ISLAMIC INSURANCE SYSTEM

RENAT BEKKIN
PhD in Law,
Moscow State Institute of International Relations
(University),
Ministry of Foreign Affairs of Russia

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CONTENTS
-

Insurance in Quran and Sunnah

Islamic scholars on insurance
Unlawful elements in insurance contract
Fatwas on insurance
What is takaful?
Key features of takaful
Takaful glossary
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CONTENTS (continued)
-

Short history of Islamic insurance

Types of takaful business
Mutual insurance vs commercial
insurance
Legal regulation
Takaful models
Takaful worldwide
Challenges facing Islamic insurance
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INSURANCE IN QURAN AND SUNNAH

And help one another in righteousness and piety"
and do not help one another in evil deeds and
.enmity" (Quran : Al Maidah, 2)
"Be sure we shall test you with something of fear
and hunger, some loss on goods, lives and the
fruits (of yours toil), but give Glad tidings to those
who patiently persevere, - Who say, when afflicted
with calamity "To Allah we belong and to him is our
return ". (Quran : Al-Baqara,155-156).
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INSURANCE IN QURAN AND SUNNAH

(continued)
The Prophet said, "Tie your camel first, then put your
trust in Allah" (reported by at-Tirmidhi and Ibn Majah).
He who relieves someone in difficulty will be relieved
by Allah in this life and in the Hereafter. And he who
protects a Muslim will be protected by Allah in this
life and in the Hereafter. Allah helps His slave as long
as the slave helps his brother (reported by Muslim).
Verily, it is better for you to leave your off-spring
wealthy than to leave them poor, asking others for
help (reported by al-Bukhari).

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ISLAMIC SCHOLARS ON INSURANCE

There are three main opinions among Shariah scholars
on conventional insurance contract:
- The insurance contract is permissible with two
conditions: that it contains no riba clause and that its
subject be legitimate.
- Only life Insurance is not permissible.
- Insurance contains elements of gharar, maysir and
riba and therefore is not permissible (haram).

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UNLAWFUL ELEMENTS IN INSURANCE

CONTRACT
Gharar

(Arabic danger) - element of

uncertainty in the subject matter of a contract
or as regards the price of the goods, or any
speculative risk.
Gharar can be characterized as the sale of
what is not present.

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UNLAWFUL ELEMENTS IN INSURANCE

CONTRACT (continued)
Three categories of gharar:
-

excessive gharar (al-gharar al-kathir);

trifling gharar (al-gharar alyasir) ;

average gharar (al-gharar al-mutawassit).

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UNLAWFUL ELEMENTS IN INSURANCE

CONTRACT (continued)

Maysir (Arabic gambling): initially, a game of chance

that was common in pre-Islamic times among the
Arabs. In the broad sense: any action aimed at an
easy material gain (without investing work or capital).
O ye who believe! Intoxicants and gambling,
sacrificing to stones, and (divination by) arrows,
are an abomination, - of Satan's handiwork:
eschew such (abomination), that ye may prosper
(Quran : Al Maidah, 90).
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UNLAWFUL ELEMENTS IN INSURANCE

CONTRACT (continued)
Riba (Arabic increase, accretion): in a loan

contract, interest on the principal charged by

the lender when providing funds to the
borrower. In the broader sense: any interest
in commercial and financial transactions
enabling one of the parties to achieve
material gain at the expense of the other
party, without providing adequate
compensation.
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UNLAWFUL ELEMENTS IN INSURANCE

CONTRACT (continued)
Other arguments against the validity of
insurance contract:
-

insurance encroaches on the rights of Allah

(insuring ones life);
risk is traded, not shared;
against the principles of mirath;
insured has no share in profit of company;
etc.
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FATWAS ON INSURANCE
1977 Fatwa of Higher Council of Saudi
Ulama
1978 Fatwa of Fiqh Council of Muslim
World League
1985 Fatwa of Islamic Fiqh Academy
(OIC)

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FATWAS ON INSURANCE (continued)

1985 Fatwa of Islamic Fiqh Academy (OIC):
The commercial insurance contract
which is commonly used by commercial
insurance companies, is a contract, which
contains major element of risk, which
voids the contract and, therefore, is
prohibited (haram) according to the
Shariah.

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WHAT IS TAKAFUL?
Takaful (Arabic mutual provision of
guarantees): Islamic insurance.
System based on the principles of
solidarity and mutual assistance,
under which the parties to the
contract support each other when
any of them suffers a loss (which
means primarily a monetary
compensation).
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WHAT IS TAKAFUL? (continued)

takaful means a scheme based on
brotherhood, solidarity and mutual
assistance which provides for mutual
financial aid and assistance to the
participants in case of need whereby
the participants mutually agree to
contribute for that purpose
(Takaful Act 1984, article 2)
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KEY FEATURES OF TAKAFUL

takaful is free from excessive gharar (al-gharar alkathir);

the installments paid, or a part thereof, may only
be used in operations that are permitted by
Shariah;
the takaful business is commonly based on a
profit sharing mechanism known as mudharabah;
the business of a takaful company is supervised
by the Shariah Supervisory Board;
takaful, as opposed to conventional insurance,
does not contravene the Shariah law of
inheritance.
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TAKAFUL GLOSSARY
General takaful Islamic non-life insurance
Family takaful Islamic life insurance
Mudharabah investment partnership
Operator insurer
Participant policyholder, insured
Tabarru donations of participants
Wakeel - agent

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SHORT HISTORY OF ISLAMIC

INSURANCE
1979 Islamic insurance company (Sudan)
1979 - Islamic Arab Insurance Company
(UAE)
1984 Takaful Act (Malaysia)
1985 Takaful Malaysia Berhad (Malaysia)
1997 Retakaful company (Asean Retakaful
International, ARIL)
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TYPES OF TAKAFUL BUSINESS

General takaful
Family takaful

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GENERAL TAKAFUL
Motor takaful scheme;
Accident

takaful scheme;
Marine takaful scheme;
Engineering takaful scheme; etc.

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FAMILY TAKAFUL
Individual family

takaful plans;
Takaful mortgage plans;
Takaful plans for education;
Group takaful plans;
Health/medical takaful.

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MUTUAL INSURANCE VS
COMMERCIAL INSURANCE
Islamic insurance can be performed in
two forms:
Mutual insurance society
Commercial insurance company

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LEGAL REGULATION
Monistic model (Sudan)
Dual

model (Bahrain, Malaysia, etc.)

Conventional model (Great Britain,
Russia, etc.).

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TAKAFUL MODELS
Pure mudharabah
Wakalah model
Modified

mudharabah (mudharabah+

wakalah)
Wakalah model with waqf

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PURE MUDHARABAH MODEL

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WAKALAH MODEL

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WAKALAH MODEL WITH WAQF

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TAKAFUL WORLDWIDE
The number of takaful operators
worldwide:
- 75 takaful operators (including
takaful windows)
- 5 retakaful operators
Total assets: USD 1,5 billion
Contributions: USD 600 mln.
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TAKAFUL WORLDWIDE
Share of takaful in insurance industry
Malaysia: 27 % of total insurance market
Asia Pacific: 9% of total insurance market
Middle East: 63 % of total insurance
market
EU and US: 1 % of total insurance market
The takaful and retakaful market is expected
to grow to $10-12 billion by 2010.
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CHALLENGES FACING ISLAMIC

INSURANCE
Legal

regulation
Investment restrictions
New products and concepts
Competitive pricing and service
Accounting standards
Technical expertise
Harmonization of the takaful practises and
operations around the world
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CHALLENGES FACING ISLAMIC

INSURANCE (continued)
Distribution

channels
Lack of insurance awareness
Human resources
Lack of uniformity in Shariah decision on
takaful
Rating
Retakaful capacity
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Azerbaijan Diplomatic Academy

Summer School
Islam in the Contemporary
International Affairs,
Baku, Azerbaijan, 11-20 July 2008
THANK YOU FOR YOUR ATTENTION!
R.I. BEKKIN
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