TAKAFUL SYSTEM

As the essence of insurance could be seen in the system of mutual help in relation to the custom of blood money under the Arab tribal custom, Muslim jurists generally accepted that the concept of insurance does not contradict with the Shariah. In fact, the principle of compensation and group responsibility was accepted by Islam and the Holy Prophet. Muslim jurists acknowledged that the basis of shared responsibility in the system of `aqila', as practiced between Muslims of Mecca (muhajirin) and Medina (ansar) laid the foundation of mutual insurance.

As a complete religion, the teaching of Islam encompasses the essence of peace, economic well-being and development of the Muslim at the individual, family social, state and `ummah' levels.

To illustrate the importance of this relationship in a life of a Muslim, Islam calls for the protection of certain basic rights, viz.: -

• The right to protect the Religion.
• The right to protect the life.
• The right to protect dignity/honour.
• The right to protect the property.
• The right to protect the mind.

It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance.

In view of the above as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists this concept of insurance is acceptable in Islam because,

• the policyholders would cooperate among themselves for their common good;
• every policyholder would pay his subscription in order to assist those of them who need assistance;
• it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;
• the element of uncertainty will be eliminated insofar as subscription and compensation are concerned;
• it does not aim at deriving advantage at the cost of other individuals.

The generally accepted view of the Muslim Jurists is that the operation of the conventional insurance as an exchange transaction under a buy and sell agreement does not in its present form conform to the rule and requirements of the Shariah as it embodies the following three elements :-

al-Gharar
There is the element of al-Gharar (unknown or uncertain factors in the operation of a contract) in both the life and general insurance policies. This arises due to the uncertainty of the subject matter of the contract or `ma'qud'alaih' of which one of the basic rules of contract in Islam is that the ma'qud'alaih must be clear. In such a contract the insured or the policyholder agrees to pay a certain sum of premium and in turn the insurance company guarantees to pay a certain sum of compensation (sum insured) in the event of a catastrophe or disaster. But the insured or the policyholder is not informed, for example, of how the amount of the compensation that the company will pay him is to be derived nor is he certain of the amount.

In addition, any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is also classified as Gharar. This is prevalent in both the life and general insurance policies. In the former, for example the loss of premium suffered by the policyholder if he would have to cancel his policy before the policy acquires the forfeiture status. Similarly the "double-standard" condition of charging customary short period in general insurance if the policyholder is responsible for the termination of the policy whilst a proportional refund of premium is applicable if the insurance company terminates the cover.

al-Maisir
There is the element of al-Maisir (or gambling) which arises as a consequence of the presence of al-Gharar, in particular in the case of life insurance. When a policyholder dies before the end of the period of his insurance policy after paying only part of the premium, for example, his dependents will receive a certain sum of money which the policyholder in the first place has not been informed and has no knowledge of how and from where it is to be derived.

al-Riba
There is the practice of al-Riba (or interest) and other related practices in the investment activities of the conventional insurance companies which contravene the rules of the Shariah.

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