PRINCIPLES & PRACTICES OF

TAKAFUL&RE-TAKAFUL
(FIN 4030)
ARTICLE REVIEW ON:
ANALYZING THE SHARIA'H COMPLIANT ISSUES
CURRENTLY FACED BY ISLAMIC INSURANCE
By: Asif Ahmed Qureshi

SECTION 4
Instructor:
DR. MARHANUM BINTI CHE MOHD SALLEH

ANIS SURAYA MOHAMED SAID

1321952

Review:
ANALYZING THE SHARIA'H COMPLIANT ISSUES CURRENTLY FACED BY
ISLAMIC INSURANCE
Asif Ahmed Qureshi1
1

Lecturer Insurance King Abdulaziz University Community College, Jeddah

King Abdulaziz University, Saudi Arabia
Sep2003. Vol 3.5. 279-294. ijcrb.webs.com

INTRODUCTION
Islam promotes the act of taking precautionary measures or `ikhtiar against any risks. For
instance, in the holy Quran it is clearly described how Prophet Yusof (Allaihi Salam) filled the
grain silos from the surplus of seven years of good harvest as a protection to ensure the
availability of continuous food supply during the seven years of drought. In fact, the act of being
careful and be prepared is urged in Islam, as portrayed in a hadith where rasulullah (PBUH)
told the Bedouin Arab to tie his camel first before leave it to the will of Allah. This is a clear
indication that one has to strive hard to avoid from being inflicted by any ill luck, and at the
same time be fully prepared. As there is no way to escape risk, one possible way out is to buy
an insurance cover. But muslims are restricted to the religious constraints, and therefore, as a
way to be free from forbidden elements (riba, gharar, maysir) in conventional insurance,
Muslim scholars took a long time to develop islamic insurance system which is operated based
on shariah principle.

Asif Ahmed Qureshi starts his article by explaining about insurance, takaful and the
development of Islamic Insurances (takaful). Islamic insurance or takaful facing quite a great
development since it was first introduced in Sudan in 19792. After more than three decades,
researchers now have sufficiently long track record to analyze the fact whether the present
insurance companies operating on Shariah basis are really able to comply with the requirement
of the Shariah. Having said that, Qureshi in his paper mentioned that there are claims among
many minds saying that some aspects of conventional insurance still persisting in Islamic
insurance and cannot be avoided until suitable alternatives are established. Therefore, Qureshi

1
2

Corresponding author
Thompson and Flower (2007)

intend to highlights those residuals of conventional insurance which become the shariah
compliant issues faced by Islamic insurance.
This paper is organized into four parts, in which the first section will discusses main
issues arises from the article reviewed. This paper will then proceed to present the methodology
used by the author. In the third section, the finding and contributions gained from the article are
presented and finally, the last section will concludes this paper and come out with comments.
.
1.0 Main issues of the article

The article begins with the statement which acknowledges that there are skeptical views of
some people towards the Islamic Insurance practices. The author mention that, eventhough the
Shariah compliant insurance which is embedded with shariah principles is introduced and is
said to be the real solutions to muslim, there is still found criticisms among many minds as they
said that certain aspects of conventional insurance still presents in takaful system. Therefore, in
this paper, the author intend to analyzes those aspects of conventional insurance which is said
to be be found in takaful practices.

Qureshi devided his article into three major parts in which he thoroughly explain the concepts
of shariah compliant insurance in the first section. The author cited as per Mahmood (2008),
Shariah-compliant insurance is based on principles of mutual cooperation (taawun) and
donation (tabarru), where the risk is shared collectively and voluntarily by the group of
participants. Its totally different with conventional insurance which treat the insurance
agreement as an act of transferring risk.

The author also briefly explains the development of takaful which was firstly introduced in
Sudan in 1979. It penetrates into Malaysia started in the 1980s as a result of a fatwa (decree)
issued by the authority which ruled that conventional insurance is a void contract due to the
presence of the elements of riba, gharar and maysir and thus, Muslims countries started
replacing the conventional insurance with Shariah compliant insurance. Thompson & Flower
(2007) mentioned that the market is primarily dominated by Middle and Far Eastern countries
for instance Saudi Arabia, Bahrain, Malaysia and Sudan.

The structure of the Islamic Insurance is also among the main parts discussed by Qureshi.
Shariah compliant insurance takes into two forms in which are cooperative insurance and

takaful insurance. Cooperative insurance is where participants pool their financial resources in
the form of donation against certain loss exposures. There is no transfer of risk; rather, all
participating scheme members share the risk together under the elements of mutual help, mutual
protection, and shared responsibility among participants. The sond form which is takaful
insurance means that if the fund is insufficient, rather than to ask the participants to pay
additional premium, Shariah compliant operator will provide interest-free loan known as Qard
Hassan.

Next, in his second section of the article, the author presents all of the findings pertaining to his
objective of doing this research which is to highlights and analyses the shariah compliant issues
faced by Islamic Insurance. He extracted two areas and provides full explanation on those
aspects. They are the investment of takaful fund, and reinsurance by the Shariah compliant
insurance company. These two are the areas where the scholars raise their doubt whether the
present insurance company which operated in shariah basis is really complying with the
requirement of shariah.

2.0 Methodology

The article uses qualitative method which is based on library research. The author refers to
many books, articles research papers and journals from the year 2001 to 2009 which gives the
readers reliable information on contemporary issues currently faced by Islamic Insurance
during the time this paper was published which was on September 2011. Besides that, in
presenting this article, the author also make use of reliable sources from the internet particularly
relevant databases and websites including the institute of Islamic Banking and Insurance,
Syarikat Takaful Malaysia Berhad, and Bank Negara Malaysia.

3.0 Findings and contributions of the research

The discussions from the article presents the facts about what is actually happen in the practices
of Shariah compliant insurance. The author presented two aspects of insurance which raise
doubts among scholars i.e reinsurance and investment of insurance fund. These two aspects
become complicated and hard to solve compared to the conventional one because there is
religious constraints on the practicality of the system.

I.

Issue on reinsurance

The first issue is on the reinsurance. Cited from Sharma (2007), she mentioned that shariah
compliant insurance companies require reinsurance facility to transfer the risk, reduce
aggregation, limiting claims vitality and protection of assets. It is well known that Reinsurance
Company is required but the quantity of them which is compliant with shariah is not enough to
cater all shariah compliant companies.

The author then states that according to the Islamic Banking and Fianance Encyclopedia (IIBI,
London 1998) because of the limited number of retakaful operators, Shariah Advisor with no
other option gives authority to conventional re-insurers to reinsure takaful companies under the
doctrine of necessity. Such dispensation is understood to be for a temporary period until a swift
resolution is made. This however, against the Islamic laws as not only the conventional
reinsurance formation does not abide by the Shariah principle, but also, as they receive the risk
premium of takaful company, they largely invest in the areas prohibited in Islamic laws. The
author in his article emphasized that even if the reinsurance is placed in conventional
reinsurance under such doctrine, the funds of the investors who is very diligent to earn income
only from according to shariah, should not be mixed up with those of the conventional investors.
As such, they practices retrocession where one reinsurance company essentially insuring
another reinsurance company

The dilemma has been the slow growth in numbers of retakaful companies, however the author
find this to be positive, as though the process is slow, the situation is gradually changing. There
are conventional reinsurers now forming the shariah compliant reinsurance arrangement to cater
customers needs such as Swiss Re, Mitsui Sumitomo, Munich Re, Labuan Re etc.

II.

Issue on Investment of takaful fund

The author cited as per Malaikah (2003) that Shariah compliant investment means controlling
and limiting the exposure of the investment to activities which comply with the rules of shariah.
Here, Qureshi mentioned such examples of prohibited activities in services industries is
conventional insurance company, and in entertainment industries is pornography. Likewise in
manufacturing, processing & trading the prohibited areas are alcoholic beverages and pork, etc.

The author presents the finding which is detailed by the Institute of Islamic Banking and
Insuranse about the statutory measures to ensure for shariah compliant investment. Shariah
Supervisory Board is to be formed by the operator in which their function is to review the
operations, supervise its development of shariah insurance products and determine the Shariah
compliance of these products and investments. They have to carry their own audit and certify
that every operations are within the shariah constrains.

But in increasingly complex world of modern finance, they find it hard to answer the question
on whether or not proposal for new transaction or product conforms to the rule of shariah. Their
act is not just to give approval, but it goes beyond that, in which they involve in investigatory
role in reviewing the operations of the financial institution to ensure that they truly comply with
the rule of shariah. The products authenticity is dubious unless been certified as shariah
compliant.

In this aspect of investment of takaful fund, the lack of transparency to the prospective
customers about the investment venue also becomes the issue. Though the takaful companies
are operated in accordance to shariah principles, customers remain blindfolded and unaware
about where did their money being invested to. This situation is said to create ambiguity in
customers mind. The author in this section also points out that there is no platform established
at global level to standardize Shariah compliant operational activities. This platform if it is
done, might probably improve the Islamic countries insurance penetration level.

4.0 Comments on the article

The abstract and introduction of this article provides a good and precise explanation that quickly
gives reader rough understanding about the topic of the article. Even the title which is
Analyzing the shariah compliant issues currently faced by Islamic Insurance is suitable, and
for me it did attract me to choose and to read this article as it makes people wonder what might
be the issues that is faced by Islamic Insurance.

This article increases my understanding particularly on the aspects of re-takaful concepts. The
definition and the concepts are explained in a way that is easy to understand. The author exposed
the reader about the reality that is happening in this era. It is the fact that ideally takaful and
retakaful companies can be a comprehensive system which is free from prohibited elements,
but due to the limited numbers of Retakaful Company, the system is a bit violated with the
involvement of conventional reinsurance system. This issue lay down a challenge to every one
of us to work towards finding suitable resolution for these problems.