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ISLAMIC INSURANCE SYSTEMISLAMIC INSURANCE SYSTEM

RENAT BEKKINPhD in Law,

Moscow State Institute of International Relations (University),

Ministry of Foreign Affairs of Russia

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CONTENTSCONTENTS

- 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)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 SUNNAHINSURANCE IN QURAN AND SUNNAH

"And help one another in righteousness and piety and do not help oneone another in evil deeds and enmity" (Quran : Al Maidah, 2).

""Be sure we shall test you with something of fear Be sure we shall test you with something of fear and hunger, some loss on goods, lives and the and hunger, some loss on goods, lives and the fruits (of yours toil), but give Glad tidings to those fruits (of yours toil), but give Glad tidings to those who patiently persevere, - Who say, when afflicted who patiently persevere, - Who say, when afflicted with calamity "To Allah we belong and to him is our with calamity "To Allah we belong and to him is our returnreturn ". ". (Quran : Al-Baqara,155-156).155-156).

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INSURANCE IN QURAN AND SUNNAHINSURANCE IN QURAN AND SUNNAH(continued)(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 INSURANCEISLAMIC SCHOLARS ON INSURANCE

There are three main opinions among Shariah scholars There are three main opinions among Shariah scholars on conventional insurance contracton conventional insurance contract::

- The insurance contract is permissible with two The insurance contract is permissible with two conditions: that it contains no conditions: that it contains no ribariba clause and that its clause and that its subject be legitimate.subject be legitimate.

- Only life Insurance is not permissible.Only life Insurance is not permissible.- Insurance contains elements of Insurance contains elements of gharargharar, , maysirmaysir and and

riba riba and therefore is not permissible (and therefore is not permissible (haramharam).).

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UNLAWFUL ELEMENTS IN INSURANCE UNLAWFUL ELEMENTS IN INSURANCE CONTRACTCONTRACT

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 Gharar can be characterized as the sale of can be characterized as the sale of what is not present.what is not present.

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UNLAWFUL ELEMENTS IN INSURANCE UNLAWFUL ELEMENTS IN INSURANCE CONTRACT (continued)CONTRACT (continued)

Three categories of gharar:

- excessive gharar (al-gharar al-kathir);

- trifling gharar (al-gharar al–yasir) ;

- average gharar (al-gharar al-mutawassit).

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UNLAWFUL ELEMENTS IN INSURANCE UNLAWFUL ELEMENTS IN INSURANCE CONTRACT (continued)CONTRACT (continued)

Maysir (Maysir (ArabicArabic ‘gambling’): initially, a game of chance ‘gambling’): initially, a game of chance that was common in pre-Islamic times among the that was common in pre-Islamic times among the Arabs. In the broad sense: any action aimed at an Arabs. In the broad sense: any action aimed at an easy material gain (without investing work or capital). easy material gain (without investing work or capital).

“ “O ye who believe! Intoxicants and gambling, O ye who believe! Intoxicants and gambling, sacrificing to stones, and (divination by) arrows, sacrificing to stones, and (divination by) arrows, are an abomination, - of Satan's handiwork: are an abomination, - of Satan's handiwork: eschew such (abomination), that ye may prosper” eschew such (abomination), that ye may prosper” ((Quran : Al Maidah, 9090).).

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UNLAWFUL ELEMENTS IN INSURANCE UNLAWFUL ELEMENTS IN INSURANCE CONTRACT (continued)CONTRACT (continued)

Riba (Riba (ArabicArabic ‘increase, accretion’): in a loan ‘increase, accretion’): in a loan contract, interest on the principal charged by contract, interest on the principal charged by the lender when providing funds to the the lender when providing funds to the borrower. In the broader sense: any interest borrower. In the broader sense: any interest in commercial and financial transactions in commercial and financial transactions enabling one of the parties to achieve enabling one of the parties to achieve material gain at the expense of the other material gain at the expense of the other party, without providing adequate party, without providing adequate compensation.compensation.

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UNLAWFUL ELEMENTS IN INSURANCE UNLAWFUL ELEMENTS IN INSURANCE CONTRACT (continued)CONTRACT (continued)

Other arguments against the validity of Other arguments against the validity of insurance contractinsurance contract: :

- insurance encroaches on the rights of Allah insurance encroaches on the rights of Allah

(insuring one’s life);(insuring one’s life);- risk is traded, not shared;risk is traded, not shared;- against the principles of against the principles of mirathmirath;;- insured has no share in profit of company; insured has no share in profit of company;

etc.etc.

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FATWAS ON INSURANCEFATWAS 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 FATWAS ON INSURANCE (continued)(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?WHAT IS TAKAFUL?

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

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WHAT IS TAKAFUL? (continued)WHAT IS TAKAFUL? (continued)

““takafultakaful means a scheme based on means a scheme based on brotherhood, solidarity and mutual brotherhood, solidarity and mutual assistance which provides for assistance which provides for mutual financial aid and assistance mutual financial aid and assistance to the participants in case of need to the participants in case of need whereby the participants mutually whereby the participants mutually agree to contribute for that purpose”agree to contribute for that purpose”

((TakafulTakaful Act 1984, article 2) Act 1984, article 2)

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KEY FEATURES OF TAKAFULKEY FEATURES OF TAKAFUL

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

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 GLOSSARYTAKAFUL GLOSSARY

General General takafultakaful – Islamic non-life insurance – Islamic non-life insurance Family Family takafultakaful – Islamic life insurance – Islamic life insuranceMudharabahMudharabah – investment partnership – investment partnershipOperator – insurerOperator – insurerParticipant – policyholder, insuredParticipant – policyholder, insuredTabarru’Tabarru’ – donations of participants – donations of participantsWakeelWakeel - agent - agent

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SHORT HISTORY OF ISLAMIC SHORT HISTORY OF ISLAMIC INSURANCEINSURANCE

1979 – Islamic insurance company (Sudan)1979 – Islamic insurance company (Sudan)

1979 - Islamic Arab Insurance Company 1979 - Islamic Arab Insurance Company (UAE)(UAE)

1984 – Takaful Act (Malaysia)1984 – Takaful Act (Malaysia)

1985 –Takaful Malaysia Berhad (Malaysia)1985 –Takaful Malaysia Berhad (Malaysia)

1997 –Retakaful company (Asean Retakaful 1997 –Retakaful company (Asean Retakaful International, ARIL)International, ARIL)

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TYPES OF TAKAFUL BUSINESSTYPES OF TAKAFUL BUSINESS

General General takafultakafulFamily Family ttakafulakaful

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GENERAL TAKAFULGENERAL TAKAFUL

Motor Motor ttakafulakaful sscheme; cheme; AccidentAccident ttakafulakaful sscheme; cheme; Marine Marine ttakafulakaful sscheme; cheme; Engineering Engineering ttakafulakaful sschemecheme; etc; etc..

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FAMILY TAKAFULFAMILY TAKAFUL

Individual family Individual family takafultakaful plans; plans; TTakafulakaful mortgage plans; mortgage plans; TakafulTakaful plans for education; plans for education; Group Group takafultakaful plans; plans; Health/Health/mmedical edical takafultakaful. .

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MUTUAL INSURANCE VS MUTUAL INSURANCE VS COMMERCIAL INSURANCECOMMERCIAL INSURANCE

Islamic insurance can be performed in Islamic insurance can be performed in two forms:two forms:

Mutual insuranceMutual insurance societysocietyCommercial insurance company

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LEGAL REGULATIONLEGAL REGULATION

Monistic model (Sudan)Monistic model (Sudan) Dual model (Bahrain, Malaysia, etc.)Conventional model (Great Britain, Conventional model (Great Britain,

Russia, etc.).Russia, etc.).

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TAKAFUL MODELSTAKAFUL MODELS

PurePure mudharabah mudharabahWakalah Wakalah modelmodelModified Modified mudharabah mudharabah ((mudharabahmudharabah+ +

wakalahwakalah))WakalahWakalah model with model with waqfwaqf

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PURE MUDHARABAH MODELPURE MUDHARABAH MODEL

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WAKALAH MODELWAKALAH MODEL

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WAKALAH MODEL WITH WAKALAH MODEL WITH WAQFWAQF

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TAKAFUL WORLDWIDETAKAFUL 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 WORLDWIDETAKAFUL 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 CHALLENGES FACING ISLAMIC INSURANCEINSURANCE

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 CHALLENGES FACING ISLAMIC INSURANCE (continued)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 Azerbaijan Diplomatic Academy Summer SchoolSummer School

““Islam in the Contemporary Islam in the Contemporary International Affairs”International Affairs”, ,

BakuBaku, , Azerbaijan, 11Azerbaijan, 11--2020 JulyJuly 2008 2008

THANK YOU FOR YOUR ATTENTIONTHANK YOU FOR YOUR ATTENTION!!

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