Payable ( i + ii ) RM 10,290.00

For the Permanent Total Disability (PTD) cover Takaful benefit shall be paid in ten equal installments annually.
If the Participant is still alive at maturity of his FTP, payment of Takaful benefit will be
made to him as follows:-

i. From his Participant’s Account RM 9,780.00

= RM 978 x 10 (i.e. total amount installments credited into his Participant’s Account from date of entry to the maturity) together with the profit from investment if any, accumulated during the same period. RM 1,800.00

ii. From Participants Special Accounts, RM XXXX

Total Takaful Benefit = RM 11,580.00 + surplus as determined by Sharikat Takaful.

General Takaful Business


In consideration for participating in the various schemes of General Takaful Business, participants agree or undertake to pay Takaful contributions as tabarru1 for the purpose of creating a defined asset as illustrated in the ‘General Takaful Fund’. The amount of Takaful contributions will vary according to the value of property or asset to be covered under the Scheme. It is from this Fund that mutual compensation would be paid to any participant who suffers a defined loss or damage arising from a catastrophe or disaster affecting his property or belonging.

As the Mudharib, Sharikat Takaful Malaysia will invest the Fund. All returns on the investment will be pooled back to the Fund. In line with the virtues of mutual help, shared responsibility, and joint guarantee as embodied in the concept of Takaful, compensation or indemnity will be paid to any participant who suffers a defined loss or damage consequent upon the occurrence of a catastrophe or a disaster. Other operational costs to manager the General Takaful Business such as the cost for arranging retakaful programme and setting-up of reserve shall also be deducted from the Fund.

After satisfying all the claims and deducting the operational costs, if the Fund registers a surplus shall be shared between the participants and Sharikat Takaful Malaysia. The sharing of such surplus will be at an agreed ratio as expressed in the principle of al-Mudharabah such as 6:4, 5:5, etc. Profits attributable to the participants are paid on expiry of their respective General Takaful Schemes provided they have not received or incurred claims during the period of participation.

The General Takaful Business is different from Family Takaful, as all the payments are credited to only Tabarru account, and not divided into two separate accounts. One problem which we can feel here is the distribution of surplus among the policy holders. If the payments were given as Tabarru, then they should not bring any profit and if these were given as loan even then providing any share from the profit will not be appropriate and bring the element of Riba in the contract. Therefore, the company should divide the available funds into two separate accounts as the case of Family Takaful Business. If due to short period of policy it is not feasible to make investment and earn some profit then the payments from the policy holders should be considered as Tabarru and no return should be given to them. If the Fund registers surplus, the management can decide to reduce the amount of premium for the renewal of policy which will indirectly help and encourage the policy holders.



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