UCLA Journal of Islamic and Near Eastern Law

____________________________________________________________________________________ Volume 9 2009-2010 Number 1



Mona Atia


Malick W. Ghachem



Oliver Agha



Sami Hasan

Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? Oliver Agha* Aisha is an observant Muslim homemaker trying to build her life. thrilled at the idea of having a choice that actually reflects her values? Or does Aisha ask questions until she understands and evaluates the basis for the structure? Aisha’s decision-making may be anecdotal. Not many details are forthcoming except for the product being called "shari’a 1 compliant". Aisha avoids. New York lawyer by training. as best as she can. and she is particularly aware of the condemnation of partaking in usury and conventional banking arrangements. but it nonetheless reflects the decisions millions of Muslims make around the world. and that of her family. believed to be the first shari'a compliant law firm established. associates at Agha & Shamsi including Mehreen Awan. What are Aisha’s obligations in examining such a product before she can make a decision about whether she will subscribe to it? What if the product is based on a fundamentally flawed structure? Or what if it is based on a model that simply replicates a conventional profile? Does she partake in takaful. He is the author of published papers. around Islamic principles. A flashy new Islamic insurance product called "takaful" presents itself. SHARI'A: THEORY. He is on the board of the Accounting and Auditing Organization of Islamic Finance Instsitutions (AAOIFI) and is recognized as a top Islamic finance lawyer by numerous publications. previously with international firms (DLA Piper. Clifford Chance Saudi affiliate and Fulbright & Jaworski) is recognized as a leading finance authority having worked on many leading and innovative deals across the Islamic spectrum. Islamic finance— * Oliver Agha is a founding partner of Agha & Shamsi. to provide excellence in the field of Islamic finance. 101 . 1 Shari'a is commonly defined as Islamic Law. gives charity. She fasts. Agha. prays and tries her best to live her life with respect for others and with dignity. The author would like to thank senior AAOIFI members for contribution to the article including Sheikh Esam Ishaq. HALLAQ. inter alia. TRANSFORMATIONS (2009) for an in—depth account of viewing shari'a as Islamic Law. Peter Hodgins. PRACTICE. for research and contribution. articles and presentations regarding salient Islamic finance topics and has been invited to speak at numerous Islamic conferences on a television (CNBC) and radio. and a senior associate at a previous firm. Mr. any act that would be subject to opprobrium. See WAEL B.

and non-Muslims (attracted to such products due to the ethical nature of Islamic finance). true success is measured in the adherence to a higher moral standard and the derivative success that flows from such adherence."3 "The takaful industry recorded double-digit growth last year despite the global downturn. What is equally discomforting as invoking "necessity" to justify products that are essentially conventional in substance is the adoption of structures that do this even when an independent Islamic construct would serve as a perfectly adequate basis for the intended commercial arrangement. Oct. More importantly.2 However. 101 (2010) financing steeped in the ethics and spirituality of Islam—is at a crossroads. The Arabic word takaful comes from the root word "kafala. . 2009.ey.COM. rather. its success must not come at the cost of sacrifice of its spiritual underpinning (to always put principle before profit). The financial solution of takaful (Islamic insurance) has emerged in response to consumer demand for shari’a compliant insurance products. tenuous structures are instead adopted that accomplish the intended commercial arrangements through a circuitous path and which suffer from serious enforceability issues. despite the existence of shari’a bases of support.site/news/Stock%20 News/2573711/. http://www. com/Publication/vwLUAssets/World_Takaful_Report_2008. such structures undermine the credibility of Islamic products as a whole and could likely result in many turning away from the industry. ISLAMIC & NEAR E.tradingmarkets. as "the global Takaful industry is growing by [twenty percent] per annum. As the industry grows and matures.com/. Takaful is therefore commonly interpreted as "mutual guarantee" and is growing at a staggering pace. the real danger to Islamic finance looms from one endemic risk—the desire to develop shari’a structures that replicate conventional products. While the industry has largely avoided the crises in the conventional banking world. Some have justified sanctioning products that replicate conventional profiles based on necessity—asserting that the "development" of Islamic finance justifies structures that replicate conventional products. registering [eighteen and 2 Islamic Banking Special Supplement: Shari'a Governance a Challenge to Islamic Banking.L. more structures will be scrutinized and a narrower definition of what is permissible will likely develop as many Muslims. available at http://www." which means guarantee.102 9 UCLA J. As the Islamic finance industry grows. 3 ERNST & YOUNG. 11. seek more genuineness in shari’a products.pdf. TRADING MARKETS. This Article identifies one such circumstance where./$FILE/Ernst_&_Young_-_WTR 08%5B1%5D. dressing up conventional structures in Islamic garb undermines the industry and imports dangers (relating to over-leverage and resulting from bifurcation of assets from debt) into the Islamic finance realm. Success for ethical ventures cannot be measured in economic terms alone. THE WORLD TAKAFUL REPORT 24 (2008).

respectively. In a typical takaful contract. In reaction to these issues. 14.e. both sides relinquish rights to enforce at the onset."5 However. it is uncertain whether an insured will ever receive a benefit in return for his premium. in an Islamic adjudicative forum. 8. Tawakkul. 6 Naturally. Therefore. in fact. The use of tabarru in the takaful context is an innovation that lacks shari’a basis and triggers both enforceability and transactional concerns and complexities. the insurer is not required to pay back the insured upon the occurrence of an event of loss because the insurer has received merely a donation (rather than a contractual premium payment) for which it cannot be obliged to act in any way.519 billion (Dh12.com/IslamicFinance_Briefing/?p=5893.com. 7 MUHAMMAD AYUB. Innovation key to Growth for Takaful. UNDERSTANDING ISLAMIC FINANCE 125 (2007). however. Surrender.pdf. then there is no legal expectation of return because donations are non-contingent and non-binding obligations. 2010. Aug. http://www. See Fethullah Gulen. insurance has been viewed sceptically by some in the Islamic world on the grounds that it covers a transaction that (i) has gharar (uncertainty). i.asp?file=/2009/8/8/business/4346310&sec=business. (ii) contains maisir (speculation) and (iii) is contrary to the concept of tawakkul (reliance on Allah). In particular. 4 . no contractual payment has been made. FETHULLAH GULEN'S WEB SITE. Jan.91) by the end of 2010 in the Gulf and the industry would grow at a faster pace than conventional insurance . Tafwiz. .opalesque.gulenmovement. the application of the tabarru concept ironically Laalitha Hunt.thestar.COM. Commitment. By making a donation. and Thiqa (Reliance.my/news/story. Traditionally. . . http://www. OPALESQUE. the expectation from both parties is to act as in a conventional insurance contract. represent enforceable obligations because under the structure.6 The elements of uncertainty and speculation are said to exist particularly in relation to nonlife insurances because it is said to be uncertain/speculative whether an event of loss will occur. 2006. and Trust). http:// biz. some of the transactional takaful structures upon which this industry is being built are questionable and of tenuous enforceability.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 103 twenty percent] rise in net contribution and total fund assets. it is unclear whether the arrangement would. such as interest returns on investments by the insurance company."4 "Islamic insurance (takaful) is estimated to grow to $3. By the same token.7 The rationale was that if the premium payor makes an absolute donation. June 14. 5 Laxman. STAR ONLINE. the premium payor is not entitled to a return upon the occurrence of an event of loss. Takaful Market to Grow Faster than Conventional Insurance. conventional insurance operations have other endemic features that are additionally problematic. takaful has evolved by characterizing the contribution (premium) as a form of tabarru (donation).com/ sufism-1/878-tawakkul-taslim-tafwiz-and-thiqa-reliance-surrender-commitment-and-confidence. 2009. Taslim.

Takaful in practice effectively involves bilateral arrangements (not parallel unilateral undertakings based on donation). to provide financial compensation to the participant in the event of a loss. supra note 7.9 The primary reason for insurance is protection.L. AND FINANCE: RELIGION. in a takaful contract. By characterizing the contribution as tabarru. 101 (2010) may result in undermining the utility of takaful. namely. it is doubtful whether the concepts of gharar and maisir were ever intended to apply in the context of insurance. Making the point that insurance conflicts with the principle of tawakkul as the insured is putting his trust in the insurer (or in their own provisions) rather than in God is similarly flawed as there is authority that alleviating risk is not necessarily contrary to the will of Allah (as referenced later in this Article). The application of gharar in the context of insurance misses the point because insurance obligations are not uncertain or tenuous but absolute (albeit contingent). far from being inconsistent with tawakkul. On balance. . 8 See FRANK E. By contrast. ISLAMIC & NEAR E.g. VOGEL & SAMUEL L. Gharar precludes tenuous transactions (originally focussed on uncertain subject matters of a sale—e. at 112. sale of fish before they are caught or more aptly the sale of an unborn calf which cannot be sold until it is born healthy). Arguing that insurance is speculative (maisir) also misses the point. HAYES III. which is a unilateral obligation.8 Unlike a contract for the sale of uncertain goods. the participant’s very right to compensation in the event of a loss comes into question. In both cases the parties to a contract have a clear understanding as to which way to proceed at each event. 9 See AYUB.104 9 UCLA J. Most conventional insurance works on the basis of risk transfer. but takaful involves the concept of communal risk sharing. takaful arrangements by their very nature are congruous with shari’a precepts and tabarru is not required to render such arrangements permissible. blanket judgement on insurance being speculative throws the baby out with the bathwater. not speculative investment. Maisir prohibits enrichment without labor.10 Furthermore. 10 See infra note 15-18. ISLAMIC LAW RISK AND RETURN 88 (Kluwer Law International) (1998). the insured is accepting from the outset that an event of loss may not occur. communal risk sharing and mitigation of risk are in fact shari’a ordained prescriptions.. There are only two possibilities—either the loss will occur or it will not. Furthermore. in the sale of an uncertain subject matter contract the buyer is counting on the delivery of certain goods but simply may not receive the goods in expected condition due to the inherent uncertainty of the transaction at the time the contract was formed. The niya (intention) and business purpose behind insurance would dictate further whether it is speculative.

This Article therefore considers: I. See MOHD MA'SUM BILLAH. i. the equivalent of the premium in a conventional insurance." See http://www. which has fixed premium. maisir and gharar.12 have sought to justify takaful by reference to the principle of tabarru. The jurisprudence which favors the permissibility of insurance. APPLIED TAKAFUL AND MODERN INSURANCE: LAW AND PRACTICE 70 (2007). This high degree of uncertainty invalidates a contract. Muslim society has historically been slower to accept insurance as permissible or.isra. Therefore. Management. the 1985 Fiqh Academy ruling declared that conventional insurance was forbidden but that insurance based on the application of cooperative principles. necessary.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 105 INTRODUCTION Insurance is an essential component of modern commerce: it mitigates risks and minimizes the effect of losses on businesses. 11 An example of the ruling against the permissibility of insurance is the following fatwa issued by the Fiqh Academy. These scholars include Mustafa Zaid. 13 For example. indeed. whether it is necessary to resort to tabarru in order to comply with such principles. However. Jeddah: "The commercial insurance contract. 12 There are scholars who totally reject any practice of insurance (whether by way of conventional insurance or takaful or otherwise) on the grounds that it is strictly prohibited in shari'a because of elements of riba.html.13 Based on the doctrine of tabarru. In the event of a loss. is a contract that has a high degree of uncertainty. .my/fatwas/takaful/modes-of-contract/70-resolution-no-9-resolution-9session-2-issued-by-the-international-council-of-fiqh-academy-regarding-insurance-andreinsurance. to the beneficiary (who will often also be the participant in many non-life insurances). bolstered by the religious imperative to help their members overcome such losses. The purpose of this Article is to consider whether any form of insurance is permissible under Islamic principles and. and II. Some scholars who accept that insurance is permissible in Islam. the long running debate amongst scholars as to the permissibility of insurance11 has undoubtedly also led many Muslims to be skeptical about insurance products.e. investors and individuals all wish to have the certainty that business and family security will continue notwithstanding the occurrence of unforeseen risks and often require that such insurance be in place. However. it is haram (impermissible) from the Shari'ah point of view. a second donation in the amount of the loss. This is due in part to the mutual support that has long existed within Muslim communities. financiers. A donation by the participant (insured) to the operator (insurer). if so. on behalf of the insurance pool. Abdullah al-Qalqeeli and Jalal Mustafa al-Sayyad. shari'a compliance and charitable donations was acceptable. this time from the operator. every takaful structure involves two unilateral contracts: I.

SUYUTI. A. as a general principle.106 9 UCLA J. takaful contracts ought to be honored and are enforceable unless such contracts contravene an express Islamic authority."16 As contractual obligations. . and IV. I. The arguments against the permissibility of insurance and the features of conventional insurance which require adaptation in order to achieve shari’a compliance. It attempts to safeguard loss for protection of the family or insureds and therefore. 1930). The concept of tabarru and its role in modern takaful. O you who believe! Squander not your wealth among yourselves in vanity. THE PERMISSIBILITY OF INSURANCE IN ISLAM The Qur'an encourages commerce and honoring obligations. that is not deceptive. ISLAMIC & NEAR E. 14 15 . This Article concludes that insurance appears to have shari’a support (subject to certain modifications to the operations of insurers) and that the doctrine of tabarru. . contractual obligations should be honored: ". is not to be restricted.. . AL-IMAM JALAUDIN ADB RAHMAN. AL-ASHBAH WA-EL NAZAIR 60 (Dar alKutub al-llmiya 1983). except it be a trade by mutual consent . Positive innovation.14 Takaful is a blend of commerce and mutuality. .L. takaful would appear to be permissible. 1930) (quoted in full below). is an unnecessary complication that creates enforceability issues without solving the purported problems its usage seeks to address. in particular. subject to the application of certain principles. . Is the Concept of Insurance Prohibited Per Se? A central argument commonly raised is that insurance is contrary to the concept of tawakkul. Furthermore. Islam is Not Restrictive Islamic jurisprudence encourages activities that positively contribute to the community.. B. The structures commonly used in takaful and the extent to which such structures address the concerns identified. 101 (2010) II. Islam generally does not restrict any parties’ freedom to enter into transactions other than in respect of certain haram activities: "The origin of everything is lawful unless an authority proves it to be unlawful. 16 Qur'an 4:29 (Marmaduke Pickthall trans."15 It follows that every transaction (including insurance) is presumed to be permissible unless authority expressly proves otherwise. whereby each Muslim is required to put his trust in See Qur'an 4:29 (Marmaduke Pickthall trans. III.

and well recognized. This is a flawed argument. prohibition in Islam: 17 The author has had several casual discussions with members of the community and at Islamic conferences where these arguments have been raised. . ."20 It is clear from the above examples that shari’a principles support taking steps to reduce risk and mitigate loss. .Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 107 Allah. .) (2003).17 Thus it is said that insurance conflicts with this principle as the insured is putting his trust in the insurer or in his own provisions rather than relying on Allah. . Some of these issues pose serious shari’a issues. Kitab al-Birr: "."19 ". most (if not all) conventional insurers will invest premium income in interest bearing investments. not only is the alleviation of risk permitted. KITAB AL-BIRR 59. The issue is not therefore with regard to the fundamental concept of insurance. the Holy Prophet said: Whosever removes a worldly grief from a 'Mum’in. ISSUES WITH CONVENTIONAL INSURANCE Identified below are the issues that purportedly justify the prohibition on conventional insurance. Whosoever alleviates a needy person Allah will alleviate him from both the world and the hereafter . trusting to the will of Allah. . and therefore alleviate harm or burden to the wider community. II. . . . Other objections raised in shari’a are actually based on misconceptions of aspects of the structure in the conventional context and a resulting inaccurate application to the Islamic concepts: A. Narrated by Abu Huraira. Riba (Interest/Usury) There are two aspects to the argument that conventional insurance involves elements of riba. The focus should therefore be on examining the way in which conventional insurance is transfigured into a shari’a compliant structure to ensure that it is sound from both a shari’a and commercial perspective. 19 SAHIH AL-MUSLIM. 18 TIRMIDHI. tie the camel first then leave it to the will of Allah . 20 Qur'an 2:185 (Ali Quli Qarai trans. . .' Allah will take away from him one of the griefs of the hereafter. Allah desires ease for you and He does not desire hardship for you . SUNAN AL-TIRMIZI 668. . There is clear authority that alleviating risk is not necessarily contrary to the will of Allah: "The Holy Prophet told a Bedouin Arab who left his camel untied. This is contrary to the clear. Islam positively encourages people to overcome the difficulties in life as per Sahih al-Muslim."18 Furthermore. . but are obviated in an authentic takaful structure. but instead with regard to the way in which insurance operates in the modern commercial context. First. .

As for those who resume. ISLAMIC & NEAR E. the prohibition on gambling (qimar). That is because they say: 'Trade is like usury.108 9 UCLA J.L. .. over-insurance in England may result in a policy being void for misrepresentation and is commonly expressly prohibited by the terms of the insurance policy.22 B. Furthermore. Islamic commentators have referenced this verse as being poignant particularly in today's troubled economic times. as well. in any event. but He makes charities flourish. the prohibition on riba may be said to result in a windfall for the beneficiary particularly if the payment on the event of loss exceeds the fair market value of the insured’s property. The banking system. based on interest lending (riba) and sale of loan receivables. Second. Allah brings usury to naught. CDOs (contravenes the Islamic prohibition on trading of debt) and proliferation of hedge funds and speculative trading (maisir) has landed the conventional ship into stormy seas because it has navigated into spiritually forbidden waters. 2003). many countries’ laws (including for example English law) prohibit such over-insurance. Again.’ While Allah has allowed trade and forbidden usury. 23 Qur'an 2:219 (Ali Quli Qarai trans. conventional insurers are typically keen to avoid either under-insurance or over-insurance on the basis that either such circumstance impacts upon the risk assessment (in particular the moral hazard associated with a risk) and the premium calculation. shall keep [the gains of] what is past. is clear: "They ask you concerning wine and gambling. which is equated to intoxication. through clear underwriting policies.'"23 Gambling involves betting money in a pool whereby there is a chance of losing the amount at stake or winning a much greater amount on an outcome. on receiving advice from his Lord. this issue can be addressed. However. Maisir Some scholars have suggested that conventional insurance is akin to gambling. . . Clearly it is possible for an insurer to invest in assets that are shari’a compliant using products developed by the Islamic finance markets. and his matter shall rest with Allah. they shall be inmates of the Fire and they shall remain in it [forever]. the very purpose of the contract is to cover loss for the beneficiary and payments in excess of market value can be well guarded against. is not fatal to the possibility of insurance in Islam.21 Such a criticism of conventional insurance albeit valid. And. Say: 'There is a great sin in both of them .. Whoever. 22 For example. relinquishes [usury]. Notably. over-insurance does run the risk of the contract being considered in violation of the shari’a for providing a disproportionate and speculative return and for violating the essential spirit of the takaful contract to the insured. 21 . There are admittedly simiQur'an 2:275 (Ali Quli Qarai trans. 2003). 101 (2010) Those who exact usury will not stand but like one deranged by the Devil’s touch. However.

e. however. interest or no interest. . 37 (Eng. the insured must stand to lose something in addition to the amount of his premium. 2008). What suffices for these purposes is defined in many common law systems by reference to the concept of "insurable interest. JOHN BIRDS & DAVID OWEN. and (iii) the return being based on the occurrence of a specific event. and the sole interest of each party consists of the sum or stake he will either win or lose. however. This principle has been reinforced in England by long-standing legislation. and that every such assurance shall be null or void to all intents and purposes. . 24 . is created by making the bet itself. These differences are considered in the following paragraphs.24 Thus. where gambling contracts are unenforceable as a matter of law. such as England.) (repealed by the Marine Insurance Act of 1906). The risk of loss in a wager." It is this interest in the subject matter of the insurance that fundamentally differentiates insurance from gambling. or without further proof of interest than the policy. 2. 19 Geo. merchandise. (ii) the possibility of receiving a greater sum in return (the insurance claim or the winnings). laden or to be laden on board any ship or ships. in order to be an insured. The lack of an insurable interest renders the contract unenforceable. or effects.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 109 larities between gambling and insurance in that they both involve: (i) the payment of a sum (the stake or the premium). MACGILLIVRAY ON INSURANCE LAW 7 (Sweet & Maxwell 11th ed. unlike contracts of insurance. the insured cannot recover. the Marine Insurance Act 1745 provided: [N]o assurance or assurances shall be made by any person or persons bodies corporate or politic on any ships or ships belonging to his Majesty or any of his subjects or any goods. 1745. Extensive consideration has been given to analyzing these differences in many Western jurisdictions. i. real and significant differences that distinguish insurance from gambling. As one leading insurance text notes: Both insurance contracts and wagering contracts are aleatory. whereas typically the function of insurance is protect the insured in respect of the risk of loss to an interest he possesses independently of the conclusion of the contract. To the extent that an insured does not have a pecuniary interest in the risk insured. There are. 25 Marine Insurance Act. c.25 NICHOLAS LEGH-JONES. economic) interest in the subject matter of the insurance. for example. Most common law jurisdictions require the insured to have a pecuniary (i. or by way of gaming or wagering . Insurable Interest Holding insurance akin to gambling involves a fundamental misconception of conventional insurance.

Other Distinctions A group of scholars headed by Sheikh Mustafa Al-Zarqa and Shaikh Abudullah Bin Menai have contested the prohibition of insurance on the basis that the element of chance is more limited than in gambling."27 The insurance industry in England is therefore fundamentally based on the understanding that insurance is not gambling. ii. 7. the Gaming Act of 1845 provides that: "All contracts or agreements. there are types of conventional insurance that are not indemnity-based and may be viewed as gambling from the perspective of the shari’a.. naturally. These may include insurance policies that provide for a fixed sum. However. 1906. or a sum calculated by a formula irrespective of the amount of loss (i. 28 See generally SHEIKH MUSTAFA AL-ZARQA.) (repealed 1 Sept.L. The insurer gains the amount of premium and the insured the security against the risk of loss of the subject. 1994). whether by parole or in writing. Admittedly. notwithstanding the different interpretation in English legislation.110 9 UCLA J. 8 & 9 Vict. Underwriting is therefore a costplus exercise whereby the insurer charges a premium that will cover the probable losses of the portfolio of risks whilst allowing for a reasonable profit. It is only certain forms of insurance that would likely be prohibited under the scrutiny of shari’a. Muhammed Nejatullah Siddiqi asserts that loss or gain associated with gambling is based on chance and luck only and does not involve any labor.26 Outside of the context of marine insurance. 41 § 4 (Eng. by way of gaming or wagering shall be null and void. 26 27 . 109 (Eng. as well as valued policies and property policies which include "new for old" provisions which could. in theory. Marine Insurance Act. contingency policies). In insurance. does not justify the conclusion that all insurance is impermissible under the shari’a. 2007). Gaming Act of 1845. both parties stand to gain.). c. 101 (2010) The subsequent Marine Insurance Act of 1906 expressly provides at section 4(1) that every contract of marine insurance by way of gaming and wagering is void.e. ISLAMIC & NEAR E. Shaikh Abdullah bin Menai argues that for gambling to exist there should be a loser and a winner. generate a profit for an insured in the event of loss.28 Insurance companies underwrite risks on the basis of complex actuarial analysis of the probability of loss occurring based on a thorough investigation of the insured and the statistical loss data for the market. NIZAM AL-TA’MIN: HAQIQATUH. to the contrary. the existence of a few such policies. WA AL-RA’Y AL’SHAR’I FIH (Mu’assasat Al-Risalah 4th ed. c. 6 Edw. The jurisprudence on insurance in England has therefore developed after consideration of the characteristics of insurance in comparison to gambling.

29 The redistribution of money pursuant to gambling is a blind distribution and contrary to justice and fair play. supra note 8. The subject matter of the insurance contract is definite and certain. they have both shared the financial burden of the peril. namely: (i) the subject matter of the insurance. the amount to be paid is either pre-agreed or arrived at upon the occurrence of the loss.30 which means entering into a contract where the subject of the contract is unspecified in quantity or size. One is gharar. If the event of loss does occur. C. Instead. Siddiqi concludes that the redistribution associated with insurance is therefore a redistribution of risk and not money. supra note 12. (iii) the perils insured against. 31 See generally MUHAMMAD NEJATULLAH SIDDIQI. because neither the insurance company nor the insured know the consequences of the contract into which they are entering. Publishing Center. BILLAH.. In order to be valid. there is no expectation of payment. such as selling an unborn calf. (iv) the matters that are ex29 SPECTIVE (Sci. The other is jahalah.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 111 competence or service. due to the parties’ lack of knowledge about the subject. whether in the form of gharar or jahalah. which means the selling of something the availability of which is uncertain. insurance premiums collected from insureds who do not suffer loss are used to pay those insureds who do. If it does not. In an insurance policy the subject matter is usually the life or property that is protected against future risk. Some scholars argue that insurance is subject to such uncertainty. Jeddah. Buying a car without knowledge of its model. 1996). In contrast. TEACHING ECONOMICS Abdulaziz Univ. where all of the salient terms of the contract are certain and pre-agreed. at 76. The only 'uncertainty’ in an insurance contract relates to whether an event of loss will occur. mileage. at 90. These salient terms of the contract. a contract ought to be free from uncertainty. King 30 See VOGEL. As Mohammed Ma’sum Billah notes: "An insurance contract also does not involve the elements of al-gharar (uncertainty). Therefore. contingency of whether or not an event occurs does not fall within the intended ambit of gharar or jahala because in either event there is absolute certainty (either a loss occurs and is compensated or it does not occur and therefore need not be compensated). IN ISLAMIC PER- . Gharar and Jahalah The concept of uncertainty is analyzed by Islamic scholars in two ways."31 Insurance is merely a contingent contract. condition or year of production would be an example of jahalah. type. (ii) the amount insured. Neither the insured who suffered loss nor the insured who did not suffer loss have made any undue gains in this situation.

u. it directly contradicts the references to Qur’an and hadith cited above. Lack of Express Authority Some may argue that there is no express authority on the permissibility of insurance and therefore it is not permissible (in any form). conventional insurance is rejected precisely because the insurer is undertaking an element of business risk. namely. This shows that the doctrine of collective risk alleviation was in place prior to and during the time of the Prophet of Islam. This pact was mentioned by the Prophet. an insured does receive a benefit of security and stability from purchasing an insurance policy. is intended to prevent any transaction whereby one contracting party ensures a return at the expense of the other contracting party without undertaking any real risk. and (v) the limits of the amount of the insurance are addressed in the insurance policy. the security that it provides and the overall reduction of the burden on society that would arise in respect of individuals and companies that suffer serious losses. there are at least two practices from the time of the Prophet. The first is the practice of hilf alfadool. The criticism of conventional insurance on the basis that the insured may not receive a benefit unless they suffer a compensable loss misconceives the purpose of insurance. (peace be upon him) which are directly analogous to insurance. D. This was a pact made between the people of Mecca to assist foreign traders in the event of a dispute with a Meccan whereby the Meccan refused to grant the trader his right. The prohibition of riba. to his companions as being a virtue of Islamic nature. (p. The pact was a sort of public indemnity to traders. Whilst premium rebates or no claims discounts are commonplace. Such a transaction is not considered to be of benefit to society because one party gains at another’s expense without a commensurate share in the underlying risk to the borrower. ISLAMIC & NEAR E. albeit the traders did not have to pay any amount to get the benefit of the coverage offered by the pact. Furthermore.b. Further. this criticism overlooks the larger scale benefit provided by insurance. This argument lacks jurisprudential basis and runs contrary to the innovative approach in Islam. it is paradoxical that insurance is criticized on the basis of the risk that the insured and insurer are undertaking. 101 (2010) cluded.h). In addition.112 9 UCLA J. More fundamentally. although primarily applied in the context of loan transactions. The second practice is diyah (especially where the aqilah of an individual have shared responsibility for the payment of blood money on his/her behalf thereby reducing the burden on the individual) and mawalat (a contract whereby one party agrees to bequeath property to the other party on the .L. Yet in the guise of gharar.

the rule of necessity comes into play to find proper solutions. . at 418. The key features of this model are as follows: 32 Mudaraba is a trust-based contract whereby one party contributes the capital (rabb al maal) and the other party contributes labor (mudarib) to a business venture. A wakala contract is an agency contract whereby one party appoints the other party to be his agent. These practices highlight that during early Islamic times. the scholars deemed it necessary to develop a scheme or system enabling human beings to avoid misfortune and to lessen the losses in a manner not against the principles of the shari’a. supra note 7. we now consider the structure of modern takaful operations. mutual arrangements defraying risk to individuals were commercially and culturally accepted. briefly addresses how this structure is intended to resolve the issues identified and focuses on the role of tabarru. As one author on the subject has noted: The idea of getting cover against risks is not intrinsically bad. TAKAFUL AND THE CONCEPT OF TABARRU Having analyzed the issues with conventional insurance. 33 AYUB. PARTICIPANT Claim payment CONTRIBUTIONS PARTICIPANTS’ FUND Underwriting surplus RISK FUND Wakala Fee INVESTMENT FUND Profit Underwriting surplus Qard hasan (if necessary) TAKAFUL OPERATOR’S FUND Profit Diagram One provides an overview of a blend wakala/mudaraba model for takaful. In case of genuine problems and remaining within the main shari’a constraints. Therefore.33 The key to this statement is the need to find 'proper solutions'. This section outlines a typical mudaraba/wakala32 structure. III.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 113 basis that the other party will pay blood money due by the former).

This supports the takaful contract as being a mutual risk-sharing arrangement and assuages the criticisms of maisir and gharar and unjust enrichment. the type of uncer34 There may be some shari'a issues in relation to the provision of such a qard hasan by the operator particularly if it is encapsulated within the mudaraba documentary arrangements. A. takaful is similar in many ways to mutual or cooperative insurance. 35 See SIDDIQUI. administration. supra note 28. is returned to the insured.34 • Wakala Element: The operator is appointed as wakeel (agent) for the participants in order to manage the underwriting. • Surplus: Many takaful structures also provide for a percentage of any surplus remaining in the risk fund to be paid to the operator as a performance incentive. Tabarru As noted. operating expenses. the operator receives a percentage of the profit on the investment fund in respect of its services and since the investment of the funds are on an Islamic basis (risk assumption investing) the riba prohibition is avoided. It is in this regard the doctrine of tabarru has emerged. the operator or its shareholders may provide a qard hassan (interest-free loan) in order to ensure that losses can be paid. . the operator does not assume overt liability for the losses.114 9 UCLA J. As explained above. 101 (2010) • Loss Sharing Not Loss Transfer: The takaful model operates on the basis that the participants insure each other on a mutual basis. etc. depending upon the terms of the takaful policy. in the author’s opinion. • Mudaraba Element:35 The operator is appointed as mudarib on behalf of the takaful fund/participants (the rab al maal) to manage the investment of the amounts contained in the investment fund in a shari’a compliant manner. thus. Unlike in conventional insurance. the uncertainty as to the amount of the payment in the event of a loss is not. reserves. one criticism of conventional insurance is that it includes elements of gharar (uncertainty) because the outcome of the contract in relation to the amount of loss between the participant and the operator is not known at the date of signing.L. If the losses exceed the amount in the risk fund then. management and claims of the takaful fund. ISLAMIC & NEAR E. • Return of Contributions: At the end of a fixed period (typically the operator’s financial year) a portion of the profit generated by the takaful fund after claims. In return the operator will receive a percentage of the contributions as a wakala fee. In return for its services as mudarib.

. it is that this point that many scholars resort to the doctrine of tabarru to justify the element of gharar. this would in theory prohibit takaful as well as conventional insurance. there is a contingency but no uncertainty in an insurance contract. No Conditional Tabarru A person who makes a tabarru has given away their property and their rights of ownership must therefore cease. where the participant makes his contribution precisely on the basis that he expects to be reimbursed in the event of loss. Therefore. Prohibited uncertainty relates to subject matter rather than the contingency of events. the whole or a certain proportion of his takaful contributions that he undertakes to pay. Logically. Ownership transfers at the time of donation from the donor to the donee. thus enabling him to fulfil his obligation of mutual help should any of his fellow participants suffer. A participant of a takaful policy agrees to relinquish. As one author on the subject notes: [T]he concept of tabarru (donation) has been incorporated into the arrangement as the main ingredient of the contract. if the inherent uncertainty in insurance arrangements does amount to gharar or jahala. supra note 7. there are critical issues of enforceability of the taburru structure under a rigorous and legalistic shari’a analysis.’"37 On this basis alone the doctrine of tabarru is wholly inconsistent with modern takaful practices. As explained above.. as tabarru. It is unlawful for the donor to seek to derive any benefit from the donated property after the property has been transferred by way of tabarru: "Ibn’Abbas reported that the Messenger of Allah said: ’He who takes his gift/donation back is like a dog which takes back its vomiting. the problems with the tabarru analysis are manifest and it is doubtful that such an analysis is necessary or efficacious in resolving the perceived difficulty of gharar. 2 MISHKAT-UL-MASABIH 316 (Al-Haj Maulana Fazlul Karim trans. However. i. 36 37 AYUB.36 The incorporation of tabarru is intended to circumvent the absolute prohibition on gharar in commercial and commutative contracts by making it a unilateral donation and not in fact a bilateral contract. 1938). However. at 42.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 115 tainty that is intended to be prohibited by gharar and jahala. Once a donation is made there can be no expectation of return.

they are seeking the security that takaful provides and expect to be compensated in the event that an insured peril eventuates. (and the author contends that it does not) the structuring of takaful arrangements through tabarru does not cure these issues. where the operator is appointed as an agent and may be granted broad but NOT unfettered discretion. CONCLUSION Tabarru is ostensibly considered to be a necessary element of takaful. tabarru is merely an innovation in form and not one in substance. In particular. enforceability and . a wakala arrangement is. a bilateral contract between a principal and an agent. This is simply not reflected in market practice. Such a bilateral contract will typically involve: (1) an express grant of authority by the participant to the operator to operate the takaful fund. Inconsistency with Wakala As noted above. The prohibition on conditional tabarru means that the operator would have free and unfettered discretion in the operation of the takaful fund. the uncertainty with regard to whether an event of loss will occur) is simply not even a vice in this context. 101 (2010) ii. most models used by takaful operators include a wakala aspect whereby the operator acts as wakeel (agent) for the participants when operating the takaful fund. Furthermore. Lack of Commercial Certainty It is clear that in the modern context of tabarru. Far from seeking to donate their contribution for charitable purposes. When applied in the context of takaful. It gives rise to conceptual. where commercial entities are seeking protection against risk that the concept of donation is far from an accurate description. Neither the concept of gharar nor jahala were intended to prohibit takaful. (2) a provision for the ratification of acts by the operator. iii.116 9 UCLA J. The absence of a bilateral contract between the operator and the participant undermines the utility of provisions seeking to ratify the acts of the operator. by definition. The doctrine of tabarru does not sit easily with the wakala relationship. even if the uncertainty identified falls within the concept of gharar and jahala. ISLAMIC & NEAR E. the operator will typically have responsibility for the underwriting and claims functions. such commercial entities are seeking to protect their assets (and thus indirectly benefit their shareholders). The relationship between the operator and the participant in the form of parallel bilateral contracts is somehow thought to cause the element of gharar to disappear. and. This kind of uncertainty is not impermissible. The alleged vice which tabarru sets out to cure (mainly.L. In its capacity as wakeel.

. In the words of perhaps the greatest Islamic scholar of all time. we mean permissibility in principle. ring true: By permissibility of mutual cooperative insurance and commercial insurance. or ruses). Fons Vitae 2000). and then return to permit by various legal stratagems and means of circumvention. The views of Dr. Therefore I prefer permissibility of insurance without hiyal (legal stratagems. who restrict the truth to uncritical acceptance of the Imam’s pronouncements . AND PRACTICE 149 (Cambridge University Press 2006). ISLAMIC FINANCE: LAW.Tabarru in Takaful: Helpful Innovation or Unnecessary Complication? 117 transactional concerns that hinder the infrastructural development of the takaful industry rather than facilitate its growth. nor can the mind even suppose a possibility. 38 . ECONOMICS. it is time to critically examine the status quo of industry practices and products. . As the Global Financial Industry emerges from recession and the spotlight turns to Islamic Finance to provide more ethical solutions. From time to time. what I found loathsome among the methods of the devotees of ta’lim. Al-Ghazali. AL-GHAZALI'S PATH TO SUFISM 17-20 (R. .39 See MAHMOUD A.. .J. EL-GAMAL. .38 Tabarru and its use in the context of takaful is simply one more example of such a legal stratagem that misses the mark. for there are jurists who forbid one thing. Now more than ever it is time to think outside the box and take up the challenge to create authentic and innovative shari’a compliant products. McCarthy trans. Rafiq Yunus Al-Misri. without necessarily accepting all details. We ask God to protect us from such practices. nor is it accompanied by the possibility of error and deception. . what I seek is knowledge of the true meaning of things . sure and certain knowledge is that in which the thing known is made so manifest that no doubt clings to it. without worry or shame. therefore. 39 ABU HAMID MUHAMMAD AL-GHAZALI. who when asked about his quest in discerning the truth from error said: my daring in mounting from the lowland of servile conformism to the highland of independent investigation . this will require each Muslim and stakeholders in the industry to have the courage to question sometimes widely accepted practices and principles.

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