INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD

Submitted by: Course Title:

Aqsa Malik Islamic law of Business Transactions
6055-FMS/BBA/S20 Dated:
Ayesha Afzal 25 -November-2021
th

6036-FMS/BBA/S20 Submitted To:

Maryam Batool Haider Ma’am Afshan Abbasi
5991-FMS/BBA/S20 Batch:
Beenish Faqeer BBA 42 (A)
6050-FMS/BBA/S20

GROUP ASSIGNMENT

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF MANAGEMENT
 Insurance in the context of Gharar:
Gharar literally means uncertainty, risk or hazard. It takes place where the consequences (of a
transaction) remains unknown.

Insurance: A modern contract of Gharar

Definition: “A contract of Insurance is one whereby one party, i.e., Insurer promises in return for
a money consideration, i.e., the premium to pay to the other party, i.e., the insured, a sum of
money or provide him with some corresponding benefit, upon the occurrence of an event
specified in the contract”.

Where ‘Premium’ is the price at which the insurer i.e. the company is prepared to take risks and
bear the burden of the probable loss involved in the contract of insurance.

Example: Muneeb insures his car with an insurance company, he gets an undertaking from the
company that it will bear all the expenses in case of any damage to the car due to an accident.

Types of Insurance:

Insurance is of the following four types;

1. Life Insurance: This type of insurance is basically against the loss of life. The main
objective of this insurance is to give financial assistance to the families of the insured
persons after their death so that in their absence their families don’t become helpless and
public charges.
2. Health Insurance: Health insurance is a type of insurance that covers the whole or part
of the risk of a person incurring medical expenses. Its main purpose is to protect people
from unexpected high medical costs. They can get free preventive care like vaccines,
screening, check-ups, etc.
3. Property Insurance: It provides compensation to the insured who suffered some loss or
damage consequent upon occurrence of a catastrophe or disaster inflicted upon his
property, assets and other belongings.
4. Liability Insurance: This type of insurance is also known as third party insurance. It
refers to a situation where a person/institution incurs some liability towards a third
person. These policies cover a variety of business and professional liability exposures.
They protect people and organizations against financial loss due to legal liability claim.

Gharar in Insurance:

The element of Gharar inherent in the insurance is of the following types:

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 1. Uncertainty about the payment of insurance amount:
There is uncertainty about what the insured person buys with premium.
For example, if a person gets his car insured, he drives it throughout the year. If he
doesn’t come across any accident his premium amount would waste. On the other hand, if
he comes across a serious accident which causes extensive damages to his car, here now
the company pays an amount greater than his premium. This shows the insured person is
not aware at the time of contract what he buys the amount of premium. Both situations
are uncertain for him.
2. Gharar with regard to time of payment:
Another form of gharar is uncertainty about the time of occurrence of event, and the time
of the payment of compensation. The particular event against which insurance is required,
is uncertain in nature. The parties to the contract do not know at the time of contract,
whether the event will occur or not. If the event occurs it will bring pecuniary benefits in
compensation for the insured and if it does not occur, he will get nothing.
3. Gharar with regard to Quantum:
This means that the insured person does not know at the time of contract how much
compensation he will get because it depends upon the magnitude of the unpleasant event
which is the subject matter of contract.

Takaful; an Islamic alternative to Insurance

Takaful or mutual guarantee is generally considered as an Islamic alternative to the modern

insurance business.

Definition: Takaful refers to an agreement among group of people called participants to

guarantee jointly that, should any of them suffer a catastrophe or disaster, he would receive
certain sum of money to meet the loss or damage. Thus, it is a method of mutual help.

Since the contributions in takaful business are invested on the basis of mudarabah, it is also
known as solidarity mudarabah. In takaful, the concept of waqf or donation is combined with that
of mudarabah.

Two contracts that conclude takaful:

i. Contract of donation or tabarru, whereby he undertakes to donate a portion of his

contribution in waqf or tabarru fund established to provide takaful benefits to any
participant who suffers some material loss or damage.
ii. Contract of mudarabah whereby he undertakes to pay a portion of his contribution to the
company for the purpose of business on the basis of mudarabah.

Takaful Benefits: Insurance benefits are paid from waqf or tabarru (donation) fund. But if the
fund proves insufficient, then the deficit is covered from the profits of mudarabah business, if
any, or from the capital of mudarabah.

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Right to share the profit: the participants in takaful or solidarity mudarabah have the right
to share the profits generated by such mudarabah business, but at the same time they are liable
for contributing to amounts in addition to the premiums they have already disbursed, if their
initial premiums paid during a particular year are not sufficient to meet all the losses and risks
incurred during that year. In other words the sharing of the profit or surplus that may emerge
from the operations of takaful is made only after the obligations of assisting the fellow
participants have been fulfilled.

Types of Takaful:

i. Life Takaful: Under life takaful, the company provides cover of mutual financial aid in
the form of takaful benefits in case of untimely death of participant.
ii. General Takaful: They are generally short-term contracts. It provides various policies
and schemes to a participant with a view to protect him against material loss or damage
arising from catastrophes, or disaster inflicted upon his properties.

Difference between Insurance and Takaful

INSURANCE TAKAFUL

It is basically a buying and selling contract. It’s a tabarru contract.

It is based solely on commercial factors. It is based on mutual cooperation.

It includes elements of uncertainty and It is free from Riba (Interest) and Gharar
interest. (uncertainty).
Premium paid by insurer is considered as There is full segregation between the
company’s income. participant’s fund account and shareholder’s
fund account.
Claims paid from company fund. Claims paid from participant’s fund.

In case of deficit, the company bears it. In case of deficit in the participant’s Takaful
fund the takaful operator provides interest free
loan to the participant’s fund.
Only subjected to the governing law. Subjected to the governing law as well as the
Islamic law.
The capital of the premium is invested in The participant’s fund and shareholder’s fund is
funds and investment channels that are not invested in investment funds that are Shariah
necessarily Shariah complaint. compliant.

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