How Can Insurance Be Islamic?

In the world of Islamic economics and finance, conventional financial instruments such as credit cards, mortgages and insurance are generally considered impermissible.  Like Judaism and Christianity, Islam prohibits usury and financial interest.  Considering credit cards and mortgages depend on financial interest to remain viable for conventional banks, both are generally considered impermissible.

In an effort to provide Muslims with the convenience and flexibility of credit cards and mortgages, Islamic banks have developed shari’ah compliant financial products that eliminate interest.  Instead, these Islamized credit cards and mortgages incorporate a profit-and-loss approach, where the lender assumes ownership risk in the goods and services financed.

However, what of insurance?  Why does insurance need to be Islamized?  Conventional insurance serves a very important function in the global economy by mitigating risk.  Insurance policies effectively transfer risk from the insured to the insurer for a monetary amount.  In the event of an insurance claim event, the insured is guaranteed a monetary payment from the insurer to make the insured whole.

The unequivocal guarantee that an insurer provides is especially problematic for family insurance products such as life insurance.  Because a life insurance policy guarantees payment in the event of death, most Muslim jurists consider this a bet against God.  In Islam, only God knows when a person will die.  Any wager or hedge against this date is theologically insoluble.

In Islam, God is considered omniscient and omnipotent.  Therefore, God’s knowledge is perfect.  More specifically, what God knows to happen must happen.  If what God knows to happen does not happen, then God is either not omniscient or not omnipotent.  However, denouncing God’s omniscience or omnipotence is anathema to Islamic theology and doctrine.

Moreover, conventional insurance typically invests the policy premiums in a variety of financial instruments that include interest.  Therefore, most Muslim jurists consider insurance and more specifically life insurance impermissible.

Instead of conventional insurance products, Islamic insurers offer mutual protection through a takaful fund.  The word “takaful” is a derivative of “kafalah” which means “surety,” “guarantee,” or “mutual care.”

Indeed, this type of a mutual care has been in use throughout Islamic history.  In addition to the myriad proscriptions mentioned above, Islam also demands that each Muslim care for members of the community.  The Qur’an says that one should “spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves” (2:177).

Accordingly, takaful embodies the spirit of social solidarity and mutual care.  Instead of insurance policy premiums, a voluntary donation is made to a communal takaful fund.  Using the law of large numbers, the takaful fund operator uses statistical data and mathematical calculations–similar to conventional actuarial sciences–to ensure that the fund is sufficiently capitalized to fund any insurance claim events.

All takaful funds are invested in shari’ah compliant investments that are free from interest and impermissible investments (e.g., equities engaged in the manufacture, distribution, or sale of porcine food products, alcoholic beverages, pornography, gambling, etc.).

Unlike a conventional insurance policy, because the tabarru payment is a donation, policy “premiums” do not accumulate any cash value for the insured.  According to proponents of takaful, this prevents an insured party from profiting from an insurance policy.

While critics of takaful–and Islamic banking and finance in general–may argue that takaful is simply another example of an Islamic financial product being superficially Islamized, takaful does appear to promote social solidarity and mutual care.

 Source : thexaminar

Gauging the Global Takaful Market

takaful_microchipBy Bill Kenealy


What happens when you apply modern technology to an ancient practice? A new report from Boston-based Celent concludes that insurers and the vendors that supply them need to answer some fundamental questions before they can reap the rewards of the fast-growing market for takaful, a form of mutual insurance popular in the Muslim world.

According to the report, takaful, once a niche product sold largely by small local operators, is rapidly being embraced by multi-national financial services firms with sophisticated product differentiation and distribution capabilities.

The report, Policy Administration Systems for Takaful: A Global Solution Spectrum, was authored by Celent analysts Catherine Magg-Stacey and Ashley Evans, and examines the issues that are shaping the market worldwide. A lack of economies of scale and comparatively lower use of technology, means takaful companies are operating with inflated expense rations, according to the authors.

“Takaful companies, particularly in the Middle East, have shown higher expense ratios than their conventional counterparts,” the report states. “Over time, volumes will rise, and higher customer persistence is expected to offset the expense ratios to some extent. The

final key to managing the expense ratios lies in the use of technology.”

The report provides detailed profiles of the core systems available to takaful companies, especially policy administration systems.

“Policy administration systems are the beating technological heart of any insurance company and this is equally true for takaful companies,” it states. “Given the specificities of a takaful company, a critical element to a successful policy administration system is a flexible architecture. Fortunately, for those entering into this market, many of the modern policy administration systems offer this with user-friendly interfaces and tools allowing configuration of products, workflow, and reports.”

Yet, the report finds many barriers to widespread technological adoption in the takaful market, including a lack of standardization.

“In the short term, it is unlikely that national or international takaful standards will emerge,” the authors state. “Even though many industry players acknowledge the benefits to be gained by harmonization, the reconciliation of the varied approaches espoused by competing associations and standards boards will be a formidable challenge.”

Challenges notwithstanding, the rapid growth of the takaful marketplace will entice insurers and vendors alike to target it. Celent predicts the global takaful market will grow to $7.39 billion by 2015, with the greatest growth in the Middle East and Southeast Asia. “For the moment, the growing takaful market presents a niche opportunity, and the small number of vendors with takaful experience reflects this. However, the sustained double-digit increase in premium in this market will see a commensurate increase in takaful operators/windows in the next few years.”

Source: Celent

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

Takaful Insurance – A new trend in the dynamic world

By Andrew Rohanaraj Insurance plays and important role in reducing the risk of loss due to accident or misfortune. The concept has grown so much so that it has become almost impossible to live in this present world without experiencing the effects of insurance. Whether it is buying a house or buying or leasing a car, insurance has become an integral part of our lives, whether we like it or not. Recently, a new form of insurance based on the principles of mutuality and cooperation called Takaful Insurance has made its presence known in providing insurance services to the Islamic community in Sri Lanka. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages. Anticipation and management of events, which repeat often enough, is a common practice in any business venture. These events could be forecasted to a certain extent if not with pin point accuracy. Let’s take the example ‘death’. It is practically impossible to predict who would survive from year to year, within a group of people. However, the number of people who would die out of a large enough group can be estimated closely enough (i.e. law of large numbers) based on many other factors. With this estimation, each individual in the group can manage this eventuality by agreeing to pool their resources to help the dependents of its members who die early. This is the concept of Takaful. Joint indemnity Takaful is an Arabic word meaning “guaranteeing each other” or joint guarantee. According to this particular insurance scheme, each participant who needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of Takaful is to pay a defined loss from a defined fund. The whole scheme of insurance is based on principles of mutuality and cooperation encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity. Takaful Insurance or insurance for Muslims is designed to adhere to Islamic laws and is based on the principles of fairness and equity among the participants (policyholders). Modern religious scholars have declared that traditional insurance is unacceptable by majority of scholars due to the type of investment traditional insurance companies’ use as well as the uncertainty involved in traditional insurance contracts. The companies, which offer this type of insurance, avoid investing in interest bearing securities as well as investing in unethical and immoral business (such as alcohol manufacturers, gambling casinos). The rewards in an Islamic investment should be profit or fee based. Typical investments include lease and rental instruments, real estate financing contracts, and venture capital funds. These investment types are largely untapped at the present moment. The relative popularity and commercialisation of Takaful has produced several types of Islamic insurance, each reflecting a different experience, environment and perhaps a different school of thought. Types of insurance The Co-operative Insurance model encourages Islamic values such as brotherhood, unity, solidarity and mutual cooperation. As per the concept, the Takaful Company and the policyholder will only share the direct investment income; the policyholder is entitled to a 100% of the surplus with no deduction made prior to the distribution. This model is applicable to life family Takaful as the fund is entirely distributed to the participants. The non-profit model includes social-governmental owned enterprises and programs operated on a non-profit basis which utilize a contribution that is 100% donation from participants who willingly give to the less fortunate members of their community.The third scheme is called Mudharabah model. In this scheme, surplus is shared between the policyholders and Takaful Operator. The sharing of such profit (surplus) may be in a mutually agreed ratio between the contracting parties. Generally, this particular scheme allows the Takaful operator to share in both the underwriting results from operations as well as the favourable performance returns on invested premiums. In Al Wakala Model, the Cooperative risk-sharing occurs among participants with a Takaful Operator earning a fee for services provided and does not participate or share in any underwriting results as these belong to Participants as Surplus or Deficit. According to this particular scheme takaful operator is eligible for a fee and may charge a fund management fee and a performance incentive fee. It is a general practice for Takaful products either General Takaful products or Family Takaful products to pay an agreed upon premium to the Takaful operator to protect them from unforeseen risk and also extraordinary losses. Then, the Takaful operator will take a portion of money from Takaful fund and pays premium to the Retakaful operator to get reinsurance protection to spread its risks. The contract for reinsurance may protect the person or business from a specific risk or a broad class of risk factors. Sri Lanka In Sri Lanka, Takaful insurance has done quite well to gain considerable market share over the past few years. Though the concept is relatively new, and only a handful of companies are offering the facility at the moment, the increase in momentum among the general public is quite interesting and encouraging. The trend is spreading very fast and more and more individuals and businesses are now turning their attention towards this new concept. A Simple look at the performance of Amana Takaful, the first such company to start business in Sri Lanka will prove the changes in the mindset of the Sri Lankan customers over the last few years. Islamic Insurance is gaining popularity primarily because according to Shariah the commercial insurance contract is prohibited. It is prohibited because conventional insurance is nothing but a “risk-transfer mechanism” (ie the insured transfers his risk to the insurance company in exchange for a premium) which, under Shariah, is considered a “contract of exchange” or a sale contract. Thus, Takaful insurance is well poised to prove itself to be a just, equitable and mutually profitable system that shall also blend ideally with the products being offered by the Islamic banks which are gaining fast popularity and acceptance not only in Sri Lanka, but in the whole world.

source : nationlk