The concept of insurance in Islamic economy
“If insurance did not exist a large proportion of the rest of the economy would not exist either. Without a reliable mechanism for pooling and transferring risk, much economics activity simply would not take place. Alone with banking and the joint-stock company, insurance is one of the three pillars on which modern commerce is based. ” (Arrow: 1963)
Insurance is one of the major financial institutions in the economy. Insurance is also economically highly beneficial to society and to individuals. It has a key role in business, industrial development and large-scale organization of commerce, industry, agriculture. It helps to mitigate the consequences resulting from hazards, accidents and losses that all businesses and human being are exposed to.
Takaful is an alternative form of cover that a Muslim can avail against the risk of loss due to misfortunes. The concept of takaful is not a new concept and is based on the idea that, what is uncertain with respect to an individual, may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.
Concept of Takaful
Although the word takaful does not appear in the Qur’an, it is derived from the term Ta’awun, or mutual assistance and connotes the same meaning. Takaful is a noun stemming from the Arabic verb “Kafal” meaning to take care of one’s needs. Takaful simply means mutual help among a group i.e. each member of the group pools efforts to support the needy within the group. This is the same as mutual insurance (cooperative insurance) as was practiced in the early days of insurance and even today by certain groups. The concept of takaful had already existed during the time of Prophet Muhammad where the Muslims contributed to a fund under the tribal system of Aaqilah for the purpose of helping members of their own community who were liable to pay diyat (blood money).
Takaful involves each participant giving away as donation or tabarru a certain proportion of the full amount of the contributions (premium) required to be paid. The financial assistance paid to a participant facing a loss or damage is from a fund that is contributed by all participants by way of donation. After the takaful claims and benefits are paid, the remaining surplus is paid back to the participants. Thus, there is no element of gambling or unjust enrichment in this arrangement. As the defined fund belongs to the participants, the practice does not aim at deriving undue advantage at the expense of other individuals. Further, there is no excessive uncertainty or gharar with respect to the contribution and financial assistance.
Emergence and Significance of Islamic Insurance
The beginning of the 20th century had Islamic scholars debating if conventional insurance was permissible under the Islamic principles of Sharia. The Takaful system of insurance, an alternative form in compliance with Sharia, was established in 1985 by the Grand Counsel of Islamic scholars in Makkah, Saudi Arabia, Shariah seeks to ensure that contracts governing insurance transactions are fair and just and in sync with social standards and the principles defined in the Koran. This conflict exists not with the concept of insurance but with a few factors that are inherent to the trading terms of conventional insurance contracts, namely:
Gharar (uncertainty and misleading terms in contracts)
Maisir (excessive risk taking, speculation)
Riba (charging and receiving interest)
Haram (investment in forbidden activities and goods, i.e. gambling)
The past two decades saw the evolution of a number of Islamic-compliant insurance forms (including Takaful), however, most of them lost credence over time, while Takaful emerged as a significant and popular form. Islamic scholars further agree that Takaful insurance, based on certain ‘tijari’ principles ensures that insurance contracts governed by Takaful are compliant to the principles of Al-Mudharabah or Al-Wakalah, which are the two main Islamic insurance business models. Takaful principles allow for the advancement of “a loan without interest” from the invested amount, “qurz-e-hasn”, to any one of the insured at the time of need.