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WHAT IS INSURANCE “HOW DOES TAKAFUL DIFFER FROM INSURANCE?” LIAQUAT ALI KHAN TABLE OF CONTENTS • INTRODUCTION. PAGE#03 • WHAT IS INSURANCE? PAGE#04 • HOW INSURANCE IS AGAINST THE PRINCIPLES OF SHARIAH? PAGE#06 • ARGUMENTS IN FAVOUR OF AND AGAINST INSURANCE. PAGE#08 • TAKAFUL AS AN ALTERNATIVE OF INSURANCE. PAGE#13 • DEVELOPMENT OF TAKAFUL IN MUSLIM & NON-MUSLIM COUNTRIES. PAGE#15 • CONCLUSION. PAGE#17 • APPENDIX. PAGE#18 • GLOSSORY. PAGE#20 • BIBLIOGRAPHY. PAGE#21 • REFERENCES. PAGE#22 2 INTRODUCTION 1These days the enthusiasm for Islamisation of banking and insurance is at its zenith. People as well as investment institutions are making all efforts to islamise the sector of banking and insurance. Insurance exists in our world from olden times. The Muslim traders in the past too felt the necessity of insurance. In olden times they used to transport their cargo in ships across the seas to other countries. And they would mutually arrange for safeguards against the risk of the sinking of ship and cargo. Its method was: all the traders will join to form a fund or pool. They contribute little at a time and who draws the lot gets the full amount. This was a good example of savings. Whenever a trader would suffer an accident, then the unfortunate trader would be recompensed by this fund so that he could recoup his loss and find his bearings against and establish his business. This is the old method of insurance. During the last two decades the new concept of Islamic insurance with the name of Takaful has become known and is progressing in different countries of the world including Islamic and Non-Islamic countries. The growth of Takaful companies has become a threat for the conventional insurance companies. In order to find out the real threats a research study has been carried out which revolves around the concept of insurance and how it is against the principles of Shariah. The arguments put forward by religious scholars in favor of and against insurance are also discussed. This study is regarding Takaful as an alternative of insurance and its development in Muslim and Non-Muslim countries as well. 3 WHAT IS INSURANCE? “Insurance is a provision, which the prudent man makes against fortuitous or inevitable contingencies, loss or misfortune.” By Thomas 2Insurance is a risk transfer mechanism whereby the individual or the business enterprise can shift some of the uncertainties of life on the shoulder of the other. All the people will desire to live a cleaner, healthier, comfortable and easy life. To meet this requirement different enterprises produce and provide goods and services. They make innovation and inventions, which take great risk. Large responsibility falls on the shoulder of Innovators and Inventors. A small error or lapse may cause numerous side effects and cause death or disability. These types of risks highlight the importance of insurance. If there had not been insurance at the back of all innovators the world would have never progressed. After assuring this in security factor the enterprises started looking for new and more high-tech machines robots and gadgets, atomic technology, space traveling computers, deep sea exploration, development of Concords and Jumbos and medical technology for Hydro Hear led diseases. All these developments could be possible with support of insurance. In peace the insurance provides protection to trade and industry, which ultimately contributes towards human progress. Thus insurance is the most lending force contributing towards economics, social and technological progress of man. Without insurance cover all industrial, economic and social activity of the world will come to a grinding halt. An insurer, by nature, tries to split and diversify its risks in many ways. A very important way is to split them horizontally and vertically within the whole insurance system by transferring risk to one or more reinsurance companies and horizontally to their competitors. The following principles apply in insurance: • Insurable interest. • Utmost good faith. • Proximate cause. • Indemnity. • Contribution. • Subrogation. The insurance market comprises the following types of insurers: • Lloyds. • Ordinary Life & General Companies. • Industrial Life Assurance Companies. • Friendly Societies. • Mutual Indemnity Associations. • Captive Insurance Companies. 4 • Self Insurance. • The State. The premium received goes into a fund or pool from which the claims are paid. Because of large number of clients in any particular fund or pool, the insurers can predict, with reasonable accuracy by applying the law of large numbers and actuarial calculation methods, the amount of claims likely to be incurred in the coming year. However, there will be some variation in claim costs from year to year for which a small margin is to be built up in reserve. As a result of better performance of insurance company some benefit is paid back to the policyholders in shape of bonus in life insurance and no claim bonus in motor/property insurance. 5 HOW INSURANCE IS AGAINST THE PRINCIPLES OF SHARIAH? 3Commercial Insurance and all its contracts are relatively new developments. The pioneer Muslims neither knew it nor was it ever considered by the earlier Islamic Jurisprudents. It was for the first time examined by a Hanafi Jurist Syed Ibn Abdin (dead 1252 H corresponding to 1836 A.D.) at the request of some Muslim Merchants who sought his opinion about the validity of Marine Insurance under Islamic laws. He discussed the essence of Marine insurance and concluded “I see that it is not permitted to any merchant to get indemnity for his damaged property against the payment of a certain sum of money known as insurance premium; because this is a commitment for what should not be committed to”. The attitude towards illegality of insurance from Islamic point of view continued for full century after Ibn Abdin. However in view of the tremendous importance assumed by Insurance for the modern finance, trade and industry the Contract of Insurance has been subject matter of extensive and in depth studies and discussions amongst the Islamic Jurisprudents during the past several decades. In 1396 H (1976) the First International Conference on Islamic Economics was held in Makkah, which was attended by more than 200 Islamic Jurists and Economists. They reached at the following decision on it: - “The Conference sees that the commercial insurance which is practiced by the commercial insurance companies in this era does not conform to the Shariah principle of cooperation and solidarity because it does not fulfill the Shariah conditions which would make it valid and acceptable”. This Conference also suggested that a committee comprising of Shariah Experts & Muslim Economists should be constituted in order to suggest a system of insurance that will be free of “Riba”, “Usury” and “Gharar”. The matter continued to receive the attention of numerous groups of Islamic Jurisprudents in cooperation with eminent and distinguished economists and insurance experts who came up with different conclusions, views and opinions. Some of them approved all forms of insurance subject to certain conditions, limitations and qualifications; others totally disapproved all of them. However an overwhelming majority of the Islamic Jurisprudents is now of the opinion that the modern western oriented insurance contract does not in its present form conform to the Islamic Shariah. 4The objection is against the existence of the weaknesses in the insurance contract namely: • Gharar (uncertainty); • Maisir (gambling); • Riba (usury). 6 In the first session, which was held at Makkah on Shaban 10, 1398 A.H. in the office of the Majlis-I-Fiqhi Islamia (the Assembly of Islamic Jurisprudence) deliberations were made on insurance and its different branches and kinds. Also kept in view was resolution #55 of Saudi Arabia’s Majlis-e-Hayat-i-Kibar-ul-Ulama (The Constituent Assembly of Most Eminent Religious Scholars) passed in its 10th Session at Riyadh held on 4-4-1397 A.H. declaring all kinds of commercial insurance as unlawful in Islam. Similarly the Council of Islamic Ideology of Pakistan gave a decision in December 1983 that the well-known and current forms of insurance are in conflict with the Islamic injunctions. On the contrary Dr. Yusuf al-Qaradawi, does not think that the concept of insurance conflicts with the teachings of Islam. However, he does find certain practices of conventional insurance in need of modification to bring it in line with Islamic teachings. 7 ARGUMENTS IN FAVOR OF & AGAINST INSURANCE Some Islamic scholars declare the insurance as un-Islamic due to the elements of Gharar (uncertainty), Maisir (gambling) and Riba (interest) involved in the operation of insurance contracts. 5According to a saying of the Holy Prophet (PBUH), which he told to a Bedouin Arab, who