The astonishing results of the underestimated Islamic Banking in Pakistan have compelled the decision makers of normal interest-based banks to dedicate at least one of their branches as Islamic Bank. With such a wide spread appreciation from the general public in respect of Islamic Banking it is expected that any Islamic product like Takaful will reap the same result because Muslim jurists conclude the fact that insurance in Islam is based on the principles of mutuality and cooperation. Such Insurance encompasses the elements of shared responsibility, joint indemnity, common interest and solidarity. This article is an endeavour to understand ifs and buts of Takaful, corporate law areas and taxation aspects.
Concept of Takaful
Muslim jurists acknowledge that the basis of shared responsibility in the system of “aquila” as practised between Muslims of Mecca and Medina laid the foundation of mutual insurance. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages (marine insurance).
Takaful is an Arabic word meaning “guaranteeing each other” or joint guarantee. The Tabarru' system is the main core of the Takaful system making it free from uncertainty and gambling. Tabarru' means “donation; gift; contribution.” Each participant that needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of Takaful is to pay a defined loss from a defined fund.
Muslim and Risk Control
It is a Muslim's belief that everything that happens in this world is by the will (Qadha and Qadar) of Allah. Similarly any accident or misfortune that befalls us, that results in the loss of life or belongings, is by the will of Allah (SWT). If that is the case, some people might ask, why should there be Takaful! Should we then not leave it to Allah and accept whatever accident, misfortune or catastrophe that befalls us? Whilst it is true that we should accept whatever “misfortune” that befalls us, we are also taught to avoid or reduce the possibility of these “misfortunes” by taking positive steps.
One day the Prophet (PBUH) saw a Bedouin leaving a camel and he asked the Bedouin, “why don't you tie down you camel?” The Bedouin answered, “I put my trust in Allah.” The Prophet said, “Tie your camel first, then put your trust in Allah.” What the Prophet (PBUH) has done here is teaching the Bedouin to reduce the risk of losing his camel. Similarly in many actions of the Prophet (PBUH), we saw that he took steps to reduce risks although he could have done otherwise if he wanted to.
For example, during the Hijrah, he went to hide in the cave first instead of going straight to Madinah. He commanded the companions to migrate to Madinah by batches instead of in one big group. Again this is to reduce risks. When he went to war, he put on his armour instead of wearing light clothes.
In this modern world, one of the ways that can be done to reduce the risk of loss due to accident or misfortune is through insurance. In fact it is almost impossible to live without being affected by insurance. The house that we buy or rent has got insurance cover. The car that we buy or rent has to have insurance. The bus that we board has insurance. Insurance is all around us whether we like it or not.
Issues in conventional Insurance
Conventional insurance contains elements contradictory to Islamic Shariah like Uncertainty [Gharar], Gambling [Maisir] and Interest [Riba]. The insurance contract contains uncertainty due to Uncertainty whether the payment will be accepted as promised, the amount to be paid is not known and the time it will occur is not known. Any form of contract which is lopsided in favour of one party at the expense and unjust loss to the other is classified as Gharar.
When a claim is not made the insurance company may acquire all the profits whilst the participant may not obtain any profit whatsoever. The loss of premiums on cancellation of a life insurance policy by the policyholder, or the “double standard” condition of charging a customary short period in general insurance, whilst only a proportional refund is made if the insurance company terminates the cover is also considered as unjust.
In furtherance, conventional insurance involves gambling because the participant contributes a small amount of premium in hope to gain a large sum; the participant loses the money paid for the premium when the insured event does not occur and the company will be in deficit if claims are higher than contributions.
When a life insurance policyholder dies after only paying part of the premium his dependants receive a certain some of money which the policyholder has not been informed of and has no knowledge as to how and from where it has been derived.
Apart from the above, conventional insurance involves interest because an element of interest exists in conventional life insurance products – as the insured, on is death, is entitled to get much more than he has paid, insurance funds invested in financial instruments such as bonds and stocks contain and element of Riba.