i. ii. iii.

Arguments for and against the contract of insurance Status of modern contract of insurance Issues related to insurance
a) b)

Insurance and gambling Insurance and interest

iv.

Insurance and public interests recognised by the shariah

The modern contract on insurance is objected by the Ulama or the learned in Islam base on the following ground:i. ii. iii.

iv.

It is a wagering contract It is mere gambling It is of an uncertain nature Life insurance is a device whereby an attempt to supersede the Will of God

v.

The amount of life insurances premium is indeterminate, the insured does not know how many instalments he will have to pay The insurance companies invest the amount paid by the insured in interest bearing securities and in the case of life insurance, the insured, on his death, is entitled to get much more than what he has paid which amounts to riba The whole insurance business is based upon riba which is unlawful

vi.

vii.

Insurance is neither gambling nor a wager

The modernist/ proponents argued that:

It is based upon mutuality and cooperation Gambling is a play with luck-detrimental to society Insurance guards human being life and property from dangers and gives benefit to trade and industry

Uncertainty in insurance transactions

The modernist/ proponents argued that:

Prophet (PBUH) saying:Contract of sale are forbidden where the seller is unable to deliver a thing contracted. For instance, the sale of a bird in the air or a fish in the water. Inevitable uncertainty - It may concluded that the saying of Prophet (PBUH) pertain to the cases where uncertainty exists in its extreme form such as gambling

Uncertainty in insurance transactions

In this light, insurance is far from uncertainty, as it is accompanied by a definite compensation Contract of insurance is one the indemnity or bail according to Islamic law and the jurist have admitted the validity of such contract uncertainty cannot be objectionable in insurance

In the issue of security in insurance is not of a tangible nature to form the sort of subject matter of a contract required by Islamic law.
To this contention answer is found in a contract of hiring someone to keep guard which is valid under Islamic law (security is the subject matter)

Life insurance is not a device to override the powers of God

Insurance does not guarantee the nonoccurrence of an event but, on the other hand, indemnifies the insured against the consequences of a specified event or risk It is cooperative movement to diminish loss resulting from a certain event

 Quran

(5:2) But help ye one another unto righteousness and pious duty. Help not one another sin and transgression
a calamity measures taken to lessen the seriousness of its consequences by mutual help and assistance.

Death

Indefiniteness amount of life insurance

Hanafi jurist make a distinction between the indefiniteness which leads to complications and renders the contract unforceable & indefiniteness which does not effect the enforcement. i.e a composition against all obligations valid for it does not create any misunderstanding; while it is invalid if against some obligations only.

The premiums/installments amount is known and so is the total when all have been paid do not affect the validity of the contract

Issue of riba in insurance

For life insurance, it is count for little as it is open to the insured not to accept more than what he has paid. While, there are no objection to other dealings of insurance companies and their investment on interest

Point to the contract of clientage (Aqd al-Muwalat) insure not only against death or injury, but also liability to third parties whose descent is unknown. Bay bil-Wafa- introduced as the circumstances demanded it. Insurance may also be adopted under the rule of necessity.

Nonetheless, insurance is acceptable in Islam due to the necessity or public good

As illustrated by the Caliph Umar who, for the sake of the public good and driven by necessity deviated from the text of the Quran in abolishing the grants given to those whose hearts are to be reconciled and in suspending the punishment of thieves in the Year of Famine

Conflict between two schools of thought

Ibn Abidin Shaikh Muhammad Bakhit al-Mutiyi Shaikh Muhammad al-Madni Shaikh Muhammad Abu Zahra Shaikh Ahmad al-Sarbashi Muhammad Yusuf Musa Nadwat al-Ulama Mahdi Hasan Syed Uruj Ahmad Qadri Mahmud Ali

Muzaffar Hussain Mazaheri

Ubaydulla Rahmani Muhammad Yahya Qasmi Muhammad Zafiruddin Abd al-Salam Nadvi Muhammad ShafiI Muhammad Haroon Baluchistani Wali Hasan

Ibn Abidin
Muslim is not allowed to take from the protected person what he is not liable to pay under Islamic law.

Shaikh Muhammad Bakhit al-Mutiyi

Bail for property is possible in 2 ways: in case of Kafalah or in case of damage to property. However In conclusion..

Shaikh Muhammad al-Madni

Issues of life insurance, stock exchange should not be left to an individual. It is essential to have unanimous opinion.

Shaikh Muhammad Abu Zahra

Life insurance is a kind of gambling because there is no justification for a person to be entitled to get the whole or to take the paid with profit.

Shaikh Ahmad al-Sarbashi

Insurance is unlawful if its based on riba and undoubtedly there is uncertainty which may give injustice result it may treated as a necessity.

Muhammad Yusuf Musa

Insurance in all its kind is an example of cooperation & helpful to society (insured & insurance companies)

Nadwat al-Ulama
Insurance in all its forms is not free from unlawful riba & gambling. But also taking into consideration protection of life & property - emergency

Mahdi Hasan
The rule of necessity no laws whereinsurance may be permissible where lawlessness prevails.

Syed Uruj Ahmad Qadri

Insurance is admixture of riba, gambling and gharar. Suggest a separate dept of insurance under interest-free bank will solve this problems.

Mahmud Ali
Insurance is not without gambling and riba. Even though riba permissible in Dar al-Harb.

Muzaffar Hussain Mazaheri

Insurance is based on riba & gambling. Premium is a loan and benefit/profit is unlawful.

Ubaydulla Rahmani
The amount earned under insurance is riba. Permissible when no safety of life and property. Issue of compensation & riba fi Dar alHarb.

Muhammad Yahya Qasmi

Confined to India(Dar al-harb). The property of Harbi is permissible for a Muslim if it is taken with his consent and without deception.

Muhammad Zafiruddin
Amount in the name of bonus is riba. Premium being a loan and the profits upon it is not permissible. Excess without counter value is riba.

Abd al-Salam Nadvi

Riba is not the object of insurance. It may be received and spent in charitable purposes but not on ones own self.

Muhammad Shafii
The bonus given is riba. The compensation renders a wager. But deposit with intention of saving is permissible if the interest is not accepted. Suggest (1) Mudharabah investment (2) portion to reserve fundwaqf (3) concept of shareholders (4) forfeiture

Wali Hasan
Insurance is based on riba & gambling - unlawful

Muhammad Haroon Baluchistani

Insurance is illegal. Life insurance is bribery as it is compensation for something which cannot be valued.

The Standard of Judgment

Basic notions of the Shariah relating to transactions are ethical in character Unjustified enrichment and risk (gharar) are forbidden Vague expressions and delays in delivery are rejected Shariah insists that there must be no doubt concerning the obligations undertaken by the parties to a contract The object/subject matter of the contract must be known

Among other causes which go to vitiate a contract are unjustified enrichment and risk Obviously, the contract of insurance could not be valid in the eye of Shariah unless it were free from these. However, the modernists contend that insurance is contract of indemnity providing for the genuine loss of the insured with no unlawful enrichment to either of the parties Then, we have to examine whether it does correspond with the contract of indemnity called kafala (bailment or suretyship)

Kafalah

Kafala can be further classified into:i. ii.

Kafalat al-Nafs (Kafala for the person) Kafalat al-Mal (Kafala for the property)

The word al-kafala is derived from al-kifl which means junction or addition In the language of law, it signifies the junction of one person to another in relation to a claim As a result, the creditor can call upon either the original debtor or the surety to perform the obligation, and a demand from one would not affect his right of demand from the other if the obligations remains unfulfilled

So that if the agreement released the original debtor from his obligation, it would not be a suretyship, but of Hawala or transfer of obligation
Two points are immediately evident:i.

ii.

Kafala in Islamic Law is the creation of an additional liability with regard to a claim there is nowhere to be found in the contract of insurance In kafala there are three parties in a contract of insurance there are two parties

Ignoring these points of divergence, the modernist argued that uncertainty of subject matter is no bar to the incorporation of insurance into Islam because kafala is lawful contract

Although upheld by Abu Hanifa, it is opposed by Shafii and others who maintain that the obligation to be fulfilled in kafala can no more be uncertainties than the price in a contract of sale

Indefinite amount of premiums/installments

The modernist argued that the number of instalments in life insurance is not truly indefinite since it becomes known when they are paid However, uncertainty in Islamic law refers to the time of the contract whereas payment of instalments relates to the future

Subject matter

Insurance contract is a bilateral transaction The subject-matter is, therefore, risk coverage (compensation) sold in consideration of the premium The contention of the modernists that security is the subject-matter is far from the truth No intangible or indeterminate object can possibly from the subject matter of a contract of sale under Islamic law The principle of Islamic law is that there should be no delay in delivery and reciprocal possessions of the articles exchanges should take place at the time of contract For this and other reasons the contract of insurance cannot be compared to that of kafala

Verdict

In short the contract of insurance is unlawful on account of:i. ii.

Its uncertain and indeterminate subject matter Its suspension on an uncertain event renders it a wager

Insurance is clearly a transfer of the risk of cashvalue loss from one party to the other In mutual insurance, the insured himself is the insurer, risk is not transferred but rather shared by all Thus, the golden principle of bear ye one anothers burdens comes into play, and indeed cooperation and community of interests find their expression

Insurance and gambling

Insurance per say does not appear to be anything morally wrong or socially harmful in it In fact, it is an indispensable means of collectively solving common human problems by mutual cooperation Though, there are view expressed by some that insurance is a form of gambling That being the case we will discuss whether insurance is a form of gambling or not by examining its nature, motivation, and impact towards economic activity Nonetheless, the discussion is not about any particular form of insurance that may have adopted by insurance companies in modern times

1. Nature Gambling The gambler seeks out the risk which was not there earlier or which, even if it did exist, did not personally concern him - it can be avoided if he wanted to do so Insurance The occurrence of perils against which and the effect of which the insured seeks protection does not depend on whether he is insured or not all such perils entail financial losses For example is death, which is a permanent peril that causes financial loss to dependants of the deceased Owners of a car have the risk that the car will be destroyed or damaged, the risk being inevitable condition of their use Unlike the gambler, the owner of the car does not willfully imperil himself by seeking out accident involving financial loss

For instance, buying lottery tickets, betting and staking on horse races, football matches, games of cards and etc

Gambler willingly seek the financial loss as they are motivated by the potential gain that independently exist in gambling

2. Motivation Gambling Hope of gain the financial motivation in gambling is provided by the gain in the event of winning The gambler seeks clear profit Insurance The desire to have protection against the loss that one is to suffer in the event of the occurrence of the apprehended peril The stipulated amount that the insured will get in such a case cannot be considered as profit it only provides relief from the burden of loss

For example, the gambler gets a prize of a million pounds from lottery ticket, with that of the shipowner who gets the same amount who get the same amount after shipwreck from insurance as agreed value of the ship
The economic status of the shipowner is still the same as it was before the shipwreck. He is not any wealthier now than he was before. By contrast, the lottery winner is absolutely wealthier now than he was before.

3. Impacts toward economic activity Gambling The gambler incurs financial loss if he losses the game absolute loss Insurance The insured, after paying the agreed premium, is guaranteed the payment of compensation for his financial loss in the event of the occurrence of the peril covered by insurance

A gambler incurs such losses of his own choice

Gambling has nothing to do with economic decision a gambler cannot take necessary business decision at the time of betting just on the basis of expectations The money that gambler wins does not compensate for any actual loss incurred and has relatively less impact towards societies and economics

Thus, premium is an investment towards security

Premium is not a loss, it is a cost

It has the economic implications, whose usefulness remains unaffected by whether there is actual accident or not The mere guarantee of compensation for loss is of great value for all economic activities that involve pure risk

Insurance/ Premiums
Provide conducive business environment

Protection against financial loss

Compensation in the event of loss

Thus, the discussion should be sufficient to remove the misunderstanding that the two share common characteristics or that gambling is in any way inherent in insurance The truth is that the two have nothing in common Rather, in their social and economic roles, they are opposed to each other

Prohibition of games of chance is explicit in the Quran (Surah Al-maidah:90-91) Islam also forbidden all such business activities as contain any elements of gambling Shah Waliullah has included sale of an indefinite quantity of dates for a definite quantity of dates, payment of advance money and buying of dried dates against fresh ones As observed by Shah Waliullah, gambling is not useful for civilisation, nor can it be termed as co-operation of the kind possible in business transaction

Insurance and interest

Premium paid by the insured accumulate into huge fund in the hands of the insuring companies At any one time this capital exceeds the claims the insurer needs to pay out to the insured. There are three reasons behind this:i. ii.

iii.

New parties continues to take out insurance The amount of premium is fixed a little higher than the minimum required to pay claims from the whole group of persons insured The premium money collected regularly, whereas the frequency of payment of claims is not so regular

By purchasing interest-bearing instrument the insurer able to minimise loss and ensure constant growth of the capital RIBA This growth in capital is taken into consideration while calculating the rate of premium payable less cost of insurance Thus, if this capital can be gainfully used through some interest-free channels, the insurance system will obviously get rid of the element of interest In fact, keeping such large amount of capital unutilised is a waste of national resources

As an alternative, the insurer should search for an avenue that comparatively safe and profitable investment of the surplus capital in an interest-free economy For instance, the insurer may invest their capital in government partnership shares or in the shares of reputed private business entity and depositing in profit-sharing bank accounts Profit from the invested insurance money may exceed the estimated amount which formed the basis for the calculation of premium surplus profit can be used to establish a reserve fund to offset any future possible loss

Profit from the invested insurance money may exceed the estimated amount which formed the basis for the calculation of premium. Surplus profit can be used to establish a reserve fund to offset any future possible loss and keep the rate of premium in harmony with the actual rate of profit over a fairly long period of time

The argument that insurance implies interest as the insured is promised an amount far excess of what he will have deposited in installments before the occurrence of any accident is baseless as Shariah does not regard absolutely every increment as interest Money paid as premium is not in the nature of a loan, and the payment of a claim does not amount to returning the loan with an incremental amount that may be considered interest

Pure risk, i.e. danger of financial loss incurred in accidents caused by unforeseeable perils or by human lapses, is a social evil Hence, it must be prevented to the extent possible This objective is even more desirable from the moral and spiritual than form the strictly economic point of view The Shariah considers these measures desirable, indeed it insists that man strive to keep life and property secure (maqasid al-shariah) Where financial loss causes destitution to individuals or to families, the need to help the victims, to compensate them for the loss, is rather obvious

In fact, prevention of any damage to an individuals efficiency, and keeping the familys economic potential intact, are necessary means for the economic progress and prosperity of the whole community Provision of compensation for losses involved in pure risks under insurance cover is a modern techniques of risk-management in the light of the law of large numbers It help maintain economic efficiency, within social conditions conducive to the confident pursuit of risk-bearing economic activities Often, insurance greatly helps those reduced to penury by some accident

All these are valid interests according to the Shariah which may be safeguarded insurance along with some other means. Nonetheless, insurance under an Islamic system will be organised in co-ordination with the system of public welfare and social security. Taking preventive measures and arranging beforehand for compensation for likely losses involved in cases of pure risk, whether done individually or collectively. It is absolutely compatible with the belief in predestination and submission to the Will of God.