No Conventional Insurance But
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NO CONVENTIONAL INSURANCE BUT TAKAFUL MODEL ISLAMIC INSURANCE Mufti Asadullah Qasmi [email protected] Today insurance plays a very important role in commercial and personal finance, but while most of us take insurance for granted, for the Muslim belief conventional insurance is incompatible with their religious beliefs. Under Islamic jurisprudence (Shari'ah), conventional insurance is not permissible. Conventional insurance means a way to provide security and compensation of what is valuable in the event of its loss, damage or destruction based on the principle of risk taking and speculation. The system of Conventional insurance involves the elements of uncertainty (Algharar) in the contract of insurance, and there are two types of Gharar: (i) Jahalah which causes to dispute. E.g. un specified or un quantified subject matter in sale.Uncertainty of one party’s profit. E.g. One party’s (such as policy holder’s) profit in Insurance Also the system contains Gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. Beyond the above mention reasons the element of Riba (Interest) exists in lending or borrowing funds/investments at fixed interest, and other related practices in the investment activities of the conventional insurance companies. In presence of these prohibited elements, the scholars of Islamic Sharia clearly said that commercial insurance is not permitted in Islamic jurisprudence. It is important to understand that Islam is not against the concept of insurance but the basis of operation of conventional insurance, which does not meet the requirement of Shari'ah. But is there any alternative of commercial insurance? Yes, Islamic Cooperative Insurance (Takaful-A Moral & Modern Insurance) Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes. Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden.
Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. Takaful originates from Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance. Al-Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other; while Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture (scheme) and the entrepreneur (industrialist) who actually conducts the business. The operation (process) of Takaful may thus be envisaged as the profit-sharing business venture between the Takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them. The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept; in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. In the event of death caused by someone from another tribe, the members of the offender's tribe would share the 'blood-money' to provide for the family of the victim. Without this sharing, the person inadvertently causing the death would face great hardship in paying the blood money. Takaful insurance also evolved from Muslim businessmen making long journeys by sea for trade. They would collect money from each merchant and use this to compensate those among them who incurred a loss of ship or merchandise from the journey. The References to Takaful, the fundamentals are based on the sayings of the prophet Mohammed (pbuh). Based on the hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some of the examples are: Basis of Responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted
with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim) Basis of Co-operation: Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2) Allah will always help His servant for as long as he helps others. (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud) One true Muslim (Mu’min) and another true Muslim (Mu’min) is just like a building whereby every part in it strengthens the other part. (Narrated by Imam al-Bukhari and Imam Muslim) Basis of Mutual Protection: By my life, which is in Allah’s power, nobody will enter Paradise if he does not protect his neighbors who are in distress. (Narrated by Imam Ahmad bin Hanbal) In Takaful insurance companies must 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 operational structure of Takaful avoids elements of Riba (interest or usury) and Gharar (unknown or ambiguous factor in the operation of contract). Riba and Gharar are the basic reasons why Muslim scholars regard conventional insurance as being against the principles of Shari’ah. The following principles must be applicable in Takaful: (i) Policyholders cooperate amongst themselves for their common good. (ii)Every policyholder pays his subscription to help those that need support. (iii)Losses are divided and liabilities spread according to the community pooling system. (iv)Uncertainty is eliminated in respect of subscription and compensation. It does not derive advantage at the cost of others. In order to reduce the facet of uncertainty in the takaful deal, the concept of tabarru (to donate, to contribute, to give away) is incorporated. In relation to
this a participant shall agree to relinquish as tabarru, certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss. As far the Need of Takaful is concern, it is Muslim's belief that everything that happens in this world is by the will of Allah (qada' and qadar). Thus it may be argued that whatever accident, misfortune or catastrophe occurs should be accepted, not eliminated through insurance. Although it is true that we should accept whatever "misfortune" which may occur, we are also taught to avoid or reduce the possibility of these "misfortunes" by taking positive steps. Although death is inevitable, it does not mean that we should not prepare ourselves for this eventuality. Within a group of people, no one can anticipate who would survive from year to year. 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). 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. The essence of insurance could be seen in the system of mutual help in the Arab tribal custom of blood money or diyah. Under this system, a victim or the injured party would be compensated by the members of the community whose action had resulted in the loss of life or impairment of the victim. Therefore the principle of compensation and group responsibility was accepted by Islam and the holy Prophet. Muslim scholars have acknowledged that the basis of shared responsibility is embedded in the system of aqila as practiced by Muslims of Mecca (Muhajirin) and Medina (Ansar), and laid the foundation of mutual insurance. From the Hadith; One day the Prophet (SAW) saw a Bedouin leaving a camel and he asked the Bedouin, "Why don't you tie down your camel?" The Bedouin answered, "I put my trust in Allah." The Prophet said, "Tie your camel first, then put your trust in Allah."(Al-Tarmizi and IbnMajah). There are three (3) models and several variations on how Takaful can be implemented. (i)Mudharabah Model (ii) Wakalah Model (iii) Combination of both The Mudharabah Model (Profit Sharing); by this principle, the entrepreneur or alMudharib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra's-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the
takaful operator is to be shared, in agreement with the rules of al-Mudharabah, between the participants as the providers of capital and the takaful operator as the entrepreneur. The sharing of such profit may be in any ratio of 50:50, 60:40, 70:30, etc. as mutually decided between the contracting parties. The Wakalah model: is a contract of agency, which replaces surplus sharing with a performance charge. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund in return for a defined fee. This model is used more in the Middle East region. On a firm explanation of the Wakalah Model, the surplus of policyholders' funds investments (net of the management fee or expenses) goes to the policyholders. The shareholders charge Wakalah fee from contributions that should enough for most of the expenses of business. The fee rate is fixed yearly in advance in discussion with Sharia’h board of the company. In order to give encouragement for good governance, managing fee is related to the point of performance. After the Tkaful model Islamic insurance is successfully educated, there is a need of Re Takaful. Re Takaful is dedicated to offer Shari’a compliant reinsurance and related services to the increasing Takaful and Islamic insurance markets. Under the (Re) Takaful scheme, the insurers form a group of people attaches great significance to mutual help, support and harmony. Premiums are therefore paid as a sort of donation to be of assistance for members of the community, society who sustain sufferers. In accumulation to this communal risksharing, surpluses are located at the disposal of the community. Premiums are invested according to strictly Islamic philosophy, principles (interest is prohibited and sectors such as gambling or alcohol excluded). Most of the profits are also returned to the community.
Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. Takaful originates from Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. It is a form of mutual insurance. Al-Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other; while Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture (scheme) and the entrepreneur (industrialist) who actually conducts the business. The operation (process) of Takaful may thus be envisaged as the profit-sharing business venture between the Takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them. The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept; in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. In the event of death caused by someone from another tribe, the members of the offender's tribe would share the 'blood-money' to provide for the family of the victim. Without this sharing, the person inadvertently causing the death would face great hardship in paying the blood money. Takaful insurance also evolved from Muslim businessmen making long journeys by sea for trade. They would collect money from each merchant and use this to compensate those among them who incurred a loss of ship or merchandise from the journey. The References to Takaful, the fundamentals are based on the sayings of the prophet Mohammed (pbuh). Based on the hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a concerted effort to implement the Takaful concept as the best way to resolve these needs. Some of the examples are: Basis of Responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted
with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim) Basis of Co-operation: Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression. (Surah Al-Maidah, Verse 2) Allah will always help His servant for as long as he helps others. (Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud) One true Muslim (Mu’min) and another true Muslim (Mu’min) is just like a building whereby every part in it strengthens the other part. (Narrated by Imam al-Bukhari and Imam Muslim) Basis of Mutual Protection: By my life, which is in Allah’s power, nobody will enter Paradise if he does not protect his neighbors who are in distress. (Narrated by Imam Ahmad bin Hanbal) In Takaful insurance companies must 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 operational structure of Takaful avoids elements of Riba (interest or usury) and Gharar (unknown or ambiguous factor in the operation of contract). Riba and Gharar are the basic reasons why Muslim scholars regard conventional insurance as being against the principles of Shari’ah. The following principles must be applicable in Takaful: (i) Policyholders cooperate amongst themselves for their common good. (ii)Every policyholder pays his subscription to help those that need support. (iii)Losses are divided and liabilities spread according to the community pooling system. (iv)Uncertainty is eliminated in respect of subscription and compensation. It does not derive advantage at the cost of others. In order to reduce the facet of uncertainty in the takaful deal, the concept of tabarru (to donate, to contribute, to give away) is incorporated. In relation to
this a participant shall agree to relinquish as tabarru, certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss. As far the Need of Takaful is concern, it is Muslim's belief that everything that happens in this world is by the will of Allah (qada' and qadar). Thus it may be argued that whatever accident, misfortune or catastrophe occurs should be accepted, not eliminated through insurance. Although it is true that we should accept whatever "misfortune" which may occur, we are also taught to avoid or reduce the possibility of these "misfortunes" by taking positive steps. Although death is inevitable, it does not mean that we should not prepare ourselves for this eventuality. Within a group of people, no one can anticipate who would survive from year to year. 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). 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. The essence of insurance could be seen in the system of mutual help in the Arab tribal custom of blood money or diyah. Under this system, a victim or the injured party would be compensated by the members of the community whose action had resulted in the loss of life or impairment of the victim. Therefore the principle of compensation and group responsibility was accepted by Islam and the holy Prophet. Muslim scholars have acknowledged that the basis of shared responsibility is embedded in the system of aqila as practiced by Muslims of Mecca (Muhajirin) and Medina (Ansar), and laid the foundation of mutual insurance. From the Hadith; One day the Prophet (SAW) saw a Bedouin leaving a camel and he asked the Bedouin, "Why don't you tie down your camel?" The Bedouin answered, "I put my trust in Allah." The Prophet said, "Tie your camel first, then put your trust in Allah."(Al-Tarmizi and IbnMajah). There are three (3) models and several variations on how Takaful can be implemented. (i)Mudharabah Model (ii) Wakalah Model (iii) Combination of both The Mudharabah Model (Profit Sharing); by this principle, the entrepreneur or alMudharib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra's-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal. The contract specifies how the profit (surplus) from the operations of takaful managed by the
takaful operator is to be shared, in agreement with the rules of al-Mudharabah, between the participants as the providers of capital and the takaful operator as the entrepreneur. The sharing of such profit may be in any ratio of 50:50, 60:40, 70:30, etc. as mutually decided between the contracting parties. The Wakalah model: is a contract of agency, which replaces surplus sharing with a performance charge. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund in return for a defined fee. This model is used more in the Middle East region. On a firm explanation of the Wakalah Model, the surplus of policyholders' funds investments (net of the management fee or expenses) goes to the policyholders. The shareholders charge Wakalah fee from contributions that should enough for most of the expenses of business. The fee rate is fixed yearly in advance in discussion with Sharia’h board of the company. In order to give encouragement for good governance, managing fee is related to the point of performance. After the Tkaful model Islamic insurance is successfully educated, there is a need of Re Takaful. Re Takaful is dedicated to offer Shari’a compliant reinsurance and related services to the increasing Takaful and Islamic insurance markets. Under the (Re) Takaful scheme, the insurers form a group of people attaches great significance to mutual help, support and harmony. Premiums are therefore paid as a sort of donation to be of assistance for members of the community, society who sustain sufferers. In accumulation to this communal risksharing, surpluses are located at the disposal of the community. Premiums are invested according to strictly Islamic philosophy, principles (interest is prohibited and sectors such as gambling or alcohol excluded). Most of the profits are also returned to the community.
