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Fund Management Possibilities
London is the major European centre for fund management, both for funds listed onshore and offshore funds listed in the Channel Islands, Dublin, Luxembourg and other centers. There are seven Islamic funds that are promoted in the Muslim world but managed from London and four that are both promoted and managed from London. All of these are designed for clients in Saudi Arabia and the Gulf, with the prices denominated in dollars and the funds administered from offshore tax havens. The HSBC Amanah Global Equity Fund is typical of these offerings, being listed in Luxembourg and managed to provide exposure to leading companies worldwide with a particular focus on major multinationals whose primary listing is in New York.
There have been mixed fortunes for Islamic funds managed from London with Kleinwort Bensons’ Islamic Fund, the first to be established in 1986, being wound up in 1989 because of poor subscriptions. Flemings Oasis Fund was launched with great promise back in 1996, but was liquidated in 2000 following the take-over by Chase of Flemings. The Institutional Investor of Kuwait, which managed the Ibn Majeed Fund that was listed in Dublin, decided to close its London office in 2000 and focus its operations in the Gulf.
The only sterling denominated fund was the Halal Mutual, also listed in Dublin, and managed by the Gulf based Al Tadamon Group. It was designed to provide income from commodity trading rather than equity investment, the price being fixed at £250, but with the income dependent on trading profits, which in practice was always around 3.6 to 3.8 percent gross, a very modest return.
None of these funds is of much interest to the British Muslim community, who as United Kingdom residents has potential tax liabilities on both income and capital gains, and therefore cannot take advantage of offshore funds. For local Muslims what is required is an Islamic fund that can qualify for tax exemptions under the Individual Savings Account (ISA) scheme. This provides for exemption from capital gains and income tax for up to £7,000 invested in any tax year for qualifying funds in a maxi ISA. This has proved popular with and ethical and ecological investors, with funds such as the Friends Provident Stewardship and the Jupiter Merlin Ecology qualifying for this status. Similar on shore funds that complied with the Shariah law could potentially appeal to British Muslim investors if a major fund management group was willing to take the initiative.
There have been mixed fortunes for Islamic funds managed from London with Kleinwort Bensons’ Islamic Fund, the first to be established in 1986, being wound up in 1989 because of poor subscriptions. Flemings Oasis Fund was launched with great promise back in 1996, but was liquidated in 2000 following the take-over by Chase of Flemings. The Institutional Investor of Kuwait, which managed the Ibn Majeed Fund that was listed in Dublin, decided to close its London office in 2000 and focus its operations in the Gulf.
The only sterling denominated fund was the Halal Mutual, also listed in Dublin, and managed by the Gulf based Al Tadamon Group. It was designed to provide income from commodity trading rather than equity investment, the price being fixed at £250, but with the income dependent on trading profits, which in practice was always around 3.6 to 3.8 percent gross, a very modest return.
None of these funds is of much interest to the British Muslim community, who as United Kingdom residents has potential tax liabilities on both income and capital gains, and therefore cannot take advantage of offshore funds. For local Muslims what is required is an Islamic fund that can qualify for tax exemptions under the Individual Savings Account (ISA) scheme. This provides for exemption from capital gains and income tax for up to £7,000 invested in any tax year for qualifying funds in a maxi ISA. This has proved popular with and ethical and ecological investors, with funds such as the Friends Provident Stewardship and the Jupiter Merlin Ecology qualifying for this status. Similar on shore funds that complied with the Shariah law could potentially appeal to British Muslim investors if a major fund management group was willing to take the initiative.
Fund Management Possibilities
London is the major European centre for fund management, both for funds listed onshore and offshore funds listed in the Channel Islands, Dublin, Luxembourg and other centers. There are seven Islamic funds that are promoted in the Muslim world but managed from London and four that are both promoted and managed from London. All of these are designed for clients in Saudi Arabia and the Gulf, with the prices denominated in dollars and the funds administered from offshore tax havens. The HSBC Amanah Global Equity Fund is typical of these offerings, being listed in Luxembourg and managed to provide exposure to leading companies worldwide with a particular focus on major multinationals whose primary listing is in New York.
There have been mixed fortunes for Islamic funds managed from London with Kleinwort Bensons’ Islamic Fund, the first to be established in 1986, being wound up in 1989 because of poor subscriptions. Flemings Oasis Fund was launched with great promise back in 1996, but was liquidated in 2000 following the take-over by Chase of Flemings. The Institutional Investor of Kuwait, which managed the Ibn Majeed Fund that was listed in Dublin, decided to close its London office in 2000 and focus its operations in the Gulf.
The only sterling denominated fund was the Halal Mutual, also listed in Dublin, and managed by the Gulf based Al Tadamon Group. It was designed to provide income from commodity trading rather than equity investment, the price being fixed at £250, but with the income dependent on trading profits, which in practice was always around 3.6 to 3.8 percent gross, a very modest return.
None of these funds is of much interest to the British Muslim community, who as United Kingdom residents has potential tax liabilities on both income and capital gains, and therefore cannot take advantage of offshore funds. For local Muslims what is required is an Islamic fund that can qualify for tax exemptions under the Individual Savings Account (ISA) scheme. This provides for exemption from capital gains and income tax for up to £7,000 invested in any tax year for qualifying funds in a maxi ISA. This has proved popular with and ethical and ecological investors, with funds such as the Friends Provident Stewardship and the Jupiter Merlin Ecology qualifying for this status. Similar on shore funds that complied with the Shariah law could potentially appeal to British Muslim investors if a major fund management group was willing to take the initiative.
There have been mixed fortunes for Islamic funds managed from London with Kleinwort Bensons’ Islamic Fund, the first to be established in 1986, being wound up in 1989 because of poor subscriptions. Flemings Oasis Fund was launched with great promise back in 1996, but was liquidated in 2000 following the take-over by Chase of Flemings. The Institutional Investor of Kuwait, which managed the Ibn Majeed Fund that was listed in Dublin, decided to close its London office in 2000 and focus its operations in the Gulf.
The only sterling denominated fund was the Halal Mutual, also listed in Dublin, and managed by the Gulf based Al Tadamon Group. It was designed to provide income from commodity trading rather than equity investment, the price being fixed at £250, but with the income dependent on trading profits, which in practice was always around 3.6 to 3.8 percent gross, a very modest return.
None of these funds is of much interest to the British Muslim community, who as United Kingdom residents has potential tax liabilities on both income and capital gains, and therefore cannot take advantage of offshore funds. For local Muslims what is required is an Islamic fund that can qualify for tax exemptions under the Individual Savings Account (ISA) scheme. This provides for exemption from capital gains and income tax for up to £7,000 invested in any tax year for qualifying funds in a maxi ISA. This has proved popular with and ethical and ecological investors, with funds such as the Friends Provident Stewardship and the Jupiter Merlin Ecology qualifying for this status. Similar on shore funds that complied with the Shariah law could potentially appeal to British Muslim investors if a major fund management group was willing to take the initiative.
ISLAMIC FINANCE
The most significant Islamic financial product to be launched for the Muslim community in the United Kingdom was the Manzil home purchase plan. Manzil can be translated as home, or in spiritual terms as the house or dwelling of the soul. The original scheme, which was introduced in 1997, provides for murabaha financing through a trading mark-up contract. The Islamic Investment Banking Unit that runs the scheme is a part of the United Bank of Kuwait, which was established in London in 1966 to serve Kuwaiti overseas financial and commercial interests. In August 2000 it was taken over by the Al-Ahli Commercial Bank, which formed a new institution, the Ahli United Bank. This has been registered as an offshore banking unit in Bahrain with its shares listed on the stock exchange in Manama.
Once the client has chosen a suitable property and agreed a price he approaches the bank for Manzil financing. An application form is completed together with a direct debit mandate for the monthly payments if the request for financing is approved by the bank’s credit committee. The client must pay 0.1 per cent of the purchase price of the property, or a minimum of £176.25 including VAT, so that the bank can commission an independent valuation of the property. The IIBU will also seek references regarding the client’s financial position, usually from an employer or accountant and current bank. The client’s solicitor will be expected to lease with the IIBU’s solicitor who will seek assurances regarding the legal title of the property, which may involve legal searches.
For murabaha to be legitimate under Islamic law the bank, as financier of the property, must be the first owner. It is therefore the bank, and not the client, who con tracts with the vendor and pays the deposit required when contracts are exchanged. The sale price from the IIBU to the client has to allow for administrative expense a return to the bank’s investors and a profit margin. The client pays the purchase price through fixed monthly payments over a period of up to 15 years.
Once the client has chosen a suitable property and agreed a price he approaches the bank for Manzil financing. An application form is completed together with a direct debit mandate for the monthly payments if the request for financing is approved by the bank’s credit committee. The client must pay 0.1 per cent of the purchase price of the property, or a minimum of £176.25 including VAT, so that the bank can commission an independent valuation of the property. The IIBU will also seek references regarding the client’s financial position, usually from an employer or accountant and current bank. The client’s solicitor will be expected to lease with the IIBU’s solicitor who will seek assurances regarding the legal title of the property, which may involve legal searches.
For murabaha to be legitimate under Islamic law the bank, as financier of the property, must be the first owner. It is therefore the bank, and not the client, who con tracts with the vendor and pays the deposit required when contracts are exchanged. The sale price from the IIBU to the client has to allow for administrative expense a return to the bank’s investors and a profit margin. The client pays the purchase price through fixed monthly payments over a period of up to 15 years.
Islamic Investment Products In the UK
Introduction
London has become the largest international centre for Islamic finance outside the Muslim World, largely as a result of the City’s role as a centre for Middle Eastern and Asian banking. Treasury management facilities are provided on behalf of Islamic banks in the Gulf, and Islamic fund management and promotion is becoming more significant. Possibilities for Islamic electronic financial services are opening up, and London is the major centre for information gathering and dissemination on the Islamic banking industry.
London’s role in serving the British Muslim community has been disappointing and despite almost two decades of experience of Islamic financing, there are few retail products available. The aim of this article is to ask why this continues to be the case, to review the limited range of products on offer, and to see if there are any more hopeful signs for the future.
Islamic financial services in the UK
The Muslim community in the United Kingdom numbers more than 1.5 million British citizens and permanent residents, with up to another 500,000 temporary residents including students and visitors. The community is ethnically and linguistically diverse however, and geo graphically scattered, that makes marketing aimed at attracting the attention of the community a’ major challenge. The community is increasingly affluent, and comprises a growing number of professionals such as doctors, as well as a substantial small business component.
Although casual evidence suggests there, is a greater propensity to use cash for transactions than with the population generally, the demand for banking and financial products is not markedly different from the national picture. Some devout Muslims avoid using conventional interest based banks, and others donate interest earnings to charity in., an attempt to purify their income. The n use conventional financing services, largely because they have little alternative, and tend, like the rest of the population, to have greater trust in large retail financial institutions with established brand names. For Islamic financial institutions to gain acceptance within the community there would need to be a substantial educational and, marketing promotion.
HSBC Islamic Financing, in many respects the HSBC is the best placed British retail bank to potentially offer Islamic financial services to the local Muslim community, but so far it has been reluctant to take on the promotional and marketing risks. HSBC’s advantage is that it already has an Islamic finance unit and extensive experience through its global operations in this type of business. It has a significant presence in many Muslim countries, including Malaysia, Pakistan and Bangladesh, and has become a major force in Middle Eastern banking since its acquisition of the British Bank of the Middle East. Its network includes six branches in Bahrain, six in Lebanon, fifteen in the United Arab Emirates, nine in Egypt, and five in Oman. HSBC also owns a minority stake in the Saudi British Bank that has 80 branches in the kingdom. These networks give the bank unparalleled business knowledge of different Muslim societies.
In the United Kingdom HSBC is the only high street bank to have a dedicated network of branches to serve the South Asian community with staff who speak Urdu and are themselves part of the community. It has teams of specialist business banking managers who profess to understand the needs of small Asian businesses. Its South Asian network has 11 branches in Blackburn, Glasgow, Harrow, Leeds, Leicester, London (2), Manchester, Preston, Walsall and Uxbridge. Islamic products could potentially be offered through all these branches.
It is however: easier for HSBC, like other British retail banks, to offer conventional loans and savings products rather than to intro duce differentiated products for a potential market of Muslim clients who do business with the bank in any case. The gains from cross selling Islamic products to existing clients are not thought to be great, and the potential to attract new clients limited due to the inertia of most retail account holders. HSBC therefore has concentrated on serving foreign Muslim clients of high net worth through it’s inter national operations, and in serving Islamic banks through wholesale business, rather than the domestic market. The HSBC’s Amanah Global Equity Fund is marketed to foreign investors, for example, rather than the British Muslim community.
United Bank of Kuwait's Islamic Investment Banking Unit’s Manzil
London has become the largest international centre for Islamic finance outside the Muslim World, largely as a result of the City’s role as a centre for Middle Eastern and Asian banking. Treasury management facilities are provided on behalf of Islamic banks in the Gulf, and Islamic fund management and promotion is becoming more significant. Possibilities for Islamic electronic financial services are opening up, and London is the major centre for information gathering and dissemination on the Islamic banking industry.
London’s role in serving the British Muslim community has been disappointing and despite almost two decades of experience of Islamic financing, there are few retail products available. The aim of this article is to ask why this continues to be the case, to review the limited range of products on offer, and to see if there are any more hopeful signs for the future.
Islamic financial services in the UK
The Muslim community in the United Kingdom numbers more than 1.5 million British citizens and permanent residents, with up to another 500,000 temporary residents including students and visitors. The community is ethnically and linguistically diverse however, and geo graphically scattered, that makes marketing aimed at attracting the attention of the community a’ major challenge. The community is increasingly affluent, and comprises a growing number of professionals such as doctors, as well as a substantial small business component.
Although casual evidence suggests there, is a greater propensity to use cash for transactions than with the population generally, the demand for banking and financial products is not markedly different from the national picture. Some devout Muslims avoid using conventional interest based banks, and others donate interest earnings to charity in., an attempt to purify their income. The n use conventional financing services, largely because they have little alternative, and tend, like the rest of the population, to have greater trust in large retail financial institutions with established brand names. For Islamic financial institutions to gain acceptance within the community there would need to be a substantial educational and, marketing promotion.
HSBC Islamic Financing, in many respects the HSBC is the best placed British retail bank to potentially offer Islamic financial services to the local Muslim community, but so far it has been reluctant to take on the promotional and marketing risks. HSBC’s advantage is that it already has an Islamic finance unit and extensive experience through its global operations in this type of business. It has a significant presence in many Muslim countries, including Malaysia, Pakistan and Bangladesh, and has become a major force in Middle Eastern banking since its acquisition of the British Bank of the Middle East. Its network includes six branches in Bahrain, six in Lebanon, fifteen in the United Arab Emirates, nine in Egypt, and five in Oman. HSBC also owns a minority stake in the Saudi British Bank that has 80 branches in the kingdom. These networks give the bank unparalleled business knowledge of different Muslim societies.
In the United Kingdom HSBC is the only high street bank to have a dedicated network of branches to serve the South Asian community with staff who speak Urdu and are themselves part of the community. It has teams of specialist business banking managers who profess to understand the needs of small Asian businesses. Its South Asian network has 11 branches in Blackburn, Glasgow, Harrow, Leeds, Leicester, London (2), Manchester, Preston, Walsall and Uxbridge. Islamic products could potentially be offered through all these branches.
It is however: easier for HSBC, like other British retail banks, to offer conventional loans and savings products rather than to intro duce differentiated products for a potential market of Muslim clients who do business with the bank in any case. The gains from cross selling Islamic products to existing clients are not thought to be great, and the potential to attract new clients limited due to the inertia of most retail account holders. HSBC therefore has concentrated on serving foreign Muslim clients of high net worth through it’s inter national operations, and in serving Islamic banks through wholesale business, rather than the domestic market. The HSBC’s Amanah Global Equity Fund is marketed to foreign investors, for example, rather than the British Muslim community.
United Bank of Kuwait's Islamic Investment Banking Unit’s Manzil
Islamic Investment Products In the UK
Introduction
London has become the largest international centre for Islamic finance outside the Muslim World, largely as a result of the City’s role as a centre for Middle Eastern and Asian banking. Treasury management facilities are provided on behalf of Islamic banks in the Gulf, and Islamic fund management and promotion is becoming more significant. Possibilities for Islamic electronic financial services are opening up, and London is the major centre for information gathering and dissemination on the Islamic banking industry.
London’s role in serving the British Muslim community has been disappointing and despite almost two decades of experience of Islamic financing, there are few retail products available. The aim of this article is to ask why this continues to be the case, to review the limited range of products on offer, and to see if there are any more hopeful signs for the future.
Islamic financial services in the UK
The Muslim community in the United Kingdom numbers more than 1.5 million British citizens and permanent residents, with up to another 500,000 temporary residents including students and visitors. The community is ethnically and linguistically diverse however, and geo graphically scattered, that makes marketing aimed at attracting the attention of the community a’ major challenge. The community is increasingly affluent, and comprises a growing number of professionals such as doctors, as well as a substantial small business component.
Although casual evidence suggests there, is a greater propensity to use cash for transactions than with the population generally, the demand for banking and financial products is not markedly different from the national picture. Some devout Muslims avoid using conventional interest based banks, and others donate interest earnings to charity in., an attempt to purify their income. The n use conventional financing services, largely because they have little alternative, and tend, like the rest of the population, to have greater trust in large retail financial institutions with established brand names. For Islamic financial institutions to gain acceptance within the community there would need to be a substantial educational and, marketing promotion.
HSBC Islamic Financing, in many respects the HSBC is the best placed British retail bank to potentially offer Islamic financial services to the local Muslim community, but so far it has been reluctant to take on the promotional and marketing risks. HSBC’s advantage is that it already has an Islamic finance unit and extensive experience through its global operations in this type of business. It has a significant presence in many Muslim countries, including Malaysia, Pakistan and Bangladesh, and has become a major force in Middle Eastern banking since its acquisition of the British Bank of the Middle East. Its network includes six branches in Bahrain, six in Lebanon, fifteen in the United Arab Emirates, nine in Egypt, and five in Oman. HSBC also owns a minority stake in the Saudi British Bank that has 80 branches in the kingdom. These networks give the bank unparalleled business knowledge of different Muslim societies.
In the United Kingdom HSBC is the only high street bank to have a dedicated network of branches to serve the South Asian community with staff who speak Urdu and are themselves part of the community. It has teams of specialist business banking managers who profess to understand the needs of small Asian businesses. Its South Asian network has 11 branches in Blackburn, Glasgow, Harrow, Leeds, Leicester, London (2), Manchester, Preston, Walsall and Uxbridge. Islamic products could potentially be offered through all these branches.
It is however: easier for HSBC, like other British retail banks, to offer conventional loans and savings products rather than to intro duce differentiated products for a potential market of Muslim clients who do business with the bank in any case. The gains from cross selling Islamic products to existing clients are not thought to be great, and the potential to attract new clients limited due to the inertia of most retail account holders. HSBC therefore has concentrated on serving foreign Muslim clients of high net worth through it’s inter national operations, and in serving Islamic banks through wholesale business, rather than the domestic market. The HSBC’s Amanah Global Equity Fund is marketed to foreign investors, for example, rather than the British Muslim community.
United Bank of Kuwait's Islamic Investment Banking Unit’s Manzil
London has become the largest international centre for Islamic finance outside the Muslim World, largely as a result of the City’s role as a centre for Middle Eastern and Asian banking. Treasury management facilities are provided on behalf of Islamic banks in the Gulf, and Islamic fund management and promotion is becoming more significant. Possibilities for Islamic electronic financial services are opening up, and London is the major centre for information gathering and dissemination on the Islamic banking industry.
London’s role in serving the British Muslim community has been disappointing and despite almost two decades of experience of Islamic financing, there are few retail products available. The aim of this article is to ask why this continues to be the case, to review the limited range of products on offer, and to see if there are any more hopeful signs for the future.
Islamic financial services in the UK
The Muslim community in the United Kingdom numbers more than 1.5 million British citizens and permanent residents, with up to another 500,000 temporary residents including students and visitors. The community is ethnically and linguistically diverse however, and geo graphically scattered, that makes marketing aimed at attracting the attention of the community a’ major challenge. The community is increasingly affluent, and comprises a growing number of professionals such as doctors, as well as a substantial small business component.
Although casual evidence suggests there, is a greater propensity to use cash for transactions than with the population generally, the demand for banking and financial products is not markedly different from the national picture. Some devout Muslims avoid using conventional interest based banks, and others donate interest earnings to charity in., an attempt to purify their income. The n use conventional financing services, largely because they have little alternative, and tend, like the rest of the population, to have greater trust in large retail financial institutions with established brand names. For Islamic financial institutions to gain acceptance within the community there would need to be a substantial educational and, marketing promotion.
HSBC Islamic Financing, in many respects the HSBC is the best placed British retail bank to potentially offer Islamic financial services to the local Muslim community, but so far it has been reluctant to take on the promotional and marketing risks. HSBC’s advantage is that it already has an Islamic finance unit and extensive experience through its global operations in this type of business. It has a significant presence in many Muslim countries, including Malaysia, Pakistan and Bangladesh, and has become a major force in Middle Eastern banking since its acquisition of the British Bank of the Middle East. Its network includes six branches in Bahrain, six in Lebanon, fifteen in the United Arab Emirates, nine in Egypt, and five in Oman. HSBC also owns a minority stake in the Saudi British Bank that has 80 branches in the kingdom. These networks give the bank unparalleled business knowledge of different Muslim societies.
In the United Kingdom HSBC is the only high street bank to have a dedicated network of branches to serve the South Asian community with staff who speak Urdu and are themselves part of the community. It has teams of specialist business banking managers who profess to understand the needs of small Asian businesses. Its South Asian network has 11 branches in Blackburn, Glasgow, Harrow, Leeds, Leicester, London (2), Manchester, Preston, Walsall and Uxbridge. Islamic products could potentially be offered through all these branches.
It is however: easier for HSBC, like other British retail banks, to offer conventional loans and savings products rather than to intro duce differentiated products for a potential market of Muslim clients who do business with the bank in any case. The gains from cross selling Islamic products to existing clients are not thought to be great, and the potential to attract new clients limited due to the inertia of most retail account holders. HSBC therefore has concentrated on serving foreign Muslim clients of high net worth through it’s inter national operations, and in serving Islamic banks through wholesale business, rather than the domestic market. The HSBC’s Amanah Global Equity Fund is marketed to foreign investors, for example, rather than the British Muslim community.
United Bank of Kuwait's Islamic Investment Banking Unit’s Manzil
Wednesday, June 10, 2009
PRINCIPLES AND PRACTICES OF TAKAFOLS
All banks require insurance on their financing transactions. Success of Islamic banks has encouraged them to establish their own takafols which, among other things, lend greater credibility to their banking operations.
Takafol is an alternative form of insurance. Consequently many of the principles and practices of insurance equally apply to takafol. Takafols cover general as well as life insurance.
General takafols are short term contracts for protection of potential material losses resulting from specified catastrophes. Participants' installments are called tabaru (donation) by STMSB (Syarikat Takafol Malaysia Sendrian Berhad) and takafol by other companies. Amount of takafol contributions varies, as in insurance, according to the value to the property to be covered under the general takafol scheme. Company invests the tabaru funds, and the profits accrued there from are allocated between the fund and the management on the basis of mudaraba. Indemnity is paid out of the tabaru fund. Operational costs including reinsurance costs and other reserves are also deducted from the tabaru fund. If the fund generates net surplus then, unlike insurance, surplus is shared between participants and the company. The STMSB and IAIC (Islamic Arab Insurance Company) pay surplus only to those participants who did not incur claims, but, IICS (Islamic Insurance Company Sudan) pays surplus to all participants. The IICS receives a share of profits if offered by the reinsurers and the participants are automatically elected to a policy holders committee if their premiums are above 1,000 Sudanese Pounds. The CIIP rejected the IAIC model because, in its view, all conditions of occidental insurance are retained under Islamic nomenclature.22 The IICS model was also rejected because of the distribution of surplus from the takafol fund.
According to the CIIP,23 if the premium is considered debt then all principal amount must be returned and if it is considered investment then profits of some participants cannot be diverted in favour of others.
In sum, in case of general insurance, there is no substantive difference between tabaru and premium from the insured point of view as the entire contributions of the participants are treated tabaru, like premium in insurance. The contributions, like premium, depend on the value of the property to be covered. But, unlike insurance, takafol participants are entitled to surplus in the tabaru fund, if any.
Islamic life insurance is organised in the name of family takafol by the STMSB, Solidarity Modarabas by the IICG (Islamic Investment Company of the Gulf) and the ITCL (Islamic Takafol Company Luxembourg), and by the IICS. Premiums, unlike insurance, are determined by the participants themselves depending on their financial strength. Instalments paid by the participants are divided into takafol, also called tabaru, account and participants' mudaraba investment account by the STMSB, the ITCL and the ITCB (Islamic Takafol Company Bahrain). The proportion for tabaru fund, like insurance, is calculated on actuarial basis which varies according to the age and participation period of the participants. In the case of ITCL, 2.5 percent to 10 percent of instalments go to takafol fund and the balance goes to the mudaraba investment account of the participants.
Insurance benefits are paid from the tabaru fund. Participants pledge to make additional contributions if the takafol fund proves insufficient. However, in reality, companies prefer to carry such deficits forward till the takafol fund enjoys surplus. In the meanwhile, companies finance the deficits on the basis of interest-free loans.
All instalments of participants in the IICS and the IICG are treated mudaraba investments. The takafol fund is generated from the profits on the modarabas. Some companies issue renewable modaraba certificates of one year duration. In the case of IICG, each subscriber can participate in mudaraba till the age of 60 or death whichever comes first. Participants can buy multiple certificates. The certificates are non-negotiable and non-transferable instruments. The IICS and IICG pay takafol benefits, sometimes called solidarity benefits, from the mudaraba profits.
The actual operating expenses are charged from the Mudaraba account by the ITCL, IICG and the IICS. In the case of IICG and ITCL, an issue fee is charged to cover the management expenses partially. The IICS does not charge management expenses from the mudaraba accounts. Likewise, the STMSB pays operating expenditures from its own profits accrued from takafols and shareholders' fund.
Profits from the mudaraba investments are shared between the participants and the companies in pre-agreed ratios. The profits among the participants' account and takafol company are shared in the ratio 70:30 in STMSB, 80:20 in ITCL, and 90:10 in IICS.
Participants are entitled to reimbursements upon maturity, withdrawal and, in some cases, upon disablement. Upon, death of a participant, his heirs are entitled to takafol benefits. The takafol benefits are reimbursed according to the Islamic inheritance laws. Benefits are payable to the nominees, in case of STMSB, as under insurance contracts because the nominees are considered trustees of the heirs of the deceased participants. If a participant lives till the maturity of the takafol contract, he is entitled to all his mudaraba investment including its profits. In addition, the STMSB pays net surplus from the tabaru account as well. The CIIP did not deliver any judgement on the STMSB due to lack of information. But the STMSB model will be disqualified on the same basis as the IAIC has been.
If a participant withdraws before the maturity of contract then the money in the investment account is paid as surrender benefits. However, participants may withdraw only after participating for a minimum of two years in the case of ITCL and IICG. In the case of IICG, withdrawing participants have to relinquish 5 percent of their account in consequence of a sudden withdrawal. This money is, reinvested in favour of other participants.
If a member is disabled, the IICS waives future instalments and pays all the benefits to the disabled participants out of the mudaraba profits of the participants. In the case of the death of a participant, his heirs are entitled to full value of the deceased participant's share in the mudaraba investment account plus money equal to all unpaid instalments, due to be paid in future if he lived, from the takafol account. In the case of the IICG, the solidarity benefits are paid only if not less than a year has elapsed, instalments were paid regularly, and no withdrawal request has been made.
In the case of family takafol in the STMSB, tabaru contribution varies, like the insurance premium, with the length as well as the maturity of the takafol plan. Calculation of tabaru, like premium, is based on the principles of actuary. The takafol companies satisfy themselves regarding the health condition of the clients. Instalments are to be paid in advance as, premium. Participants can withdraw from the takafol schemes after a specified period, as in the case of insurance, but their contributions to tabaru, like the insurance premium, are forfeited.
Like insurance, takafol is concerned with uncertain future events which produce losses; and the special legal rules governing insurance contracts similarly apply to takafol. Participants cannot interfere with the management activities as the management assumes full authority. However, if a loss occurs due to disrespect of modaraba conditions, the takafol companies will bear those losses.
Takafol, like insurance, is based on the principles of insurable interest, indemnity, subrogation, and utmost good faith. The utmost good faith clause is required for the disclosure of all material facts, a condition commended in Islam. Unfortunately, insurers misuse it arid try to avoid contracts. Subrogation entitles insurers to claim from a third party on behalf of the insured. Indemnity implies that a claim can be made only to the extent of actual financial loss to the insured. Indemnity and subrogation together ensure compliance with the requirements of insurable interest. Insurable interest itself ensures that a client can obtain insurance only if susceptible to loss for which insurance in sought.24 Takafol companies perform entrepreneurial and managerial tasks. But management of takafol funds, unlike insurance premiums, is kept separate from the management of shareholders' funds. Even the rules to resolve takafol disputes are similar to those for insurance. All takafol companies have recourse to reinsurance companies. In insurance, any insurance surplus becomes profit of the company (shareholders) while takafol surplus is shared between the participants and the management (company) in the prescribed ratios.
Takafols do buy reinsurance, like these insurance companies, because existing retakafol companies are very few and too new for handling the entire retakafol needs of existing takafol companies. However, the takafol companies deal with them on a net basis in order to minimise their indulgence in riba practices of reinsurers.
In sum, takafols are different from insurance in several respects. Takafol differs from conventional insurance in the sense that the company manages and employs the funds for investment, business and administration on behalf of the participants. Profits attributed to the participants' funds are shared between the takafol company and the participants according to an agreed formula. In case of insurance, the premium funds become property of the company and any profits or losses go to the company's account.
The takafols need to invest funds in long-term as well as in short-term avenues to match their liquidity requirements. Takafol companies, unlike insurance, certainly face difficulties in making short-term investments on and interest-free basis. Otherwise, the takafols and the insurance companies are at liberty to employ funds in projects of their choice. Therefore, one may conclude that the takafol companies primarily operate on similar lines as insurance companies, although they may have to select only halal projects to meet Shariah requirements
Takafol is an alternative form of insurance. Consequently many of the principles and practices of insurance equally apply to takafol. Takafols cover general as well as life insurance.
General takafols are short term contracts for protection of potential material losses resulting from specified catastrophes. Participants' installments are called tabaru (donation) by STMSB (Syarikat Takafol Malaysia Sendrian Berhad) and takafol by other companies. Amount of takafol contributions varies, as in insurance, according to the value to the property to be covered under the general takafol scheme. Company invests the tabaru funds, and the profits accrued there from are allocated between the fund and the management on the basis of mudaraba. Indemnity is paid out of the tabaru fund. Operational costs including reinsurance costs and other reserves are also deducted from the tabaru fund. If the fund generates net surplus then, unlike insurance, surplus is shared between participants and the company. The STMSB and IAIC (Islamic Arab Insurance Company) pay surplus only to those participants who did not incur claims, but, IICS (Islamic Insurance Company Sudan) pays surplus to all participants. The IICS receives a share of profits if offered by the reinsurers and the participants are automatically elected to a policy holders committee if their premiums are above 1,000 Sudanese Pounds. The CIIP rejected the IAIC model because, in its view, all conditions of occidental insurance are retained under Islamic nomenclature.22 The IICS model was also rejected because of the distribution of surplus from the takafol fund.
According to the CIIP,23 if the premium is considered debt then all principal amount must be returned and if it is considered investment then profits of some participants cannot be diverted in favour of others.
In sum, in case of general insurance, there is no substantive difference between tabaru and premium from the insured point of view as the entire contributions of the participants are treated tabaru, like premium in insurance. The contributions, like premium, depend on the value of the property to be covered. But, unlike insurance, takafol participants are entitled to surplus in the tabaru fund, if any.
Islamic life insurance is organised in the name of family takafol by the STMSB, Solidarity Modarabas by the IICG (Islamic Investment Company of the Gulf) and the ITCL (Islamic Takafol Company Luxembourg), and by the IICS. Premiums, unlike insurance, are determined by the participants themselves depending on their financial strength. Instalments paid by the participants are divided into takafol, also called tabaru, account and participants' mudaraba investment account by the STMSB, the ITCL and the ITCB (Islamic Takafol Company Bahrain). The proportion for tabaru fund, like insurance, is calculated on actuarial basis which varies according to the age and participation period of the participants. In the case of ITCL, 2.5 percent to 10 percent of instalments go to takafol fund and the balance goes to the mudaraba investment account of the participants.
Insurance benefits are paid from the tabaru fund. Participants pledge to make additional contributions if the takafol fund proves insufficient. However, in reality, companies prefer to carry such deficits forward till the takafol fund enjoys surplus. In the meanwhile, companies finance the deficits on the basis of interest-free loans.
All instalments of participants in the IICS and the IICG are treated mudaraba investments. The takafol fund is generated from the profits on the modarabas. Some companies issue renewable modaraba certificates of one year duration. In the case of IICG, each subscriber can participate in mudaraba till the age of 60 or death whichever comes first. Participants can buy multiple certificates. The certificates are non-negotiable and non-transferable instruments. The IICS and IICG pay takafol benefits, sometimes called solidarity benefits, from the mudaraba profits.
The actual operating expenses are charged from the Mudaraba account by the ITCL, IICG and the IICS. In the case of IICG and ITCL, an issue fee is charged to cover the management expenses partially. The IICS does not charge management expenses from the mudaraba accounts. Likewise, the STMSB pays operating expenditures from its own profits accrued from takafols and shareholders' fund.
Profits from the mudaraba investments are shared between the participants and the companies in pre-agreed ratios. The profits among the participants' account and takafol company are shared in the ratio 70:30 in STMSB, 80:20 in ITCL, and 90:10 in IICS.
Participants are entitled to reimbursements upon maturity, withdrawal and, in some cases, upon disablement. Upon, death of a participant, his heirs are entitled to takafol benefits. The takafol benefits are reimbursed according to the Islamic inheritance laws. Benefits are payable to the nominees, in case of STMSB, as under insurance contracts because the nominees are considered trustees of the heirs of the deceased participants. If a participant lives till the maturity of the takafol contract, he is entitled to all his mudaraba investment including its profits. In addition, the STMSB pays net surplus from the tabaru account as well. The CIIP did not deliver any judgement on the STMSB due to lack of information. But the STMSB model will be disqualified on the same basis as the IAIC has been.
If a participant withdraws before the maturity of contract then the money in the investment account is paid as surrender benefits. However, participants may withdraw only after participating for a minimum of two years in the case of ITCL and IICG. In the case of IICG, withdrawing participants have to relinquish 5 percent of their account in consequence of a sudden withdrawal. This money is, reinvested in favour of other participants.
If a member is disabled, the IICS waives future instalments and pays all the benefits to the disabled participants out of the mudaraba profits of the participants. In the case of the death of a participant, his heirs are entitled to full value of the deceased participant's share in the mudaraba investment account plus money equal to all unpaid instalments, due to be paid in future if he lived, from the takafol account. In the case of the IICG, the solidarity benefits are paid only if not less than a year has elapsed, instalments were paid regularly, and no withdrawal request has been made.
In the case of family takafol in the STMSB, tabaru contribution varies, like the insurance premium, with the length as well as the maturity of the takafol plan. Calculation of tabaru, like premium, is based on the principles of actuary. The takafol companies satisfy themselves regarding the health condition of the clients. Instalments are to be paid in advance as, premium. Participants can withdraw from the takafol schemes after a specified period, as in the case of insurance, but their contributions to tabaru, like the insurance premium, are forfeited.
Like insurance, takafol is concerned with uncertain future events which produce losses; and the special legal rules governing insurance contracts similarly apply to takafol. Participants cannot interfere with the management activities as the management assumes full authority. However, if a loss occurs due to disrespect of modaraba conditions, the takafol companies will bear those losses.
Takafol, like insurance, is based on the principles of insurable interest, indemnity, subrogation, and utmost good faith. The utmost good faith clause is required for the disclosure of all material facts, a condition commended in Islam. Unfortunately, insurers misuse it arid try to avoid contracts. Subrogation entitles insurers to claim from a third party on behalf of the insured. Indemnity implies that a claim can be made only to the extent of actual financial loss to the insured. Indemnity and subrogation together ensure compliance with the requirements of insurable interest. Insurable interest itself ensures that a client can obtain insurance only if susceptible to loss for which insurance in sought.24 Takafol companies perform entrepreneurial and managerial tasks. But management of takafol funds, unlike insurance premiums, is kept separate from the management of shareholders' funds. Even the rules to resolve takafol disputes are similar to those for insurance. All takafol companies have recourse to reinsurance companies. In insurance, any insurance surplus becomes profit of the company (shareholders) while takafol surplus is shared between the participants and the management (company) in the prescribed ratios.
Takafols do buy reinsurance, like these insurance companies, because existing retakafol companies are very few and too new for handling the entire retakafol needs of existing takafol companies. However, the takafol companies deal with them on a net basis in order to minimise their indulgence in riba practices of reinsurers.
In sum, takafols are different from insurance in several respects. Takafol differs from conventional insurance in the sense that the company manages and employs the funds for investment, business and administration on behalf of the participants. Profits attributed to the participants' funds are shared between the takafol company and the participants according to an agreed formula. In case of insurance, the premium funds become property of the company and any profits or losses go to the company's account.
The takafols need to invest funds in long-term as well as in short-term avenues to match their liquidity requirements. Takafol companies, unlike insurance, certainly face difficulties in making short-term investments on and interest-free basis. Otherwise, the takafols and the insurance companies are at liberty to employ funds in projects of their choice. Therefore, one may conclude that the takafol companies primarily operate on similar lines as insurance companies, although they may have to select only halal projects to meet Shariah requirements
Insurance Islamicity
Insurance is an exchange contract. Ibn Abidin rejected it as it did not fit in the exchange contracts known in Islam. The first phase of acceptance of insurance took place when the so called Modernists became the trend-setters for Muslim society, particularly under the leadership of Muhammad Abduh. A series of attempts were made to insert insurance into permitted contracts and to prove its legality.3 A correspondent of Pakistan, and Gulf Economists cites fatawa (religious rulings) of prominent ulema (Islamic scholars) of different mazahib (Islamic schools of thought)4 generally favouring insurance, and refuting the presence of riba (usury and interest), mai'sar (gambling) and gharar (indeterminacy) therein. Another survey of fatawa for and against the contract of insurance issued up to 1965 is given in Muslehuddin.5
In its 1972 meeting the Islamic Studies Conference (ISC) considered eighty opinions on insurance submitted by scholars worldwide, but adjourned without making final recommendations, leaving the topic pending for further study.6 Interestingly, fuqaha have seldom given unanimous recommendations on the issue of insurance. For instance, recommendations of the Majlis Fiqhi Islami were dissented by Sheikh Mustafa Zarqa and of CIIP were dissented by Abdul Malik Irfani.7
Positions taken by scholars on insurance differ depending on their views regarding presence of gharar, riba, and gambling in insurance contracts. Gambling and riba are condemned in the Qur'an while condemnation of gharar is supported by (chained) Ahadith (Prophet’s rulings).8
Insurance is blamed for gharar because, at the time of the contract, the insured are uncertain about (i) occurrence of indemnity, (ii) amount accrued in case of indemnity, and (iii) the timing of indemnity. But supporters of insurance argue that these matters are unknown only at the individual level, while at the collective level, they are scientifically determined by statistical laws of large numbers, actuary and probability. It would not be proper to prohibit it due to gharar at the individual level.9
Gharar inherent in the contract of insurance is condoned under the doctrines of darura (necessity) and mosalahah (public interest). Siddiqi10 emphasises that the present system of wealth creation and the present level of civilisation is simply inconceivable without recourse to insurance. Insurance is important, he argues, for the smooth flow of business activity and production processes; large-scale supply of capital; availability of goods requiring a long production period; and reduction in cost of goods. Others argue that insurance is a hedging against misfortunes through personal means rather than relying on the public means or family support, which may not be realised.11
Insurance is declared mai'sar because the policy holders are seen to bet premiums on the condition that the insurer will make payment (indemnity) on the happening of a specified event. The advocates of insurance argue that insurance is the contract of indemnity,12 which is altogether different from gambling. A specified event must occur by the appointed time and one of the parties must win or lose in gambling. In the case of insurance, the specified event may or may not happen during the policy period. But the indeterminacy of event used to disclaim gambling can be cited as a reason for gharar. Moreover, the insured holds a specific financial interest, called insurable interest, in the subject-matter of insurance. He is entitled to compensation only if he suffers any loss or damage and indemnity is limited to the actual loss or damage. In gambling, the parties have no other interest than the sum to be won or lost by the determination of an event. They further argue that the act of gambling creates a new risk while insurance tries to manage inherent, though predictable, risks to make losses bearable to the individuals susceptible to such risks. The risk of financial loss courted by a gambler can be avoided if desired, but the inherent risks cannot be avoided. Insured persons seek protection against the financial loss which may result from such risks.13
Riba refers to transactions involving unequal exchange of the same thing. Insurance is viewed as unequal exchange of money in premiums and compensations. In fact, money paid in premiums, never equals the money received in indemnity. The insured receives less or nothing, as the case may be, in exchange of the premium when (i) he withdraws the policy, (ii) defaults on premiums, (iii) does not experience peril deserving indemnity and (iv) the insurance contract is declared void due to any other reason. Moreover, compensation received from insurers may be far greater than the premiums if a peril strikes. So riba accrues to the insured if the indemnity is more than the premium and to the insurers when compensation is nil or falls short of premiums. Therefore insurance contract, interpreted as exchange of money, cannot be free from riba. Moreover, there is riba beyond the riba embedded in the insurance contracts since the premium is invested by insurers in interest-bearing securities.
The advocates of insurance argue that there is no riba in insurance because neither is the premium a loan nor compensation a returning of the loan with an incremental amount. The money received in claim by the insured neither depends on the elapsed period nor on the total money in the premium. The amount actually depends on the extent of financial loss incurred in consequence of a peril. Such increment is not riba.14
It is also argued that individuals engage in riba transactions with the sole purpose of monetary gains. Insurance is a systematic pooling of individual resources to cover collectively the expected inherent risks of loss that each and every member faces. The purpose of an insurance policy is to protect, not to enhance, the financial position of the insured.15
Insurance is also considered unlawful because the compensation is given to nominees, which is contrary to the Islamic laws of inheritance.
Qur'an16 ordains compensation including monetary benefits to the victim's family for killing someone by mistake. Therefore, in principle, there is no harm in obtaining monetary gains against this death of a family member which seemingly justifies conduct of life insurance. In fact, liability insurance covering compensation to victims of (say) accidents shall be made compulsory in Muslim countries to ensure compliance with the Qur'anic injunction, particularly when damage is done by the financially weak or runaway aggressors.
Insurance is also an essential part of banking and international trade transactions. For instance, banks do not negotiate the international bills of exchange unless the goods are insured against Marine insurance and do not finance large industrial projects without an insurance arrangement.
Omar Farrukh argues that "insurance may be equated with an agreement between two parties in which one gives a guarantee to the other regarding some property in possession of the other against its perishing, undergoing startling degradation or deviating from its normal course of development Islam admits some aspects of this guarantee."17 Obviously, if insurance is viewed as a contract of guarantee, rather than an exchange of money, then it is absolved of contractual riba.
However, commercial insurance has been generally condemned while mutual insurance, organised as a private or a public venture, is commended.18 Commercial insurance is condemned because insurers are alleged to "profit out of the weakness of individual insurees".19 But, barring the profit motive, mutual and commercial insurance are not very different.20 Profit-seeking activities are not prohibited in Islam. Moreover, insurance performs security functions similar to zakah, although to different categories of people. As managers of zakah are entitled to a remuneration from zakah fund then, in principle, the managers of insurance should not be denied profits for performing insurance services.
In a nutshell, insurance itself is not contrary to Islam. However, the conduct of insurance is suspect mainly on account of gharar, riba and gambling.
In its 1972 meeting the Islamic Studies Conference (ISC) considered eighty opinions on insurance submitted by scholars worldwide, but adjourned without making final recommendations, leaving the topic pending for further study.6 Interestingly, fuqaha have seldom given unanimous recommendations on the issue of insurance. For instance, recommendations of the Majlis Fiqhi Islami were dissented by Sheikh Mustafa Zarqa and of CIIP were dissented by Abdul Malik Irfani.7
Positions taken by scholars on insurance differ depending on their views regarding presence of gharar, riba, and gambling in insurance contracts. Gambling and riba are condemned in the Qur'an while condemnation of gharar is supported by (chained) Ahadith (Prophet’s rulings).8
Insurance is blamed for gharar because, at the time of the contract, the insured are uncertain about (i) occurrence of indemnity, (ii) amount accrued in case of indemnity, and (iii) the timing of indemnity. But supporters of insurance argue that these matters are unknown only at the individual level, while at the collective level, they are scientifically determined by statistical laws of large numbers, actuary and probability. It would not be proper to prohibit it due to gharar at the individual level.9
Gharar inherent in the contract of insurance is condoned under the doctrines of darura (necessity) and mosalahah (public interest). Siddiqi10 emphasises that the present system of wealth creation and the present level of civilisation is simply inconceivable without recourse to insurance. Insurance is important, he argues, for the smooth flow of business activity and production processes; large-scale supply of capital; availability of goods requiring a long production period; and reduction in cost of goods. Others argue that insurance is a hedging against misfortunes through personal means rather than relying on the public means or family support, which may not be realised.11
Insurance is declared mai'sar because the policy holders are seen to bet premiums on the condition that the insurer will make payment (indemnity) on the happening of a specified event. The advocates of insurance argue that insurance is the contract of indemnity,12 which is altogether different from gambling. A specified event must occur by the appointed time and one of the parties must win or lose in gambling. In the case of insurance, the specified event may or may not happen during the policy period. But the indeterminacy of event used to disclaim gambling can be cited as a reason for gharar. Moreover, the insured holds a specific financial interest, called insurable interest, in the subject-matter of insurance. He is entitled to compensation only if he suffers any loss or damage and indemnity is limited to the actual loss or damage. In gambling, the parties have no other interest than the sum to be won or lost by the determination of an event. They further argue that the act of gambling creates a new risk while insurance tries to manage inherent, though predictable, risks to make losses bearable to the individuals susceptible to such risks. The risk of financial loss courted by a gambler can be avoided if desired, but the inherent risks cannot be avoided. Insured persons seek protection against the financial loss which may result from such risks.13
Riba refers to transactions involving unequal exchange of the same thing. Insurance is viewed as unequal exchange of money in premiums and compensations. In fact, money paid in premiums, never equals the money received in indemnity. The insured receives less or nothing, as the case may be, in exchange of the premium when (i) he withdraws the policy, (ii) defaults on premiums, (iii) does not experience peril deserving indemnity and (iv) the insurance contract is declared void due to any other reason. Moreover, compensation received from insurers may be far greater than the premiums if a peril strikes. So riba accrues to the insured if the indemnity is more than the premium and to the insurers when compensation is nil or falls short of premiums. Therefore insurance contract, interpreted as exchange of money, cannot be free from riba. Moreover, there is riba beyond the riba embedded in the insurance contracts since the premium is invested by insurers in interest-bearing securities.
The advocates of insurance argue that there is no riba in insurance because neither is the premium a loan nor compensation a returning of the loan with an incremental amount. The money received in claim by the insured neither depends on the elapsed period nor on the total money in the premium. The amount actually depends on the extent of financial loss incurred in consequence of a peril. Such increment is not riba.14
It is also argued that individuals engage in riba transactions with the sole purpose of monetary gains. Insurance is a systematic pooling of individual resources to cover collectively the expected inherent risks of loss that each and every member faces. The purpose of an insurance policy is to protect, not to enhance, the financial position of the insured.15
Insurance is also considered unlawful because the compensation is given to nominees, which is contrary to the Islamic laws of inheritance.
Qur'an16 ordains compensation including monetary benefits to the victim's family for killing someone by mistake. Therefore, in principle, there is no harm in obtaining monetary gains against this death of a family member which seemingly justifies conduct of life insurance. In fact, liability insurance covering compensation to victims of (say) accidents shall be made compulsory in Muslim countries to ensure compliance with the Qur'anic injunction, particularly when damage is done by the financially weak or runaway aggressors.
Insurance is also an essential part of banking and international trade transactions. For instance, banks do not negotiate the international bills of exchange unless the goods are insured against Marine insurance and do not finance large industrial projects without an insurance arrangement.
Omar Farrukh argues that "insurance may be equated with an agreement between two parties in which one gives a guarantee to the other regarding some property in possession of the other against its perishing, undergoing startling degradation or deviating from its normal course of development Islam admits some aspects of this guarantee."17 Obviously, if insurance is viewed as a contract of guarantee, rather than an exchange of money, then it is absolved of contractual riba.
However, commercial insurance has been generally condemned while mutual insurance, organised as a private or a public venture, is commended.18 Commercial insurance is condemned because insurers are alleged to "profit out of the weakness of individual insurees".19 But, barring the profit motive, mutual and commercial insurance are not very different.20 Profit-seeking activities are not prohibited in Islam. Moreover, insurance performs security functions similar to zakah, although to different categories of people. As managers of zakah are entitled to a remuneration from zakah fund then, in principle, the managers of insurance should not be denied profits for performing insurance services.
In a nutshell, insurance itself is not contrary to Islam. However, the conduct of insurance is suspect mainly on account of gharar, riba and gambling.
Insurance In ISLAM
The concept of takaful, or Islamic insurance, where resources are pooled to help the needy does not contradict Shariah (Islamic Law). The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practiced by the Muhajrin of Mecca and the Ansar of Medina following the hijra (migration) of the Prophet over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah. Conventional insurance involves the elements of uncertainty (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes.
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