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Essentials for Islamic Finance (Final Report)

Submitted by:

Muhammad Hashim Abbasi

Hafiz Tariq Abbas Syed Waqar Ali

Muhammad Manzar Abbas

Submitted to:

Zeeshan Ali

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Acknowledgement All praise to ALMIGHTY ALLAH alone, the omnipresent and the most merciful and

compassionate. The words are bound, knowledge is limited and time is short to

express His dignity. It is one of infinite blessings of ALLAH that he bestowed me with

the potential and ability to contribution towards the deep oceans of knowledge

already existing. I pay hum-age to greatest personality of the universe; HOLY

PROPHET HAZARAT MUHAMMAD (PBUH) who is forever torch bearer and

spring of guidance in every sphere of life. I am deeply indebted and also express my

gratitude to my respected teacher Zeeshan Ali for his support. Last, but not least we

are thankful to all the mates at IQRA University especially our Essential for Islamic

Finance fellows who supported us a lot. We could not achieve what little we have

without the support of all of them.

Group Members

S.no Members SID

1 Muhammad Hashim Abbasi 2259

2 Hafiz Tariq Abbas 2472

3 Syed Waqar Ali 1627

4 Muhammad Manzar Abbas 1626

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Table of Contents

S.NO. DESCRIPTION PAGE

NO.

1. Insurance 2

2. Importance of Insurance 3-4

3. Declarations by Sharia Scholars 5-6

4. Gharar, Mayser & Riba 6-8

5. Takaful 9

6 History of takaful 9-10

7 Model of Takaful 11-12

8 Differnce B/w takaful & Conventional Takaful 12-14

9 Conclusion 15

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Insurance Insurance gives the means for to transfer the burden of financial loss or uncertainty of

Insured to the insurer, in exchange of some amount called “premium, the insurer

promises to gives financial compensation if loss occur. This is the security which is

provided by modern insurance. The following are the key points of insurance,

Risk Aversion

Risk sharing

Assuring others or protect others

Does Islam against all these point??

No, The act of taking responsibility or ikhtiar‟ against possible danger and its

consequences it is correct in the light of Islam. As in the Holy Quran it is mentioned how

Prophet Yussof a.s. filled the grain silos from the surplus of seven years of good harvest

as a protection to ensure the availability of continuous food during the upcoming seven

years. 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 in terms of the measures taken as

precautions in the event such an unfortunately eventuality cannot be avoided. One such

measure available to every member of the community presently is the cover or

protection provided by insurance policies.

In Asia, the practice of insurance was first established in the second century of Islamic

era when Muslim Arabs began to expand their trade to India, Malay and other Asian

countries. Because of the long distance, the voyage was hazardous and the traders often

had to incur losses arising from a multitude of misfortunes.

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There is no reason to be considered haram or illegal since Islam itself encourages

helping others.

Importance of Insurance

Islam in fact even goes to the length of ensuring that incase of one‟s death, there should

be enough to support the widow for at least a year as mentioned in Quran

From the Quran

And those of you who die and leave behind wives should bequeath for their wives a year's maintenance and residence.

Chapter Al-Baqra (2), Verse No. (240)

Basis of Co-operation Help one another in al-Birr and in al-Taqwa (virtue, righteousness and piety): but do not help one another in sin and transgression.

Surah Al-Maidah, Verse 2

From the Hadith

Islam teaches us not only to have total dependence on Allah but also emphasizes on self

protection against risks and threats as mentioned in Tirmidhi

By Anas-bin-Malik, One day Prophet Muhammad (PBUH) noticed a Bedouin leaving his Camel without tying it. He asked the Bedouin, “Why don’t you tie down your

camel”? The Bedouin answered, “I put my trust in Allah (SWT)”. The Prophet (PBUH) then said,” Tie your camel first, then put your trust in Allah (SWT)”

Tirmidhi

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Allah will always help His servant for as long as he helps others.

(Narrated by Imam Ahmad bin Hanbal and Imam Abu Daud)

Basis of Responsibility The place of relationships and feelings of people with faith,

between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected.

(Narrated by Imam al-Bukhari and Imam Muslim)

One true Muslim (Mu’min) and another true Muslim (Mu’min) is just like a building

whereby every part in it strengthens the other part.

(Narrated by Imam al-Bukhari and Imam Muslim)

Therefore, it is decided that the philosophy of Insurance does not contain any flaws from

the Shariah perspective and it can not be considered Haram or illegal. But Shariah

Scholars are declared Insurance as unlawful , corrupt, false, Prohibited.

Declaration by Shariah scholars

In the first session, which was held at Makkah Mukarrmah on Shaban 10, 1398 A.H. in

the office of the Majlis -I-Fiqhi Islamia (the Assembly of Islamic Jurisprudence)

deliberated on insurance and its difference branches and kinds. The vast amount of

writings by the Ulama on this subject was also kept in view. Also kept in view was

resolution # 55 of Saudi Arabia‟s Majlis -e- Hayat-I-Kibar-ul-Ulama (The Constituent

Assembly of Most Eminent Religious Scholars) passed in its tenth session at Riad held

on 4.4.1397 A.H. declaring all kinds of commercial insurance as unlawful in Islam.

Verdict of Supreme Court of Egypt on Dec. 27, 1926.

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Unanimous resolutions and fatwa by Ulama in the Muslim League Conference in

Cairo in 1965.

Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6,

1972. Introduction to Takaful 28

The Council of Islamic Ideology of Pakistan gave a decision in December, 1983 that the

well-known and current forms of insurance are in conflict with the Islamic practices and

they quote that,

“The contract of insurance, in all its forms, is unlawful, corrupt, false, prohibited and

not promulgatable.”

The objection is not against the concept of insurance but against the existence of the

weaknesses in the insurance contract namely:

Gharar (uncertainty)

Maisir (gambling)

Riba (usury)

Gharar: An insurance contract contains gharar because, when a claim is not made, one party

(insurance company) may acquire all the profits (premium) gained whereas the other

party (participant) may not obtain any profit.

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Maysir: Islamic scholars have stated that maysir (gambling) and gharar are inter-related.

Where there are elements of gharar, elements of maysir is usually present. Maysir exists

in an insurance contract when; the policy holder contributes a small amount of premium

in the hope to gain a larger sum; the policy holder loses the money paid for the premium

when the event that has been insured for does not occur; the company will be in deficit if

the claims are higher that the amount contributed by the policy holders.

Riba: Conventional endowment insurance policies promising a contractually-guaranteed

payment, hence offends the riba prohibition. The element of riba also exists in the profit

of investments used for the payment of policyholders‟ claims by the conventional

insurance companies. This is because most of the insurance funds are invested by them

in financial instruments such as bonds and stacks which may contain elements of Riba.

Insurance funds invested in financial instruments which contain element of Interest like

securities

Shariah Scholars view the insurance contract as a transaction where money is being

exchanged with money. Basically, the two parties to an insurance contract are

exchanging the premium for claims both in monetary terms. Money is therefore viewed

as the subject-matter of the insurance contract. It should be noted that treating the

insurance contract as a contract for exchange of money is not just a Muslim view but is

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also shared by some western writers. The following definition of an insurance contract

from a textbook clearly shows that it is a contract of exchanging money for money

“An agreement whereby one party, the Insurer, in return for a consideration , the

premium, undertakes to pay to the other party, the Insured, a sum of money or its

equivalent in kind on the happening of a specified event, which is contrary to the

Insured’s financial interest”.

Malaysian Insurance Institute (MII) Text Book - Risk and Insurance.

Exchanging money with money in itself is not a problem so long as there is no difference

in the amount or time involved. However, in the insurance transaction, the amount of

premium and claim (both in terms of money) being exchanged are different and takes

place at different times. This brings about the problem of riba buyu‟. Another problem is

that in many cases, the exchange does not take place because the event giving rise to the

claim did not occur. This gives rise to another problem, namely gharar and maisir. The

existence of these three elements is the only objections most Scholars have with

insurance.

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Takaful Takaful is an alternative form of conventional insurance based on the concept of

shariah principles

The words „Takaful‟ has been derived from the Arabic verb „Kafala‟ which is also

referred to as „Kafalat‟ in urdu language, its means to guarantee, to help, to take

care of one another‟s needs.

It is a system of Islamic Insurance based on the principle of TA’AWUN (mutual

assistance) and TABARRU‟ (Gift, Give away, donation) where the risk is shared

collectively by the group VOLUNTARILY.

This is a pact among a group of members or participants who agree to jointly

guarantee among themselves against loss or damage to any of them as defined in

the pact.

History of Takaful Takaful originated within the ancient Arab tribes as a pooled liability that obliged those

who committed offences against members of a different tribe to pay compensation to the

victims or their heirs. This principle later extended to many walks of life, including sea

trade, in which participants contributed to a fund to cover anyone in a group who

suffered mishaps on sea voyages.

Modern Takaful:

Sudan: 1970s Emergence of Takaful as Waqala Model. First Ever Takaful

Companies: The Islamic Insurance Co. of Sudan the Islamic Arab Insurance Co.

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(IAIC) in the UAE. It would be interesting to know that the founder of the

company was a Pakistani.

Malaysia: 1980s Emergence of Takaful as Mudarabah Model.

Pak Kuwait Takaful was the first Takaful Company in Pakistan to be introduced.

There are approximately more than 108 Takaful and 6 Re-Takaful companies

operating globally with an approximate sum of $ 3 Billions Takaful contribution. Out

of these companies 60% are General Insurance Companies while the remaining 40%

are working as Life and Family Insurance Companies. Geographically, 56% of them

are located in South East Asia, 36% in Middle East, 17% in Africa and !% in Europe

and America. For the 23% of the Muslim population of the world, the existence of

260 Billion US dollars worth of Islamic Financial Market is a very encouraging

factor for the Takaful Companies.

Models of Takaful Mudarabah Model

Wakalah Model (hybrid of Wakalah & Mudarabah)

Wakalah based on Waqf Model.

The Mudaraba model: The participant and the operator enter into a Mudarabah

contract from the beginning of the relation. This model is essentially a basis for sharing

profit and loss between the takaful operator and the policy holders. The takaful operator

manages the operation in return for a share of the surplus on underwriting and a share

of profit from investment.

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The Wakala Model: Wakala model is a contract of agency. The takaful operator in this

case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund

in return for a defined fee. This model is used more in the Middle East region.

The Wakalah based on Waqf Model: The participant's donate the fund and operator

charge an agency fee. This model is used in Pakistan.

The operational methodology/system of the model can be explained through the

following example; Some individuals form a Fund on the basis of Waqf and subsequently

donate/contribute in the fund, hence giving it the name Participation Takaful Fund

( P.T.F ) with an understanding that if any calamity/risk befalls any of the participants

of the fund, a decided amount would be donated (Tabbaru) to the effected. The fund

would be monitored by an organization (Takaful Company) on the pattern of Waqf, to

safeguard the deposits and to increase the profitability of the fund. Subsequently, the

company would be paid its Wakalah agency fee. The example of a Waqf is similar to

that of a Mosque Waqf Committee which receives its contributions from people for the

maintenance of the Mosque. Likewise, Takaful Company also acts as a Waqf operator. It

will receive donations from the people and strengthen the fund. Incase of a calamity to

either of the members of the Fund, the company would pay the compensation.

Furthermore, it would do its level best to make the Waqf Fund/Takaful contribution

more profitable and for that, it would receive its Wakalah fees which would be its profit.

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Takaful Vs Conventional Insurance

Takaful Companies Conventional Insurance Companies

Takaful is based on mutual cooperation.

Conventional insurance is based solely on

commercial factors.

Takaful is free from interest (Riba),

gambling, (Maysir), and uncertainty

(Gharar).

Conventional insurance includes elements

of interest, gambling, and uncertainty.

All or part of the contribution paid by the

Participant is a donation to

the Takaful Fund, which helps other

Participants by providing protection

against potential risks.

The premium is paid

to conventional insurance companies and

is owned by them in exchange for bearing

all expected risks.

Takaful companies are subject to the

governing law as well as a Shariah

Supervisory Board.

Conventional companies are only subject

to the governing laws.

There is a full segregation between the

ParticipantsTakaful Fund account and the

shareholders' accounts.

Premium paid by the Policyholder is

considered as income to the company,

belonging to the shareholders.

Any surplus in the Takaful Fund is shared

among Participants only, and the

All surpluses and profits belong to the

shareholders only.

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investment profits are distributed among

Participants and shareholders on the

basis of Mudaraba or Wakala models.

In case of the deficit of a

Participants‟ Takaful Fund,

theTakaful operator (Wakeel) provides

free interest loan (Qard Hasan) to the

Participants.

In case of deficit,

the conventional insurance company

covers the risks.

The Plan Owners‟ and shareholders‟

capital is invested in investment funds that

are Shariah compliant.

The capital of the premium is invested in

funds and investment channels that are not

necessarily Shariah compliant.

Takaful companies have re-insurance

with Re-Takaful companies or

with conventional re-insurance companies

that adhere to certain conditions of

Shariah.

Conventional insurance companies do not

necessarily have re-insurance with re-

insurance companies that abide by

Shariah principles.

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Takaful Vs Conventional Insurance

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Conclusion

In Conclusion, Takaful system does not go against any of the

established Shariah principals and there are a minor population of scholars who are

against it compare to vast majority accepting it. It provides an exploitation free society.

Safeguards people faith, life, prosperity and property. It facilitates capital formation,

motivates saving and creates employment. Moreover it establishes a mutual beneficial

forum in the society. And the main difference between Takaful and conventional

Insurance is the process behind it if all the process is according to Islamic laws so it is

Halal for us if not so Its Haram ,unlawful, corrupt, false, prohibited and not

promulgatable.”