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Takaful: modern global market
Monday July 12, 2004

by Dr. Rukhsar Ahmed
Mutual Cooperation
According to Islamic law, public welfare and social security are fundamental obligations of the Islamic state. The financial resources that a social security system requires will come from the government revenue, including zakat. This charitable contribution ranges between 2.5 percent and 10 percent of a person’s or organization’s yearly income.
Islamic law, or Shari’ah classifies all human activities into five categories:
(1) commanded; (2) recommended; (3) indifferent; (4) reprehended; and (5) prohibited.

Shari’ah provides the legal guidelines of political and economic systems for Islamic society. To appreciate Takaful (Islamic insurance), therefore, it is necessary to understand Islamic tenets about interest and insurance.

The Interest
From a historical perspective, the Bible states that taking interest on a loan is wrong. In ancient societies most loans existed to help people survive hard times rather than to invest. Interest was seen as unjust because it meant charging continuously for money that could only be spent once. During the Protestant Reformation, Calvin argued that the poor should still be given loans without interest but that otherwise it was acceptable to charge interest on a loan as long as the rate was reasonable and the security was not excessive. He dismissed the Biblical strictures against interest because they were designed for a society much different from the mercantile one in which he lived. The Christian issue moved from the ethics of interest to the ethics of the rate of interest.

The Islamic insurance market is huge and relatively unexplored by Western insurance providers. According to some reports, the deposit assets held by Islamic banks increased from nearly billion in 1985 to over billion in 1994 and continue to grow. As a result of the desire of devout Muslims to live their lives according to Islamic law.

Islamic scholars are divided into two groups regarding insurance-the conservatives and the modernists. The conservatives assert that insurance of any kind is haram because: (1) it is an implicit wagering contract; (2) it is a contract based on uncertainties and prone to exploitation; (3) it is an attempt to supersede the will of God; (4) most insurance business is based upon riba, which is haram; and (5) the values exchanged between the insurance company and the insured are not equal.

The modernists, on the other hand, proclaim that any insurance not based on riba is halal. They contend that insurance is neither gambling nor wagering because in gambling, one creates a risk when none exists. Through insurance, the insured tries to eliminate the adverse economic consequences by eliminating the already existing risk.

Shari’ah opposes uncertainties that lead to disputes based on exploitation, fraud, ignorance and coercion. But the insured knows exactly how much he or she is willing to pay for buying economic security; and the insurance company has reduced uncertainty through actuarial calculations of probability.

The modernists also argue that accepting the will of God does not prevent one from avoiding perils and preventing accidents. The purchase of insurance is an intelligent measure for the reparation of losses in the event of an accident or calamity.

While it is true that non-Islamic insurance companies invest part of their funds in interest-bearing bonds and mortgages, interest alone is not a requisite for an insurance program. Funds can be gainfully used through alternate interest-free channels such as common stocks, real estate investment trusts, equity mutual funds and partnerships. Interest-free banking systems have already demonstrated that financial institutions can operate successfully by opening profit- and loss-sharing accounts through equity investments.

Takaful as an Alternative Solution
Most Muslims adhere to the modernist view. They believe that insurance can be carried out in accordance with Shari’ah. The impressive range of Islamic insurance products and providers shows that the Islamic insurance market has a bright future. Currently, there are Shari’ah-compliant insurance companies in Malaysia, Indonesia, Saudi Arabia, Tunisia, Luxembourg, Sudan and Bahrain. As this global trend continues, the ins