As the essence of insurance could be seen in the system of mutual help in relation to the custom of blood money under the Arab tribal custom, Muslim jurists generally accepted that the concept of insurance does not contradict with the Shariah. In fact, the principle of compensation and group responsibility was accepted by Islam and the Holy Prophet. Muslim jurists acknowledged that the basis of shared responsibility in the system of `aqila' , as practiced between Muslims of Mecca (muhajirin) and Medina (ansar) laid the foundation of mutual insurance.
As a complete religion, the teaching of Islam
encompasses the essence of peace, economic well-being and development of
the Muslim at the individual, family social, state and `ummah' levels.
To illustrate the importance of this relationship in a life of a Muslim, Islam calls for the protection of certain basic rights, viz.: -
The right to protect the Religion.It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance.
The right to protect the life.
The right to protect dignity/honour.
The right to protect the property.
The right to protect the mind.
In view of the above as well as the real need
for insurance cover, Muslim jurists looked further into the Islamic system
of insurance. Their conclusion was that insurance in Islam should be based
on the principles of mutuality and cooperation. On the basis of these principles,
Islamic system of insurance embodies the elements of shared responsibility,
joint indemnity, common interest, solidarity, etc. According to the jurists
this concept of insurance is acceptable in Islam because, the policyholders
would cooperate among themselves for their common good;
every policyholder would pay his subscription
in order to assist those of them who need assistance;
it falls under the donation contract which
is intended to divide losses and spread liability according to the community
pooling system; the element of uncertainty will be eliminated insofar as
subscription and compensation are concerned; it does not aim at deriving
advantage at the cost of other individuals. The generally accepted view
of the Muslim Jurists is that the operation of the conventional insurance
as an exchange transaction under a buy and sell agreement does not in its
present form conform to the rule and requirements of the Shariah as it
embodies the following three elements :-
(I)al-Gharar
There is the element of al-Gharar (unknown
or uncertain factors in the operation of a contract) in both the life and
general insurance policies. This arises due to the uncertainty of the subject
matter of the contract or `ma'qud'alaih' of which one of the basic rules
of contract in Islam is that the ma'qud'alaih must be clear. In such a
contract the insured or the policyholder agrees to pay a certain sum of
premium and in turn the insurance company guarantees to pay a certain sum
of compensation (sum insured) in the event of a catastrophe or disaster.
But the insured or the policyholder is not informed, for example, of how
the amount of the compensation that the company will pay him is to be derived
nor is he certain of the amount.
In addition, any form of contract which is
lopsided in favour of one party at the expense and unjust loss to the other
is also classified as Gharar. This is prevalent in both the life and general
insurance policies. In the former, for example the loss of premium suffered
by the policyholder if he would have to cancel his policy before the policy
acquires the forfeiture status. Similarly the "double-standard" condition
of charging customary short period in general insurance if the policyholder
is responsible for the termination of the policy whilst a proportional
refund of premium is applicable if the insurance company terminates the
cover.
(II) al-Maisir
There is the element of al-Maisir (or gambling)
which arises as a consequence of the presence of al-Gharar, in particular
in the case of life insurance. When a policyholder dies before the end
of the period of his insurance policy after paying only part of the premium,
for example, his dependents will receive a certain sum of money which the
policyholder in the first place has not been informed and has no knowledge
of how and from where it is to be derived.
(III) al-Riba
There is the practice of al-Riba (or interest)
and other related practices in the investment activities of the conventional
insurance companies which contravene the rules of the Shariah.
Thus in consonance with the above basic characteristics,
the jurists resolved that the system of insurance which falls within the
confine of Islamic framework should be founded on the concept of
`al-Takaful'
Takaful in Arabic, means joint guarantee.
Thus it can be visualised as a pact among a group of members or participants
who agree to jointly guarantee among themselves against loss or damage
that may inflict upon any of them as defined in the pact. Should any member
or participant suffer a catastrophe or disaster he would receive a certain
sum of money or financial benefit from a fund, as also defined in the pact,
to help him meet the loss or damage.
In other words, the basic objective of takaful
is to pay for a defined loss from a defined fund. Each member of the group
pools effort to support the needy. It means mutual help among the group.
Difference Between Takaful and Conventional Insurance
The act of taking precautionory measures or `ikhtiar’ against possible danger and its consequences is in line with the teachings of Islam. In the holy Quran it is clearly described how Prophet Yussof a.s. filled the grain silos from the surplus of seven years of good harvest as a protection to ensure the availability of continuous food during the seven lean years. This is a clear indication that one has to strive hard to avoid from being inflicted by any ill luck, and at the same time be fully prepaired in terms of the measures taken as precautions in the event such an unfortunately eventuality cannot be avoided. One such measure available to every member of the community presently is the cover or protection provided by insurance policies.
As a concept, insurance actually does not contradict the teachings of Islam as it is a method by way common resources are pooled in order to help the needy. Based on this, it is said that the operation of insurance as known today was established on the practice of blood money under the Arab tribal custom which formed the basis of modern-day mutual insurance. In Asia, the practice of insurance was first established in the early second century of Islamic era when Muslim Arabs began to expand their trade to India, Malay Archipelago and other Asian countries. Because of the long distance, the voyage was hazardous and the traders often had to incur losses arising from a multitute of misfortunes.
In the modern economic environment insurance is a necessity, not only for individuals to protect their dependents and loved ones but also to institutions to protect their assets and other liabilities. Without insurance one has to shoulder the financial liability fully should a catastrophe or misfortune occur, and certainly this would pose a heavy burden to the individual concerned and his family. The requirement of insurance therefore is not only the purpose of creating and enhancing savings but also the need to comply with the legal requirements of which motor insurance is a good example. As a matter fact, insurance is usually one of the precedent conditions before a loan or financing is disbursed by any financial institution. Thus insurance is not a service or facility at the pleasure for the affluence only. As a necessity in modern-day living insurance has become part of life.
In view that the present-day practice of insurance is not in conformity with the requirements of Syariah, Muslim scholars had to look into an alternative system which would conform with such requirements. According to the scholars, the business of insurance is based on a buy-and-sell contract which however does not fulfill the characteristics of a buy-and-sell contract according to Islam. Such buy-and-sell contract essentially has three characteristics, namely parties to the contract (Aaqid), subject matter to the contract (Ma’aqud Alaih) and offer and acceptance (Sighah). In particular, the scholars examined the subject matter of the contract which they concluded as a buying-and-selling transaction the operation contains unknown and uncertain factors. The uncertainty of the subject matter would result to the presence of the element of `gharar’ (unknown or uncertain factors in the operation of a contract). The presence of gharar would make the contract void.
Gharar is presence in a buying-and-selling operation when sale or purchase of goods or services which are non-existence; sale or purchase of goods or services which are in existence but cannot be delivered to the buyer but its form, value and timing of delivery cannot be determined and known at the time when the contract was made. In the case of an insurance policy, the insured company guarantees to pay a certain sum of compensation in the event of a catastrophe or disaster, but the policyholder in the first place does not know, for example of when such catastrophe or disaster is to occur as well as the amount of the compensation that the company will pay him. Nor would he have any knowledge the source of the compensation.
The scholars further viewed that as a consequence of obtaining compensation or proceeds from a financial transaction which contains the element of gharar would lead to the practice of `maisir’ or gambling. Indeed the whole business is said to have semblance of gambling as profit or loss would very much depend on `chance'.
In this regard, the operation of an insurance
system acceptable to the rules and practices of Syariah must not be based
on buy-and-sell contract. The subject matter of the contract under this
system must be definite, clear and transparent so that it is known to all
parties of the contract. The obligations and responsibilities under the
contract are clearly known to both parties. In addition, a buy-and-sell
contract which is lopsided in favour of one party at the expense of the
other contracting party is viewed as gharar too. A financial contract in
which one party has to forfeit his capital or contribution in the event
of cancellation prior to the maturity or expiry of the contract resulting
in the loss of the capital, as in the example of no refund of premium when
a policyholder surrenders his insurance policy would be considered as gharar.
The system of Islamic insurance would therefore contain the element of
shared responsibility enabling the spreading and sharing of profits or
losses among a group of members through a defined fund jointly established
by them in line with the pronouncement of the holy Quran, “Help ye one
another in righteousness and piety, But help ye not one another in sin
and rancor: Fear God: for God is strict in punishment (Al-Maidah-verse
2).
Sources of Law Affecting ‘Takaful’
Principles of Contract Affecting Takaful and Insurance - Compared
Sub-Leasing, Insurance Premiums for Al-Manzil
Takaful: An Islamic answer to insurance arrives in the United States
Takaful (Islamic insurance): a case study in Pakistan
Takaful (Islamic Insurance): an economic paradigm
Legal Capacity to Contract of ‘Takaful’: a shari'ah jurisprudential analysis
Takaful (Islamic Insurance) Intermediaries: a possible shari'ah framework
Doctrine Of ‘Utmost Good Faith’ In Takaful: a regulatory framework
Quantum of Damages in Takaful in the Contemporary Economic Reality
Takaful Premium: a suggested regulatory framework
Further
Justifications for the Validity of Takaful
Takaful Institution
Malaysia Nasional Insurance - Takaful
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