Difference Between Islamic & Conventional Insurance____________________________ (1

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DIFFERENCE BETWEEN ISLAMIC INSURANCE (TAKAFUL) & CONVENTIONAL INSURANCE:
MUHAMMAD ASGHAR SHAHZAD
asghar_skp@yahoo.com asghar_ibf@yahoo.com

WHAT IS INSURANCE?
The law of insurance is contained in the insurance ordinance 2000. It extends to the whole of Pakistan. The securities and exchange commission of Pakistan will implement the law. Insurance is a means to spread the loss caused by particular risk over a number of people against some amount called premium. Insurance creates a fund under which many persons contribute some money called the premium, out of which the persons who suffer losses are compensated.

Definition of Insurance:
“A contract of insurance is contract in which one party undertakes, against premium, to pay to the other party a certain amount on the happening of a certain event. A contract of insurance is a conditional contract. The general principles of the law of contract apply to it. It is a valid contract. It comes into existence by the offer in the form of proposal and its acceptance. The object of the contract must not be immoral or illegal.” Parties involved in Insurance: 1. Insurer 2. Insured Insurer: The party which promises to pay to certain sum of money to the other party is called the insurer (insurance company). Insured: The party of whom a certain some of money is paid is called the insured (Policy-holder)1

Explanation:
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Cheema, Khalid Mahmood, Business Law, Published by Syed mobin Mahmud & co, Lahore, 2007, page# 368

deep sea exploration. All these developments could be possible with support of insurance. space traveling computers. the insurers can predict. They make innovation and invention. atomic technology. As a result of better performance of insurance company some benefit is paid back to the policyholders in shape of bonus in life insurance and no claim bonus is motor/property insurance. Without insurance cover all industrial. After assuring this in security factor the enterprises started looking for new and more high-tech machines robots and gargets. there will be some variation in claim costs from year to year for which a small margin is to be built up in reserve. the amount of claims likely to be incurred in the coming year. The premium received goes into a fund or pool from which the claims are paid. However. HOW INSURANCE IS AGAINST THE PRINCIPLES OF SHARIAH? . Because of large number of clients in any particular fund or pool. An insurer. • Utmost good faith • Proximate cause • Indemnity • Contribution • Subrogation The insurance market comprises the following types of insurers: • Lloyds. • Ordinary Life & General Companies • Industrial Life Assurance companies • Friendly societies • Mutual Indemnity Associations • Captive Insurance companies • Self Insurance • The State. development of concords and jumbos and medical technology for hydro hear led diseases. These types of risks highlight the importance of insurance. Thus insurance is the most lending force contributing towards economics. which ultimately contributes towards human progress. The following principles apply in insurance: • Insurable Interest. with reasonable accuracy by applying the law of large numbers and actuarial calculation methods. If there had not been insurance at the back of all innovators the world would have never progressed. tries too split and diversify its risks in many ways a very important way is to split them horizontally and vertically within reinsurance companies and horizontally to their competitors.Difference Between Islamic & Conventional Insurance____________________________ (2) Insurance is a risk transfer mechanism hereby the individual or the business enterprise can shift some of the uncertainties of life on the healthier. A small error or lapse may cause numerous side effects and cause death or disability. Large responsibility falls on the shoulder of innovators and inventors. by nature. economic and social activity of the world will come to a grinding halt. In peace the insurance provides protection to trade and industry. comfortable and easy life to meet this requirement different enterprises produce and provide goods and services. social and technological progress of man. which take great risk.

Takaful Insurance . He discussed the essence of marine insurance and concluded” I see that it is not permitted to any merchant to get indemnity for his damaged property against the payment of a certain sum of money known as insurance premium. The objection is against the existence of the weaknesses in the insurance contract namely: • • • Gharar (Uncertainry). Some of them approved all forms of insurance subject to certain conditions. Riba (Usury).) at the request of some muslim merchants who sought his poinion about the validity of marine insurance under Islamic laws.” The attitude towards illegality of insurance from Islamic point of view continued for full century after ibn Abdin. limitations and qualifications. because this is a commitment for what should not be committed to.Difference Between Islamic & Conventional Insurance____________________________ (3) Commercial Insurance and all its contracts are relatively new development. In 1396 H (1976) the first international conference on Islamic Economics was held in Makkah. Usury and gharar the matter continued to receive the attention of numerous groups of Islamic Jurisprudents in cooperation with eminent and distinguished economists and insurance experts who came up with different conclusion.D. views and opinions. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages (marine insurance). However in view of the tremendous importance assumed by insurance for the modern finance. others totally disapproved all of them.. which was attended by more that 200 Islamic Jurists and Economists. Mainsir (Gambling). This conference also suggested that a committee comprising of shariah Experts & Muslim Economists should be constituted in order to suggest a system of insurance that will be free of “Riba”. It was for the first time examined by a Hanafi Jurist syed Ibn Abdin (dead 1252 H corresponding to 1836 A. However an overwhelming majority of Islamic shariah. The pioneer muslims neither knew it nor was it ever considered by the earlier Islamic Jurisprudents. Introduction to Islamic Insurance (Takaful): Muslim jurists acknowledge that the basis of shared responsibility in the system of "aquila" as practiced between Muslims of Mecca and Medina laid the foundation of mutual insurance. trade and industry the contract of insurance has been subject matter of extensive and in depth studies and discussions amongst the Islamic Jurisprudents during the past several decades. They reached at the following decision on it: “The conference sees that the commercial insurance which is practiced by the commercial insurance companies in this era does not conform to the shariah principle of cooperation and solidarity because it does not fulfill the shariah conditions which would make it valid and acceptable”.

European Council for Fatwa and Research2 Definition of Islamic Insurance (Takaful): The word Takaful is derived from the Arabic verb Kafala. agree to jointly guarantee themselves against loss or damage to 2 http://www. common interest and solidarity. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and cooperation. The purpose of this system is not profits but to uphold the principle of “bear ye one another’s burden. If a person is forced by law to insurance or by way of need. who by paying contributions to a common fund. It is well known that in most non-Islamic countries there are cooperative and mutual insurance companies. contribution. it is obligatory for him to be content with the minimum proportion of insurance that covers his need or to the minimum of such transaction he’s being forced to carry out. Every policyholder pays his subscription to help those that need assistance. It does not derive advantage at the cost of others. The Tabarru' system is the main core of the takaful system making it free from uncertainty and gambling. Aug 2008 . Tabarru' means "donation. where members contribute a certain sum of money to a common pool. it is unlawful for a Muslim living in a country where there is such a cooperative insurance company to make an agreement with a commercial insurance company. Theoretically.” “Commercial insurance is originally haram as agreed upon by most contemporary scholars. So.” . The principles of Takaful insurance are as follows: • • • • • Policyholders cooperate among themselves for their common good. which means to guarantee. to help. There is no harm from the Shari`ah point of view to participate in these services. Losses are divided and liabilities spread according to the community pooling system. But. Uncertainty is eliminated in respect of subscription and compensation. The objective of takaful is to pay a defined loss from a defined fund. where risk is shared collectively by a group of participants. to take care of one’s needs. Date 11. Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. Therefore. Encompassing the elements of shared responsibility.asp . Takaful is a system of Islamic insurance based on the principle of Ta’awun (mutual assistance) and Tabarru (voluntary contribution). if a cooperative insurance company is not found one may enter into a contract with a commercial insurance company only by way of necessity." Each participant that needs protection must be present with the sincere intention to donate to other participants faced with difficulties.org/services/takaful/about. joint indemnity.Difference Between Islamic & Conventional Insurance____________________________ (4) Takaful is an Arabic word meaning “guaranteeing each other” or joint guarantee. gift. Takaful is perceived as cooperative insurance.icmif.

The alternative contract which conforms to the principle of Islamic dealings is the contract of cooperative insurance (Takaful).Difference Between Islamic & Conventional Insurance____________________________ (5) any one of them as defined in the pact.com. 2. from 10 to 16 Rabiul Thani. And having looked into what has been issued by the Fiqh Academies and other instituitions in ths regard. brotherhood. Saudi Arabia. 1985) issued a resolution which in summary stated the following: • • • • After reviewing the presentations made by participating scholars during the session on the subject of ‘Insurance/Re-insurance’. Takaful is operated on the basis of shared responsibility. an Arabic noun meaning ‘donation. 3 Difference between Insurance & Takaful 1. Muslim jurists therefore concluded that: • • • • Insurance should be based on the principles of mutuality and cooperation. which is founded on the basis of charitable donation and Shariah compliant dealings. And after closely examining all types and forms of insurance and deeply examining the basic principles upon which the are founded and their goals and objectives.takaful. 3 http://www. Resolves: 1.html .pk/Fatwa. And after discussing the same. gift. Insurance products should be founded on the basis of Tabarru. The commercial insurance contract…is prohibited (Haraam) according to the Shariah. It is a Risk Transfer mechanism whereby risk is transferred from the policy holder (the Insured) to the Insurance Company (the Insurer) in consideration of 'insurance premium' paid by the Insured. 1406 H (corresponding to 22-28 December. Fatwa on Takaful: The Islamic Fiqh Academy emanating from the Organization of Islamic conference. meeting in its Second Session in Jeddah. solidarity and mutual cooperation. contribution’. The insurance company must conduct all its affairs in line with the Shariah The participants mutually contribute to the same fund for the purpose of mutual indemnity in case of risk and harm.

The Company acts only as the manager of the pool (Takaful Operator). There is an uncertainty as to when any loss would occur and how much compensation would be payable. 4. The insured is covered during the policy period but is not entitled to any return at the end of such period. securities.e.Difference Between Islamic & Conventional Insurance____________________________ (6) It is based on mutuality.e. 'gharrar' isbrought down to acceptable levels under Shariah by making contributions as "Conditional Donations" (tabarru) for a good cause i. Surplus or profit belongs to the Shareholders. i. If the loss does occur. Surplus belongs to the participants and is accordingly returned to them (in proportion to their respective shares of contributions) at the end of the accounting period . It contains the element of uncertainty i. hence it obviates the element of 'maisir' while at the same time without losing the benefit of Takaful in the same way as conventional insurance. TFCs. 5. hence the risk is not transferred but shared by the participants who form a common pool. 3. riba-free instruments. "maisir" in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against claim). Funds are only invested in non-interest bearing.e. 2. It contains an element of gambling i. The participant pays the contribution (tabarru) in the spirit of Ne'ea (purity) and brotherhood. the insurer loses a far larger amount than collected as premium and the insured gains by the same. to mitigate the loss suffered by any one of the participants.e. "gharrar" which is forbidden in Islam.e. If the anticipated loss (claim) does not occur. etc. the insured loses the amount paid as premium. The element of 'uncertainty' i. Funds are mostly invested in fixed interest bearing instruments like bonds. Hence these contain the element of "riba" (usury) which is forbidden in Islam.

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