Development & Applications of Islamic Insurance (Takaful)

© Prof. Dr. Mohd. Ma'sum Billah1

Introduction

Conceptually, Takaful (Islamic insurance) is a financial transaction of a mutual co-operation between two parties towards providing a financial security for one of them against an unexpected material risk. In a Takaful transaction, the party called the participant (insured), who pays a particular amount of money known as contribution (premium) to another, who is known as Takaful operator (insurer) with a mutual agreement that, the operator is under a legal responsibility to provide the participant with a financial security against unexpected loss or damage caused to the subject matter of the policy should one occurs within the agreed period of the policy. However, in case of a life Takaful policy where the loss does not occur against the subject matter within the specified period, the participant (insured) is entitled to the entire amount of paid-contributions to the participant’s account (PA) together with the share of profits made out of the cumulated paid-contributions from PA, based on the principles of al-Mudarabah2

1 Professor of Islamic Financial Regulations & Policies, University of Camden, USA; also having the same position at the University of King Abdul Aziz, Jeddah ; Assoc. Professor of Regulations & Policies (Insurance, Takaful, Islamic Banking, Finance & E-Commerce), Faculty of Economics and Management Sciences, International Islamic University Malaysia. He is also an Adviser and Consultant to several Companies and Institutions (Internationally & Locally ) on Insurance, Banking, Financial and IT regulations both under modern principles and Shari’ah rulings. Also the author of

http//.www.islamic-insurance.com. E-mail: masum2001@yahoo.com

2 ‘Al-Mudarabah’ is one of the financial technique in the Islamic partnership dealings between two or more parties whereby on party provides capital while the other offers service or skill in a particular business, both sharing profits accordingly. Today’s Islamic banks and Islamic insurance companies have been operating based on the principle of Mudharabah, which is an alternative to the interest based-transaction. In other word, Mudarabah is a complete interest free profits and loss sharing transaction.

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financing technique. In this transaction, both the Takaful operator and the participant are mutually helping each other for a financial protection.

Such a mutual co-operation between both parties is certainly in line with the Qur’anic doctrine of mutual co-operation as Allah (swt) commanded to the effect:

“…..and co-operate you one another in righteousness and piety…..” 3

Under the Islamic teachings, the commandment to practice mutual co-operation is not an absolute. There is in other words, a limitation to it, as Allah (swt) has further prohibited mankind from co-operating among them in any manner, which involves sinful elements. Allah (swt) again says to the effect:

“….. and do not co-operate in sin and rancor……..” 4

Based on the above verse of the holy Qur’an, it is submitted that, the practice of Takaful contract and business will only become in harmony with the Islamic concept of mutual co-operation should the transaction is operated based on the principles of al-Mudarabah, which is permissible in the eyes of Allah (swt), and is carried out based on the noble and sincere intention to ensure the participant with a financial security against unexpected future material risk. Hence, in order for a Takaful transaction to become valid and enforceable, it should be free from unlawful elements, like usury, fraud, and so on5.

This research however, seeks to provide a conceptual frameworks of Islamic insurance and also the scenario of governing principles, which regulate Takaful and Re-takaful products in the contemporary reality.

Development Scenario

Even though it was not expressly clear when insurance practices began in Islam, it may be concluded based on the nature of insurance contracts today, that insurance transactions by nature had been practised since before the time of the Holy Prophet Muhammad (SAW) and had since been gradually developed until the beginning of the 19 th century, when a Hanafi lawyer Ibn Abidin (1784 -1836) became the first Islamic scholar who came up with the meaning, concept and legal entity of insurance contract.6 As a result we can see in the world of today a number of insurance companies are operating based on the Divine principles.

Such a development of Islamic insurance could mainly be classified into the following six stages:

3 Al-Qur’an, 5:3.4 Ibid.5 See generally, Billah, M. Masum, “Life Insurance? An Islamic View”, Arab Law Quarterly, 8:4, 1993 at 317ff.6 Klingmuller, Ernest, The Concept and Development of Insurance in Islamic Countries” in Islamic Culture, Vol. 43, January, 1969 at 30.

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i) Practices of the doctrine of al-Aqilah among the ancient Arab tribes as a tribal custom: There are many encyclopaedias justifying the fact that the nature of insurance practice had been originated from the ancient Arab’s practices7, whereby it became a custom among the tribes of Arab that if any member of a tribe was killed by a member of different tribe, the heir of the victim would be paid with an amount of blood money as a compensation by close relatives of the killer. Those close relatives of the killer were addressed as Aqila’ in Arab terminology8, who were supposed to pay the blood money9, on behalf of the killer. According to Dr. Muhammad Muhsin Khan, the word ‘Aqila’ means ‘asaba’ which denotes paternal relatives of the killer10, therefore, the central idea of the doctrine ‘Aqila’ was practised among the ancient Arab trines as everybody in those tribes used to be ready to make monetary contributions on behalf of the killer to compensate the heir of the victim.11 Such monetary contributions known as blood money. Readiness of the ancient Arabs at that time to pay compensation seemed to be a kind of financial protection for the heir of the deceased against an unexpected death of the victim.

ii) Practices of the Holy Prophet (SAW): The development of insurance practices during the time of the Holy Prophet (SAW) could be discovered from two situations:

(a) The acceptance of the ancient Arab’s practices of ‘Aqila’. The Prophet (SAW) himself had accepted the concept of ‘Aqila’ as practised by the ancient Arab tribes. This could well be justified from the numerous verdicts or ‘Sunnah’ of the Prophet (SAW).12

In one of the disputes, the Holy Prophet (SAW) decided as follows:

“Narrated by Abu Hurairah (R ), he said that once two women from Huzail clashed when one of them hit the other with a stone which killed her and the baby in the victim’s womb. The heirs of the victim brought an action to the court of the Holy Prophet (SAW) who gave a verdict that the compensation for the foetus to be a male or female slave slave while the compensation for the killed woman is a blood money (dyat) to be paid by the ‘Aqila’ (the relatives of the father’s side) of the killer.”13

b) The relevant legislations passed in the first constitution of Medina was in 622 B.C. Dr. Celal Venicery discovers that the first constitution in the Muslim world which was prepared by the Holy Prophet Muhammad (SAW) shortly after the migration 7 See “Aqila” in Gibb H.A.R., et.al., The Encyclopaedia of Islam, E.J. Bril, Leiden, 1979.8 See ‘Aqilah” in Hughes, Thomas Patric, Dictionary of Islam, Cosmo Publications, New Delhi India, 1982.9 See Murghimani, Ali Ibn Abi Sakar, al-Hedaya (Trans. Eng.) Charles Hamilton, The Hedaya, Vol. 4, Book 51, Premier Book House, Lahore, Pakistan, 1982, at 670.10 See Sahih Al-Bukhari, (Trans. Eng.) Khan, Dr. Muhammad Mushin, The translation of the meanings of Sahih al-Bukhari, Kazi Publications, Lahore, Pakistan 1979, at 34.11 See generally “Aqila” in Gibb, H.A.R., et. Al., Shorther Encyclopaedia of Islam, E.J. Brill Leiden, 1953.12 See Athqalam, Ahmad Ibn Hajar, Fath ul-Bari, Vol. 12, Alan Nashrul Kutub Al-Islamiah, Lahore, Pakistan 1981, at 246.13 Sahih Al-Bukhari,, op.cit., Vol. 9, No. 45 at 34.

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to Medina in 622 B.C., which was meant for the people of Medina (i.e. the Muhajireen, the Ansar, the Jews and the Christians) had included and introduced in it a kind of social insurance which appeared into three modules:14 viz

Through the practice of Dyat: dyat or blood money was supposed to be paid mutually by the ‘Aqila’ (i.e. the close relatives of the killer) to the heir of the deceased (victim) in order to rescue the killer from legal burden.15 The Holy Prophet (SAW) ruled it out at article 3 of the above said constitution of Medina that:

“The immigrants among ‘quraish’ shall be responsible for their word and shall pay their blood money in mutual collaboration….”16

Similarly, Banu Awf, Banu Harith and other groups living in Medina at that time were also obliged to pay blood money in mutual collaboration relying on the doctrine of ‘Aqila’ as ruled out in the constitution.17

Through the payment of ‘Fidya’ (ransom): The Holy Prophet (SAW) had also enacted a provision in the first constitution concerning rescuing the life of the prisoners, which stated that should there be any person being made a prisoner of war by an enemy, the ‘Aqila’ of the prisoner shall contribute to a ransom to be paid to the enemy in order to enable the captive to be freed.18 Such contribution could well be considered as another form of social insurance. The Holy Prophet (SAW) mentioned to the effect:

“The immigrants among the Quraish shall be responsible for…… releasing the prisoners by way of paying their ransom, so that the mutual collaboration among the believers be in accordance with the principles of goodness and justice.”19

Likewise, above ruling was also applicable to other groups like Banu Harith, Banu Najjar, Banu Jusham and others living in the Medinan society at that time.20

By way of other forms of social insurance included in the first constitution: which mentioned that the society shall be responsible to establish a joint venture with a mutual understanding towards providing necessary aids for the needy, ill and poor.21 These were the three modules in which elements of social insurance were

14 Vardit, Rispler, Insurance in the World of Islam, Origins and Current Practice, UMI, USA, 1985 at 28.15 Rahim M.A., Islamic Arthanaitik Nirapatta wa Binma (Bangla) Islamic Foundation, Bangladesh, Dhaka, 1983, at 106.16 The articles of the constitution from 3 to 12 emphasis on the payment of blood money relying on the doctrines of ‘aqila’.17 See Hamidullah, op. cit. at articles 4-12a, at 42ff.18 Hamidullah, Dr. N., Introduction to Islam, Sh. Muhammad Ashraf, Lahore, 1983, at para. 362 at 146.19 See Supra No. 4, Art. 3 at 55.20 See Ibid, at articles 4 - 12a at 42ff.21 Islam da Devlet Butcest, pp. 382-83 as cited by Vardit, op.cit., at f.n. 84 at 28.

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introduced and practised in the light of the relevant provisions in the first constitution of Medina.

iii) Practices of the Companions: Further development of the practice of insurance-based transactions could be discovered from the period of the second Caliph, Sayedina Umar (R ). During the period, the doctrine of ‘Aqila’ had even been encouraged by the government to be practised by the people. Sayedina Umar (R) had commanded that a ‘Diwan’ of Mujahideen be established in various districts and those whose names were recorded and contained in the ‘Diwan’ owed each other a mutual co-operation to contribute sincerely the blood money for manslaughter committed by one from their own tribe.22 Hence, it is presumed here that the application of the doctrine of ‘Aqila’ had further been developed during the period of the second Caliph of Islam. Sayedina Umar (R ) which, hence, reflects the elements of insurance practice during the period.

iv) Development in the 14th - 17th Century: During the period of fourteenth to seventeenth century a Sufi Order of the Kazeeruniyya was very active especially in port cities in Malabar and in China. This order served as a kind of marine travel insurance company. It had been associated with the tomb of Abu Ishaq Ibrahim Ibn Shahariyahb (963 - 1035 C.E.) whose blessings were considered as a protection against peril during the sea voyage.23

v) Development in the 19th Century: During the period of the nineteenth century Ibn Abidin (1784-1836), a Hanafi lawyer was the first person to discuss about the idea of insurance and its legal entity. He was also the first person to discover insurance in the context of a legal constitution, being no longer a customary practice.24

Ibn Abidin’s opinion on insurance practice being a legal institution served as an eye-opener to many Muslims who did not accept the legality of insurance practice and it had prompted other Muslims to accept the idea of involvement in insurance business. Kling Muller claims that Muslims began to practise insurance business not only by buying it from foreign companies, but also be establishing insurance companies and becoming insurers themselves.25

vi) Development in the 20th Century: In the period of twentieth century, a well-known Islamic jurist, Muhammad Abduh issued two ‘fatwas’ mentioned that an insurance transaction is like the transaction of al-Mudhaabah’ financing technique, while the other was that a transaction which is similar to endowment or life insurance are legal.26

The gradual growth and development of Shari’ah-based insurance practices in the twentieth century in both Muslim and non-Muslim countries are quite satisfactory despite the fact that there are still some areas to be developed in this field in meeting the needs

22 See ‘Akila’ in Gibb, et. Al., op. cit., at 29f.23 Vardit, op. cit., at 29f.24 See, Klingmuller, E., The Concept and Development of Insurance in Islamic Countries” in Islamic Culture, Vol. XLIII, 1969, at 30.25 Ibid.26 See, Vardit, op. cit., at 32.

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the necessities of the society of today. It is also sad to say that there are also many scholars of today who oppose the practice of insurance, especially life insurance, without suggesting an alternative for the Muslim Ummah. It is undeniable that there are some elements involved in today’s conventional insurance practices which are not recognised by the Shari’ah, this does not mean that insurance practice is entirely unlawful and illegal. It is however, suggested here that even though certain aspects of the conventional insurance could not be practised by Muslims due to its involvement of some unlawful elements in the eyes of the Shari’ah, it is now the responsibility of the present Islamic scholars to be innovative and come up with an alternative model of Islamic insurance which eliminates all the elements prohibited by Islamic law, in order to ensure the Muslim Ummah to be rescued from any form of unexpected risk and peril.

The following chart is given as an example of Islamic insurance companies operated in the contemporary world.

INSURANCE COMPANY(S) COUNTRY YEARThe Islamic Insurance Company Sudan 1979The Islamic-Arab Insurance Co. Saudi Arabia 1979The Islamic-Arab Insurance Co. U.A.E. 1980Darul-Mal Al-Islami Geneva 1981Syarikat Takaful Al-Islamiyah Bahrain 1983Islamic Takaful and Re-Takaful Co. Bahamas 1983Islamic Takaful Company Luxembourg 1983Al-Barakah Insurance Co. Sudan 1984Islamic Insurance and Re-Insurance Company Bahrain 1985Syarikat Takaful Malaysia Sdn. Bhd.27

This company is currently managing nine-other branches throughout the country.28

Brunei 1992

Syarikat Takaful Brunei Darus-Salam29 Brunei 1992The PT Syarikat Takaful Indonesia30 Indonesia 1994The Syarikat Takaful Singapore31 Singapore 1995Islamic Insurance Company32 Qatar 1995MNI Takaful Sdn. Bhd.33 Malaysia 1993ASEAN Takaful Group (ATG) Malaysia 1996ASEAN Re-Takaful International (Labuan) LTD (ARIL) Malaysia 1997

27 The information extracted from Rahman, Dr. M. Ataur “Akti Desher Orthomaitik Unnayona Islami Bimer Vornica: Bangladesh Prekkith” Thoughts on Economics, Vol. 4, No. 3-4, 1994 at 91.28 See in The Malaysian Insurance Directory 1994/95, op. cit., at 194.29 See in Profitle of Asuransi Takaful Umum Indonesia, (An information Brochure, n.d.) at 2.30 See in Ibid., at 1.31 See in Juhari, Johrawati, “Islamic Insurance Takaful Launched in Singapore,” in the Muslim Reader, Vol. 13, No. 3, Oct. - Nov. 1995.32 See in The Islamic Banker, July, 1995, at 5.33 See in The Malaysian Insurance Directory 1994/95, op. cit., at 194Af.

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Besides all the Islamic insurance companies listed above, the Organization of Islamic Conference (OIC) is at present taking the initiative to establish an international Re-Insurance Corporation.34

At present, serious studies and researchers in the sight of the Shari’ah are being conducted on insurance in many parts of the world in order to make insurance to be understood by all, in both theories and practices, so that the contemporary Muslim Ummah could be benefited from.

Nature of Insurance Practices in the Islamic Economy

Islamic insurance or course, differs from that of conventional. This is because an Islamic insurance policy must operate based on the concept of al-Mudharabah, a profit sharing scheme and must be free from the elements which are illegal in the eyes of Shari’ah. The scholars who are not in favour of legalising insurance must have based their opinions and judgments on the conventional insurance practices which for sure involve a few unlawful elements in the eyes of the Shari’ah.

Thus, here is given a proposed model for Islamic insurance policy which is different from that of the conventional one.

i) An insurance contract binds the insurer only on unilateral basis that the insurer is under an obligation to provide a compensation against the loss to the subject matter of the policy, while the insured not be forced if he does not want to continue the payment of premiums. But it is necessary to the insured to continue the payment of premiums in order for claiming benefit over the policy. If the insured discontinues the payments of premiums, the paid-premium should not be forfeited.

ii) An Islamic model of insurance policy is based on the fundamental principle of mutual co-operation and solidarity, as ordained by Allah (SWT) Allah (SWT) mentioned to this effect:

“Sustain a mutual co-operation among yourselves in the righteousness and piety.”35

iii) A Shari’ah based insurance policy does not involve unlawful element of usury (Riba), but it is based on the profit-sharing financing technique of al-Mudharabah, whereby the insured pays the premiums to the insurer (insurance company) who will run a business by the cumulated money, the profits arising from such transaction will be shared by both the insurer and the insured accordingly.36

34 Ali, K.M. Murtuza, Insurance in Islam: Some Aspects of Islamic Insurance, Islamic Economics Research Bureau, Dhaka, 1991 at 45.35 Al-Quran, at 5:2.36 See generally in Rashid, S.K., “Islamization of Insurance - A Religio - Legal Experiment in Malaysia” in Religion and Law Review, Vol. 2, No. 1, 1993 at 26f.

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iv) In the case of life insurance policy, some claim that such practice is prohibited in Islam, relying on the fact that the insurer and the insured, in this case, are trying to determine one’s life or death, as claimed by the Muslim brotherhood in 1941.37 However, such criticism was proven to be groundless.

v) In an Islamic model of life insurance policy, however, the nominee(s) is not an absolute beneficiary(s), but a mere trustee who is under an obligation to receive the benefits over the policy and distributes them among the legal heirs of the deceased in accordance with the principles of ‘Mirath’ (inheritance) and ‘Wasiyah’ (bequest).38

vi) In an insurance transaction an agent is working for the company. Hence, it is suggested here that agent should also have a certain share in profits in the business carried out by the company as salary. The agent therefore, should not be paid out of the insured premiums.

vii) In a life policy, if the assured passes away at any time before the maturity of the period, the beneficiary(s) is expected to claim from the policy the total paid-premiums, the share of the profit, and dividends made over the paid premiums which are all based on Al-Mudharabah financing technique plus an additional sum of donation from the company taken out of its charitable fund upon considering the financial status of the beneficiary(s).39 But if the insured sustains his life upon the maturity of the period of the policy, the insured is entitled to claim from the insurer the total paid-premiums also the share of the profits, dividends accordingly.

viii) In the case of general insurance, it is to be mutually understood by both the insurer and the insured that the insured’s payment of premium will be given out as a donation based on the principle of ‘Tabarru’40 (donation or contribution) whereby the insured can not legally claim back the premium if there is no loss on the agreed subject matter. However, if a loss or damage occurs to the subject matter within the policy period, the insurer is unilaterally bound to pay the agreed compensation to the insured for that particular loss or damage of the subject matter.

ix) The person who claims the benefits over a policy must have an insurable interest on the subject matter.

x) The parties involve in an insurance policy must have legal capacity to enter in to contract.

Scope of Islamic Insurance Contract

37 See in Klingmuller, op.cit., at 35.38 See the details in Billah, M. Masum, “Life Insurance? An Islamic View”, in Arab Law Quarterly, Vol. 8., part 4, 1993 at 319.39 See the details in Billah, op. cit., at 324.40 See in Rashid, op. cit., at 27.

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Generally, the scope of an Islamic insurance policy is very wide and flexible. Such wider scope and flexibility are just for the purpose of Inter Alia to ensure a smooth life in the society which is of course in line with the following sanction:

“….. Our Lord, give us happiness in this world and happiness in the hereafter…..”41

In spite of the wider scope and flexibility of the Islamic insurance policy, there are certain limitations set by the Shari’ah in order to purify the transactions. For instance, Allah (SWT) prohibited any kind of cumulation of profits and wealth by way of unjust enrichment. He commanded to the effect:

“….. do not eat up your property among yourselves in vanities, but there be amongst traffic and business by mutual goodwill…..”42In short, the limitation imposed by the Shari’ah to an insurance policy are as follows:

i) A contract of insurance should not involve a single element of ‘Riba’ in its investment activities or any other activities43 organised by the insurance company. This is because besides it is being totally forbidden in Islam, it Inter Alia, creates the sense of selfishness, miserliness, greed, and malevolence, at the individual level and hence Haji Azlan Khalil accepts the view of Khan M.V. that the institution of ‘Riba’ could lead to miserable, unstable society.44 Allah (SWT) warns the believers against involving ‘Riba’ in their transactions. He (SWT) says to the effect:

“O ye who believe! Do not involve with usury, double and multiple…..”45

ii) An insurance business should be based on the principle of al-Mudharabah financing technique as an alternative to the principle of the fixed-rate interest.46

iii) The nominee(s) in a life insurance policy is not an absolute beneficiary(s) as under the conventional system.47 Such nominee(s) is only a mere trustee(s) whose obligation is to receive the benefits over the policy and distribute them among the legal heirs of the deceased (insured)48 in accordance with the principles of ‘al-Mirath’ and ‘al-

41 Al-Quran, at 2:201.42 Ibid., at 4:29.43 See Takaful Cover, Syarikat Takaful Malaysia Sdn Bhd., Kuala Lumpur (n.d.)44 Shamsuddin, Haji Azlan Khalili Hj., Banking and Public Finance in Islam, Dewan Pustaka Fajar, Kuala Lumpur, 1988 at 13.45 Al-Quran, at 3:130.46 See Shafi, Maulana Mufti Muhammad, et. Al., ‘Bimah Jendegi’ (trans. Urdu-Eng.), Meenai, Anwar Ahmad, Life Insurance, Darul Isayat, Karachi, 1995, at 36.47 See the judgment of Suffian J., in Reman bin Mihat (1965) 2 MLJ 1.48 See the decision of the High Court of Karachi in Karim Vs. Hanifa (1970) PLD 683.

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Wasiyah’.49 Such responsibility is shouldered by the nominee(s) and is just for the sake of enabling the heirs of the assured to enjoy a fair distribution of the benefits of the policy.

iv) An insurance contract is only enforceable if it does not contravene with any of the principles of Shari’ah. This has been clarified by the Malaysian Takaful Act 1984:

“Takaful business means a business of takaful whose aims and operations do not involve by any element which is not approved by the Shari’ah.”50

v) Every individual in the society has a freedom of buying an insurance policy. The only exceptions to this general rule are set out as follows:

a) Any person whose age is below eighteen years. The Malaysian Takaful Act to the effect:

“A person under the age of eighteen years shall not have the capacity to enter into a contract of Takaful.”51

b) A person who is an insane and an ill (the one medically unfit) are also incapable to enter into a contract of insurance.

vi) An insurance contract does not aim at gaining something as it is a mutual transaction aimed at fostering the sense of mutual co-operation among the parties to the contract in order to establish brotherhood and solidarity among them. Thus, in an insurance policy, there is a mutual co-operation between both parties whereby the insured undertakes to pay the premiums throughout the period of the policy while the insurer undertakes, in return, to provide the insured with the necessary material protection against an unexpected risk, danger or loss. Allah (SWT), in the Holy Quran, has enjoined such mutual co-operation to be established among the people. He (SWT) says to the effect:

“…… And co-operate one another in righteousness and piety…..”52

vii) A contract of insurance is enforceable should it be entered upon a speculation of a risk on a particular subject matter.

viii) If either party to the insurance contract has the intention of gaining instead of establishing mutual co-operation, the transaction will become morally and spiritually unlawful. Hence, it is also required from both parties to the contract to instill in their hearts purity and sincerity in order to abide the principle of mutual co-operation as enjoined by the Holy Quran at 5:2.49 See in Billah, op. cit., at 319.50 Takaful Act, (Malaysia) 1984 at S.2.51 Ibid, at S. 64.52 Al-Quran, at 5:2.

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ix) The fundamental aspects of insurance must be controlled and supervised by the State Authority based on the Shari’ah rules and nothing should be left, unchecked. Such a wise move is aimed at ensuring the legality and fairness of all the transactions conducted by the insurance companies, since insurance businesses are considered as ‘Amanah’ or trusts, whereby the insurance companies undertake to protect the insured from future unexpected losses, damages, risks or perils. Nejarullah Siddiqi hence suggested to the effect:

“All insurance concerning perils to lives, limbs, and health should be dealt with exclusively under the supervision of the state.”53

He further suggested:

“Insurance against peril involving money and property should also be run by the state.”54

Again he aspired in his proposal that all kind of insurance practices should be dealt under the supervision of the state authority.

Foundation of Insurance in the Islamic Economy

An insurance practice under Islamic teachings posses certain fundamental characteristics upon which an insurance contract is to be held valid. Those fundamental characteristics could mainly be classified into four categories:

i) Sincerity (Ikhlas )

Every transaction and dealing should always be done with sincerity and pure intention in order to achieve the desired result from Allah (SWT). He (SWT) says:

“… And they have been commanded no more than this, to worship Allah (SWT), offering him sincere devotion.”55

This has further been enhanced by the tradition of the Prophet (SAW) as follows:

53 Siddiqi, M.N., Insurance in an Islamic Economy, The Islamic Foundation, U.K., 1985 at 67.54 Ibid.55 Al-Quran, at 98:5.

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“….. Narrated by Omar Ibn Khattab (R ) the Holy Prophet (SAW) said: The validity of the actions are depending on intention and therefore every man shall have but that which he intended…..”56

Moreover, the parties to the insurance contact must have the sincerity of not to gain, but to be bound by that transaction based on the principles of mutual co-operation, solidarity and brotherhood towards rescuing one from unexpected losses and damages. This is because Allah (SWT) never look at any material gains but at the sincerity of the hearts. The Holy Prophet (SAW) said to this effect:

Narrated by Abu Huraira (R ) the Holy Prophet (SAW) said: Verily Allah (SWT) never look at your physical shape nor at your appearance but considers sincerity in your hearts…..”57

What more in an insurance transaction whereby the parties undertake must by all means put their trusts and faith in Allah (SWT)58 in order to get His (SWT) protection from the consequential unpredicted loss. This is because an insurer formally undertakes only to compensate the insured against a loss or damage through he (i.e. the insurer) is not liable to guarantee for an ultimate protection. This is because Allah (SWT) is the one who has a power of protection over all in the universe. He (SWT) indicates it as follows:

“To Him belongs the domination of the heaven and the earth: to give life and death: and He has power over all things.”59

ii) Absolute Shari’ah Principles

An insurance business in the eyes of Islamic discipline will not be valid should any of its aspect contravenes any Shari’ah principle. The Takaful Act (Malaysia) 1984 rules out that a Shari’ah based insurance is enforceable if its “aims and operations do not involve any element which is not approved by the Shari’ah.”60 Therefore, it is a pre-requisite for the validity of an insurance contract that none of its aspect should be in contravenes with any expressed or implied Shari’ah sanctions. It is also to be clarified here that Islam is the only system of life recommended by Allah (SWT)61 and therefore, it is logical for any transaction (including that of insurance) to be conformed with the Divine rules and regulations. Any transaction which fails to be practised in line with such Divine will therefore, become invalid. Allah (SWT) says to the effect:

56 Bukhari and Muslim, (agreed), Kitabul Iman.57 Sahih Muslim, compiled in An Nawari, Riyadhussalihin (trans. Bangla) Ali, Maulana Syed Muhammad et. At. Riadussaliheen, Vol. 1, Bangladesh Islamic Centre, Dhaka, 1990, No. 7 at 5.58 Shafi, Mawlana Mufti Mohd., op. cit., at 36.59 Al-Quran at 57:2.60 Takaful Act (Malaysia), 1984 at S. 2.61 See in the Holy Quran, at 3:19, “The System Before Allah (SWT) is Islam (Submission to His Will)”.

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“If any one desires any system other than Islam never will it be recognised by Allah (SWT……”62

iii) Moral Attributes

An insurance contract and practice must also conform with moral sanctions. Those moral sanctions and valued therefore, itemised as follows:

a) The principle of Uberrimae fidei: In an Islamic insurance contract, the parties should observe the principles of utmost good faith, honesty, disclosure and truthfulness. This principle could be justified by the following verse of the Holy Quran:

“…… Do not misappropriate your property among yourselves in vanities…..”63

b) The parties involved in an insurance contract should not be greedy in gaining something but should purify their purposes and aims based on the principle of mutual co-operation in protecting one from an unexpected disaster or loss. This is in line with Divine sanction:

“…..help ye another in righteousness and piety…..”64

iv) Elements of Insurance Contract: It is suggested that the following elements should be available in a Shari’ah-based insurance transaction:

a) The parties to the contract must have legal capacity;65

b) The availability of insurable interest;66

c) Indemnity clause: The insurer is unilaterally bound to compensate the insured for the loss to the agreed-subject matter;

d) The payments of premiums by the insured as a consideration to the contract;

e) The presence of mutual consent by both parties. This requirement has been justified by the Quranic sanction:

62 Ibid., 3:85.63 Al-Quran, at 4:29.64 Ibid., at 5:3.65 One of the legal capacities is Inter Alia, majority The Takaful Act (Malaysia) 1984, at S 64 rules that a person involving in a contract of insurance must be at least 18 years old.66 See in Rashid, op. cit., at 28.

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“… Do not misappropriate your property among yourselves in vanities, but let there be amongst you traffic and trade by mutual good-will..”67

f) An offer and an acceptance to be expressed in a formal agreement between the insurer and the insured, in which the terms and conditions being put are subject to the doctrine of Uberrimae fidei, and of course in compliance with the Shari’ah principles;68

g) Specification of period for the agreed policies which is to be contained in the agreement.

v) A contract of insurance should be operated based on the principles of interest (Riba) but should be operated based on the principle of al-Mudharabah” financing technique69, whereby both parties will enjoy the share of profits and dividends made over the paid premiums and company’s policies.

Rational Outlook

An insurance policy does not signify a change for a material gain nor to override the power and determination of Almighty Allah (SWT) in one’s life, death or destiny. But it aims at achieving the pleasure of Allah (SWT) through the concept of mutual help and co-operation with the goal of providing material assistance against unexpected future damage, loss or peril. After all, Allah (SWT) does not prohibit one from making an effort in overcoming difficulties or obstacles in life. Here are some of the basic purposes of having an insurance policy outlined:

i) An insurance policy will enable certain helpless people to be rescued from unexpected future material risk which may lead to hardship to those unfortunate lives. The Holy Prophet (SAW) advised the Ummah to come forward in relieving one’s hardship. He (SAW) said in the following:

“… Narrated by Abu Huraira (R ) from Holy Prophet (SAW) saying that: whosoever removes a wordly hardship from a believer Allah SWT) will remove from him one of the hardship of the hereafter, Whosoever alleviates the needy person, Allah (SWT) will alleviate from him in this world and the next…”70

ii) An insurance policy contributed towards the reduction of poverty rates in the society while ensuring a comfortable life for the poor. It is universal nature that anyone might become poor resulting from any concurrence of material loss or damage. Such 67 Al-Quran, at 4:29.68 See The Rules of Shari’ah Supervisory Board, Faisal Islamic Bank Sudan Publications, English Series (5), Sudan n.d. at 12.69 See in Shafi, Maulana Mufti Muhammad, op. cit., at 36.70 Sahih Muslim, as compiled in Nawawi Forty Hadith, (trans. Eng.) Ibrahim Ezzeddin et.al., IIFSO 1985, No. 36 at 114f.

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material poverty could be solved should one have an insurance policy, insuring him/her against such damage or loss. Insurance policy, hence, guarantees the insured a comfortable life or material security against unexpected occurrence of loss or risk. Allah (SWT), indeed, encourages people to seek for better life in the world and in the hereafter. He (SWT) says to the effect:

“….. Our Lord, give us comfortable life in both the world and the hereafter….”71

iii) Having an insurance policy may ensure a development of mutual cooperation and the spirit of brotherhood as well as cultivating solidarity. The rational behind the establishment of an insurance is further highlighted by the Takaful Act (Malaysia) 1984 which reads as follows:

“It is a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agreed to contributed for the purpose.”72

For example, the insured in a policy pays regular premiums to the insurer (insurance company) which enables the insurer to invest and make profits, while the insurer undertakes to provide material assistance for the insured unexpected loss, damage or peril. Such financial co-operation could certainly strengthen brotherhood among the parties to the policy in achieving economic progress and independence. Here the practice of mutual co-operation is of course recommended by Allah (SWT):

“… maintain a mutual co-operation among yourselves in righteousness and piety….”73

iv) An insurance policy contributes towards producing a society with self reliance. Such an insurance policy materially protects the insured from unexpected tragedy, loss or damage. However, an availability of this material protection will ensure that the insured will not be dependent on others assistance and help in difficulties. Allah (SWT) in this respect always intends to facilitate and makes life easy and comfortable for all. He (SWT) says to the effect:

“…. Allah (SWT) intends easy life for you while he does not want your to be in difficulties…..”74

v) An insurance policy is based on the principles of al-Mudarabah financing technique whereby the parties involved share the profits with an agreed portion.

71 Al-Quran, at ch. 2:201.72 See in Takaful Act (Malaysia) 1984, at S. 2.73 Ibid., at 5:3.74 Ibid., at 2:185. See in Pervez, Imtias Ahjmad, “The Financial Instrument Used by Islamic Bank” in New Horizon, No. 45, No. 1995 at 3.

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Simultaneously avoiding the consumption of interest (Riba). An interest-based transaction on the other hand, always leads to unfairness in the commercial society. The practices of Riba is being prohibited not only by Allah (SWT) in the Holy Quran, it had also been prohibited in other faiths as well. Aristotle, for instance, had rejected the consumption of interest while Cato, in rejecting such practice, equated interest consumption to that of homicide in 340 B.C. Lex Genucia had declared in Rome that interest consumption was unlawful. According to the teachings of Judaism, interest was considered as unfair and unfriendly appropriation. In 1311 A.D., Pope Clement announced that all transactions involving usury were prohibited and hence, he declared that all secular legislations in favour of such practice were null and void.75 As far as Islam is concerned, Allah (SWT) has prohibited the consumption of interest or Riba for the obvious reason of its unfairness. The Holy Prophet (SAW) said to the effect:

“O ye who believe! Do not eat usury, doubled and multiplied…..”76

The Mudharabah financing technique is however, considered by the Islamic jurists as a fair and just transaction and hence, presents a fair commercial dealing to the community as the best alternative to the unfair interest-based transaction.77

vi) The case of life insurance policy has often been misunderstood by many Muslim scholars as a transaction of determining one’s life and destiny.78 Such misconception is of course groundless. This is because life insurance policy is a transaction for welfare aimed at compensating and providing material protection for the Inter Alia unfortunate offsprings, who had been left helpless upon the death of the deceased (policy holder or the assured). The Holy Prophet (SAW) had also advised people to provide for their offspring’s material protection. He (SAW) said to the effect:

“….. Narrated by Amir bin Saad bin Abi Waqqas (R ), The Holy Prophet (SAW) said: Verily it better for you to leave your offspring wealthy than to leave them poor asking others for help….”79

vii) A life insurance policy guarantees future material security for the widow and other dependents of the deceased (assured). The Holy Prophet (SAW) indeed encouraged people to strive towards ensuring security for the widows and the poor in the society. He (SAW) said in one of his traditions:

75 See in Pervez, Imtias Ahmad, “The Financial Instrument Used by Islamic Bank” in New Horizon, No. 1995at 3.76 Al-Quran, at 3:130.77 See in Shafi, Mawlana Mufti Muhammad, op.cit., at 35.78 See in Klingmuller, op.cit. at 35.79 Sahih Bukhari (trans. Eng.) Khan, Dr. Muhammad Muhsin, Kazi Publication, Lahore, 1979, Vol. 8, No. 725, at 477f.

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“Narrated by Safwan bin Salim ( R), the Holy Prophet (SAW) said: The one who looks after and works for a widow and for a poor person, is like a warrior fighting for the cause of Allah (SWT), or like a person who fasts during the day and prays over the night."80

viii) A life policy guarantees future material protection for Inter Alia, orphans and it is again justified by a tradition of the Holy Prophet (SAW). He (SAW) advised people to provide security for the orphans for the purpose of getting great significance in the hereafter. The Holy Prophet (SAW) said to the effect:

“Narrated by Sahal bin Saad (R), the holy Prophet (SAW) said: I and the person who looks after an orphan and provides for him security will be in paradise like this….81

ix) Finally, an insurance policy also has its own hidden rational in the sense that it generally ensures security for one from unexpected risk and this may encourage every individual in the society to involve themselves in any lawful transaction without any hesitation and fear of facing any future loss or damage. Allah (SWT) has always encouraged people to be involved in any lawful trade. He (SWT) says to the effect:

“….. Allah (SWT) permitted trade and transaction while prohibited in involving usury….”82

Sources of Takaful Law in the Islamic Economy

An insurance policy remain valid if none of its aspects contravene the Shari’ah principles.83 Hence, every source of an Islamic insurance policy should absolutely be based on the Shari’ah discipline.84 This section attempts to highlight the sources of Islamic insurance contract which may mainly be divided into two categories:

Sources in General

The general sources of Islamic law begin with the holy Quran and the Sunnah or the Tradition of the Holy Prophet (SAW). These two are regarded as the principal sources of Islamic law. Other secondary sources of Islamic law indeed should strictly be based on these two primary sources. This has been indicated in the following Divine injunction:

“O ye who believe! Obey Allah (SWT) and obey the Prophet (SAW)…..”85

80 Ibid., No. 35 at 23.81 Ibid., No. 34 at 23.82 Al-Quran, at 2:275.83 See Rules of the Shari’ah Supervisory Board, op. cit. at 12.84 See also The Takaful Act (Malaysia) 1984, at S. 2.85 Al-Quran, at 4:59.

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As regards to the basic sources of insurance contract under the Islamic law, remain the Holy Quran and Sunnah or Traditions of the Prophet (SAW) while the other secondary sources must remain in accordance with the above two primary sources. Prof. Abdur Rahmah I Doi has acknowledged the fact that the Quranic injunctions are the code of conduct for every Muslim from cradle to grave.86 He again went on to accept that the Sunnah as the supplementary source to that of the Holy Quran.87

Generally, the sources of insurance contract could be itemised as follows:

The Holy Quran

There are five hundred verses in the Holy Quran which deal with the legal sanctions.88

There are indeed a number of Divine injunctions in the Holy Quran which justify the validity of an insurance contract. A contract of insurance contains the elements of mutual co-operation89 it is a binding promise which binds both the insurer and the insured based on the general principles of contract.90 It also contains the elements of alleviation of hardships and provision of providing material security and assistance for those who are facing unexpected risk and peril, so to ensure a comfortable life.91 All these elements of a contract of insurance are justified by the Quranic principles. It is concluded here that the Holy Quran is the principal guidance to provide an instrumental justification for the application of insurance contract, as the Holy Quran is the plain statement and guidance for mankind for their success.

“… it is a plain statement to man, a guidance and instruction to those who feal Allah (SWT)….”92

The above sanction renders an opportunity for mankind to practice insurance policy so long as one does not violate the Divine sanctions directly or indirectly.

Sunnah

The Sunnah or the traditions of the Holy Prophet (SAW) is the second source immediately after the Holy Quran.93 As regards to the justification of an insurance contract and practice, there are indeed numerous traditions justifying the validity and permissibility of its concept and practices. For instance, an insurance policy embodies

86 See I. Doi, Abdur Rahman, Sharia: The Islamic Law, A.S. Noordeen, Kuala Lumpur, 1984, at 36.87 Ibid, at 49.88 Al-Suyuti, Itqan fi Ulumel Quran, as cited in I. Doi, Abdur Rahman, loc. cit., at 36.89 See Al-Quran, at 5:2.90 See Id. at 5:1.91 See Id. at 2:201.92 Id. at 3:138.93 See Ibid, at 4:59

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the concept of “Tawakkul” where by one would strive hard in overcoming one’s unexpected future risk or peril before leaving one’s fate and destiny in the hands of Allah (SWT), such a concept had been justified in one of the tradition of the Holy Prophet (SAW) which reads to the effect:

“….. Narrated by Anas bin Malik (R), the Holy Prophet (SAW) told a Bedwin Arab who left his camel untied trusting to the will of Allah (SWT): Tie the camel first then leave it to Allah (SWT).”94

Moreover, an insurance policy aims at protecting the insured from future material constraints upon the occurrence of a particular unexpected future risk. Such idea of protection for those who are in need is justified by the following tradition of the Holy Prophet (SAW):

“… Narrated by Abu Huraira (R), the Holy Prophet (SAW) said: whosoever removes a wordly hardship from a believer, Allah SWT) will remove from him one of the hardships of the day of judgment. Whosoever alleviate from one, Allah (SWT) will alleviate his lot in this world and the next…”95

There are also other essential aspects of an insurance contract justified by the sunnah, such as the fact that an insurance policy was originated from the ancient Arab custom of ‘al-Aqila’ which had been approved by the Holy Prophet (SAW) during his time.96

Moreover a life insurance policy aimed at providing in advance, material security for the offsprings of the deceased (assured), is also justified by the traditions.97

Practices of the Companions:

An insurance policy was originated from the doctrine of ‘al-Aqila’. During the later stage of the period of the second caliph Sayedina Umar (R ) who had practiced it and directed citizens to practise the same.98

Ijtihad and Consensus of Opinions Among the Islamic Scholars:

The idea, meaning and legal characteristics of an insurance policy is practised in the world of today had first been discovered by the famous Hanafi lawyer Ibn Abidin (1784-

94 Sunan Al-Tirmizi, Vol. 4, Cagri Yayianlari, Istanbul, 1981, in Kitabu Sifatul Qiyamah Wal-Rakaik, Bab 60, No. 2517 at 668.95 Sahih Muslim, op. cit.96 See in Gibb, op. cit, at 29.97 Such in Sahih al-Bukhari, op. cit Vol. 8, No. 725 at 478.98 See in Gibb, op.cit., at 29f.

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1836) after a critical effort99 in his book Radhul Mukhtar100 at volume 3, page 249.101 Abu Johra, another Hanafi scholar also accepted the idea of Ibn Abidin102, Mufti Muhammad Abduh also agreed to the validity of insurance practices generally.103 In1906, the Mufti of Egypt, Sheikh Muhammad Baqit also accepted the idea of insurance as laid down by Ibn Abidin.104

There are other Islamic scholars who did not oppose the idea of insurance policy such as Muhammad Musa, Ahmed Ibrahim, Sheikh Shawkat Ali, Khan Muhammad Yusuf Musa, Ahmed Taha Sanusi, Abdur Rahman Isa, Ali Khalif,105 Mustafa Zarqa, Dr. Nejatullah Siddiqi and to name a few contemporary Islamic scholars who unanimously agreed on the validity of insurance policy. However, despite the unanimous agreements among the above mentioned Muslim scholars, there are still some contemporary Muslim scholars who refuse to accept, it especially a life insurance policy based on certain grounds. The diversification among the Ulama on this issue will be highlighted later in this chapter.

Analogical Sources

Analogical sources such as qiyas, instihsan and istishab could also be used as further additional justification for the idea and practice of insurance policy, so long as nothing contravenes with the sanctions of the Holy Quran nor the Sunnah of the Holy Prophet (SAW), which advised people to come up with analogical decision if necessary so long as such analogical decisions are not contrary to the Holy Quran and the Sunnah. Allah (SWT) says to the effect:

“…..Think deeply o ye who understanding…..”106

Masaleh al-Mursalah:

An insurance contract as we see today had not exactly been practised during the time of the Holy Prophet (SAW). However, life necessity and status of human being had since been changing with the evolution of time and era. The necessity to practice insurance policy arises to suit the changing environment, in the sense that there is an urgent need to find a way of providing a material security for those who are suffering in the society due to unexpected loss, damage or peril. Hence, an insurance is necessary for the public interest in which the victim is to be rescued from the unexpected risk, and thus, it is justified by the doctrine of Masaleh al-Mursalah. It is noted here that even though the

99 Kling Muller, op.cit., at 30.100 See Shafi, op.cit., at 30.101 Hadgha, Refat Muhammad, Insurance Contract and Its Provision in the Islamic Shari’ah (an unpublished thesis), IIUM, 1995 at 15.102 Mankabady, Samir, Insurance and Islamic Law, in Arab Law Quarterly, Vol. 4, 1989 at 199.103 See in Id, at 201.104 Ibid.105 See in Billah, op. cit. at 315.106 Al-Quran, at 59:2.

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practice of insurance could also be based on the said doctrine, its validity is still subjected to conformation with the Divine principles laid down in the Holy Quran and the Sunnah of the Holy Prophet (SAW). The significance in an insurance practice for human beings are Inter Alia to ensure a comfortable life which is also a wish of Allah (SWT) as evident in the following verse:

“Allah (SWT) intends you to enjoy with an easy life. He does not wish you to face hardships…..”107

Urf:

Urf is custom, practices or usage of the community. An ‘Urf could also be used for a justification of a particular matter provided that a ‘Urf conforms with the Divine sanctions of Allah (SWT). The development of insurance practices has in fact originated from a popular ancient Arab tribal custom (Urf), the practices of Al-Aqila which had also been approved by the Holy Prophet (SAW) in a dispute between two women from the tribe of Hudhail.108 Hence, it is clear that the ‘Urf or custom of ‘Al-Aqila’ practised by the ancient Arab tribes, and approved by the Holy Prophet (SAW) could stand as a valid justification for the validity of insurance practice.

Fiqh

There are provisions in the Fiqh which deal with the practices of insurance. For instance, Syed Sabeq, in the book Fiqh Al-Sunnah, under the section of ‘Shirkatul Tameen’ discussed the validity of insurance contract. An insurance contract is based on the general principles of Al-Aqd ‘al-Mudharabah’, financing technique, al-Waqala, as-Shirkah and so on which have also been discussed in detail in his book.109

The Hedaya by Allama Murginani also focussed on partnership, ‘waqala’ as well as other relevant aspects of insurance. There are many other books of Fiqh which discuss either directly or indirectly, partly or wholely, the relevant aspects of an insurance practice.

Relevant Literatures of the Islamic Scholars:

There are indeed Islamic scholars who had come up with opinion of upholding the validity of insurance policy as well as the essential procedures and solutions to it. The ideas and solutions have been written by the Islamic scholars in their respective books. For example, in 1982, Abdullah bin Jaid al-Mahmoud has written a book on insurance entitled Ahkam Uqud Tameem wa Makaniha Min Shariat at Deen, Saad Abu Zaid, in 1989 had written At Tameem binal Khator wal Ibahat, while Mustafa Ahmad Zarqa, in

107 Al-Quran, at 2:185.108 See “Al-Aqila”, in Gibb, op.cit. at 29.109 See Sabeq al-Sabiq, Fiqh al-Sunnah, Darul Kitab al-Arabi, Lebanon, 1971, Vol. 3.

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1984 had written Nizamul Tameem. In 1969, Dr. Mhammad Muslehuddin had written Insurance and Islamic Law while Dr. Nejatullah Siddiqi wrote in 1985, Insurance in an Islamic Economy.

As far as articles on insurance are concerned, there are also a number of them had been written by various Islamic scholars. For instance, Prof. Shamir Mankabadi wrote “The Concept and Development of Insurance in Islamic countries” published by Islamic Culture in 1969 and to name many others.

All these literatures written by these distinguished Islamic scholars portray the validity of insurance policies and its practices in the contemporary Muslim world.

Acts of Parliament:

There are several Shari’ah based insurance companies operating today in the contemporary world. For example in Malaysia, Sudan, Brunei, Qatar, Saudi Arabia, to name a few. These Islamic insurance companies were established and operated based on the Shari’ah-based enactment and regulations directly or indirectly approved by the Parliament of the respective countries. A clear examples of such enactment and regulations is The Takaful Act (Malaysia) 1984 (Act 312) which is one of the acts of Parliament aimed at controlling Islamic based insurance practices in Malaysia.

Rules of the Shari’ah Supervisory Board:

Behind the certain of every Shari’ah-based insurance company, there is a Council or Board called the Shari’ah Supervisory Board. This Supervisory Board functions as the supervisor of the Islamic Insurance activities run by that particular company, ensuring that all these insurance activities are operating in accordance with the Divine principles of the Shari’ah and some necessary circumstances they come up with regulations which bind that Islamic insurance company. For instance, the Malaysian Takaful Operation is supervised by a Shari’ah Supervisory Council by virtue of Section 8(5) (b) of The Takaful Act and it has so far approved Inter Alia the under written guidelines and procedures on general takaful on the 1st July 1994. In Sudan, moreover, there is a Shari’ah Supervisory Board which supervises, Inter Alia, insurance business in the country and also passed the Rules of the Shari’ah Supervisory Board published by the Faisal Islamic Bank Sudan (n.d.).

Precedents:

Precedents could also play a role as one of the sources of insurance law and practice. Some times, there are some Islamic scholars who had given a particular decision of several issues on insurance policy and practice which we may find useful in governing practice of Islamic insurance practices. For instance, the opinion given Ibn Abidin had later became a precedent which influenced the Mufti of higher level to advise the governmental departments and various bodies on insurance matters.110 Mufti Muhammad

110 See Mankabadi, op. cit. at 200.

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Abduh had held on many occasions that insurance policy and practices are valid.111

Besides the precedents, set up by the independent Islamic scholars, there is also another type of precedent set up by the courts relevant to the insurance practices.112 Such precedents could also be considered as a valid source of insurance law.

Unanimous Decision of the Islamic Scholars

There are numerous conferences held on Islamic insurance in the Muslim globe, in which Muslim scholars had unanimously agreed on the practices of insurance policy. Here are some of the examples of such conferences:

a) The Islamic Fiqh Week held in Damascus from 1st - 6th 1961; 113

b) The Seminar held in Morroco on 6th May 1972 which upheld the validity of insurance business with the exception of life insurance business:114

c) The Second Conference on Muslim Scholars held in Cairo in 1965;115

d) The Symposium on Islamic Jurisprudence held in Libya from 6th - 11th May 1972;116

e) The First International Conference on Islamic Economics held in Mecca from 21st - 26th February 1976;117

f) The Islamic Conference held in Mecca in October 1976.118

Specific Sources

Principles of Contract ('Aqd):

An insurance policy binds the parties unilaterally by an offer and an acceptance upon reliance on the principles of contract. The fundamentals required in an insurance policy are the parties to the contract, legal capacities of the parties, offer and acceptance, consideration subject matter, insurable interest, and Uberrimei fidei, most of which are available in general practices of contract. For example, a contract is a promise by an offer and an acceptance and must be fulfilled as Allah (SWT) has commanded to the effect:

111 See Ibid, 201.112 For example the cases decided on Mirath, endownment, etc.113 Ibid.114 See in Mankabadi, op. cit. 202.115 Hadagha, op. cit. at 17.116 Ibid.117 Ibid.118 Shawky, Muhammad, Al-Islam wal Tameem, at 14 as quoted in Ibid.

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O ye who believe! Fulfill your agreement119

In the case of legal capacity, as to age of the parties to the contract of insurance, for instance. The Takaful Act (Malaysia) 1984 determines the age of the parties to be 18 and above as a legal capacity:

A person under the age of eighteen years shall not have the capacity to enter into contract of Takaful.120

The requirement of age of the parties in an insurance policy is the same as required in a general practices of contract. Hence, the above principles, and other relevant principles relating to contract are basically applied in the formation of an insurance contract.

Principles of Liability:

An insurance policy covers losses arising from the death, incident, disaster and other losses to the human life, property or business. The insurer (insurance company) undertakes in the policy to compensate against the losses to the agreed subject matter. Such undertaking is considered as vicarious liability. For instance, in the case of ‘Aqila’ practiced in the ancient Arab tribes approved by the Holy Prophet (SAW) that, if a person was being killed by another from a different tribe either mistakenly or negligently, this would bring a vicarious liability to the whole inhabitants on behalf of the killer of own tribe to pay blood money writ to the heirs of the slain.121

Moreover, the rights and obligations in an insurance policy mainly arise from the law of contract and tort. For example, in a case of an accident of a motorbike, the insurer (insurance company) is liable on behalf of the person who causes that accident (i.e. the insured) to pay compensation to the victim. Here, the insurer is bound by the terms stipulated between the insurer and the insured to pay that compensation.

Principles of Uberrimae Fidei:

In an insurance contract for the enforcement of the policy, the parties involved in it should have good faith. Therefore, non-disclosure of material facts, involvement of a fraudulent act, misrepresentation or false statement are all the elements which could invalidate a policy of insurance. Allah (SWT) says to the effect:

“….. Do not misappropriate your property among yourselves in vanities but let there be amongst you traffic and trade by mutual good will……”122

119 Al-Quran, at 5:1.120 See The Takaful Act (Malaysia) 1984, at S. 64.121 For example, See Uddin M. Musleh, Concept of Civil Liability in Islam and the Law of Torts, Islamic Publication Ltd. Lahore, 1982 at 62, See also Niazi Liaqat Ali Khat, Islamic Law of Tort, Research Cell Dayal Singh Trust Library, Lahore, 1988 at 339.122 Al-Quran, at 4:29.

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Principles of “Mirath” and “Wasiyah”

In a life policy, the assured appoints the nominee who is not an absolute beneficiary. This decision has been given in the ‘Fatwa’ on succession and will by The National Council for Muslim Religious Affairs, Malaysia in 1974, and also in the case of Karim vs. Hanifa in 1970 in the high court of Karachi. In both decisions, it was ruled out that a nominee in a life insurance policy is a mere trustee who would received benefits over the policy and distributed them among the heirs of the deceased, in accordance with the principles of “Mirath” and “Wasiyah”.123

Principles of Al-Wakala (agencies):

The appointment of the agent by the insurer and the broker by the insured are of utmost importance. In fact such appointments had been widely practised for the purpose of making the transaction and dealings between the insurer and the insurer more effective. The governing principles of agents and broker however, are laid down in the Mejelle as follows:

“…. Is for someone to put business of his one another and to make him stand in his own place in respect of their business.”124

Principle of Daman (guarantee)

In an insurance policy the insurer undertakes to guarantee a material protection for the insured against unexpected future loss, damage or risk. The idea of such guarantee is justified by the general principles of Daman or guarantee.125

Principle of ‘Al-Mudharabah and Al-Musharakah:

The operation of an insurance policy under the Shari’ah discipline is in fact, based on the principle of ‘al-Mudharabah’ financing technique, which is an alternative to the interest-based technique.126 In this technique, one person provides the capital while the other party contributes own business skills in a joint-venture in which both parties mutually agree to share the profits accordingly.127 However, on insurance policy is a transaction wherein both parties agree that the insured pays regular premiums and the insurer will invest the cumulated premiums to a lawful business in which both the insured and the insurer will share the profits in an agreed portion. At the same time, the insurer also under takes to provide for the insured a compensation (in consideration of the paid-

123 See in Billah, M. Masum, op. cit, at 319.124 See Mejelle al-Ahkam al-Adliya (trans. Eng) Tyser, C.R., The Mejelle, Law Publishing Company, Lahore n.d. at art 1449.125The principle of Daman’ is laid down in I. Doi, Abdur Rahman, op. cit., at 369. 126 See Shafi, Mawlana Mufti Muhammad, op. cit., at 36.127 See the Mudharah Companies and Mudharabah Land Control Ordinance 1980 (The gazzette of Pakistan, extra, June 26, 1980, part 1) at article 2(2) as cited in Niazi Liaqat Ali Khan, Islamic Law of Contract, research cell, Dyal Sina Trust Library, Lahore 1900 at 228 and citation at 246, n. 5.

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premiums) against unexpected future loss occurring on the subject matter. That is how the principle of al-Mudharabah financing technique works in an insurance policy.

Meanwhile, an insurance policy also operates on the basis of the principle of al-musharakah as both the insurer and the insured are partners in the policy run by the company.128

Principles of Rights and Obligations:

An insurance policy is based on the principles of rights and obligations arising from humanity and nature. For instance, it is logical and natural for every person in the society to feel obliged to provide material security and protection as a right for themselves, their property, family, for the poor and helpless, widows, children against an unexpected peril and danger. Such natural obligations and rights could well be justified by the following Tradition of the Holy Prophet (SAW). He (SAW) said to the effect:

“….. Narrated by Saad bin Abi Waqqas (R )… the Holy Prophet (SAW) said … it is better for you to leave your offspring wealth than to leave them poor asking others for help….”129

The Holy Prophet (SAW) had also emphasized on the importance of providing a material security for widows and poor dependents in the following Tradition:

“Narrated by Safwan bin Salim ( R), the Holy Prophet (SAW) said: The one who looks after, works for a widow and for a poor person, is like a warrior fighting for Allah’s cause or like a person who fasts during the day and prays over the night……."130

Principles of Humanitarian Law:

It is one of the purpose of Humanitarian Law to incalculate a mutual understanding in the community, to protect one against unexpected loss, damage or other forms of risks or hardships. Hence, an insurance policy contributes towards alleviating hardships from one arising from an unexpected material risks, which is of course within the scope of the principles of Humanitarian Law. This has been justified in the following Tradition of the Holy Prophet (SAW) which reads to the effect:

“… Narrated by Abu Huraira (R),…. the Holy Prophet (SAW) said …..: whosoever removes a worldly grief from a believer, Allah SWT) will remove from him one of the grieves of the day of judgement. Whosoever alleviates a needy person, Allah (SWT) will alleviate from him in this world and the next…”131

128 For further detail, see Mudharabah in Niazi Islamic Law of Contract, op. cit., at 227 ff and for Sharikah, see at 420f.129 Sahih al-Bukhari, op. cit., Vol. 8, No. 725, at 477f.130 Ibid., No. 35 at 23.131 Sahih Muslim, as complied in An Nawawi, op. cit., No. 36 at 114f.

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Principles of Mutual Co-operation:

In a policy both the insurer and the insured mutually agreed to a lawful co-operation, in which the insured provides capital (through the payments of the premiums) to the insurer (insurance company), enabling the insurer to invest the premiums in a lawful business (based on al-Mudharabah) while the insurer, in return of the payments of the premiums mutually agrees to compensate the insured in the occurrence of an unexpected loss or damage or risk on the subject matter. Such mutual co-operation among the parties in an insurance policy has been clearly justified by the Divine principle of mutual co-operation, solidarity and brotherhood.132 The Quranic sanction to the effect:

“… Serve your mutual co-operation among yourselves in righteousness and piety….”133

Dispute Among Muslim Scholars on Insurance (Takaful) Issue

The Ulama have mixed views on the validity of insurance. Generally these views of the Muslims scholars be divided into three classes viz:

Insurance practice entirely and absolutely is lawful provided that it is free from element of ‘Riba’ (usury). Among the Ulama sharing this viewpoint are Shaikh Mohammad Abduh.134

The Hanafi lawyer Shaikh Ibn Abidin,135 Mohammad Taqi Amini, Shaikh Mahmud Ahmad, Mustafa Ahmad Zarqa, Syed Mohammad Sadeeq al- Ruhani, Ibrahim Tahawi, Ahmad Taha Al-Sanusi, Yusuf Musa, Mohammad Al-Bahi, Ali Al-Khafif, Zafar Shahidi, Mohammad Nejatullah Siddiqi, Mohammad Muslehudin, M.A. Manna, Ali Jalamuddin Awad136 as well as Ayatullah Khomeni.137

a)The second group accepts general insurance practice but objects to life insurance policy as it involves the elements of gambling (Maisir) and uncertainty (Gharar) as well as it contrasts with the principles of Mirath and Wasiyah. The Muslim scholars belonging to this group decided this view in a seminar held in Morocco on 6th May 1972.138 Among these are Abdur Rahman Isa, Ahmad Ibrahim, Shaikh Shawkat Ali Khan, Mohd. Musa, Mufti Mohammad Bakheet, Mohammad Abu Zuhra,139 Shaikh al-Azhar Shaikh Jaid al-

132 See The Takaful Act (Malaysia) at S. 2.133 Al-Quran at 5:3.134 See in Vardict, op. cit., at 32, Mankabady, op. cit., at 201135 See in Kling Muller, op. cit., at 30136 See in Siddiqi, M.N., ‘Muslim Economic Thinking: A Survey of Contemporary Literature”, in

Studies in Islamic Economics (ed) Khurshid Ahmad, The Islamic Foundation, UK, 1980, at 265 - 315137 See in Khomeni, Ayatullah, Tawzih al-Masaill, 1979, Problem No. 2863-65 as cited in Amin, S.H.

Islamic Law in the Contemporary World, Glassgow, 1985 at 79138 See in Mankabady, op. cit., at 202139 See in Siddiqi, M.N. “Muslim Economic Thinking” op. cit., at 216

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Haq Ali Jaid al-Haq,140 the Muslim brotherhood published in 1941141 and the Muslim World League Conference in 1965.142

b) The third group clearly and totally rejects any practice of insurance policy or business on the ground that it involves the elements of Riba, Maisir and Gharar which are strictly prohibited by the Shari’ah. Among the Islamic scholars who are in favor of the third view are Mustafa Zaid, Abdullah al-Qalqeeli, Jalal Mustafa. al-Sayyad and Shawkat Ali Khan.143

c)We have seen how Muslim scholars in particular and Muslims in general have objected the validity of insurance policy and practice. In my effort to justify the validity of insurance practice, allow me to highlight the misconceptions that have been surrounding the very idea of insurance as well as its operations which may have urged some Muslim scholars to such rejection to insurance practice. Finally, I would also like to refute these misconceptions in my sincere and humble effort to prove that insurance practice may become valid in the eyes of the Shari’ah.

Misconceptions

i) An insurance policy contains the element of Riba.144 Hence, any transaction which involves Riba is void ab initio. Allah (SWT) has clearly forbidden Riba based transaction in the following verse to the effect:

‘... Allah (S.W.T.) permitted trade while prohibited Riba...” 145

ii) It contains an element of betting. This is because, the insured, in an insurance policy, hopes to get the opportunity for a material gain and hence this is similar to that of betting. This view had been developed unanimously by some Ulama.146

iii) It contains the element of al-Gharar. Al-Gharar means uncertainty in either the object or the subject matter of a transaction. Any transaction involving the element of Gharar is void ab initio in the eyes of the Shari’ah. The Holy Prophet (SAW) had prohibited any transaction involved the element of Gharar in the following tradition to the effect:

“.......... The holy Prophet (s.a.w.) prohibited transaction by Gharar, (uncertainty) “ 147

140 See in Al-Iqtisadul Islami, July 1995 at 60141 See in Kling Muller, op. cit., at 35142 The Conference was held in Cairo in 1965, see in Rashid, op. cit., at 37 n. 17143 See Siddiqi, M.N., ‘Muslim Economic Thinking’, op. cit., at 216144 Ibid, see also Shafi, Mawlana Mufti Mohd. op. cit., at 86145 Al-Quran at ch. 2:275146 The decision was made in a Judicial Conference held in Mecca in Sha’ban , 1398H147 Anas , Imam Malik bin al-Muatta, compiled by Dr. Saad, Faruq, Darul afaq al-Jadidah, Bairut, 1985

at Baiul Garar, No. 63, at 554

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iv) It contains the element of Maisir (gambling) which had been strictly prohibited by Allah (SWT) in the Holy Quran.148 A transaction involving gambling is that the gambler pays a certain amount of money in which the gamblers hope for a material gain. Hence, it was argued that an insurance policy has the elements of Maisir as the insured pays the premiums with the hope for a chance to a material gain with a large amount of money. Therefore, such transaction is alleged to involve unlawful element of Maisir. Thus it is not permissible. As Allah (SWT) prohibited Maisir in the following sanction:

“….They ask you concerning the wine and gambling. Say: In them is great sin... 149

v) There is also no expressed authority from the Divine principles justifying the validity of the practice of insurance policy. Hence, it was argued that any transaction or dealing which is inconsistent with the Holy Quran and the Sunnah or Tradition of the Holy Prophet (SAW) should be held void. Allah (SWT) has indicated to the effect:

“........... if anyone desires a system other than Islam never will it be accepted from him...”150

vi) It is contrary to the principle of Tawakkul. In an insurance policy, the insured puts a trust on the insurer to protect him against an unexpected loss instead of putting his trust on Al-Mighty Allah (SWT). Such practice is against the principle of Tawakkul as every believer is obliged to put his own trust (Tawakkul) on Allah (SWT.) only. Allah (SWT) says to the effect:

“........... but on Allah (SWT) put your trust (Tawakkul) if you have faith....” 151

vii) It is contrary to the principles of Mirath and Wasiyah. This is because, in a life insurance policy the nominee(s) is (are) an absolute beneficiary(s) over the policy after the demise of the insured, in which the nominee(s) deprived the heirs of the deceased from their legal rights based on the principles of Mirath and Wasiyah.152

viii) Some Muslims and even some Islamic scholars claim that life insurance policy means to ensure one’s life against death and such practice is unlawful. Among those who support this opinion are Shaikh Al-Azhar Shaikh Zad al-Haqq Ali Zad al-Haqq153

the publication of Muslim brotherhood published in 1914, 154 the unanimous decision of

148 See al-Quran, at ch. 2:219149 Ibid150 Id., at ch. 3:85151 Id., at ch. 5:26152 See generally in Billah, M.Masum , op. cit., at 316153 See in Al-Iqtisadul Islami, supra154 See in Kling Muller, op. cit., at 35

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the Muslim scholars in a Seminar held in Morocco on 6th May 1972 155 and also the verdict of the Supreme Islamic Court in Egypt on December, 27th 1926.156 The above view is mainly based on the ground that no creature can ensure one’s life or death but Almighty Allah (SWT) who is the only powerful Cherisher and Sustainer of the whole universe. Allah (SWT) justifies to the effect:

“......... Verily the knowledge of hour is with Allah (SWT) . It is He who sends down rain, and He who knows what is in the wombs nor does anyone know what it is that he will earn tomorrow, nor does anyone know in what land he is to die. Verily with Allah (SWT) is full knowledge and He is acquainted (with all things)....”157

ix) An insurance policy stands towards ensuring one’s wealth and property. In the light of the Shari’ah, a transaction which guarantees protection of other’s property is said to be invalid except in three situations: fear for unjust enrichment; fear of losing one’s property; and fear of one’s property being destroyed or perished. This view was upheld by Shaikh al-Azhar Zal al-Haqq in denying the validity of life insurance policy.158

x) A life insurance contract involves unlawful elements. A contract which is based on unlawful elements is not binding as the Holy Prophet (SAW) said in one Tradition to the effect:

“......... Muslims are bound by their conditions except the condition which prohibits the lawful one or the one which permits the unlawful one....”159

ix) Finally, the Shaikh al-Azhar Zad al-Haqq Ali Zad al-Haqq recently in a fatwa session advised the Muslim Ummah against practicing life insurance policy as it involves unlawful elements and therefore, Muslim should not be making money or profits through unlawful means. 160

Response to the Misconception

i) An Islamic model of insurance policy does not involve the element of Riba because it is practiced based on the principle of al-Mudarabah financing technique161 in which both the insurer and the insured share the profits, and dividends made out over the paid premiums in agreed proportion. Such a transaction is based on the mutual agreement between the parties and therefore, the Shari’ah Supervisory Board in Sudan held that such transaction does not contravene with the Shari’ah rule nor does it contain any

155 See in Mankabady, op. cit., at 202156 See in Al-Sanhuri, Civil Law, Vol. 7, 1964 at 1088 (Arabic), as cited in Mankabady, op. cit., at 201157 Al-Quran, at 31:34158 See in Al-Iqtisadul Islami, op. cit., at 60159 Al-Tirmizi as quoted by Shaikh Jad al-Haqq in Al-Iqtisadul Islami, loc. cit .160 See Al-Iqtisadul Islami, loc. cit161 See, Shafi, Mawlana Mufti Muhammad, op. cit, at 36

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unlawful element 162. Moreover, it is further justified by the Divine principle of mutual transaction as Allah (SWT) says to the effect:

“..... O ye who believe! do not misappropriate your property among yourselves in vanities, but let there be among you traffic and trade by mutual good will....”163

ii) An insurance policy does not supersede the will of Allah (SWT). In such a policy, particularly in a life insurance policy, it is not the aim to ensure and determine one’s life or death nor does one intends to determine the future material luck of one’s dependents. A life insurance policy also does not connote the idea of the assured trying to protect his life from death against the will of Allah (SWT). An insurance policy also does not mean that the insured is determining his future financial capacity. A policy, be it general or life, simply means that, both the insurer and the insured, in a contract of insurance mutually agree to work for a compensation or security against an unexpected tragedy. Such concept is of course in line with the Islamic principles whereby Islam encourages the Ummah to strive hard themselves in overcoming difficulties in their lives. The Prophet (SAW) said to the effect:

“..... Narrated by Abu Huraira (R ) the Holy Prophet (SAW) said: Whosoever removes a worldly grief from a mu’min, Allah (SWT) will take away from him one of the grieves of the hereafter. Whosoever alleviates a needy person, Allah (SWT) will alleviate from him in both the world and the hereafter...” 164

iii) In an insurance policy, the insured is not putting own trust ( Tawakkul) on the insurer for a future protection but it is a mere mutual transaction whereby both parties agree to work for the welfare or protection of the insured against an unexpected occurrence of loss or damage. This is of course in line with the Divine principle of mutual co-operation as Allah (SWT) commanded to the effect:

“.... do mutual co-operation one another in righteousness and piety....”165

iv) An insurance policy does not involve the element of gambling or betting. Mustafa Al-Zarqa maintains that the gambler, in a transaction of gambling or betting is always hoping for a material gain in a chance with the spirit of defeating each other rather than cooperating.166 In contrast, the parties in a contract of insurance are bound together in a manner of mutual co-operation and good will in providing material security

162 See in Rules of the Supervisory Board, Sudan, op. cit., at 12*163 See Al-Quran, at 4:29164 Sahih Muslim in an Nawawi, op. cit., at 114f165 Al-Quran, at 5:3166 See in Al-Zarqa, Mustafa, Nizam al-Tameen, Muassasatul Risalah, Beirut, 1984 at 46

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for the orphans,167 widows,168 other dependents169 as well as one’s own self against an unexpected future loss, damage or peril.

v) A contract of insurance also does not involve element of ‘Gharar’ or uncertainty. In an insurance policy generally, the subject matter is the property against which the risk is presumed to occur in the future. The subject matter of the insurance contract is definite and certain. Similarly, the subject matter of a life insurance policy is the life of the assured which is also definite in the sense that the assured had been given with a life by Allah (SWT) and will one day die by the will of Allah (SWT). Such occurrence on life or death is of course definite and certain as Allah (SWT) says to the effect:

“...... Every soul shall have a test of death.... “ 170

Therefore, the allegation that insurance policy involves the element of ‘Gharar’ or uncertainty and thus, making it invalid, is groundless.

vi) Some believe that an insurance policy cannot be justified by express Divine sanction, hence, making it unlawful. In responding to this misconception, there are a couple of Divine provisions in the Holy Quran and the Tradition or Sunnah of the Holy Prophet (SAW) approving the principles of mutual co-operation171 and Mudarabah financing technique.172 Thus both Divine elements mentioned above are contained in a Shari’ah based insurance policy. Moreover, the idea of insurance policy and practice was originated from the traditional doctrine of al-Aqila, which had later been approved by the holy Prophet (SAW) in one of his verdicts against a dispute between two women from Hudhail tribe.173 The case in which the Holy Prophet (SAW) gave the above judgement could well be seen in the below Tradition:

“Narrated by Abu Huraira (R ) that two women from Hudhail tribe fought with each other and one of them flung a stone at the opponent, killing her and what was in her womb, the case was brought to the Prophet (SAW) in which he gave verdict that the dyat (Blood-wit) of her unborn child is a male or female slave of the best quality and he also decided that the vicarious liability of the dyat on behalf of the slainer is to be rendered to her paternal relatives while the Prophet (SAW) made her son and those who were with them her heirs...” 174

167 For justification, see in Sahih al-Bukhari, op. cit., Vol. 8, No. 34, at 23168 Id., at No. 35169 Loc. cit170 Al-Quran, at 3:185171 See Id., at 5:3 172 Shafi, Mawlana Mufti Mohammad, op. cit., at 36173 See Ibn. Asir, An Nihayat Garibil Hadith., Vol. 3, at 174 For the text, see Sahih al-Muslim, (Tahqiq) Mohd. Nasiruddin al-Albani, Laznatu Ihya al-Sunnah,

Ashare, Arabi, Asyuf (n.d.) , Kitab Tahreem al-Dimaa’ wa Zitnil Qisas al al-Diyyat, No. 1032, at 274. Also see Sahih al-Bukhari, Kitab al-Diyyat, Bab Janeen al-Marat, No. 6395. For translation see Sahih al Muslim (translation English), Siddiqi, A. Hamid, Darul arabia, Lebanon, 1978, Vol. 3, No. 4:68, at 905

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The same doctrine of al-Aqila was subsequently approved by the second caliph Sayyedana Umar (R ), who even practiced it mandatorily in some cases.175 Thus, it is baseless to allege that insurance policy and practice have no basis for justification.

vii) Some argue that the practice of insurance policy is contrary to the Islamic principle of ‘Tawakkul’ (putting trust on Allah (SWT)) . It is admitted here that the insurer and the insured, in a policy, mutually agree to take an initiative for the protection of the insured against an unexpected risk, loss or damage on the subject matter, but they ultimately still put their trust on Al-Mighty Allah (SWT) who is the sole Cherisher and Sustainer of the whole universe. In fact , the initiative which is taken by both parties does not deviate from the principle of ‘Tawakkul’, as such an initiative is only an effort made to the best of their ability to overcome future unexpected difficulties and nothing more. Indeed, in accordance with the Islamic concept of ‘Tawakkul’, man is asked to strive to the best of one’s ability in performing a particular act or job before putting one’s trust on Allah (SWT). The Holy Prophet (SAW) gave a paradigm nature of ‘Tawakkul’ in the following tradition which reads to the effect:

“The Holy Prophet (SAW) told a Beduin Arab who left his camel untied, trusting to the will of Allah (SWT) , tie the camel first then leave it to the will of Allah (SWT)…..”176

Therefore, it is concluded here that the practice of insurance policy does not contravene the Islamic principle of ‘Tawakkul’.

viii) Life insurance policy does not contravene the principles of ‘Mirath’ and ‘Wasiyah’. In a life insurance policy, the nominee(s) is nothing more than a trustee, as held by the supreme court of Pakistan in the case of 177, who is under an obligation to receive the benefits over the policy on behalf of the heirs of the deceased (assured) and distribute the benefits among the heirs of the deceased in accordance with the Islamic principles of Mirath and al-Wasiyah.

Hence, the nominee(s) here is not an absolute beneficiary(s) but a mere trustee and the nominee(s) may only receive a portion of the benefits if he or she, him or herself is one of the legal heirs of the deceased.

Further Justifications for the Validity of Insurance in the Islamic Economy

175 See in Gibb, op. cit., at 29176 Sunan al-Tirmizi, op. cit., No. 2517 at 668 177 [1974] PLD 185 (SC)

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Besides the grounds which have already been mentioned above in justifying the mentioned-ideas and practices of insurance policy, there are some additional grounds which could well justify an insurance policy. These grounds are pointed out as follows:

i) An insurance transaction is quite similar to the principle of al-Wadiyah (deposit) whereby two parties engage themselves in an agreement in which one of them deposits money to the other as a trust or ‘Amanah’ for the purpose of safe keeping.178 Likewise, such methods of dealing also exists in a contract of insurance as the insured deposits money to the insurer for future safety. The governing principles of al-Wadia’ had been developed from the Holy Quran. Allah (SWT) says to the effect:

“.... Verily Allah (SWT) commands you to render back your trust to those to whom they are due ...” 179

ii) Any transaction originated from the ancient custom or ‘Urf’ is permissible so long as such custom was not contravene with any of the Divine principle enshrined in the Holy Quran and the Sunnah of the Prophet (SAW). Islam in this matter has always been flexible in accepting any custom or ‘Urf’ of the people which may be convenient for the society, but of course with the condition that such custom is in line with the Shari’ah. The justification of ‘Urf’ is indicated in the following Hadith:

“.......... Whatever Muslims see good it is appreciated towards Allah (SWT).”180

An insurance contract was thus, originated from the ancient Arab custom (urf) the doctrine of ‘al-Aqila’ which had been approved by the Prophet (SAW)181, hence, making the custom and at the same time the practice of insurance is justified and having legal entity.182

iii) The origin of every transaction is permissible unless an authority proves one invalid. This principle has been laid down by Ibn Nazim in the following maxim:

“The origin in everything is lawful unless an authority proves one unlawful.”183

In an insurance contract the fundamental aspects of it; such as its origin is from the ancient Arab custom of al-Aqil, its objective is a mutual co-operation justified by al-Quran at 5:3 , its operation is based on ‘al-Mudarabah’ financing technique for the purpose of public interest relying on the doctrine of ‘al-Masalih al-Murasalah’ have all

178 See in Al-Zubaidi, Mohammad, Tajul Aris, Vol. 2, Kuwait, 1967, at 591.179 Al-Quran, at ch. 4:58180 Qudama, Ibn. Raudatul Nadhir (n.d.) at 85 181 See in Gibb, op. cit., at 29182 See also The Mejelle, op. cit., at arts. 36, 40 and 45183 Suyuti, Al-Imam Jalaluddin Abd. Rahman, Al-Ashbah Wa - al-Nazair., Darul Kutub al-Alamiyyah,

Lebanon 1983, at 60

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been highly approved and justified by the Shari’ah. Hence, it is only logical and natural to hold such practice of insurance policy valid.

iv) Any transaction, in which the parties undertake to fulfil their respective lawful obligations is naturally valid and binding on both parties. This is because, the Shari’ah has emphasised a lot on the performance or undertakings and promises. The Prophet (SAW) once said in one of his traditions:

“Muslims are bound by their conditions except the one which prohibits the permitted one or permits the prohibited one...”184

This is further justified in the holy Quran:

“O ye who believe! fulfil your promises”185

The terms and conditions to be required in a contract of insurance between the two parties are lawful and hence binding on them. The school of Maliki made a remark on the practice of insurance contract when it said that it is a binding promise and hence permissible in the eyes of the Shari’ah.186

v) The practice of insurance policy is also actually based on Inter Alia the doctrine of public interest or ‘Masalih al-Mursalah’ for the purpose of eliminating hardship from one’s life, while taking an initiative to look after the welfare of the poor who may have suffered resulting from an occurrence of loss or damage. It is thus, justified in the holy Quran, that Allah (SWT) has always wishes good and convenient life for His creatures without having to face any difficulty. Allah (SWT) says to the effect:

“..... Allah (s.w.t.) intends easy life for you while He does not want to put you to difficulties....”187

vi) An insurance policy does not signify an opportunity for the insured to hope for a chance for a material gain. In fact, it is a transaction whereby the insured takes an initiative, to the best of one’s ability, to be compensated or in the event of unexpected loss, damage or peril. Such compensation and indemnity has been mutually agreed by both the insurer and the insured. And this further signifies the element of mutual co-operation between both parties to the contract of insurance. The principle of mutual is justified in the Shari’ah. Allah (SWT) says to the effect:

“...... Maintain a mutual co-operation among yourselves in righteousness and piety...” 188

184 At Tirmizi, as quoted by Shaikh Jad-al-Haq, op. cit 185 Al-Quran, at 5:1186 See in Hadagha, op. cit., at 56187 Al-Quran, at 2:185188 Id., at 5 :2

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vii) An insurance contract also operates for the purpose of necessity. Any transaction operating along the line of necessity is permissible as justified in maxim:

“Necessity makes forbidden things cannoncially harmless....”189

Hence, a life insurance policy also operates based on the principle of necessity in providing material protection for the unfortunate widow, offsprings and so on in the event of the death of the assured. Islam again justifies such. The prophet (SAW) advised in one of his traditions:

“Narrated by Saad bin Abi Waqqas (R): The Holy Prophet (SAW) said: It is better for you to leave your offspring wealthy than to leave them poor asking others for help...”190

The holy Prophet again said to the effect:

“Narrated by Safwan bin Salim (R ) , the Holy Prophet (SAW) said: The one who looks after and works for a widow and for a poor person is like a warrior fighting for the cause of Allah (SWT) or like a person who fasts during the day and prays over night.....” 191

viii) An insurance policy involves an element of donation or Sadaqah. For instance, the insured in a general policy pays regular premiums for the purpose of compensation in case of an unexpected loss or damage occurring to a particular subject matter. However, if there is no occurrence of loss to that subject matter, the premiums will be considered as ‘Tabarru’ 192 in general insurance, which means that the premiums will be non-refundable. Meanwhile in a life insurance policy, the assured pays regular premium like a gift for the welfare of his dependents and at the same time the assured pays amount of donation from the charitable fund for the beneficiary(s) of the assured as an addition to the paid-premiums and share of profits.193 The Holy Prophet (SAW) also used to accept donation. 194 Thus, a transaction like insurance contract which involves the element of donation could be held lawful.

ix) The nature of life insurance policy is similar to that of a retirement pension scheme. Al-Zarqa and Al-Alwan apparently discovered that, all contemporary Islamic scholars unanimously agreed on the lawfulness and validity of a retirement pension scheme.195 Adil Salahi accepted the fact that all scholars of Islamic Jurisprudence had approved the idea of pension scheme for the reason of ensuring material security for the

189 The Mejelle, at article 21, see also Nazim , Ibn, op. cit ., at 84190 Sahih al-Bukhari, op. cit., at Vol. 8, No. 725 at 477191 Id., at 35 at 23192 See in Rashid, op. cit., at 34193 See in Billah, M. Masum, op. cit., at 324194 See in Al-Sanani, Mohammad, Subul al-Salam , Egypt , 1987 , Vol. 1-3 at 90195 See in Al-Zarqa , op. cit. at 62; and also Al-Alwan, Abdullah, Hukum al-Islam fi Tameen, Darul

Islam, Egypt, 1987, at 13

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subscriber himself as well as his family in cases of difficulties or death.196 Salahi went on to defend the validity of life insurance in reliance of the approval of all Islamic scholars to the pension scheme, posed a question why family security should be rendered lawful in a pension scheme, and unlawful in a life insurance policy? When their method of operations are practically the same?197 It was also inferred that the reason why all Ulama accepted the idea of retirement pension is that it was widely accepted during the time of Omar (R ). Hence, it is submitted that, life insurance policy is similar to that of pension scheme and hence should be held valid.

Indeed, based on the above mentioned arguments, it is submitted and asserted that insurance policy which is based on the Islamic principle of ‘al-Mudaraba’ is valid and enforceable. It is also observed that the arguments forwarded by Islamic scholars opposing the idea and validity of insurance are entirely rebuttable.

The scope of insurance business under the Common Law if somewhat limited to a transaction whereby the subject matter is speculated to be at risk. A contract of insurance, in an insurance business is bound by the general principles of the law of contract. For instance, in the issue of legal capacity of the parties as well as other general provisions of contract of insurance is not enforceable if its subject matter or object is unlawful.

The purpose of having an insurance policy is to indemnity one against an unexpected loss, peril or any form or risk.

As far as the essentials and fundamentals of a contract of insurance under the Common Law, which determine its legality and validity, are the legal capacity of the parties to the contract, consideration (i.e. the payments of premiums) subject matter of the insurance contract and insurable interest of the beneficiary. Finally, the parties to a contract of insurance must also abide with the doctrine of Uberrimae Fidei.

The sources of an insurance policy under the Common Law, they are the relevant Acts of Parliament, custom, judicial precedents as well as relevant literatures on insurance such as books, articles, papers and so on.

As far as the view on the validity of insurance policy under the Common Law is concerned, it is found that there was no diversification of views among the Common Law scholars or jurists. However, prior to the development of insurance policy and practice, the people of the primitive society used to object to the practice of insurance based transaction for the reason that they lived in the tribal society in which they used to be well protected by their tribes and families against any risk or peril.198 Hence, they did not feel a necessity of having insurance policy.

196 Salahi, Adil, “Is Life Insurance Haram?” in New Horizon, Islamic Banking and Insurance, No. 45, Nov. 1995 at 12

197 Ibid198 See in Clayton, op. cit., at 13. See also Rehman Afzalur, op. cit., at 19.

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Final Remarks:

In Islam, insurance policy and practice was originated from the custom practiced by the ancient Arab tribe before the rise of Islam in the form of the doctrine of al-Aqila which was subsequently approved by the Prophet Mohammad (SAW) during his life time in one of his decisions given against a woman from Hudhail tribe. Later such insurance transaction was gradually practiced and was even made mandatory in some cases during the period of the second Caliph, Saydina Omar (R ).199

In the contemporary world of today, there are many Shari’ah based insurance companies established in many countries such as Malaysia, Brunei, Singapore, Indonesia, Iran, Sudan, Saudi Arabia, Qatar, Luxemborg, Bahrain and to name some. However, the debate as regards to the validity of insurance policy is still going on among the Islamic scholars.

An insurance contract is mainly based on the principle of mutual co-operation, solidarity and brotherhood which is operated based on the Mudharabah financing technique in which the parties to the contract share the profits (made out over the paid-premiums) at the agreed proportions as an alternative to the interest-based financing technique.200 The paid-premiums of the general insurance is to be given away as tabarru or donation in the case of non occurrence of loss or damage to the subject matter. In life insurance policy, the beneficiary(s) cannot claim the exact agreed-sum of money from the insurer. The beneficiary(s), however, may claim the total paid-premiums, the share of profits over the paid-premiums, dividends and bonuses besides the donation from the charitable fund according to their financial status. Similarly, if the assured sustains own life until the maturity of the policy, he is also entitled for the claims entitled by the beneficiary(s) with the exception of the donation.201 The nominee(s) in a life insurance policy is not an absolute beneficiary but a mere trustee who receives the benefits and distributes them among the heirs of the deceased assured which had been decided in Karim vs. Hanifa202

Moreover, it is also suggested here that the agents should enjoy the share of profits as a salary from the company. Such proposal is due to the fact that the agents are working for the company.

An insurance practice should not be valid if it involves the elements of Riba or usury. Hence, insurance policy must be operated based on the principles of al-Mudarabah financing technique in order for it to remain valid and enforceable. Insurance business is to be conducted only for the purpose of solidarity, brotherhood an mutual co-operation towards protecting the insured against loss or risk. The parties to the contract of insurance are not allowed to hope for a change for material gain per se, but must have sincerity against unexpected future damage or loss to the subject matter. Every aspect of an insurance practice must comply with Shari’ah principles absolutely.203

199 See in Gibb, op. cit., at 29.200 Shafi, Mawlana Mufti Muhammad, op. cit., at 36.201 See in Billah, op. cit., at 323.202 (1970) PLD at 683.203 ?See The Takaful Act (Malaysia) 1984 at SS 2, 8(5)(a), (b). See also The Roles of the Shari’ah Supervisory Board, Sudan, op. cit., at 11f.

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The fundamentals and essentials of an insurance contract are, Inter Alia the sincerity of the parties towards the protection of the insured against an unexpected loss, legal capacity of the parties, paid-premiums, insurable interest as well as maintenance of utmost good faith during the whole transaction.

There are few rationals that could be presumed from the practice of an insurance policy. The practice of insurance policy could develop mutual co-operation in promoting solidarity and brotherhood among the parties to the contract.204 It could also take care of the welfare of those who are in need of compensation against occurrence of loss, risk or peril. Apart from the above purposes and rationales, an insurance policy also strives at reducing poverty rates while having an economic stability in the society. This would also ensure the society to live comfortably without having any material constraint.

As far as the sources of insurance law under Islamic principles, they could be divided into two categories: namely the sources in general while the other is in specific. In general, the sources of insurance law include the Holy Quran, the Sunnah or Tradition of the Holy Prophet (SAW), Ijma’, Qiyas, Ijtihad, Istihsan, Masalik al-Mursalah, ‘Urf, Fiqh, Shari’ah based literatures and regulations enacted by the legislative body. Meanwhile, specifically the sources of insurance are the general principles of contract, the laws on liability, the principle of al-Mudharabah, the principle of Agency, the principle of mutual co-operation, the principle of humanitarian law, the concept of welfare and so on.

Despite the development of insurance practice in the world, the Ulama or Islamic scholars are still not unanimous as regards to the validity of insurance policy. These Muslim scholars are divided into three groups. The first group totally accepts the idea and practice of insurance. The second, accepts the idea and practice of general insurance while rejecting the idea and practice of life insurance, while the third group opposes to the entire idea of any insurance practice arguing that it is totally against the principles of the Shari’ah.205 It is also to be clarified here that a model of an Islamic insurance policy which is different from the conventional one. This model is justified by the Shari’ah principles of Mirath and Wasiyah. Therefore, it is submitted here that there are enough justifications to uphold the validity of insurance policy in the eyes of the shari'ah principles and the Muslims scholars should no longer be divided on this issue.

For the purpose of enabling the contemporary Muslim Ummah to practice insurance justified by the Shari’ah principles, it is recommended that:

i) An insurance policy and practice should not be based on interest (Riba) but on the principle of profit sharing (al-mudharaba) which may enable the parties involved to enjoy a fair transaction on the basis of friendship, brotherhood and mutual co-operation.

204 See in The Takaful Act (Malaysia) at S. 2.205 See in Rashid, op. cit., at 20.

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ii) The agents and the brokers naturally work for the promotion of the insurance practices. It is suggested that they should also enjoy with the share of profits according to the company’s policies.

iii) The nominee(s) in the life insurance policy should be a mere trustee and would only be entitled to enjoy the benefit if he/she falls within the categories of the deceased’s legal heirs. The nominee(s) should not become the absolute beneficiary(s).

iv) Once insurable interest should not be determined based on the nomination clause but based on the principles of Mirath and Wasiyah.

v) The beneficiary(s) in a life insurance policy, should not claim the agreed amount in the policy. The beneficiary(s) could only claim for the paid-premiums plus a share of its profit, dividends, bonuses, etc. which may enable both the insurer and the beneficiary(s) to enjoy a fair transaction without any risk.

vi) Finally, it is to be suggested here that the scholars should not remain in diversity, but should contribute towards finding a solution to eliminate any unlawful elements from insurance policy. In doing so, they must design a model of an insurance transaction which may enable the Muslim Ummah to benefit from a fair and legal transaction.

It is humbly and sincerely hoped that all insurance policies and transactions be practiced based on the principles of profit sharing. This is because such a transaction is based on mutual co-operation and good will, and therefore, the parties involved in any contract of insurance may look after each other’s welfare. Finally, it is humbly hoped that the Islamic scholars would not remain in diversification of views as regards to the validity of the idea and operation of insurance, but to invent an alternative model of insurance as opposed to the conventional model for the benefit and betterment of the present Ummah.

=END=

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